DOLBY LABORATORIES, INC. - S-1/A - 20050119 - OPERATING_EXPENSES
Operating Expenses
Fiscal Year Ended
Change
September 26,
2003
September 24,
2004
In Dollars
Percentage
($ in thousands)
Operating expenses:
Selling, general and administrative (includes $12.7 million in stock-based compensation expense in fiscal 2004)
$
76,590
$
113,477
$
36,887
48
%
Percentage of total revenue
35
%
39
%
Research and development (includes $1.2 million in stock-based compensation expense in fiscal 2004)
18,262
23,884
5,622
31
%
Percentage of total revenue
8
%
8
%
Settlements
(2,000
)
(2,000
)
Percentage of total revenue
(1
)%
In-process research and development
1,310
1,738
428
33
%
Percentage of total revenue
1
%
1
%
Total operating expenses
$
96,162
$
137,099
$
40,937
43
%
Selling,
General and Administrative
. Selling, general and administrative expense consists primarily of personnel and personnel related expenses, facility costs and professional service fees for our sales, marketing and
administrative functions. The $36.9 million, or 48%, increase in selling, general and administrative expense from fiscal 2003 to 2004 was primarily due to a $13.8 million increase in payroll and benefits costs as a result of increased headcount
and performance-based awards and a $12.7 million increase in stock-based compensation expense. To a lesser extent, our selling, general and administrative expense also increased in fiscal 2004 as compared to fiscal 2003 due to an increase of
$7.1 million of expenses incurred in connection with professional and consulting fees related primarily to our preparations for being a public company. These professional and consulting fees included costs incurred in connection with the
implementation of a new enterprise resource planning, or ERP, system, the augmentation of our internal controls related to the Sarbanes-Oxley Act, consulting fees related to an evaluation of our royalty reporting processes, and additional tax and
audit services. We expect that our selling, general and administrative expense will increase in absolute dollars in fiscal 2005, as we continue to build our infrastructure in order to accommodate growth and to meet the requirements of being a public
company. We expect to continue to incur additional costs associated with Sarbanes-Oxley Act compliance efforts, as well as consulting fees and ancillary ERP implementation costs related to implementing recommendations resulting from the
consultants report on our royalty reporting processes, such as enhanced data collection and compliance tracking tools and improved licensee training and communications. We intend to fund these additional costs from our available working
capital.
Research and
Development
. Research and development expense consists primarily of salary and related costs for personnel responsible for the research and development of new technologies. The $5.6 million, or 31%, increase in research
and development expense from fiscal 2003 to 2004 was primarily due to a $3.3 million increase in payroll and benefit costs as a result of increased headcount and, to a lesser extent, to a $1.2 million charge related to stock-based compensation
expense incurred in fiscal 2004. We anticipate that research and development expense will increase in absolute dollars in fiscal 2005, as we expect to hire additional personnel to support the development of new technologies. We intend to fund this
increase in research and development expense from our available working capital.
Settlements
. Settlements include interest and penalties related to the collection of royalties and resolution of disputes in our favor or against us. Settlements of royalty disputes from
licensees that specifically represent unpaid royalties are recorded as licensing revenue in the period payment is received, if all other revenue recognition criteria have been met. Settlements of other disputes, such as disputes with implementation
licensees from which we typically do not receive royalties, are recorded in settlements. In fiscal 2004, we received a
$2.0 million payment in connection with the settlement of a dispute with one of our semiconductor manufacturing implementation licensees regarding
violation of the terms of their implementation licensing agreement with us.
In-process Research and Development
. In fiscal 2004, we recorded a $1.7 million charge related to purchased in-process research and development that had no alternative uses and had not
reached technological feasibility. See Note 3 of the Notes to Consolidated Financial Statements included as part of this prospectus for information on in-process research and development we acquired in connection with our acquisition transactions.
Other Income (Expenses), Net
Other income (expenses), net primarily consists of gains and losses on
interest rate swap agreements and interest expense on outstanding balances on our facility debt obligations, offset by interest income earned on cash and cash equivalent balances. Other income, net was $0.2 million in fiscal 2004 compared to $0.1
million in other expenses, net in fiscal 2003. The fluctuation from fiscal 2003 was due to an increase in interest income as a result of higher average cash and cash equivalent balances for fiscal 2004.
