DTS
DTS, INC. (Form: 10-Q, Received: 11/08/2012 16:33:57)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q

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

For the Quarterly Period Ended September 30, 2012

Commission File Number 000-50335

GRAPHIC

DTS, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  77-0467655
(I.R.S. Employer
Identification No.)

5220 Las Virgenes Road
Calabasas, California 91302
(Address of principal executive
offices and zip code)

 

(818) 436-1000
(Registrant's telephone number,
including area code)



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

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

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

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

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

         As of October 31, 2012 a total of 18,728,827 shares of the Registrant's Common Stock, $0.0001 par value, were outstanding.

   


Table of Contents

DTS, INC.
FORM 10-Q
TABLE OF CONTENTS

PART I   FINANCIAL INFORMATION     1  

Item 1.

 

Financial Statements (unaudited):

 

 

1

 

 

 

Consolidated Balance Sheets

 

 

1

 

 

 

Consolidated Statements of Operations

 

 

2

 

 

 

Consolidated Statements of Comprehensive Income (Loss)

 

 

3

 

 

 

Consolidated Statements of Cash Flows

 

 

4

 

 

 

Notes to Consolidated Financial Statements

 

 

5

 

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

 

22

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

32

 

Item 4.

 

Controls and Procedures

 

 

32

 

PART II.

 

OTHER INFORMATION

 

 

34

 

Item 1.

 

Legal Proceedings

 

 

34

 

Item 1A.

 

Risk Factors

 

 

34

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

50

 

Item 3.

 

Defaults Upon Senior Securities

 

 

50

 

Item 4.

 

Mine Safety Disclosures

 

 

50

 

Item 5.

 

Other Information

 

 

50

 

Item 6.

 

Exhibits

 

 

50

 

SIGNATURES

 

 

51

 

Table of Contents

DTS, INC.

PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

        


DTS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in thousands, except per share data)

 
  As of
September 30,
2012
  As of
December 31,
2011
 

ASSETS

             

Current assets:

             

Cash and cash equivalents

  $ 56,823   $ 46,944  

Short-term investments

    23,840     38,697  

Accounts receivable, net of allowance for doubtful accounts of $541 and $251 at September 30, 2012 and December 31, 2011, respectively

    4,592     5,322  

Deferred income taxes

    1,263     1,296  

Prepaid expenses and other current assets

    2,987     1,823  

Income taxes receivable, net

    2,442     2,591  
           

Total current assets

    91,947     96,673  

Property and equipment, net

    33,193     32,800  

Intangible assets, net

    79,277     6,549  

Goodwill

    52,431     1,257  

Deferred income taxes

    14,830     13,574  

Long-term investments

        6,922  

Other assets

    2,432     1,695  
           

Total assets

  $ 274,110   $ 159,470  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             

Accounts payable

  $ 2,184   $ 1,056  

Accrued expenses

    13,759     3,605  

Deferred revenue

    4,017     1,121  
           

Total current liabilities

    19,960     5,782  

Long-term debt

    30,000      

Deferred income taxes

    24,760      

Other long-term liabilities

    21,744     7,886  

Commitments and contingencies (Note 9)

             

Stockholders' equity:

             

Preferred stock—$0.0001 par value, 5,000 shares authorized at September 30, 2012 and December 31, 2011; no shares issued and outstanding

         

Common stock—$0.0001 par value, 70,000 shares authorized at September 30, 2012 and December 31, 2011; 20,666 and 20,536 shares issued at September 30, 2012 and December 31, 2011, respectively; 18,729 and 16,536 shares outstanding at September 30, 2012 and December 31, 2011, respectively

    3     3  

Additional paid-in capital

    201,730     192,819  

Treasury stock, at cost—1,938 and 4,000 shares at September 30, 2012 and December 31, 2011

    (51,194 )   (107,222 )

Accumulated other comprehensive income

    680     644  

Retained earnings

    26,427     59,558  
           

Total stockholders' equity

    177,646     145,802  
           

Total liabilities and stockholders' equity

  $ 274,110   $ 159,470  
           

See accompanying notes to consolidated financial statements.

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DTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except per share data)

 
  For the Three Months
Ended September 30,
  For the Nine Months
Ended September 30,
 
 
  2012   2011   2012   2011  

Revenue

  $ 22,235   $ 20,546   $ 70,874   $ 67,910  

Cost of revenue

    2,105     217     2,493     643  
                   

Gross profit

    20,130     20,329     68,381     67,267  

Operating expenses:

                         

Selling, general and administrative

    25,322     12,784     57,311     39,608  

Research and development

    7,625     3,364     16,915     9,759  
                   

Total operating expenses

    32,947     16,148     74,226     49,367  
                   

Operating income (loss)

    (12,817 )   4,181     (5,845 )   17,900  

Interest and other income (expense), net

    19     348     (67 )   322  
                   

Income (loss) before provision for income taxes

    (12,798 )   4,529     (5,912 )   18,222  

Provision for income taxes

    6,288     1,627     9,884     7,030  
                   

Net income (loss)

  $ (19,086 ) $ 2,902   $ (15,796 ) $ 11,192  
                   

Net income (loss) per common share:

                         

Basic

  $ (1.04 ) $ 0.17   $ (0.92 ) $ 0.65  
                   

Diluted:

  $ (1.04 ) $ 0.17   $ (0.92 ) $ 0.63  
                   

Weighted average shares outstanding:

                         

Basic

    18,329     16,910     17,104     17,131  
                   

Diluted

    18,329     17,434     17,104     17,768  
                   

   

See accompanying notes to consolidated financial statements.

