10-K - FY'14
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 26, 2014
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 28, 2014 was $1.3 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 28, 2014. This calculation does not reflect a determination that such persons are affiliates for any other purposes. On October 24, 2014, the registrant had 50,796,461 shares of Class A common stock, par value $0.001 per share, and 51,490,239 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 2015 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 26, 2014. 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

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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 and 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.

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PART I
ITEM 1. BUSINESS
OVERVIEW
Dolby Laboratories creates audio, imaging, and communication 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 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 DVD and Blu-ray discs and devices. More recently, our technologies have played a prominent role in the development of the next generation of audio technologies for the cinema, home entertainment, mobile and gaming experiences. We derive the majority of our revenue from licensing our audio technologies, and have also been developing technologies aimed at enhancing voice conferencing communications and imaging. Additionally, we provide products and services that enable entertainment content creators and distributors to produce, encode, transmit and playback content for superior consumer experiences.
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 imaging 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. Our tools help showcase the quality of work, impact and intent of the artist which helps generate market demand.
Delivering Superior Experiences. We license our technologies for use in various consumer devices and professional systems 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.
REVENUE GENERATION
The following table presents a summary of the composition of our revenues for all periods presented:
 
Fiscal Year Ended
Revenue
September 26,
2014
September 27,
2013
September 28,
2012
   Licensing
92
%
89
%
86
%
   Products
6
%
9
%
11
%
   Services
2
%
2
%
3
%
Total
100
%
100
%
100
%
We license our technologies in 47 countries, and our licensees distribute products with our technologies throughout the world. We sell our products and services in 90 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 26,
2014
September 27,
2013
September 28,
2012
United States
33
%
28
%
32
%
International
67
%
72
%
68
%

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Licensing
We license our technologies to a broad range of customers who incorporate them into their products for enhanced audio and imaging functionality. These products cover a wide range of end-user experiences whether it be at home, at work, on mobile devices, or at the cinema.
The following table presents the composition of our licensing revenues across our markets:
 
Fiscal Year Ended
 
Market
September 26,
2014
September 27,
2013
September 28,
2012
Main Products Incorporating Our Technologies
Broadcast
43
%
37
%
34
%
Televisions & set-top boxes
PC
19
%
24
%
28
%
OEMs, Windows operating systems & DVD software players
Consumer Electronics
15
%
16
%
19
%
DVD and Blu-ray Disc devices, AVRs, & Home theatres-in-a-box
Mobile
13
%
12
%
8
%
Smartphones, tablets & other mobile devices
Other
10
%
11
%
11
%
Video game consoles & automobile entertainment devices
Total
100
%
100
%
100
%
 
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, distributors, and consumers. For the use of our technologies, our system licensees commonly 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 47 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 licenses from Dolby and third parties for audio coding, interactive television, digital radio and wireless technologies.

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We offer a broad array of audio technologies that are used for numerous applications. However, the audio technologies that generate the vast majority of our licensing revenues are as follows:
Technology
Description
Home
Work
Mobile
Dolby Digital Plus
Dolby Digital Plus offers efficiency in transmission, and can support a wide range of current applications such as digital television, mobile, and Internet-based content services.
ü
ü
ü
Dolby Digital
A digital audio coding technology that provides multichannel sound in the home from DVDs, digital terrestrial broadcast, cable, and satellite systems, and in theaters.
ü
ü
ü
AAC & HE-AAC
High quality audio coding technologies used for broadcast, download and streaming content.
ü
ü
ü
Dolby TrueHD
An audio delivery technology that enables content providers to include a 100% lossless audio track on Blu-ray Disc without using excessive storage capacity.
ü
 
 
Dolby Atmos
An object-oriented platform that provides unparalleled precision and flexibility in sound placement to deliver more immersive sound.
ü
 
ü
Dolby Voice
An audio conferencing technology with superior spatial perception, voice clarity and background noise reduction that emulates in-person meetings.
 
ü
 

Home - Digital TVs, STBs (Set-top boxes), DVD and Blu-ray devices, AVRs, HTIBs, Gaming Work - PCs and Enterprise Voice Conferencing Mobile - Smartphones and tablets
Settlements & Back Payments From Licensees.   Due to ongoing collection efforts, licensing revenue recognized in any given quarter may include back payments and/or settlements with licensees. Such collections have become a recurring part of our business which we cannot predict with certainty.
Products
We design and manufacture audio and imaging products for the film production, cinema, and television broadcast industries. Distributed in over 80 countries, these products are used in content creation, distribution, and playback to enhance image and sound quality, and improve transmission and playback. Digital cinema is based on open standards that, unlike standards for film-based cinema, do not include our proprietary audio technologies. Further, revenue from our cinema products tends to fluctuate based on the underlying trends in the cinema industry, including technology adoption and replacement cycles.
The following table presents the composition of our products revenue for all periods presented:
 
Fiscal Year Ended
Market
September 26,
2014
September 27,
2013
September 28,
2012
Cinema
86
%
87
%
87
%
Broadcast
10
%
9
%
10
%
Other
4
%
4
%
3
%
Total
100
%
100
%
100
%
Product revenue is derived primarily from sales of the following:
Product
Description
Digital Cinema Products
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
Deliver a 3D image with an existing digital cinema server. Our Dolby 3D glasses feature high quality lenses that deliver sharp 3D images.
Dolby Atmos Processor
An object-oriented platform enabling precision and flexibility in sound placement for the most natural and realistic experience in a cinema environment.
Broadcast Products
Used to encode, transmit, and decode multiple channels of high quality audio for DTV and HDTV distribution, and to measure the loudness of broadcast audio content.

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Services
We offer a broad array of services to support theatrical and television production for cinema exhibition, broadcast, and home entertainment. The nature of these support services include current and next generation formats for Digital Cinema, Mastering and Distribution services. Our engineers assist in the integration and support of our technologies and products to create and reproduce both audio and imaging content. The specific areas in which their assistance is provided can involve equipment calibration, mixing room alignment, equalization, as well as color and light image calibration. To ensure optimal quality, our engineers also provide equipment training, system and venue design consultation, as well as on-site technical expertise to cinema operators, film festivals, movie premieres, and trade shows throughout the world. These support services include movie premieres and special events at the iconic Dolby Theatre® in Hollywood, California. We maintain a global presence in key creative markets and offer state of the art screening room facilities with Dolby Atmos, Dolby 3D, and high quality image projection for rental.
INTELLECTUAL PROPERTY
We have a substantial base of intellectual property assets, including patents, trademarks, copyrights, and trade secrets developed based on our technical expertise.
As of September 26, 2014, we had approximately 4,300 issued patents in addition to approximately 2,900 pending patent applications in more than 70 jurisdictions throughout the world. Our currently issued patents expire at various times through April 2039.
Some of our patents relating to Dolby Digital technologies, from which we derive a significant, but declining portion of our licensing revenue, have expired and others will expire over the next several years. The primary products where Dolby Digital is widely used include DVD players (but not Blu-ray players), TVs, and set top boxes. 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, the technology from which we derive the majority of our licensing revenue.
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 960 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 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, Dolby audio technologies have been adopted in various regions of the world, highlights of which are as follows:

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In North America, Dolby Digital is the mandated audio standard for digital terrestrial and cable television.
Several European countries, including France, Italy, the United Kingdom, Sweden as well as Russia, have adopted Dolby Digital Plus and HE AAC in their HD terrestrial broadcast standards. Other countries 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.
Developing digital television markets across sub-Saharan Africa, South-East Asia and India are also choosing to include requirements for Dolby Digital Plus technology in their local specifications.
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 a requirement for 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
We conduct research and development ("R&D") activities at numerous locations both in the United States and internationally. Dolby’s history of producing innovative technology has created many forms of intellectual property. When licensed from us, this intellectual property generates revenue that enables further innovation.
We have historically focused the majority of our R&D resources on audio technologies. In recent years, we have expanded our efforts to identify and develop new technologies. Beyond the strong audio platform we have created, we announced two new platforms this year - Voice and Imaging. Each of these platforms can support many offerings and we anticipate bringing new products to market from these platforms in the future.
R&D expenses included in our consolidated statements of operations were as follows (in thousands):
    
 
Fiscal Year Ended
 
September 26,
2014
September 27,
2013
September 28,
2012
Research and Development
$
183,128

$
168,746

$
140,143

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. Although we have an internal manufacturing facility, we rely primarily upon contract manufacturers for the majority 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 solutions improve entertainment and communications. We sell our solutions primarily using an internal sales organization 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.