Income Taxes
Actual
Pro Forma
Fiscal Year Ended
Fiscal Year Ended
September 26, 2003
September 24, 2004
September 26, 2003
September 24, 2004
($ in thousands)
Income taxes:
Provision for income taxes
$
16,079
$
25,039
$
26,714
$
39,267
Effective tax rate
34
%
42
%
36
%
41
%
Our fiscal 2004
effective tax rate was higher than in fiscal 2003 primarily due to the impact of incentive stock-based compensation expense, which is nondeductible, and losses from our foreign subsidiaries that we incurred in fiscal 2004. Excluding the effect of
incentive stock-based compensation expense, our effective tax rate for fiscal 2004 would have been 39%. For fiscal 2003, the effective tax rate was below the statutory tax rate of 35% primarily due to the impact of extraterritorial income exclusion
and research and experimentation credits. Our pro forma provision for income taxes and effective tax rate for fiscal 2003 and 2004 reflect the increase in operating income due to the exclusion of $27.6 million and $36.9 million, respectively, in
royalty expense payable to Ray Dolby.
Fiscal Years Ended September 27, 2002 and September 26, 2003
Licensing
. Licensing revenue increased $51.3 million, or 48%, from
fiscal 2002 to fiscal 2003 principally due to increased sales by our licensees of their consumer electronics products that incorporate our technologies, reflecting the growth in sales of DVD players worldwide. The increase in licensing revenue was
primarily attributable to increases in the volume of units shipped by our licensees, and to a lesser extent to increases in our royalty rates resulting from cost of living license rate increases. Aside from the growth in sales of DVD players, the
increase in our licensing revenue was also attributable to growth in sales of personal computer software DVD players and, to a lesser extent, home theatre systems and set-top boxes. Sales of products such as home-theatre-in-a-box and audio/video
receivers that incorporate multiple Dolby technologies also helped increase our licensing revenue. In addition, a portion of the increase in licensing revenue was due to an amendment to our licensing agreements with Ray Dolby in the fourth quarter
of 2002. Prior to June 2002, we administered the licensing of certain intellectual property rights for Ray Dolby, remitting to him the revenue derived from licensing these rights, net of the related administrative costs we incurred. These revenues
were not recorded in our consolidated financial statements. In June 2002, we terminated this licensing administration arrangement and amended our licensing agreements with Ray Dolby to license from him the intellectual property rights we had
previously administered on his behalf. In exchange, we agreed to pay him royalties in an amount that was intended to approximate the net revenue he would have received under our prior licensing administration arrangement. As a result, our fiscal
2003 licensing revenue reflects a full year of royalty revenue resulting from the June 2002 amendment of our licensing agreements, whereas our licensing revenue in fiscal 2002 reflects only one quarter of this additional royalty revenue stream. On a
pro forma basis, our licensing revenue in fiscal 2002 increased by $6.7 million as compared to our actual results due to the amendments to our licensing agreements with Ray Dolby described above.
Product Sales
. The $3.0 million, or 7%,
increase in our revenue from product sales from fiscal 2002 to fiscal 2003 was principally attributable to a $2.5 million increase in sales of our broadcast products to local television stations, cable networks and European satellite broadcasters.
We believe this is principally attributable to the efforts of terrestrial broadcasters in the United States to comply with the requirement of the FCC that those stations broadcast digital signals and the desire of terrestrial, cable and satellite
broadcasters throughout the world to deliver programming that can utilize the capabilities of viewers home theatre systems. To a lesser extent, the increase in product sales revenue was also attributable to a $0.5 million increase in sales of
our cinema products. The decrease in product sales revenue as a percentage of revenue was attributable to increases in licensing revenue both in absolute dollars and as a percentage of total revenue.
Production Services
. The $1.3 million, or 9%,
increase in production services revenue from fiscal 2002 to fiscal 2003 was primarily attributable to a $0.6 million increase in service calls as a result of an increase in the number of original films released during the period and a $0.7 million
increase in service calls related to foreign language versions of films, commercial and film trailer services, and other service offerings such as print checking and screening services.