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DTS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Amounts in thousands)

 
  For the Three Months
Ended September 30,
  For the Nine Months
Ended September 30,
 
 
  2012   2011   2012   2011  

Net income (loss)

  $ (19,086 ) $ 2,902   $ (15,796 ) $ 11,192  

Other comprehensive income (loss), net of tax:

                         

Foreign currency translation adjustments

    (16 )   50     27     126  

Other

    12     1     9     (3 )
                   

Total comprehensive income (loss)

  $ (19,090 ) $ 2,953   $ (15,760 ) $ 11,315  
                   

   

See accompanying notes to consolidated financial statements.

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DTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)

 
  For the Nine Months
Ended September 30,
 
 
  2012   2011  

Cash flows from operating activities:

             

Net income (loss)

  $ (15,796 ) $ 11,192  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

             

Depreciation and amortization

    6,292     3,867  

Stock-based compensation charges

    8,358     6,756  

Deferred income taxes

    3,185     470  

Tax benefits from stock-based awards

    108     76  

Excess tax benefits from stock-based awards

    (312 )   (30 )

Other

    381     362  

Changes in operating assets and liabilities, net of business acquisitions:

             

Accounts receivable

    6,366     2,633  

Prepaid expenses and other assets

    (325 )   (809 )

Accounts payable, accrued expenses and other liabilities

    6,301     (4,622 )

Deferred revenue

    2,390     (4,643 )

Income taxes receivable

    349     (715 )
           

Net cash provided by operating activities

    17,297     14,537  
           

Cash flows from investing activities:

             

Purchases of held-to-maturity investments

    (3,450 )   (36,583 )

Purchases of available-for-sale investments

    (42,074 )   (12,888 )

Maturities of held-to-maturity investments

    20,120     55,686  

Maturities of available-for-sale investments

    22,092      

Sales of held-to-maturity investments

    9,109      

Sales of available-for-sale investments

    24,760      

Cash paid for business acquisitions, net

    (59,616 )    

Purchases of property and equipment

    (2,813 )   (2,443 )

Purchases of intangible assets

    (422 )   (413 )
           

Net cash provided by (used in) investing activities

    (32,294 )   3,359  
           

Cash flows from financing activities:

             

Proceeds from the issuance of common stock under stock-based compensation plans

    1,411     3,596  

Repurchases and retirement of common stock for restricted stock tax withholdings

    (966 )   (1,511 )

Excess tax benefits from stock-based awards

    312     30  

Proceeds from long-term borrowings

    30,000      

Purchases of treasury stock

    (5,881 )   (26,810 )
           

Net cash provided by (used in) financing activities

    24,876     (24,695 )
           

Net change in cash and cash equivalents

    9,879     (6,799 )

Cash and cash equivalents, beginning of period

    46,944     41,744  
           

Cash and cash equivalents, end of period

  $ 56,823   $ 34,945  
           

See accompanying notes to consolidated financial statements.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except per share data)

Note 1—Basis of Presentation

        The accompanying unaudited consolidated financial statements of DTS, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.") and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments considered necessary for a fair statement of the Company's financial position at September 30, 2012, and the results of operations and cash flows for the periods presented. All significant intercompany transactions have been eliminated in consolidation. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full fiscal year. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission on March 2, 2012.

        The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Acquisition of SRS Labs, Inc.

        On July 20, 2012, the Company completed its previously announced acquisition of SRS Labs, Inc., a Delaware corporation ("SRS"), pursuant to the Agreement and Plan of Merger and Reorganization, dated as of April 16, 2012 (the "Merger Agreement"), by and among the Company, DTS Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of the Company ("Merger Sub"), DTS LLC, a single member limited liability company and a wholly owned subsidiary of the Company ("DTS LLC"), and SRS. Pursuant to the Merger Agreement, Merger Sub was merged with and into SRS, with SRS surviving the merger as a wholly owned subsidiary of the Company (the "Merger"). Immediately following the Merger, SRS was merged with and into DTS LLC, with DTS LLC continuing as the surviving entity and a wholly owned subsidiary of the Company. For additional information, refer to Notes 2 and 6 of the consolidated financial statements, "Significant Accounting Policies" and "Business Combinations", respectively.

Acquisition of Phorus' Assets

        On July 5, 2012, the Company completed its acquisition of assets from Phorus, Inc. and Phorus, LLC (collectively "Phorus") pursuant to an Asset Purchase Agreement dated as of July 5, 2012 (the "Asset Purchase Agreement"). For additional information, refer to Notes 2, 4 and 6 of the consolidated financial statements, "Significant Accounting Policies", "Fair Value Measurements" and "Business Combinations", respectively.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 2—Significant Accounting Policies

    Business Combinations

        The Company includes the results of operations of the businesses that it has acquired in its consolidated results as of the respective dates of acquisition. However, as noted below in the revenue recognition policy, the Company will not begin to recognize revenue from per-unit licensing agreements acquired with SRS until the fourth quarter of 2012.