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We maintain 27 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 26,
2014
September 27,
2013
September 28,
2012
Sales and Marketing
$
252,647

$
231,103

$
188,486

CUSTOMERS
We license our technologies to a broad range of customers that 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 film studios, content creators, post-production facilities, cinema operators, broadcasters, and video game designers.
Samsung is one of our licensees and accounted for approximately 11% and 12% of our total revenue in fiscal 2014 and 2013, respectively, and consisted primarily of licensing revenue from our mobile and broadcast markets. Revenue from Samsung did not exceed 10% of our total revenue in fiscal 2012. Although revenue from Microsoft did not exceed 10% of our total revenue in either fiscal 2014 or 2013, revenue from Microsoft did represent approximately 14% of our total revenue in fiscal 2012, and included licensing revenue from our PC, CE, and other markets.
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 Entertainment Services Group Inc.
Beats Electronics, LLC (owned by Apple Inc.)
 
GDC Technology Limited
 
DTS, Inc.
DTS, Inc.
 
IMAX Corporation
 
Sony Corporation
Fraunhofer Institut Integrierte Schaltungen
 
MasterImage 3D, Inc.
 
Technicolor
Koninklijke Philips Electronics NV
 
NEC Corporation
 
 
Technicolor
 
Qube Cinema, Inc.
 
 
Thomson Video Networks
 
QSC Audio Products, LLC
 
 
Sony Corporation
 
RealD, Inc.
 
 
Waves Audio Ltd.
 
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 systems in certain markets for entertainment technologies, including audio, imaging, 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

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Price.
We believe we compete favorably with respect to many of these factors. Our products and services span the audio and imaging sectors of several distinct and diverse industries, including the cinema, broadcasting, imaging, gaming, 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 26, 2014, we had 1,667 employees worldwide, of which 675 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 in the State of New York 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.
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. We expect the shift away from optical disc media to online and mobile media content consumption to continue, resulting in decreased revenue from DVD and Blu-ray Disc players.
Mobile Industry Risks. Successful penetration of the mobile device market is important 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. With shorter product lifecycles, it is easier for mobile device OEMs to add or remove our technologies from mobile devices than it was for PC OEMs. In the current mobile market, we see some smartphone manufacturers are reducing feature sets in order to achieve profitability, even in high-end devices. In April 2014, we indicated that our Dolby Digital Plus technology was one of several third party features that Samsung elected not to include in their recently released Galaxy line of smartphones and tablets, which will negatively impact our mobile market share and revenue in FY15.
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. The completion of our acquisition of Doremi Labs could cause disruptions in our cinema business. For example, our cinema customers may delay, reduce or even cease making purchases of our cinema products from us until they determine whether the acquisition will affect our cinema products and services. 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

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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.
Maturity of Digital Cinema Market. The industry transition to digital cinema is essentially complete, 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, our successful integration of Doremi Labs, 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.

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. For example, in April 2014, we indicated that our Dolby Digital Plus technology was one of several third party features that Samsung elected not to include in their recently released Galaxy line of smartphones and tablets.
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 ("AVRs"), 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 our ability to offer technologies for new markets, including Dolby Voice for the communications market, Dolby Vision and other imaging offerings 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 entertainment, PC, broadcast, and gaming markets. If we fail to promote and maintain the Dolby brand successfully in licensing, products

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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
Timing of revenue recognition under licensing agreements and other contractual arrangements, including 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 challenge the accuracy

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of our calculation. We are regularly involved in discussions 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 are regularly involved in discussions 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. Our revenue growth 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 imaging and communications. 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 market needs in a timely manner. Technology development 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 Dolby Vision and other imaging offerings 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:
Possibility that innovations may not be protectable;

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Failure to protect innovations that later turn out to be important;
Insufficient patent protection to prevent third parties from designing around our patent claims;
Our pending patent applications may not be approved; 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 26, 2014, we had approximately 4,300 issued patents in addition to approximately 2,900 pending patent applications in more than 70 jurisdictions throughout the world. Our currently issued patents expire at various times through April 2039.
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 that do not include any Dolby intellectual property.
In particular, some of our patents relating to Dolby Digital technologies, from which we derive a significant, but declining portion of our licensing revenue, have expired and others will expire over the next several years. The primary products where Dolby Digital is widely used include DVD players (but not Blu-ray players), TVs, and set top boxes. 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 derive the majority 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, 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,

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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 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 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 have limited 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 reduce 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

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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 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. Attacks on our systems are sometimes successful, and, in some instances, we might be unaware of an incident or its magnitude and effects. We seek to detect and investigate such attempts and incidents and to prevent their recurrence where practicable through changes to our internal processes and tools, but in some cases preventive and remedial action might not be successful. 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 our 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. These competitors may also be able to offer integrated systems in markets for entertainment technologies on a royalty-free basis or at a lower price than our technologies, including audio, imaging, 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 offerings. Furthermore, to the extent that customers perceive our competitors’ products as providing 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. 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 to be a valuable benefit.


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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;
Content distributors, such as film exhibitors, broadcasters, operators, and over-the-top ("OTT") video service 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 and cinema businesses and expand 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
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, including antitrust laws, that may differ or conflict with laws in other countries where we conduct business, or are otherwise not harmonized with one another;
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;

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Adverse fluctuations in foreign currency exchange rates and interest rates, including risks related to any interest rate swap or other hedging activities we undertake;
Political or social instability, natural disasters, war or events of terrorism; and
The strength of international economies.
In Note 15 "Legal Proceedings," we describe reviews by government regulators in Korea and China pursuant to their competition laws. Certain foreign governments, particularly in China, have advanced arguments under their competition laws that exert downward pressure on royalties for intellectual property. Because these jurisdictions have only recently implemented competition laws, their enforcement activities are unpredictable. 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.
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.
Conflict Minerals. The Securities and Exchange Commission ("SEC") has adopted rules regarding disclosure of the use of conflict minerals (commonly referred to as tantalum, tin, tungsten, and gold), which are sourced from the Democratic Republic of the Congo and surrounding countries. This requirement could affect the sourcing, availability and pricing 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 further actions to change materials, designs or manufacturers to reduce the possibility that Dolby's contracts to manufacture products that contain conflict minerals finance or benefit local armed groups in the region. The implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers that can certify to us that they are offering conflict free conflict minerals, we cannot be sure that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices.  These actions could also add engineering and other costs in connection with the manufacturing of our products.
We may not be able to sufficiently verify the origins for the minerals used in our products. Our reputation may suffer if we determine that our products contain conflict minerals that are not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products. In addition, some customers may require that all of our products are certified to be conflict free and if we cannot satisfy these customers, they may choose a competitor's products.
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 research and development ("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