Licensing Gross
Margin.
The decrease in licensing gross margin from fiscal 2002 to fiscal 2003 was due to the increase in licensing revenue derived from royalties from product sales that incorporate technologies we license from third
parties. Our pro forma licensing gross margin for fiscal 2002 and 2003 excludes $16.4 million and $25.1 million, respectively, in expenses we recorded for sublicensing royalty payments we made to Ray Dolby. Our fiscal 2002 pro forma licensing
gross margin was also affected by the $6.7 million increase in our fiscal 2002 pro forma licensing revenue described above due to the June 2002 amendments to our licensing agreements with Ray Dolby.
Product Sales Gross Margin.
The increase in
product sales gross margin from fiscal 2002 to fiscal 2003 was the result of higher production levels as compared to fiscal 2002, as the higher production volumes were able to absorb greater amounts of relatively fixed labor and overhead costs. Pro
forma product sales gross margin excludes expenses for royalties payable to Ray Dolby of $2.4 million and $2.5 million for fiscal 2002 and 2003, respectively.
Production Services Gross Margin
. The decrease in production services gross margin was principally attributable to a $0.9
million increase in costs associated with higher staff and related expenses.
Selling, General and Administrative
. Selling, general and administrative
expense increased $12.3 million, or 19%, from fiscal 2002 to fiscal 2003, primarily due to a change in our licensing agreements with Ray Dolby. Prior to June 2002, Ray Dolby reimbursed us for expenses we incurred in connection with administering
licenses covering certain of his intellectual property rights. Ray Dolby reimbursed us $6.0 million in fiscal 2002 for these administrative services, which we recorded as a reduction in selling, general and administrative expense. In July 2002,
we terminated this licensing administration arrangement and amended our licensing agreements with Ray Dolby to license from him the intellectual property rights we had previously administered on his behalf. As a result, selling, general and
administrative expense for fiscal 2003 did not include any reimbursements by Ray Dolby. The increase in selling, general and administrative expense was also due to a $1.7 million increase in legal expenses incurred to address intellectual
property and licensing revenue collection issues and to a $1.7 million increase in bad debt expense based on a reassessment of our allowance for doubtful accounts. To a lesser extent, selling, general and administrative expense was also
affected by a $1.2 million increase in payroll and benefits costs resulting from an increase in headcount and $0.8 million in expenses related to our senior executive supplemental retirement plan in fiscal 2003. The decrease in selling, general and
administrative expense as a percentage of total revenue was due primarily to our total revenue growing at a higher rate than our selling, general and administrative expense during such period. On a pro forma basis, our selling, general and
administrative expense in fiscal 2002 increased $6.0 million as compared to our actual results due to the June 2002 amendments to our licensing agreements with Ray Dolby described above.
Research and Development
. Research and
development expense increased $3.1 million, or 21%, from fiscal 2002 to fiscal 2003, primarily attributable to a $2.4 million increase in payroll and benefits costs due to increased headcount. The decrease in research and development expense as a
percentage of total revenue was due primarily to our total revenue growing at a higher rate than our research and development expenses during such period.
Settlements
. In fiscal 2002, we entered into a settlement agreement with a third party regarding an intellectual property
dispute and agreed to pay a total of $30.0 million in ten equal annual installments of $3.0 million beginning in June 2002. We recorded this settlement liability in fiscal 2002 at its net present value of $24.2 million with a corresponding
charge to our results of operations.
In-process Research
and Development
. In fiscal 2003, we recorded a $1.3 million charge related to purchased in-process research and development that had no alternative uses and had not reached technological feasibility. See Note 3 of the
Notes to Consolidated Financial Statements included as part of this prospectus for information on in-process research and development we acquired in connection with our acquisition transactions.
Other Income (Expenses), Net
Other expenses, net decreased to $0.1 million in fiscal 2003 compared to
$0.7 million in fiscal 2002, primarily due to a gain in the market value of our interest rate swap agreements, offset by an increase in interest expense as a result of the imputed interest on the intellectual property dispute settlement payment made
in June 2003.