        The Company allocates the fair value of the purchase consideration of its acquisitions to the tangible assets, liabilities and intangible assets acquired, including in-process research and development ("IPR&D"), based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. The primary items that generate goodwill include the value of the synergies between the acquired companies and the Company and the acquired assembled workforce, neither of which qualifies as an identifiable intangible asset. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, the Company records a charge for the value of the related intangible asset in its consolidated statements of operations in the period it is abandoned. Acquisition and integration related costs are recognized separately from the business combination and are expensed as incurred.

    Revenue Recognition

        The Company recognizes revenue when persuasive evidence of a sales arrangement exists, delivery has occurred or services have been rendered, the buyer's price is fixed or determinable and collection is reasonably assured.

        Revenue from licensing audio technology, trademarks and know-how is generated from licensing agreements with consumer electronics product manufacturers that pay a per-unit license fee for products manufactured (or upon shipment for those licensing agreements acquired with SRS) under those license agreements. Licensees generally report manufacturing or shipping information within 30 to 60 days after the end of the quarter in which such activity takes place. Consequently, the Company recognizes revenue from these licensing agreements on a three-month lag basis, generally in the quarter following the quarter of manufacture or shipment, provided amounts are fixed or determinable and collection is reasonably assured, since the Company cannot reliably estimate the amount of revenue earned prior to the receipt of such reports. Use of this lag method allows for the receipt of licensee royalty reports prior to the recognition of revenue.

        Cash collections from per-unit licensing agreements acquired with SRS during the three months ended September 30, 2012 were the result of product shipments during the three months ended June 30, 2012 or prior to the Company's acquisition of SRS. Therefore, the Company has not yet recognized revenue from per-unit licensing agreements and certain other licensing arrangements acquired with SRS during the three months ended September 30, 2012. The Company will begin to recognize revenue from per-unit licensing agreements and certain other licensing arrangements acquired with SRS during the fourth quarter of 2012.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 2—Significant Accounting Policies (Continued)

        The Company is responsible for the licensing and enforcement of its patented technologies and pursues third parties that are utilizing its intellectual property without a license or who have under-reported the amount of royalties owed under a license agreement with it. As a result of these activities, from time to time, the Company may recognize royalty revenues that relate to infringements that occurred in prior periods. These royalty recoveries may cause revenues to be higher than expected during a particular reporting period and may not occur in subsequent periods. Differences between amounts initially recognized and amounts subsequently audited or reported as an adjustment to those amounts due from licensees, will be recognized in the period such adjustment is determined or contracted, as appropriate.

        Deferred revenues arise primarily from payments for licensing audio technology received in advance of the culmination of the earnings process. Deferred revenues expected to be recognized within the next twelve months are classified within current liabilities. Deferred revenues will be recognized as revenue in future periods when the applicable revenue recognition criteria are met.

        Licensing revenue is recognized gross of withholding taxes that are remitted by the Company's licensees directly to their local tax authorities. For the three months ended September 30, 2012 and 2011, withholding taxes were $1,288 and $1,157, respectively. For the nine months ended September 30, 2012 and 2011, withholding taxes were $3,539 and $3,944, respectively.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 3—Cash and Investments

        Cash and investments consist of the following:

 
  As of
September 30,
2012(1)
  As of
December 31,
2011
 

Cash and cash equivalents:

             

Cash

  $ 12,582   $ 11,330  

Money market accounts

    44,241     35,383  

Municipal securities

        231  
           

Total cash and cash equivalents

  $ 56,823   $ 46,944  
           

Short-term investments:

             

Available-for-sale securities:

             

U.S. government and agency securities

  $ 17,549   $ 11,391  

Certificates of deposit

    6,291      

Municipal securities

        4,329  

Held-to-maturity securities:

             

Certificates of deposit

        1,543  

Commercial paper

        429  

U.S. government and agency securities

        11,628  

Municipal securities

        9,377  
           

Total short-term investments

  $ 23,840   $ 38,697  
           

Long-term investments:

             

Available-for-sale securities:

             

U.S. government and agency securities

  $   $ 4,010  

Held-to-maturity securities:

             

Municipal securities

        2,912  
           

Total long-term investments

  $   $ 6,922  
           

(1)
During July 2012, the Company liquidated certain investments classified as held-to-maturity to fund the acquisition of SRS. Accordingly, all investments are now classified as available-for-sale.

        The Company had no material gross realized or unrealized holding gains or losses from its investments in securities classified as available-for-sale or held-to-maturity for the periods presented. The contractual maturities of investments at September 30, 2012 were due within one year.

        For additional information on investments classified as available-for-sale, refer to Note 4 of the consolidated financial statements, "Fair Value Measurements."

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 4—Fair Value Measurements

        The Company's investments classified as available-for-sale are required to be measured and recorded at fair value on a recurring basis. All other investments are classified as held-to-maturity and reported at amortized cost. The Company's contingent consideration related to its acquisition of assets from Phorus is also measured and recorded at fair value on a recurring basis until it can be determined whether or not any future payments will be made.