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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. For example, the Organization for Economic Co-operation and Development ("OECD"), an international association of 34 countries including the United States, is contemplating revisions to certain corporate tax, transfer pricing, and tax treaty provisions. If and when the OECD finalizes these revisions, they could be adopted by many countries. These contemplated revisions, if finalized and adopted by various countries, could increase our income taxes and adversely affect our provision for income taxes.
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. At September 26, 2014, the Dolby family and their affiliates owned 1,405,702 shares of our Class A common stock and 51,463,316 shares of our Class B common stock. As of September 26, 2014, the Dolby family and their affiliates had voting power of approximately 99.7% of our outstanding Class B common stock, which in the aggregate represented approximately 91.1% 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, the Dolby family 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 other stockholders do not view as beneficial. Absent a transfer of Class B common stock that would trigger an automatic conversion as described above, there is no threshold or time deadline at which the shares of Class B common stock will automatically convert into shares of Class A common stock.
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, is located at 100 Potrero Avenue, San Francisco, California. The lease for this office expires on October 31, 2024, and provides approximately 70,000 square feet of space.
Dolby Wootton Bassett, LLC, of which Dagmar Dolby as Trustee of the Dolby Family Trust is the sole member, the Ray Dolby Trust established under the Dolby Family Trust Instrument dated May 7, 1999 (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 ("R&D") and for sales, services, and administrative facilities. Additionally, we lease approximately 33,000 square feet of space in Wootton Bassett, England from these real estate entities for various administrative purposes. The leases for these facilities expire at various times through 2015.
In fiscal 2012, we purchased commercial office 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 starting in fiscal 2015. During fiscal 2014, we purchased a commercial office building in Sunnyvale, California for $19.7 million. For additional information regarding these transactions, see Note 5Property, Plant & Equipment” to our consolidated financial statements.
We also lease additional R&D, 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 consolidated 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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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.” Our Class B common stock is neither listed nor publicly traded. As of October 24, 2014, there were 13 holders of record of our Class A common stock and 53 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. 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 2014
 
Fiscal 2013
 
High
Low
 
High
Low
Q1 - Quarter Ended December
$
38.57

$
34.51

 
$
34.84

$
28.48

Q2 - Quarter Ended March
44.97

38.48

 
33.56

29.33

Q3 - Quarter Ended June
44.89

39.01

 
35.60

31.38

Q4 - Quarter Ended September
46.93

41.26

 
35.03

31.38

Dividend Policy
Prior to fiscal 2013, we had never declared nor paid a cash dividend on our common stock.
During the first quarter of fiscal 2013, our Board of Directors declared a special dividend of $4.00 per share on our Class A and Class B common stock. The special dividend was paid 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 common stock outstanding as of the record date, the total special dividend payment was $408.2 million.
On October 23, 2014, we announced the initiation of a quarterly dividend to stockholders, with the first quarterly dividend declared by our Board of Directors on October 21, 2014. The first dividend payment of $0.10 per share of Class A and Class B Common Stock will be paid on November 20, 2014 to the stockholders of record as of the close of business on November 3, 2014. Based on the 102,282,102 shares of common stock outstanding as of the record date, the total dividend payment will be $10.2 million. Dividend declarations and the establishment of future record and payment dates are subject to the Board of Directors’ continuing determination that the dividend policy is in the best interests of the Company’s stockholders. The dividend policy may be changed or canceled at the discretion of the Board of Directors at any time. See Note 7Stockholders' Equity & Stock-Based Compensation” for additional information related to the quarterly dividend.
Sales of Unregistered Securities
During the fiscal quarter ended September 26, 2014, we issued an aggregate of 15,233 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 27, 2014 through October 24, 2014, we issued an aggregate of 4,724 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 $0.2 million in the fiscal quarter ended September 26, 2014 and less than $0.1 million in the period from September 27, 2014 through October 24, 2014 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 24, 2014 options to purchase an aggregate of 2,378 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.
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.

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers 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. 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 authorized maximum was subsequently increased by $300.0 million, $250.0 million, $100.0 million and $200.0 million as announced on July 27, 2010, August 4, 2011, February 8, 2012 and October 23, 2014. For additional details on the increase announced on October 23, 2014, refer to Note 19Subsequent Events”.
The following table provides information regarding our share repurchases made under this program during the fourth quarter of fiscal 2014:
Repurchase Activity
Total Shares Purchased
Average Price
Paid Per Share 
(1)
Total Shares Purchased As Part Of Publicly Announced Programs
Remaining Authorized Repurchases (2)
June 28, 2014 - July 25, 2014

$


$75.1 million
July 26, 2014 - August 22, 2014
254,700

45.29

254,700

$63.6 million
August 23, 2014 - September 26, 2014
75,300

46.88

75,300

$60.0 million
Total
330,000

 
330,000

 
(1)
Average price paid per share excludes commission costs.
(2)
Amounts represent the approximate dollar value of the maximum remaining number of shares that may yet be purchased under the stock repurchase program, and excludes commission costs.
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 26, 2014. The figures represented below assume an investment of $100 in our Class A common stock at the closing price of $37.99 on September 25, 2009, 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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PART II
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 26, 2014 and September 27, 2013, and consolidated statements of operations data for the fiscal years ended September 26, 2014, September 27, 2013, and September 28, 2012 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 30, 2011 and September 24, 2010 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.

 
Fiscal Year Ended
 
September 26,
2014
September 27,
2013
September 28,
2012
September 30,
2011
September 24,
2010
Reclassified implementation licensee settlements
N/A
N/A
$
6,750

$
5,560

$
7,840

 
Fiscal Year Ended
 
September 26,
2014
September 27,
2013
September 28,
2012
September 30,
2011
September 24,
2010
 
(in thousands, except per share amounts)
Operations:
 
 
 
 
 
Revenue
$
960,176

$
909,674

$
933,014

$
961,065

$
930,553

Gross margin
890,000

812,955

840,987

849,894

790,898

Operating expenses
616,282

567,693

478,995

420,161

369,357

Income before provision for income taxes
276,099

250,646

368,991

440,643

437,012

Net income attributable to Dolby Laboratories, Inc.
206,103

189,271

264,302

309,267

283,447

 
 
 
 
 
 
Net Income Per Share:
 
 
 
 
 
Basic
$
2.02

$
1.86

$
2.47

$
2.78

$
2.50

Diluted
$
1.99

$
1.84

$
2.46

$
2.75

$
2.46

Weighted-Average Shares Outstanding:
 
 
 
 
 
Basic
102,151

101,879

106,926

111,444

113,452

Diluted
103,632

102,788

107,541

112,554

115,388

 
 
 
 
 
 
Cash dividends paid per common share
$

$
4.00

$

$

$

 
 
September 26,
2014
September 27,
2013
September 28,
2012
September 30,
2011
September 24,
2010
 
(in thousands)
Cash and cash equivalents
$
568,472

$
454,397

$
492,600

$
551,512

$
545,861

Working capital
816,481

639,907

813,446

999,213

894,657

Short-term and long-term investments
527,543

446,605

664,307

664,078

493,106

Total assets
1,984,012

1,737,945

1,960,798

1,884,387

1,711,772

Long-term debt





Total stockholders’ equity—Dolby Laboratories, Inc.
1,731,648

1,481,110

1,720,269

1,663,513

1,473,737


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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
Following are highlights of our progress in key revenue areas during fiscal 2014:
Broadcast. We focused on growth opportunities in emerging markets where the potential for high volume in TV and set-top boxes ("STBs") is significant and the transition to digital broadcast is still in the early stages. We worked with country-specific operators and standards bodies to encourage adoption of our technologies for digital television and high definition content. To date, we’ve made notable progress in China and India, two of our largest market opportunities in Asia. In both of these countries, over two-thirds of HD channels are now in Dolby. During the year, Dolby Digital Plus was confirmed in five new standards - India, Russia, United Arab Emirates, Kenya, and most recently, Nigeria. Also as a result of our efforts, over thirty new pay TV operators have included Dolby Digital Plus in their STBs this year.
Mobile. We continued to promote the adoption of our technologies in smartphones and tablets across various mobile ecosystems. In the Amazon ecosystem, our technologies now enhance the audio experience in the Prime Instant Video library, Fire TV, the Fire phone, and the full line of Kindle Fire tablets. In the Windows ecosystem, our technologies continue to enhance playback in the Windows 8 operating system for PCs and tablets. In the Android ecosystem, unlike previous Samsung models, our technology was not offered in the Samsung Galaxy S5 which is their most recent flagship model. However, Dolby technologies are now included in a broad array of other smartphones and tablets to which some six mobile over-the-top service providers now stream in Dolby.
Cinema. In 2012, we launched Dolby Atmos, an object-oriented audio platform that allows for precision, flexibility and realism in sound placement. Since then, we have steadily established this new offering by working closely with studios, content creators, post-production facilities and exhibitors. As at the end of our current fiscal year, we had over seven hundred Dolby Atmos-enabled screens installed or committed to be installed, compared to a year ago when we had more than three hundred such screens. Similarly, we had one hundred and eighty Dolby Atmos movie titles released or announced for release compared to over seventy such titles a year ago. Fourteen of the fifteen highest grossing titles in 2014 were in Dolby Atmos.