The fiscal 2003 increase to the effective tax rate was attributable to lower taxable income in fiscal
2002 due to the charge associated with the settlement of the intellectual property dispute. For fiscal 2003, the effective tax rate was below the statutory tax rate of 35% primarily due to the impact of extraterritorial income exclusion and research
and experimentation tax credits. Our pro forma provision for income taxes and effective tax rate for fiscal 2002 and 2003 reflect the increase in operating income due to the exclusion of the $18.8 million and $27.6 million, respectively, in
royalty expense payable to Ray Dolby.
The following tables present our unaudited quarterly consolidated results of operations and our unaudited quarterly consolidated results of operations as
a percentage of revenue for the eight quarters ended September 24, 2004. The unaudited quarterly consolidated information has been prepared on the same basis as our audited consolidated financial statements for our full fiscal years. You should read
the following tables presenting our quarterly consolidated results of operations in conjunction with our audited consolidated financial statements for our full fiscal years and the related notes included elsewhere in this prospectus. This table
includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for the fair presentation of our consolidated financial position and operating results for the quarters presented. The operating results for any
quarter are not necessarily indicative of the operating results for any future period.
Actual
Fiscal Quarter Ended
Dec 27,
2002
Mar 28,
2003
Jun 27,
2003
Sep 26,
2003
Dec 26,
2003
Mar 26,
2004
Jun 25,
2004
Sep 24,
2004
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenue:
Licensing
$
35,670
$
40,580
$
40,032
$
41,640
$
47,799
$
58,948
$
55,487
$
49,161
Product sales
11,111
11,344
9,593
12,355
13,392
14,386
15,355
14,848
Production services
3,493
3,871
3,670
4,113
4,232
5,357
5,208
4,868
Total revenue
50,274
55,795
53,295
58,108
65,423
78,691
76,050
68,877
Cost of revenue (includes stock-based compensation for periods beginning in fiscal 2004; see table below):
Cost of licensing
9,659
9,864
9,980
10,498
12,781
15,105
13,441
12,511
Cost of product sales (1)
6,401
7,035
6,173
7,075
6,896
7,717
7,848
7,635
Cost of production services (1)
1,466
1,532
1,632
2,328
1,587
1,931
1,945
2,180
Total cost of revenue
17,526
18,431
17,785
19,901
21,264
24,753
23,234
22,326
Gross margin
32,748
37,364
35,510
38,207
44,159
53,938
52,816
46,551
Operating expenses (includes stock-based compensation for periods beginning in fiscal 2004; see table below):
Selling, general and administrative (1)
17,662
19,043
19,462
20,423
20,303
31,075
29,167
32,932
Research and development (1)
3,952
4,535
4,835
4,940
4,934
5,700
6,388
6,862
Settlements
(2,000
)
In-process research and development
1,310
1,540
198
Total operating expenses
21,614
23,578
24,297
26,673
25,237
38,315
33,555
39,992
Operating income
11,134
13,786
11,213
11,534
18,922
15,623
19,261
6,559
Other income (expenses), net
(130
)
(351
)
46
378
224
156
370
(521
)
Income before provision for income taxes and controlling interest
11,004
13,435
11,259
11,912
19,146
15,779
19,631
6,038
Provision for income taxes
3,973
4,899
3,443
3,764
6,840
5,877
8,633
3,689
Income before controlling interest
7,031
8,536
7,816
8,148
12,306
9,902
10,998
2,349
Controlling interest in net income
(89
)
(102
)
(24
)
(347
)
(286
)
(70
)
(494
)
(79
)
Net income
$
6,942
$
8,434
$
7,792
$
7,801
$
12,020
$
9,832
$
10,504
$
2,270
Basic net income per common share
$
0.08
$
0.10
$
0.09
$
0.09
$
0.14
$
0.12
$
0.12
$
0.03
Diluted net income per common share
$
0.08
$
0.10
$
0.09
$
0.09
$
0.13
$
0.11
$
0.11
$
0.02
Shares used in the calculation of basic net income per share
85,014
85,008
85,006
85,006
85,010
85,432
85,707
86,072
Shares used in the calculation of diluted net income per share
The following tables present our pro forma unaudited quarterly consolidated results of operations, and our pro forma
unaudited quarterly consolidated results of operations as a percentage of revenue, for the eight quarters ended September 24, 2004. The unaudited quarterly consolidated financial information has been prepared on the same basis as our audited
consolidated financial statements for our full fiscal years. You should read the following tables presenting our pro forma quarterly consolidated results of operations in conjunction with our audited consolidated financial statements for our full
fiscal years and the related notes included elsewhere in this prospectus, as well as our pro forma unaudited consolidated statements of operations for full fiscal years set forth elsewhere in this prospectus. The pro forma operating results for any
quarter are not necessarily indicative of the operating results for any future period.