        The Company obtained the fair value of its available-for-sale securities, which are not in active markets, from a third-party professional pricing service using quoted market prices for identical or comparable instruments, rather than direct observations of quoted prices in active markets. The Company's professional pricing service gathers observable inputs for all of its fixed income securities from a variety of industry data providers (e.g., large custodial institutions) and other third-party sources. Once the observable inputs are gathered, all data points are considered and the fair value is determined.

        The Company validates the quoted market prices provided by its primary pricing service by comparing their assessment of the fair values against the fair values provided by its investment managers. The Company's investment managers use similar techniques to its professional pricing service to derive pricing as described above.

        As all significant inputs were observable, derived from observable information in the marketplace or supported by observable levels at which transactions are executed in the marketplace, the Company has classified its available-for-sale securities within Level 2 of the fair value hierarchy.

        The preliminary fair value of contingent consideration was determined based on the valuation work of independent consultants, and it is subject to the achievement of certain revenue milestones over a three and a half year period from the date of the asset acquisition from Phorus. Increases or decreases in the fair value of contingent consideration can result from accretion of the liability due to the passage of time, changes in the timing and amount of revenue estimates, changes in discount rates or payments. As of September 30, 2012, there have been no material changes to the fair value of contingent consideration or assumptions used since the acquisition of Phorus. For additional information on contingent consideration, refer to Note 6 of the consolidated financial statements, "Business Combinations."

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 4—Fair Value Measurements (Continued)

        The Company's financial assets and liabilities, measured at fair value on a recurring basis, were as follows:

 
   
  Fair Value Measurements at
Reporting Date Using
 
Assets (Liabilities)
  Total   Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 

As of September 30, 2012

                         

U.S. government and agency securities

  $ 17,549   $   $ 17,549   $  

Certificates of deposit

  $ 6,291   $   $ 6,291   $  

Contingent consideration(1)

  $ (7,500 ) $   $   $ (7,500 )

As of December 31, 2011

                         

U.S. government and agency securities

  $ 15,401   $   $ 15,401   $  

Municipal securities

  $ 4,329   $   $ 4,329   $  

(1)
As of September 30, 2012, $2,673 and $4,827 were classified in accrued expenses and other long-term liabilities, respectively, on the consolidated balance sheet.

Note 5—Property and Equipment

        Property and equipment consist of the following:

 
  As of
September 30,
2012
  As of
December 31,
2011
 

Land

  $ 6,600   $ 6,600  

Building and improvements

    21,347     21,233  

Machinery and equipment

    4,296     3,481  

Office furniture and fixtures

    6,333     5,445  

Leasehold improvements

    3,895     2,386  

Software

    6,393     5,959  
           

    48,864     45,104  

Less: Accumulated depreciation

    (15,671 )   (12,304 )
           

Property and equipment, net

  $ 33,193   $ 32,800  
           

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 6—Business Combinations

Acquisition of SRS Labs, Inc.

        On July 20, 2012, the Company completed its previously announced acquisition of SRS. SRS is recognized as a leader in audio enhancement, surround sound, volume leveling, audio streaming and voice processing technologies. In connection with the Merger, DTS issued 2,307 shares of its common stock, paid $66,876 in cash to former SRS stockholders and paid $13,338 in cash to former SRS equity award holders. Aggregate consideration for this Merger was valued at $124,785. The purchase price was funded with the Company's existing cash, liquidated investments, borrowings of $30,000 under a new credit facility and the issuance of common stock from treasury. The following table presents the purchase price for accounting purposes based on the Company's closing common stock price of $19.32 per share on July 20, 2012 and 14,452 outstanding SRS shares as of July 20, 2012:

Cash consideration

             

SRS common shares outstanding at closing

    14,452        

Cash per share

  $ 9.50        
             

Preliminary cash consideration

  $ 137,294        

Split between cash and common stock(1)

    48.71 %      
             

Total cash consideration for outstanding shares

        $ 66,876  

Equivalent SRS shares issued pursuant to the intrinsic value of outstanding and accelerated SRS stock options at closing

    1,306        

SRS shares issued pursuant to the acceleration of outstanding SRS restricted stock units at closing

    98        
             

Total share equivalents prior to transaction

    1,404        

Cash per share

  $ 9.50        
             

Total cash consideration for share equivalents prior to transaction

        $ 13,338  
             

Total cash consideration

        $ 80,214  

Stock consideration

             

SRS common shares outstanding at closing

    14,452        

Exchange ratio for each SRS share

    0.31127        
             

Equivalent DTS shares

    4,498        

Split between cash and common stock(1)

    51.29 %      
             

DTS treasury shares used for consideration

    2,307        

DTS closing common stock price on July 20, 2012

  $ 19.32        
             

Total stock consideration(2)

        $ 44,571  
             

Total consideration

        $ 124,785  
             

(1)
As a result of the decline in the stock price of the Company's common stock leading up to the closing of the Merger, the Company and SRS were required to adjust the proration to the minimum extent necessary to ensure that the Merger qualified as a tax reorganization

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 6—Business Combinations (Continued)

    pursuant to the tax savings clause in Section 2.6(e) of the Merger Agreement, which resulted in (i) an immaterial decrease in the maximum amount of cash the Company was permitted to pay to former SRS stockholders as consideration under the terms of the Merger Agreement and (ii) a related immaterial increase in the number of shares of common stock to be issued by the Company to former SRS stockholders as consideration under the terms of the Merger Agreement.