OPPORTUNITIES, CHALLENGES AND RISKS
We are focused on several key objectives including:
Developing New Growth Drivers
We continue to invest significant resources to develop technologies and successfully bring solutions to market.
Dolby Voice
With outstanding fidelity, spatial perception, and background noise suppression, Dolby Voice is an audio conferencing solution that enables virtual meetings to sound and feel more like in-person meetings. Launched a year ago in global partnership with BT, a leading provider of audio and imaging conferencing systems, deployment of Dolby Voice continues with numerous companies in trial with the solution, and others in the implementation process. We recently launched a Dolby Voice mobile application to extend the in-person experience to mobile devices, and we announced the Dolby Voice conference phone, which we expect to be available in the first quarter of fiscal 2015. By offering the complete solution, we expect additional momentum behind ongoing deployment of the service. Ultimately, our success in this market will depend on our ability to differentiate this service on its technical merits, and encourage customer acceptance amid long-standing competition.

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Dolby Vision
In early 2014, we introduced our latest imaging technology, Dolby Vision which offers more realistic distinctions in color, brighter highlights and improved shadow details. The technology focuses on the image quality each pixel represents and is not dependent on the number of pixels. To date, the content community has expressed strong support for this innovation. We are working to build out the ecosystem for this solution which includes enabling the post-production and color grading processes to create content in Dolby Vision. This, along with our ability to successfully work with manufacturers, will dictate whether we facilitate the launch of new offerings using Dolby Vision in the near future.
Increasing The Adoption Of Our Technologies
Many devices now designed for enhanced capture and playback present a challenge for content creators and device manufacturers seeking consistent audio and image quality especially amid bandwidth constraints. We believe this challenge provides opportunities for us to provide solutions designed to optimize the audio and visual experience across the broadcast and mobile markets.
Broadcast Market
Broadcast services that operate under bandwidth constraints, such as terrestrial broadcast or Internet protocol television (“IPTV”) services, benefit from Dolby technologies. These technologies enable the delivery of high quality audio content at reduced bit rates, thereby conserving bandwidth. We derive significant revenue from licensing our technologies to OEMs of televisions and set-top boxes since a high percentage of global sales of TV and STBs are shipped with our technologies, especially in North America and Europe. As emerging markets convert to digital television, particularly in China and India, we are well positioned to benefit from this transition. Our growth in these markets is dependent, in part, upon continued adoption of our technologies. To this end, we continue to develop, maintain and strengthen relationships across the broad spectrum of entertainment industry participants, professional organizations, and global standards-setting bodies. To the extent that we are unable to succeed in these efforts, incorporation of our technologies into these products will be impacted and future revenues will be adversely affected.
Mobile Market
Our mobile market is largely driven by sales of smartphones, tablets and other mobile devices that use our technologies. Growth in this market is dependent on several factors, including the performance of the mobile device market as a whole, our success in collaborating with manufacturers of mobile devices to incorporate our technologies, and the development of various ecosystems, which includes the availability of content in Dolby formats. Currently, Dolby audio technologies are featured on various smartphones and tablets in the Android, Windows 8 and Amazon ecosystems. However, the rate of new product development in this sector continues to be rapid and can result in dramatic swings in consumer trends and design changes that may exclude our technologies. By working with existing and additional partners to further enhance the content, distribution and playback of all ecosystems, we hope to drive further growth across these markets.
Expanding the Dolby Atmos Ecosystem
Dolby Atmos, the immersive, object-based sound technology originally developed for the cinema environment, is now available for the living room. Using Dolby Atmos-enabled hardware to customize soundtracks over a speaker array, we can deliver full Dolby Atmos playback by using either Blu-ray Disc media or streaming content services. To this end, several manufacturers have announced Dolby Atmos-compatible AV receivers and pre-processors as well as speaker add-on modules, and a home theater-in-a-box offering. In addition, we have partnered with major studios to release feature titles via streaming services and Blu-ray Disc, and will continue to work with content developers and distributors to expand entertainment selections using the Dolby Atmos format. Lastly, we are also focused on extending this technology to the mobile market, and the recent announcement of the next-generation Fire HDX 8.9 tablet marks the first mobile device to deliver the Dolby Atmos sound experience. Expanding this ecosystem depends on several factors including market acceptance of Dolby Atmos for immersive audio entertainment in content creation, distribution and playback across various channels and devices.

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Revenue From Significant Customers
In fiscal 2014 and 2013, revenue from Samsung represented approximately 11% and 12% of our total revenue, respectively, and consisted primarily of licensing revenue from our mobile and broadcast markets. Revenue from Samsung did not exceed 10% of our total revenue in fiscal 2012. Although revenue from Microsoft did not exceed 10% of our total revenue in either fiscal 2014 or 2013, revenue from Microsoft did represent approximately 14% of our total revenue in fiscal 2012, and included licensing revenue from our PC, CE, and other markets. Under the Windows 8 arrangement, our technologies are embedded in the entire operating system for tablets and PCs, for which we receive royalty payments primarily from PC OEMs in addition to royalties from Microsoft. For versions prior to Windows 8, our technologies were only included in certain configurations of these operating system versions, and we were paid a royalty by Microsoft. Additionally, other PC licensees such as ISVs paid us a royalty for the inclusion of their software that incorporated our technologies.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States (“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, revenue and expenses. The SEC considers an accounting policy and estimate to be critical if it is both important to a company’s financial condition or results of operations, and requires significant judgment by management in its application. If actual results or events differ materially from our judgments and estimates, our reported financial condition and results of operation for future periods could be materially affected. Historically, actual results have not differed significantly from our estimates and assumptions. On a regular basis, we evaluate our assumptions, judgments, and estimates and these have not changed notably in recent years nor do we anticipate them to change notably in the future. We have reviewed the selection and development of the critical accounting policies and estimates discussed below with the Audit Committee of our Board of Directors.
Goodwill, Intangible Assets, and Long-Lived Assets
As part of our annual goodwill impairment test, we first evaluate goodwill to determine if it is more likely than not that the occurrence of an event or change in circumstances has reduced the fair value of a reporting unit below its carrying value. This qualitative assessment requires that we consider events or circumstances that may include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy and changes in customers.
If the qualitative assessment indicates that the two-step quantitative analysis should be performed, we exercise judgment at various steps, including the identification of reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. We assess the fair value of each reporting unit using expected cash flows that reflect our best estimate of future revenue using our historical information, third-party industry data, and review of our internal operations. We also estimate operating costs using these sources. We adjust expected future cash flows by discount rates based on our weighted average cost of capital and related considerations. The estimates used to calculate the fair value of a reporting unit may change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment, if any, for each reporting unit.
Intangible assets and long-lived assets subject to amortization and depreciation, respectively, are only evaluated for impairment upon a significant change in the operating or macroeconomic environment. If an asset's undiscounted future cash flows are lower than its carrying value, the asset is written down to its estimated fair value, which is based on its discounted future cash flows. Assessing discounted future cash flows requires management to make assumptions and exercise judgment in forecasting revenues and the useful lives of assets, as well as selecting the discount rate that reflects the risk inherent in our future cash flows.
Income Taxes
We make estimates and judgments that affect our accounting for income taxes. This includes estimating temporary differences from differing treatment of items for tax and accounting purposes, future taxable income and actual tax exposure, possible or likely changes in current tax laws, and uncertainties in tax positions. These differences 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. Lastly, we are subject to the review of our