Pro Forma
Fiscal Quarter Ended
Dec 27,
2002
Mar 28,
2003
Jun 27,
2003
Sep 26,
2003
Dec 26,
2003
Mar 26,
2004
Jun 25,
2004
Sep 24,
2004
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenue:
Licensing
$
35,670
$
40,580
$
40,032
$
41,640
$
47,799
$
58,948
$
55,487
$
49,161
Product sales
11,111
11,344
9,593
12,355
13,392
14,386
15,355
14,848
Production services
3,493
3,871
3,670
4,113
4,232
5,357
5,208
4,868
Total revenue
50,274
55,795
53,295
58,108
65,423
78,691
76,050
68,877
Cost of revenue (includes stock-based compensation for periods beginning in fiscal 2004; see table below):
Cost of licensing
3,751
3,861
3,630
3,633
4,668
5,917
5,106
4,379
Cost of product sales (1)
5,774
6,390
5,662
6,364
6,139
6,946
7,029
6,893
Cost of production services (1)
1,466
1,532
1,632
2,328
1,587
1,931
1,945
2,180
Total cost of revenue
10,991
11,783
10,924
12,325
12,394
14,794
14,080
13,452
Gross margin
39,283
44,012
42,371
45,783
53,029
63,897
61,970
55,425
Operating expenses (includes stock-based compensation for periods beginning in fiscal 2004; see table below):
Selling, general and administrative (1)
17,662
19,043
19,462
20,423
20,303
31,075
29,167
32,932
Research and development (1)
3,952
4,535
4,835
4,940
4,934
5,700
6,388
6,862
Settlements
(2,000
)
In-process research and development, net
1,310
1,540
198
Total operating expenses
21,614
23,578
24,297
26,673
25,237
38,315
33,555
39,992
Operating income
17,669
20,434
18,074
19,110
27,792
25,582
28,415
15,433
Other income (expenses), net
(130
)
(351
)
46
378
224
156
370
(521
)
Income before provision for income taxes and controlling interest
17,539
20,083
18,120
19,488
28,016
25,738
28,785
14,912
Provision for income taxes
6,352
7,344
5,556
7,462
10,257
9,714
12,180
7,116
Income before controlling interest
11,187
12,739
12,564
12,026
17,759
16,024
16,605
7,796
Controlling interest in net income
(89
)
(102
)
(24
)
(347
)
(286
)
(70
)
(494
)
(79
)
Net income
$
11,098
$
12,637
$
12,540
$
11,679
$
17,473
$
15,954
$
16,111
$
7,717
Basic net income per common share
$
0.13
$
0.15
$
0.15
$
0.14
$
0.21
$
0.19
$
0.19
$
0.09
Diluted net income per common share
$
0.13
$
0.15
$
0.15
$
0.13
$
0.19
$
0.17
$
0.17
$
0.08
Shares used in the calculation of basic net income per share
85,014
85,008
85,006
85,006
85,010
85,432
85,707
86,072
Shares used in the calculation of diluted net income per share
(1) Stock-based compensation recorded in fiscal 2004 was classified as follows:
Cost of product sales
$
$
$
78
$
79
Cost of production services
28
27
Selling, general and administrative
23
7,005
2,772
2,911
Research and development
607
608
Total stock-based compensation
$
23
$
7,005
$
3,485
$
3,625
Pro Forma
Fiscal Quarter Ended
Dec 27,
2002
Mar 28,
2003
Jun 27,
2003
Sep 26,
2003
Dec 26,
2003
Mar 26,
2004
Jun 25,
2004
Sep 24,
2004
As a percentage of revenue:
Revenue:
Licensing
71
%
73
%
75
%
72
%
73
%
75
%
73
%
71
%
Product sales
22
20
18
21
20
18
20
22
Production services
7
7
7
7
7
7
7
7
Total revenue
100
100
100
100
100
100
100
100
Cost of revenue (includes stock-based compensation for periods beginning in fiscal 2004; see table below):
Cost of licensing
8
7
7
6
8
7
7
7
Cost of product sales (1)
11
11
10
11
9
9
9
10
Cost of production services (1)
3
3
3
4
2
3
3
3
Total cost of revenue
22
21
20
21
19
19
19
20
Gross margin
78
79
80
79
81
81
81
80
Operating expenses (includes stock-based compensation for periods beginning in fiscal 2004; see table below):
Selling, general and administrative (1)
35
34
37
35
31
40
38
48
Research and development (1)
8
8
9
9
8
7
8
10
Settlements
(2
)
In-process research and development, net
2
2
0
Total operating expenses
43
42
46
46
39
49
44
58
Operating income
35
37
34
33
42
32
37
22
Other income (expenses), net
0
0
0
0
0
0
0
(1
)