(2)
The Company recorded a $17,335 loss in retained earnings, which represents the aggregate difference between the average price per treasury share and the closing price on July 20, 2012, multiplied by the quantity of treasury shares used for consideration.

        The preliminary allocation of the purchase price was based on preliminary estimates and valuations of independent consultants and the Company. The final allocation of the purchase price is expected to be completed as soon as practicable, but no later than one year from the date of acquisition. The preliminary allocation of the purchase price may have material adjustments when the valuations have been completed. The following table presents the preliminary purchase price allocation:

 
  Weighted Average
Estimated Useful
Life (years)
   
  Estimated
Fair Value
 

Cash and cash equivalents

              $ 23,298  

Short-term investments

                8,529  

Accounts receivable

                6,048  

Prepaid expenses and other current assets

                1,359  

Income taxes receivable

                200  

Property and equipment

                1,033  

Goodwill

                45,721  

Identifiable intangible assets:

                   

Customer relationships

    8     39,170        

Developed technology

    6     23,440        

Trademarks/tradenames

    5     2,690        

IPR&D

          4,920        
                   

Total identifiable intangible assets

                70,220  

Deferred tax assets

                4,408  

Long-term investments

                249  

Accounts payable

                (401 )

Accrued expenses

                (2,610 )

Deferred revenue

                (506 )

Deferred tax liabilities

                (24,760 )

Other long-term liabilities

                (8,003 )
                   

Total preliminary purchase price

              $ 124,785  
                   

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 6—Business Combinations (Continued)

        Customer relationships represent existing contracted relationships with consumer electronics manufacturers and others. Developed technology relates to SRS' technology across all of their markets that have reached technological feasibility. Trademarks/tradenames are primarily related to the SRS brand name. Amortization of finite-lived identifiable intangible assets will be amortized on a straight-line basis over their estimated useful lives. IPR&D assets will be tested for impairment until the successful completion and commercialization or abandonment of the associated research and development efforts, at which point the IPR&D assets will either be amortized over their estimated useful lives or written-off.

        The estimated fair values of the customer relationships, developed technology and trademarks/tradenames were primarily determined using either the relief-from-royalty or excess earnings methods. The discount rate utilized for these intangible assets was 22% and was determined after consideration of the overall enterprise rate of return and the relative risk and importance of the assets to the generation of future cash flows. The estimated fair value of IPR&D was determined using the excess earnings method and considers the remaining costs to complete and the expected cash flows to be generated from these IPR&D projects. The discount rate utilized for IPR&D was 26%, which reflects the riskier profile of uncompleted R&D projects relative to that of existing assets.

        Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets. Goodwill will not be amortized, but instead will be tested for impairment at least annually or more frequently if certain indicators are present. In the event the Company determines that the value of goodwill has become impaired, it will incur an accounting charge for the amount of impairment during the quarter in which the determination is made. None of the goodwill recognized upon the acquisition is deductible for tax purposes.

        Revenues from licensing agreements acquired with SRS amounted to $891 for the three and nine months ended September 30, 2012. Acquisition and integration related costs for this acquisition included severance costs, change in control costs, banker fees, legal fees, other professional fees, contract termination costs and other administrative costs. The following table presents the acquisition and integration related costs for this acquisition that have been included in the Company's results of operations:

 
  For the Three
Months Ended
September 30, 2012
  For the Nine
Months Ended
September 30, 2012
 

Selling, general and administrative

  $ 7,153   $ 9,864  

Research and development

    882     894  
           

Total acquisition and integration related costs

  $ 8,035   $ 10,758  
           

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 6—Business Combinations (Continued)

        The following table presents the pro forma operating results as if SRS had been included in the Company's consolidated statements of operations as of the beginning of 2011:

 
  For the Three Months
Ended September 30,
  For the Nine Months
Ended September 30,
 
 
  2012   2011   2012   2011  

Revenue

  $ 27,264   $ 28,813   $ 92,707   $ 91,631  

Net income (loss)

  $ (17,560 ) $ 2,070   $ (16,280 ) $ 7,180  

Net income (loss) per common share—basic

  $ (0.93 ) $ 0.11   $ (0.87 ) $ 0.37  

Net income (loss) per common share—diluted

  $ (0.93 ) $ 0.10   $ (0.87 ) $ 0.36  

        The pro forma financial information assumes the companies were combined as of January 1, 2011 and include business combination accounting effects from the acquisition, including amortization charges from acquired intangible assets and an increase in interest expense for the debt obtained to help finance the acquisition. Acquisition and integration related costs have not been included in the pro forma financial information. Also, the tax effects of adjustments have been included in the pro forma financial information. The pro forma information as presented above is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2011, nor is it necessarily indicative of future results.