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income tax returns by the IRS and other tax authorities here in the U.S. and abroad. We periodically assess the likelihood of adverse outcomes from these examinations to determine the adequacy of our provision for income taxes.
Investments
We periodically value and review our marketable securities for impairment. In fair valuing our investments, we make estimates and exercise judgment based upon the market pricing information available, the availability of observable inputs, the frequency of trading in the investments and the investments' complexity. If we made different judgments regarding inputs, we could potentially reach different conclusions regarding the fair value of our investments. If we conclude that any investments are impaired, we determine whether such impairment is other-than-temporary. Considerations for this determination include the duration and severity of the impairment, the reason for the decline in value and the potential recovery period, and our intent to sell. If any impairment is deemed to be other-than-temporary, we record an impairment charge that results in a new cost basis for the investment.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable, and collection is probable. Determining whether and when these criteria have been satisfied may involve assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.
Revenue recognition for transactions may include multiple elements such as hardware and accompanying software, upgrade rights, support and maintenance, and rights to receive commissioning services in connection with certain digital servers. For these transactions, we may also have to exercise judgment in the following areas:
Identify the significant deliverables within the arrangements and determine whether the significant deliverables constitute separate units of accounting;
Assess inputs used to determine selling price (whether vendor-specific objective evidence, third-party evidence, or estimated selling price) for the significant deliverables;
Estimate, as necessary, the period of time over which customers receive certain elements of the arrangement following initial delivery so as to assess the period over which revenue should be recognized.
Stock-Based Compensation
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
For each line item included on our consolidated statement of operations, the significant factors identified as the leading drivers contributing to the fluctuation are presented in descending order according to the magnitude of their impact on the overall change.
 
Revenue and Gross Margin
Licensing
Licensing revenue consists of fees earned from licensing our technologies to customers who incorporate them into their products to enable and enhance audio and imaging capabilities. The technologies that we license are either internally developed, acquired, 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.

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Fiscal Year Ended
 
2014 vs. 2013
 
2013 vs. 2012
Licensing
September 26,
2014
September 27,
2013
September 28,
2012
 
$
%
 
$
%
Revenue
$
878,844

$
807,081

$
801,313

 
$
71,763

9
 %
 
$
5,768

1
%
Percentage Of Total Revenue
92
%
89
%
86
%
 
 
 
 
 
 
Cost Of Licensing
10,814

16,856

12,924

 
(6,042
)
(36
)%
 
3,932

30
%
Gross Margin
868,030

790,225

788,389

 
77,805

10
 %
 
1,836

%
Gross Margin Percentage
99
%
98
%
98
%
 
 
 
 
 
 

FY 2014 vs. FY 2013
Factor
Revenue
Gross Margin
Broadcast
á
Increase in net back payments received for royalties, higher settlements received including $24.7 million from a large licensee, and higher volumes of TV and STB shipments that incorporate our technologies
á
Decrease in cost of licensing due to the release of a previously-accrued liability of $4.7 million in the fourth quarter of the current fiscal year
related to certain revenue sharing agreements
PC
â
Lower revenues associated with the transition to the Windows 8 business model and lower unit shipments from declines in the underlying PC market
Mobile
á
Increase in direct patent licensing revenues from mobile phones, settlements and unit growth of tablets that incorporate our technologies
Other
á
Higher revenues from our gaming market largely attributable to the new PlayStation 4 and Xbox One game consoles that were launched in the late 2013 calendar year
â
Non-recurring revenue recognized in the third quarter of fiscal 2013 from a licensing arrangement for certain imaging technologies outside of our core markets
CE
á
Higher shipment volumes of soundbars and digital media adapters that incorporate our technologies, partially offset by a decrease in shipment volumes of Blu-ray Disc devices and AVRs

FY 2013 vs. FY 2012
Factor
Revenue
Gross Margin
Mobile
á
Higher shipment volumes of smartphones that incorporate our technologies as well as the recognition of previously deferred tablet revenue
ßà
Although gross margin remained consistent, cost of licensing increased primarily due to greater third-party fees for higher royalty revenue, and a $3.9 million charge related to revenue-sharing agreements
Broadcast
á
Higher volumes of TV and STB shipments that incorporate our technologies
PC
â
Lower unit shipments from declines in the underlying PC market
CE
â
Lower revenue from DVD and Blu-ray Disc devices that incorporate our technologies
Other
á
Non-recurring revenue recognized in the third quarter of fiscal 2013 from a licensing arrangement for certain imaging technologies outside of our core markets
â
Lower shipment volumes of PlayStation and Xbox game consoles that incorporate our technologies
Products
Products revenue is generated from the sale of audio and imaging products for the film production, cinema, and television broadcast industries. Cost of products consists primarily 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
 
2014 vs. 2013
 
2013 vs. 2012
Products
September 26,
2014
September 27,
2013
September 28,
2012
 
$
%
 
$
%
Revenue
$
59,219

$
80,603

$
103,388

 
$
(21,384
)
(27
)%
 
$
(22,785
)
(22
)%
Percentage Of Total Revenue
6
%
9
%
11
%
 
 
 
 
 
 
Cost Of Products
45,132

64,270

66,325

 
(19,138
)
(30
)%
 
(2,055
)
(3
)%
Gross Margin
14,087

16,333

37,063

 
(2,246
)
(14
)%
 
(20,730
)
(56
)%
Gross Margin Percentage
24
%
20
%
36
%
 
 
 
 
 
 


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FY 2014 vs. FY 2013
Factor
Revenue
Gross Margin
Digital Cinema - Video
â
Lower shipments and lower average selling prices on products
á
Improved product mix with higher margins and lower warranty charges
Digital Cinema - Audio
â
Lower shipments and lower average selling prices on digital cinema audio processors
ßà
Improved product mix with higher margins offset by higher excess manufacturing capacity charges
á
Higher shipments of Dolby Atmos processors
3D Cinema
â
Lower shipments of 3D glasses and 3D projector kits
â
Less favorable product mix, lower average selling prices and higher excess manufacturing capacity charges

FY 2013 vs. FY 2012
Factor
Revenue
Gross Margin
Digital Cinema - Video
â
Lower unit shipments and lower average selling prices
â
Lower average selling prices and increased unit costs
Film-Based Cinema
â
Lower shipments from industry transition to digital cinema
â
Less favorable product mix and higher excess manufacturing capacity charges partially offset by lower unit costs in addition to higher average selling prices
3D Cinema
â
Lower shipments of glasses and adapter equipment and lower average selling prices for adapter equipment
â
Driven by higher discrete charges related to write-downs of excess inventory and lower average selling prices
Digital Cinema - Audio
á
Global theater installations of Dolby Atmos processors for which we began recognizing revenue in fiscal 2013
á
Higher margins on installations of Dolby Atmos processors
á
Higher shipments of our digital cinema audio processors
â
Lower average selling prices and higher unit costs
Services
Services revenue consists of fees for consulting, commissioning and training services in support of film production and television broadcast. Cost of services consists primarily of personnel and related costs, the cost of outside consultants, and other direct expenses incurred on behalf of customers.
 