Income before provision for income taxes and controlling interest
35
37
34
33
42
32
37
21
Provision for income taxes
13
14
10
13
15
12
16
10
Income before controlling interest
22
23
24
20
27
20
21
11
Controlling interest in net income
0
0
0
0
0
0
0
0
Net income
22
%
23
%
24
%
20
%
27
%
20
%
21
%
11
%
(1) Stock-based compensation recorded in fiscal 2004 was classified as follows:
Cost of product sales
%
%
0
%
0
%
Cost of production services
Selling, general and administrative
0
9
4
4
Research and development
1
1
Total stock-based compensation
0
%
9
%
5
%
5
%
Our recognition
of licensing revenue is dependent upon our receipt of royalty reports from our licensees, and our quarterly operating results can fluctuate based on the timing of our receipt of those reports. We generally experience seasonality in our licensing
business, and we expect that business to continue to be affected by seasonality in the future. Because our licensees are required to deliver to us royalty reports based on their shipment of consumer electronics products that incorporate our
technologies in the quarter following shipment, we have typically experienced higher licensing revenue in the second quarter of each fiscal year, principally due
to the holiday sales of consumer electronics products in the preceding quarter. The growth in licensing revenue during the past few fiscal years has masked
some of the seasonality we experience and expect to continue to experience in our licensing revenue.
In addition to seasonality, we have experienced and expect to continue to experience fluctuations in our quarterly operating results as a result of the
time lag between when our licensees ship their products and when they report those shipments to us, a lag that can sometimes be significant. In addition, it is not uncommon for royalty reports to include corrective or retroactive royalties that
cover extended periods of time. In the past, we have experienced lags greater than one year. Also, there have been times in the past when we have recognized an unusually large amount of licensing revenue from a licensee in a given quarter because
not all of our revenue recognition criteria were met in prior periods. This can result in a large amount of licensing revenue from a licensee being recorded in a given quarter that is not necessarily indicative of the amounts of licensing revenue to
be received from that licensee in future quarters, thus causing fluctuations in our quarterly operating results.
In fiscal 2004, our licensing revenue for the quarters ended March 26, 2004, June 25, 2004, and September 24, 2004 were all affected by various
factors relating to the royalty reports we received from licensees during such periods, including seasonality and, in certain cases, significant lag times between when licensees shipped products and when they delivered royalty reports to us. In
addition, our quarterly operating results in fiscal 2004, both on an actual and pro forma basis, were significantly affected by stock-based compensation charges resulting from our decision, in connection with the preparation of the financial
statements for our initial public offering, to reassess the fair value of our Class B common stock for purposes of accounting for employee stock-based compensation. These stock-based compensation charges affected our cost of product sales, cost of
production services, total cost of revenue, selling, general and administrative expense, research and development expense, total operating expenses, and operating income in these periods. We expect that these stock-based compensation expenses, which
are amortized over the four-year vesting periods of the related equity awards, will continue to affect our quarterly financial results through the fourth quarter of fiscal 2008.