Acquisition of Phorus' Assets

        On July 5, 2012, the Company completed its acquisition of assets from Phorus pursuant to an Asset Purchase Agreement dated as of July 5, 2012. The Phorus business is dedicated to wireless audio solutions for connected devices with expertise in such areas as acoustic design, digital signal processing and wireless networking. Pursuant to the terms of the Asset Purchase Agreement, the Company paid initial cash consideration of $3,000 upon the closing of the acquisition, and it may be required to pay up to an additional $10,000 in consideration subject to the achievement of certain revenue milestones over a three and a half year period from the date of acquisition. Contingent consideration of $3,000 could be due and payable at the end of both the first and second anniversaries, and $4,000 could be due and payable at the end of the third anniversary. The final six months of the three and a half year period allows for a catch-up of any unpaid contingent consideration. The following table presents the preliminary purchase price as of the acquisition date:

Cash(1)

  $ 3,000  

Fair value of contingent consideration

    7,500  
       

  $ 10,500  
       

(1)
Includes a $300 holdback for potential indemnification matters, which is expected to be fully released and delivered to Phorus by July 5, 2014.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 6—Business Combinations (Continued)

        The preliminary allocation of the purchase price was based on preliminary estimates and valuations of independent consultants and the Company. The final allocation of the purchase price is expected to be completed as soon as practicable, but no later than one year from the date of acquisition. The preliminary allocation of the purchase price may have material adjustments when the valuations have been completed. The following table presents the preliminary purchase price allocation:

 
  Weighted Average
Estimated Useful
Life (years)
   
  Estimated
Fair Value
 

Goodwill

              $ 5,453  

Identifiable intangible assets:

                   

Developed technology

    5     3,060        

Non-compete

    2     540        

IPR&D

          1,360        
                   

Total identifiable intangible assets

                4,960  

Other assets

                87  
                   

Total preliminary purchase price

              $ 10,500  
                   

        Developed technology relates to Phorus' technology across all of their markets that have reached technological feasibility. Non-compete relates to certain agreements that the Company entered into with certain members of Phorus' management team. Amortization of finite-lived identifiable intangible assets will be amortized on a straight-line basis over their estimated useful lives. IPR&D assets will be tested for impairment until the successful completion and commercialization or abandonment of the associated research and development efforts, at which point the IPR&D assets will either be amortized over their estimated useful lives or written-off.

        The estimated fair value of the developed technology was primarily determined using the excess earnings method. The fair value of the non-compete was established using the profit differential method, which is an income approach on estimated financial projections for the acquired business using market participant assumptions and various non-compete scenarios. The discount rate utilized for this intangible asset was 58% and was determined after consideration of the overall enterprise rate of return and the relative risk and importance of the assets to the generation of future cash flows. The estimated fair value of IPR&D was determined using the excess earnings method and considers the remaining costs to complete and the expected cash flows to be generated from these IPR&D projects. The discount rate utilized for IPR&D was 62%, which reflects the riskier profile of uncompleted R&D projects relative to that of existing assets.

        Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets. Goodwill will not be amortized, but instead will be tested for impairment at least annually or more frequently if certain indicators are present. In the event the Company determines that the value of goodwill has become impaired, it will incur an accounting charge for the amount of impairment during the quarter in which the determination is made. Goodwill recognized upon this acquisition is deductible for tax purposes.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 6—Business Combinations (Continued)

        The fair value of the contingent consideration is based on Level 3 inputs, and with the exception of measurement period adjustments, further changes in the fair value of the contingent consideration will be recognized in the consolidated statement of operations. The Company used the income approach, which includes an analysis of the cash flows and risks associated with achieving such cash flows, to value the contingent consideration based on two scenarios. One scenario was a risk neutral analysis and utilized a discount rate of 4%. The second scenario utilized was not a risk neutral analysis and utilized a discount rate of 13%. For additional information on contingent consideration, refer to Note 4 of the consolidated financial statements, "Fair Value Measurements."

        Acquisition and integration related costs for this acquisition totaled $133 and $193 for the three and nine months ended September 30, 2012, respectively, and have been included in the Company's results of operations within selling, general and administrative expenses. These costs included legal fees, other professional fees and other administrative costs.

        If this business combination took place on January 1 of the previous year, the consolidated revenues and net income (loss) would not have been significantly different from reported amounts.

Note 7—Goodwill and Intangibles

        During the nine months ended September 30, 2012, the Company added $51,174 to goodwill in connection with the acquisitions of SRS and Phorus. For additional information, refer to Note 6 of the consolidated financial statements, "Business Combinations."

        The following table summarizes amortization of intangibles included in the Company's results of operations:

 
  For the Three Months
Ended September 30,
  For the Nine Months
Ended September 30,
 
 
  2012   2011   2012   2011  

Cost of revenue

  $ 2,037   $ 184   $ 2,400   $ 549  

Operating expenses

    210     161     387     456  
                   

Total amortization of intangible assets

  $ 2,247   $ 345   $ 2,787   $ 1,005  
                   

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 7—Goodwill and Intangibles (Continued)

        The following table summarizes the weighted average lives and the carrying values of the Company's intangible assets by category:

 
   
  As of September 30, 2012(1)   As of December 31, 2011  
 
  Weighted
Average
Life
(Years)
 
 
  Gross
Amount
  Accumulated
Amortization
  Net
Carrying
Amount
  Gross
Amount
  Accumulated
Amortization
  Net
Carrying
Amount
 

Existing technology

    6   $ 32,777   $ (5,459 ) $ 27,318   $ 6,277   $ (4,034 ) $ 2,243  

Contractual rights(2)

    5     2,000         2,000     2,000         2,000  

Customer relationships

    8     40,220     (1,515 )   38,705     1,050     (450 )   600  

Non-compete

    2     540     (64 )   476     515     (515 )    

Tradename

    5     2,880     (295 )   2,585     190     (190 )    

Patents

    10     2,566     (967 )   1,599     2,269     (868 )   1,401  

Trademarks

    5     554     (240 )   314     516     (211 )   305  
                                 

Total amortizable intangible assets

          81,537     (8,540 )   72,997     12,817     (6,268 )   6,549  

IPR&D

          6,280         6,280              
                                 

Total intangible assets

        $ 87,817   $ (8,540 ) $ 79,277   $ 12,817   $ (6,268 ) $ 6,549  
                                 

(1)
Includes intangible assets acquired during July 2012. For additional information, refer to Note 6 of the consolidated financial statements, "Business Combinations."