Fiscal Year Ended
 
2014 vs. 2013
 
2013 vs. 2012
Services
September 26,
2014
September 27,
2013
September 28,
2012
 
$
%
 
$
%
Revenue
$
22,113

$
21,990

$
28,313

 
$
123

1
 %
 
$
(6,323
)
(22
)%
Percentage Of Total Revenue
2
%
2
%
3
%
 
 
 
 
 
 
Cost Of Services
14,230

15,593

12,778

 
(1,363
)
(9
)%
 
2,815

22
 %
Gross Margin
7,883

6,397

15,535

 
1,486

23
 %
 
(9,138
)
(59
)%
Gross Margin Percentage
36
%
29
%
55
%
 
 
 
 
 
 

FY 2014 vs. FY 2013
Factor
Revenue
Gross Margin
Configuration & Post-Production
á
Higher commissioning services for Dolby Atmos-enabled cinemas and related maintenance services, partially offset by declines in digital mastering services
á
Comparatively lower installation expenses in the current fiscal year relative to the prior fiscal year which reflected higher labor costs to prepare exhibitor facilities
Film-Based Production
â
Declines in film-based production services consistent with the industry transition to digital cinema
á
Lower labor and other related costs
FY 2013 vs. FY 2012
Factor
Revenue
Gross Margin
Film-Based Production
â
Declines in film-based production services consistent with the industry transition to digital cinema
â
Decreased revenues from certain higher margin service offerings
Other
á
Increase from support and maintenance services from a higher volume of equipment in the field that are covered under our service programs
â
Increase in costs associated with exhibitor installations of Dolby Atmos equipment

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Operating Expenses
Research and Development
Research and Development ("R&D") expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, consulting and contract labor costs, depreciation and amortization, facilities costs, costs for outside materials and services, and information technology expenses.
 
Fiscal Year Ended
 
2014 vs. 2013
 
2013 vs. 2012
 
September 26,
2014
September 27,
2013
September 28,
2012
 
$
%
 
$
%
Research and Development
$
183,128

$
168,746

$
140,143

 
$
14,382

9
%
 
$
28,603

20
%
Percentage of total revenue
19
%
19
%
15
%
 
 
 
 
 
 

FY 2014 vs. FY 2013
Category
Key Drivers
Compensation & Benefits
á
Higher employee headcount aimed at developing new product and technology offerings and related expenses, merit increases and higher variable compensation costs
Professional & Consulting Fees
â
Lower one-time costs related primarily to the funding of various research projects and initiatives

FY 2013 vs. FY 2012
Category
Key Drivers
Compensation & Benefits
á
Higher employee headcount aimed at increasing the amount of new product offerings and solutions
Stock-Based Compensation
á
Higher employee 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 7 for additional information)
Information Technology
á
Increase in projects and activities aimed at developing new products and technologies
Product Development
á

Sales and Marketing
Sales and Marketing ("S&M") 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, and information technology expenses.
 
Fiscal Year Ended
 
2014 vs. 2013
 
2013 vs. 2012
 
September 26,
2014
September 27,
2013
September 28,
2012
 
$
%
 
$
%
Sales and Marketing
$
252,647

$
231,103

$
188,486

 
$
21,544

9
%
 
$
42,617

23
%
Percentage of total revenue
26
%
25
%
20
%
 
 
 
 
 
 

FY 2014 vs. FY 2013
Category
Key Drivers
Compensation & Benefits
á
Driven by the impact of merit increases across the existing employee base and higher variable compensation costs
Legal, Professional & Consulting Fees
á
Higher consulting and other costs associated with expanded marketing programs for numerous initiatives
á
Higher professional fees for intellectual property related activities
Marketing Programs
á
Expanded marketing programs for various growth initiatives
á
Higher costs associated with industry trade shows and other marketing events

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FY 2013 vs. FY 2012
Category
Key Drivers
Compensation & Benefits
á
Higher employee 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
Higher employee 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 7 for additional information)
Marketing Programs
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
Facilities & Related Costs
á
Increase in the number of offices and leasehold improvements at both new and existing locations where sales and marketing is conducted
Depreciation
á

General and Administrative
General and Administrative ("G&A") expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, depreciation, facilities and information technology costs, as well as professional fees and other costs associated with external consulting and contract labor.
 
Fiscal Year Ended
 
2014 vs. 2013
 
2013 vs. 2012
 
September 26,
2014
September 27,
2013
September 28,
2012
 
$
%
 
$
%
General and Administrative
$
178,104

$
161,970

$
149,175

 
$
16,134

10
%
 
$
12,795

9
%
Percentage of total revenue
19
%
18
%
16
%
 
 
 
 
 
 

FY 2014 vs. FY 2013
Category
Key Drivers
Compensation & Benefits
á
Higher employee headcount, in addition to the impact of merit increases across the existing employee base and higher variable compensation costs
Legal, Professional & Consulting Fees
á
Costs incurred in connection with our pending acquisition of Doremi Labs; an increase in costs associated with patent filings and other legal activities; and an increase in various IT & HR project costs

FY 2013 vs. FY 2012
Category
Key Drivers
Compensation & Benefits
á
Higher employee headcount
Stock-Based Compensation
á
Higher employee 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 7 for additional information)
Legal, Professional & Consulting Fees
á
Attributed to patent filings and other legal activities
â
Due to conversions from consultants to full-time hires and lower volume of contracted resources

Restructuring
 
Fiscal Year Ended
 
2014 vs. 2013
 
2013 vs. 2012
 
September 26,
2014
September 27,
2013
September 28,
2012
 
$
%
 
$
%
Restructuring
$
2,403

$
5,874

$
1,191

 
$
(3,471
)
(59
)%
 
$
4,683

393
%
Percentage of total revenue
%
1
%
%
 
 
 
 
 
 
Restructuring charges recorded in the fiscal periods presented above represent amounts recorded in relation to separate restructuring plans implemented in each of these fiscal years. The extent of restructuring charges recorded and fluctuations in a given fiscal year as compared to other fiscal years are attributed to differences in the nature of activities under the various plans.

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Restructuring charges incurred in relation to our Fiscal 2014 Restructuring Plan implemented during the first quarter of fiscal 2014 represent costs to reorganize and consolidate certain activities and positions within our global business infrastructure. These charges primarily related to severance and other related benefits provided to employees that were affected as a result of this action.
Restructuring charges for fiscal 2013 include the expenses we incurred in relation to a strategic restructuring program implemented 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. During the third quarter of fiscal 2014, we recognized a credit of $0.7 million representing the release of a previously-accrued exit obligation for this facility following its sale.
Restructuring charges for fiscal 2012 primarily include severance charges attributable to the reorganization of our global business infrastructure and a strategic restructuring program.

Other Income/Expense
Other income/(expense) typically consists of interest income earned on cash, cash equivalents, and investments and the net gains/(losses) from foreign currency transactions, derivative instruments, and sales of marketable securities from our investment portfolio.
 
Fiscal Year Ended
 
2014 vs. 2013
 
2013 vs. 2012
Other Income/Expense
September 26,
2014
September 27,
2013
September 28,
2012
 
$
%
 
$
%
Interest Income
$
3,344

$
3,848

$
6,411

 
$
(504
)
(13
)%
 
$
(2,563
)
(40
)%
Interest Expense
183

(575
)
(196
)
 
758

(132
)%
 
(379
)
193
 %
Other Income/(Expense), Net
(1,146
)
2,111

784

 
(3,257
)
(154
)%
 
1,327

169
 %
Total
$
2,381

$
5,384

$
6,999

 
$
(3,003
)
(56
)%
 
$
(1,615
)
(23
)%
FY 2014 vs. FY 2013
Category
Key Drivers
Other Income/Expense
â
Increase in other expense due to an impairment charge in the second quarter of fiscal 2014 on a cost method investment
â
Decrease in other income due to lower realized gains from the sale of investment securities during the current fiscal year-to-date period as the prior comparative period benefited from a substantially higher volume of sales of securities to fund the special dividend payment in the first quarter of fiscal 2013
Interest Expense
á
Decrease primarily relates to a credit to interest expense for the release of accrued interest on royalties payable under a patent agreement.
Interest Income
â
Lower interest income due to reduced yields on investment balances during the current fiscal year-to-date period relative to the prior comparative period following the special dividend payment in the first quarter of fiscal 2013
FY 2013 vs. FY 2012
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
á
Higher 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
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 10Income Taxes” to our consolidated financial statements.
 