Liquidity, Capital Resources and Financial Condition
Our financial position includes cash and cash equivalents of $61.9 million and $78.7 million at September 26, 2003 and
September 24, 2004, respectively. We believe that our cash, cash equivalents and potential cash flow from operations will be sufficient to satisfy our cash requirements through at least the next 12 months.
Operating Activities
Our principal sources of liquidity are our cash and cash equivalents as well
as the cash flow we generate from our operations. Our operating activities generated cash of $22.9 million, $39.6 million and $46.9 million in fiscal 2002, 2003 and 2004, respectively. The increase in cash flows provided by operating activities in
fiscal 2004 as compared to fiscal 2003 was due primarily to an increase in net income, excluding the non-cash charge for stock-based compensation recorded during fiscal 2004.
Under licensing and royalty agreements with Ray Dolby, we recorded expenses for the use of certain patent and trademark
rights in the amounts of $18.8 million, $27.6 million and $36.9 million in fiscal 2002, 2003 and 2004, respectively. In connection with the asset contribution by Ray Dolby, which will occur prior to the completion of this offering, these licensing
and royalty agreements will terminate, and we will have no further obligation to pay royalties, or incur any costs or expenses, under these agreements. We expect to incur less than $1.0 million in acquisition costs for legal, tax and other
professional fees incurred as a result of the asset contribution.
Under an amended royalty agreement that we entered into in December 2004, we made a lump sum payment of $11.0 million for the exclusive irrevocable right to license a third partys technology to our customers. See Note 12 of the
Notes the Consolidated Financial Statements Subsequent Eventsh for more information.
Our investing activities are primarily related to capital expenditures associated with the purchases of office equipment,
building fixtures, computer hardware and software, leasehold improvements and production and test equipment. In fiscal 2002, we received $1.8 million in proceeds from the sale of a facility and recorded a gain of $0.5 million related to this
property sale. Capital expenditures for fiscal 2004 increased as compared to fiscal 2003 principally due to additional costs associated with the implementation of a new ERP system and for increased leasehold improvement costs made to our various
facilities.
In both fiscal 2003 and 2004, we acquired
complementary businesses related primarily to technologies that facilitate the delivery of digital entertainment, such as technologies that process digital moving images, digital signal processing technologies or technologies that protect content
from piracy. We paid $7.1 million and $18.4 million in fiscal 2003 and 2004, respectively, in connection with these acquisition transactions. Under the terms of one of the acquisition agreements, we will pay approximately $3.0 million in
September 2005, and we have future payment obligations equal to approximately 5% to 8% of revenue generated from products incorporating technologies we acquired in the transaction.
Financing Activities
Our financing activities consist primarily of principal payments made on our facility debt obligations. In fiscal 2004, we also received proceeds from
the exercises of employee stock options, which were offset by the payments on our debt obligations. Our financing activities in fiscal 2002 were also affected by the retirement of an outstanding facility debt obligation in the amount of $1.3 million
prior to its scheduled maturity date. Our available working capital will increase as a result of the approximately $ million in net proceeds received by us from this offering.
Personal Holding Company Tax Matters
If we or any of our subsidiaries were to become subject to, or liable for,
personal holding company tax, we expect that it is likely that instead of paying the personal holding company tax, we would elect to pay a dividend to our stockholders in an amount equal to all or a significant part of our undistributed personal
holding company income. We expect that we would pay such a dividend out of our available working capital, which could significantly decrease our cash, unless we sought additional financing for this purpose. Any such financing might not be available
on terms acceptable to the Company or at all. If instead of paying a dividend we elect to pay the tax, this could significantly increase our consolidated tax expense. We expect we would pay any such tax out of our available working capital, which
could also significantly decrease our cash, unless we sought additional financing. See Critical Accounting PoliciesAccounting For Income Taxes for a further explanation of matters related to personal holding tax issues.
Contractual Obligations and Commitments
The following table presents a summary of our contractual obligations and
commitments as of September 24, 2004.