(2)
Amortization will begin upon the in-service date, which is expected to occur later in 2012. Further, under existing arrangements, the Company may acquire additional rights, and as a result, it could make payments up to $8,250 over the next three years if certain milestones are achieved.

        The Company expects the future amortization of intangible assets held at September 30, 2012 to be as follows:

Years Ending December 31,
  Estimated
Amortization
Expense
 

2012 (remaining 3 months)

  $ 2,841  

2013

    11,732  

2014

    11,542  

2015

    11,386  

2016

    10,683  

2017 and thereafter

    24,813  
       

Total

  $ 72,997  
       

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 8—Long-term Debt

        In connection with the consummation of the Merger, the Company entered into a Loan Agreement, dated as of July 18, 2012 (the "Loan Agreement"), between the Company and Union Bank, N.A. ("Union Bank"), together with the other lenders thereunder from time to time (collectively, the "Lenders"). The Loan Agreement provides the Company with a $30,000 revolving line of credit (the "Revolver"), with a $5,000 sublimit for the issuance of standby and commercial letters of credit, to use to finance permitted acquisitions and for working capital and general corporate purposes. The Company may increase the Revolver by up to $20,000 subject to certain conditions. Proceeds from the Revolver were used to finance $30,000 of the cash portion of the Merger consideration as mentioned above.

        Amounts borrowed under the Revolver will bear interest, at the option of the Company, at either (i) LIBOR (as defined in the Loan Agreement) plus 1.0% or (ii) the higher of (a) the rate of interest most recently announced by Union Bank as its prime rate or (b) the Federal Funds Rate plus 0.50%. Through September 30, 2012, the Company elected LIBOR plus 1.0%. Pursuant to the Loan Agreement, the Company is required to pay an annual commitment fee of 0.25% on the unused portion of the Revolver.

        The Company's ability to borrow amounts under the Revolver is conditioned upon its compliance with specified covenants, including certain reporting covenants and financial covenants that require the Company to maintain a (i) minimum rolling four quarter adjusted EBITDA of $32,000, (ii) maximum leverage ratio, defined as funded debt divided by adjusted EBITDA, not to exceed 1.50 to 1.00 and (iii) minimum liquidity amount of $30,000. In addition, the Loan Agreement contains covenants that restrict, among other things, the Company's ability to dispose of property, enter into mergers, acquisitions or other business combination transactions, grant liens, pay dividends and make certain other restricted payments. As of and for the three months ended September 30, 2012, the Company was in compliance with all loan covenants.

        The Loan Agreement contains customary events of default. All advances under the Revolver will become due and payable on July 18, 2015, or earlier in the event of a default. Accordingly, the Revolver has been classified as a long-term liability on the consolidated balance sheet. Upon the occurrence and during the continuance of an event of default, the Lenders may declare all outstanding amounts under the Revolver immediately due and payable, and may terminate commitments to make any additional advances thereunder.

        Union Bank and its affiliates may in the future perform, for the Company and its affiliates, various commercial banking, investment banking, financial advisory or other services, for which they may in the future receive customary compensation and expense reimbursement.

        In connection with the Loan Agreement, the Company and all of its U.S. subsidiaries, entered into a security agreement (the "Security Agreement") dated as of July 18, 2012 with Union Bank as agent for the Lenders pursuant to which the Company and its U.S. subsidiaries granted the Lenders a first priority perfected security interest in (i) all their respective current and later acquired tangible and intangible assets in current and future domestic subsidiaries and (ii) up to 65% of the stock of the Company's current and future foreign subsidiaries to secure amounts borrowed under the Revolver.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 9—Commitments and Contingencies

Indemnities, Commitments and Guarantees

        In the normal course of business, the Company makes certain indemnities, commitments and guarantees under which the Company may be required to make payments in relation to certain transactions. These indemnities, commitments and guarantees include, among others, intellectual property indemnities to customers in connection with the sale of products and licensing of technologies, indemnities for liabilities associated with the infringement of other parties' technology based upon the Company's products and technologies, guarantees of timely performance of the Company's obligations, and indemnities to the Company's directors and officers to the maximum extent permitted by law. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments that the Company could be obligated to make. The Company has not recorded a liability for these indemnities, commitments or guarantees in the accompanying consolidated balance sheets, as future payment is currently not probable.