Fiscal Year Ended
 
September 26,
2014
September 27,
2013
September 28,
2012
Provision for income taxes
$
(67,379
)
$
(60,344
)
$
(103,857
)
Effective tax rate
24
%
24
%
28
%

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FY 2014 vs. FY 2013
Factor
Impact On Effective Tax Rate
Foreign Operations
â
Increased benefits in the current fiscal year due to a higher proportion of earnings from lower tax-rate jurisdictions
Federal R&D Credits
á
Reduced benefits from federal R&D credits that expired after December 2013 and have not been reinstated
Foreign Operations Reorganization
á
Following the re-organization of a foreign subsidiary, increased benefits in the third quarter of fiscal 2013 which did not occur in the current fiscal year

FY 2013 vs. FY 2012
Factor
Impact On Effective Tax Rate
Reinstatement of Federal R&D Tax Credits
â
Benefits 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
Following our reorganization of certain foreign subsidiaries’ operations, increased benefits to our fiscal 2013 tax rate of 3% from the release of $7.4 million of accrued federal taxes

LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
Our principal sources of liquidity are cash, cash equivalents, and investments, as well as cash flows from operations. We believe that these sources will be sufficient to satisfy our currently anticipated cash requirements through at least the next twelve months. As of September 26, 2014, we had cash and cash equivalents of $568.5 million, which consisted of cash and highly-liquid money market funds. In addition, we had short and long-term investments of $527.5 million, which consisted primarily of municipal debt securities, commercial paper, corporate bonds, and U.S. agency securities.
Our policy is to indefinitely reinvest a portion of our undistributed earnings in certain foreign subsidiaries to support the operations and growth of these subsidiaries. Of our total cash, cash equivalents, and investments held as of September 26, 2014, approximately $417 million, or 38%, was held by our foreign subsidiaries. This represented a $151 million increase from the $266 million that was held by our foreign subsidiaries as of September 27, 2013. 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 the applicable foreign tax credits.
 
September 26,
2014
September 27,
2013
 
(in thousands)
Cash and cash equivalents
$
568,472

$
454,397

Short-term investments
231,208

140,267

Long-term investments
296,335

306,338

Accounts receivable, net
86,168

97,460

Accounts payable and accrued liabilities
174,274

148,490

Working capital (1)
816,481

645,764

(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, laboratory equipment, 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 to prepare the building for its intended use as our new worldwide headquarters.
Additionally, we purchased a commercial office building that we had been occupying under a lease in Sunnyvale, California for $19.7 million using existing cash during fiscal 2014. Refer to Note 5Property, Plant & Equipment” to our consolidated financial statements for additional information on this transaction.
During the second quarter of fiscal 2014, we entered into a definitive agreement to acquire Doremi Labs, a privately held company headquartered in Burbank, California, for $92.5 million in cash, payable during the first quarter

33

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of fiscal 2015, and an additional $20.0 million in contingent consideration that may be earned over a four-year period. For additional details, see Note 13Acquisitions” to our consolidated financial statements.
During the first quarter of fiscal 2013, our Board of Directors declared a special dividend of $4.00 per share on our Class A and Class B common stock. The special dividend was paid 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 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.
On October 23, 2014, we announced the initiation of a quarterly dividend to stockholders, with the first quarterly dividend declared by our Board of Directors on October 21, 2014. The first dividend payment of $0.10 per share of Class A and Class B Common Stock will be paid on November 20, 2014 to the stockholders of record as of the close of business on November 3, 2014. Based on the 102,282,102 shares of common stock outstanding as of the record date, the total dividend payment will be $10.2 million. To fund the dividend payment, we will use existing cash reserves.
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 I, Item 1ARisk Factors.”
Indemnification Clauses
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. Since the terms and conditions of the indemnification clauses do not explicitly specify our obligations, we are unable to reasonably estimate the maximum potential exposure for which we could be liable. For additional details regarding indemnification clauses within our contractual agreements, see Note 12Commitments & Contingencies” to our consolidated financial statements.
Cash Flows
For the following year-to-date comparative analysis performed for each of the sections of the statement of cash flows within this section, the significant factors identified as the leading drivers contributing to the fluctuation are presented in descending order according to the magnitude of their impact on the overall change (amounts displayed in thousands, except as otherwise noted).
Operating Activities
 
Fiscal Year Ended
 
September 26,
2014
September 27,
2013
Net cash provided by operating activities
$
361,547

$
276,501

Net cash provided by operating activities increased $85.0 million from the fiscal year ended September 27, 2013 as compared to the fiscal year ended September 26, 2014, primarily due to the following:
Factor
Impact On Cash Flows
Changes in operating assets and liabilities
á
Higher cash collections during the current fiscal year-to-date period
Net Income
á
Higher revenues partially offset by higher operating expenses

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Investing Activities
 
Fiscal Year Ended
 
September 26,
2014
September 27,
2013
Net cash provided by/(used in) investing activities
$
(204,944
)
$
175,025

Capital expenditures
(78,718
)
(26,711
)
Net cash provided by/(used in) investing activities decreased $380.0 million from the fiscal year ended September 27, 2013 as compared to the fiscal year ended September 26, 2014, primarily due to the following:
Factor
Impact On Cash Flows
Proceeds from sales of investments
â
Lower cash inflows due to a decrease in proceeds received from sales of marketable securities as compared to fiscal 2013 when we sold significant holdings to fund the special dividend payment
Purchase of investments
á
Lower cash outflows as we purchased less available-for-sale marketable securities in fiscal 2014
Purchase of long-lived assets
â
Higher cash outflows for purchases of property, plant, and equipment & intangible assets
Financing Activities
 
Fiscal Year Ended
 
September 26,
2014
September 27,
2013
Net cash used in financing activities
$
(40,580
)
$
(487,964
)
Repurchase of common stock
(56,028
)
(82,245
)
Net cash used in financing activities was $447.4 million lower in the fiscal year ended September 26, 2014 as compared to the fiscal year ended September 27, 2013, primarily due to the following:
Factor
Impact On Cash Flows
Dividend Payment
á
A special dividend of $408.2 million was paid to holders of our Class A and Class B common stock in the first quarter of fiscal 2013, and no such payment was made in the current fiscal year
Share Repurchases
á
Lower cash outflows as we made fewer share repurchases of our common stock in fiscal 2014 relative to fiscal 2013
Common Stock Issuance
á
Higher cash inflows associated with the issuance of shares of our common stock from an increase in employee stock option exercises and shares issued under our ESPP during fiscal 2014
Off-Balance Sheet Arrangements and Contractual Obligations
As at September 26, 2014, we did not engage in off-balance sheet financing arrangements other than operating leases for office space and computer equipment, and the following table presents a summary of our contractual obligations and commitments as of that date (in thousands):
 
Payments Due By Period
 
1 Year
2 - 3
Years
4 - 5
Years
More Than
5 Years
Total
Naming rights
$
7,432

$
15,144

$
15,526

$
110,888

$
148,990

Donation commitments

6,045

134

805

6,984

Operating leases
14,384

17,936

13,234

34,034

79,588

Purchase obligations
9,442

1,872



11,314

Total
$
31,258

$
40,997

$
28,894

$
145,727

$
246,876

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 twenty 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.
Donation Commitments.    Our donation commitments relate to non-cancelable obligations to the Museum of the Academy of Motion Picture Arts and Sciences in Los Angeles, California. We will make a one-time donation of installing imaging and audio products in its theatres, and provide maintenance services for fifteen years from its expected opening date of 2017.

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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 26, 2014.
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 26, 2014, we had an accrued liability for unrecognized tax benefits and related interest and penalties, net of related deferred tax assets, totaling $31.4 million. We are unable to estimate when any cash settlement with a taxing authority might occur.
For additional details regarding our contractual obligations, see Note 12Commitments & Contingencies” to our consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
As of September 26, 2014, we had cash and cash equivalents of $568.5 million, which consisted of cash and highly liquid money market funds. In addition, we had short-term and long-term investments of $527.5 million, which consisted primarily of municipal debt securities, corporate bonds, commercial paper and U.S. agency securities. Our investment policy is focused on the preservation of capital and supporting our liquidity requirements. Under the policy, we invest in highly rated securities with a minimum credit rating of A- while limiting the amount of credit exposure to any one issuer other than the U.S. government. At September 26, 2014, our weighted-average portfolio credit quality was AA and the weighted-average maturity of our investment portfolio was approximately fifteen months. We do not invest in financial instruments for trading or speculative purposes, nor do we use leveraged financial instruments. We utilize external investment managers who adhere to the guidelines of our investment policy.
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 26, 2014, hypothetical changes in interest rates of 1% and 0.5% would have an impact on the carrying value of our portfolio of approximately $5.3 million and $2.6 million, respectively.
Foreign Currency Exchange Risk
We maintain business operations in foreign countries, most significantly in the United Kingdom, Australia, China, Germany, Poland and the Netherlands. Additionally, a growing portion of our business is conducted outside of the U.S. through subsidiaries with functional currencies other than the U.S. dollar, most notably:
Australian Dollar
British Pound
Chinese Yuan
Euro
Indian Rupee
Japanese Yen
Korean Won
Polish Zloty
Swedish Krona
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.

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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 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 26, 2014 and September 27, 2013, the outstanding derivative instruments had maturities of 31 days or less and the total notional amounts of outstanding contracts were $22.9 million and $11.6 million, respectively. The fair values of these contracts were nominal as of September 26, 2014 and September 27, 2013, 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 2 "Summary of Significant Accounting Policies" to our consolidated financial statements.
A sensitivity analysis was performed on all of our foreign currency forward contracts as of September 26, 2014. 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 $0.8 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 $0.8 million.

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


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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 26, 2014 and September 27, 2013, 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 26, 2014. 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 26, 2014 and September 27, 2013, and the results of their operations and cash flows for each of the years in the three-year period ended September 26, 2014, 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.'s internal control over financial reporting as of September 26, 2014, 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 17, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP
San Francisco, California
November 17, 2014

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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Dolby Laboratories, Inc.:
We have audited Dolby Laboratories, Inc.'s internal control over financial reporting as of September 26, 2014, 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.'s 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 26, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by COSO.
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 26, 2014 and September 27, 2013, 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 26, 2014, and our report dated November 17, 2014 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP
San Francisco, California
November 17, 2014

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Table of Contents


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

 
September 26,
2014
September 27,
2013
ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
$
568,472

$
454,397

Restricted cash
2,142

3,175

Short-term investments
231,208

140,267

Accounts receivable, net of allowance for doubtful accounts of $1,615 and $514
86,168

97,460

Inventories
8,536

10,093

Deferred taxes
86,445

84,238

Prepaid expenses and other current assets
22,880

28,949

Total current assets
1,005,851

818,579

Long-term investments
296,335

306,338

Property, plant and equipment, net
289,755

242,917

Intangible assets, net
63,700

41,315

Goodwill
277,574

279,724

Deferred taxes
41,746

37,434

Other non-current assets
9,051

11,638

Total assets
$
1,984,012

$
1,737,945

 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
Current liabilities:
 
 
Accounts payable
$
15,898

$
10,695

Accrued liabilities
158,376

137,795

Income taxes payable
2,600

3,394

Deferred revenue
12,496

20,931

Total current liabilities
189,370

172,815

Long-term deferred revenue
19,279

19,663

Other non-current liabilities
43,715

45,441

Total liabilities
252,364

237,919

 
 
 
Stockholders’ equity:
 
 
Common stock
 
 
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 50,658,627 shares issued and outstanding at September 26, 2014 and 46,862,893 at September 27, 2013
51

47

Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 51,610,239 shares issued and outstanding at September 26, 2014 and 54,876,494 at September 27, 2013
52

55

Additional paid-in capital
46,415

18,812

Retained earnings
1,660,485

1,454,382

Accumulated other comprehensive income
3,014

7,814

Total stockholders’ equity – Dolby Laboratories, Inc.
1,710,017

1,481,110

Controlling interest
21,631

18,916

Total stockholders’ equity
1,731,648

1,500,026

Total liabilities and stockholders’ equity
$
1,984,012

$
1,737,945




See accompanying notes to consolidated financial statements

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Table of Contents


DOLBY LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
Fiscal Year Ended
 
September 26,
2014
September 27,
2013
September 28,
2012
Revenue:
 
 
 
Licensing
$
878,844

$
807,081

$
801,313

Products
59,219

80,603

103,388

Services
22,113

21,990

28,313

Total revenue
960,176

909,674

933,014

 
 
 
 
Cost of revenue:
 
 
 
Cost of licensing
10,814

16,856

12,924

Cost of products
45,132

64,270

66,325

Cost of services
14,230

15,593

12,778

Total cost of revenue
70,176

96,719

92,027

 
 
 
 
Gross margin
890,000

812,955

840,987

 
 
 
 
Operating expenses:
 
 
 
Research and development
183,128

168,746

140,143

Sales and marketing
252,647

231,103

188,486

General and administrative
178,104

161,970

149,175

Restructuring charges
2,403

5,874

1,191

Total operating expenses
616,282

567,693

478,995

 
 
 
 
Operating income
273,718

245,262

361,992

 
 
 
 
Other income/expense:
 
 
 
Interest income
3,344

3,848

6,411

Interest expense
183

(575
)
(196
)
Other income/(expense), net
(1,146
)
2,111

784

Total other income/expense
2,381

5,384

6,999

 




 
Income before income taxes
276,099

250,646

368,991

Provision for income taxes
(67,379
)
(60,344
)
(103,857
)
Net income including controlling interest
208,720

190,302

265,134

Less: net (income) attributable to controlling interest
(2,617
)
(1,031
)
(832
)
Net income attributable to Dolby Laboratories, Inc.
$
206,103

$
189,271

$
264,302

 
 
 
 
Net Income Per Share:
 
 
 
Basic
$
2.02

$
1.86

$
2.47

Diluted
$
1.99

$
1.84

$
2.46

Weighted-Average Shares Outstanding:
 
 
 
Basic
102,151

101,879

106,926

Diluted
103,632

102,788

107,541

 
 
 
 
Related party rent expense:
 
 
 
Included in operating expenses
$
2,125

$
2,526

$
1,372

Included in net income attributable to controlling interest
$
4,827

$
3,636

$
3,270

 
See accompanying notes to consolidated financial statements

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Table of Contents


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

 
Fiscal Year Ended
 
September 26,
2014
September 27,
2013
September 28,
2012
Net income including controlling interest
$
208,720

$
190,302

265,134

Other comprehensive income:




 
Foreign currency translation adjustments, net of tax
(5,004
)
(2,037
)
3,082

Unrealized gains/(losses) on available-for-sale securities, net of tax
302

(876
)
380

Comprehensive income
204,018

187,389

268,596

Less: comprehensive (income) attributable to controlling interest
(2,715
)
(991
)
(1,140
)
Comprehensive income attributable to Dolby Laboratories, Inc.
$
201,303

$
186,398

$
267,456


See accompanying notes to consolidated financial statements


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Table of Contents


DOLBY LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)

 
Dolby Laboratories, Inc.
 
 
 
Class A
Class B
 
 
 
 
 
 
 
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Dolby
Laboratories,
Inc.
Controlling
Interest
Total
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

Currency translation adjustments, net of tax of $30






2,774

2,774

308

3,082

Unrealized gains on investments, 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 (deficiency) from employee stock plans




(3,585
)


(3,585
)

(3,585
)
Common stock issued under employee stock plans
911




17,279



17,279


17,279

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

Currency translation adjustments, net of tax of $497






(1,997
)
(1,997
)
(40
)
(2,037
)
Unrealized losses on investments, net of tax of $493






(876
)
(876
)

(876
)
Distributions to controlling interest








(5,039
)
(5,039
)
Stock-based compensation expense




64,328



64,328


64,328

Repurchase of common stock
(2,557
)
(2
)


(46,081
)
(36,162
)

(82,245
)

(82,245
)
Cash dividends declared and paid on common stock





(408,206
)

(408,206
)

(408,206
)
Tax (deficiency) from employee stock plans




(6,564
)


(6,564
)