Note 10—Income Taxes

        For the three months ended September 30, 2012, the Company recorded an income tax provision of $6,288 on pre-tax loss of $12,798. For the nine months ended September 30, 2012, the Company recorded an income tax provision of $9,884 on pre-tax loss of $5,912, which resulted in an annualized effective tax rate of (167)%. This negative effective tax rate differed from the U.S. statutory rate of 35% primarily due to the effects of foreign operations, as the Company's tax rates on those operations are generally lower than the U.S. statutory rate, non-creditable foreign withholding taxes, certain non-deductible transaction costs associated with its acquisition of SRS and reserves for U.S. federal and state tax audits, partially offset by state research and development tax credits.

        Other long-term liabilities at September 30, 2012 and December 31, 2011, included unrecognized tax benefits of $15,739 and $7,459, respectively, for both domestic and foreign matters. The net increase of $8,280 was primarily due to uncertain tax positions relating to the foreign tax credits and research and development tax credits acquired from SRS, the Company's transfer pricing with its foreign licensing subsidiary and California income apportionment methodology, partially offset by the reversal of reserves for a U.S. federal audit issue that has been effectively settled. The Company believes that it is reasonably possible that a decrease of up to $4,390 in unrecognized tax benefits related to certain transfer pricing adjustments may be necessary within the coming year due to a favorable settlement of the 2007 Internal Revenue Service ("IRS") audit. In addition, the Company believes its accruals for uncertain tax positions are adequate for all open years, based on the assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. Inherent uncertainties exist in estimating accruals for uncertain tax positions due to the progress of income tax audits and changes in tax law, both legislated and concluded through the various jurisdictions' tax court systems.

        The Company may, from time to time, be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to the Company's

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 10—Income Taxes (Continued)

financial statements. Interest expense and penalties related to income taxes are included in income tax expense.

        The Company, or one of its subsidiaries, files income tax returns in the U.S. and other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for the years prior to 2007. The IRS is examining the Company's 2007 federal income tax return, including certain prior period carryforwards. In addition, the California Franchise Tax Board ("FTB") is conducting a state tax examination for the years 2004 and 2005. The Company disagrees with and has protested certain adjustments proposed by the IRS and FTB, and thus, has filed separate appeals. The timing of the ultimate resolution of these matters cannot be reasonably estimated.

Note 11—Geographic Information

        The Company's revenue by geographical area, based on the customer's country of domicile, was as follows:

 
  For the Three Months
Ended September 30,
  For the Nine Months
Ended September 30,
 
 
  2012   2011   2012   2011  

United States

  $ 1,884   $ 1,730   $ 8,121   $ 7,480  

International

    20,351     18,816     62,753     60,430  
                   

Total revenue

  $ 22,235   $ 20,546   $ 70,874   $ 67,910  
                   

        The following table sets forth net long-lived tangible assets by geographic area:

 
  As of
September 30,
2012
  As of
December 31,
2011
 

United States

  $ 31,105   $ 30,496  

International

    2,088     2,304  
           

Total long-lived tangible assets, net

  $ 33,193   $ 32,800  
           

Note 12—Net Income (Loss) Per Common Share

        Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated by dividing net income (loss) by the sum of the weighted average number of common shares outstanding plus the dilutive effect of unvested restricted stock, outstanding stock options and the employee stock purchase plan ("ESPP") using the treasury stock method. Due to the net losses for the three and nine months ended September 30, 2012, all potential common shares are excluded from the diluted shares outstanding for those periods.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 12—Net Income (Loss) Per Common Share (Continued)

        The following table sets forth the computation of basic and diluted net income (loss) per common share:

 
  For the Three Months
Ended September 30,
  For the Nine Months
Ended September 30,
 
 
  2012   2011   2012   2011  

Basic net income (loss) per common share:

                         

Net income (loss)

  $ (19,086 ) $ 2,902   $ (15,796 ) $ 11,192  
                   

Weighted average common shares outstanding

    18,329     16,910     17,104     17,131  
                   

Basic net income (loss) per common share

  $ (1.04 ) $ 0.17   $ (0.92 ) $ 0.65  
                   

Diluted net income (loss) per common share:

                         

Net income (loss)

  $ (19,086 ) $ 2,902   $ (15,796 ) $ 11,192  
                   

Weighted average shares outstanding

    18,329     16,910     17,104     17,131  

Effect of dilutive securities:

                         

Common stock options

        442         538  

Restricted stock

        81         97  

ESPP

        1         2  
                   

Weighted average diluted shares outstanding

    18,329     17,434     17,104     17,768  
                   

Diluted net income (loss) per common share

  $ (1.04 ) $ 0.17   $ (0.92 ) $ 0.63  
                   

Anti-dilutive shares excluded from the determination of diluted earnings (loss) per share

    3,282     612     2,498     371  
                   

Note 13—Common Stock Repurchases

        In February 2012, the Company's Board of Directors authorized, subject to certain business and market conditions, the purchase of up to 2,000 shares of the Company's common stock in the open market or in privately negotiated transactions. As of September 30, 2012, the Company repurchased 245 shares of its common stock, for an aggregate of $5,881, under this authorization.

        All shares repurchased under this authorization are accounted for as treasury.

Note 14—Related Party Transaction

        The Company continues to lease the former offices of SRS in Santa Ana, California from Daimler Commerce Partners, L.P., the general partner of which is Conifer Investments, Inc. ("Conifer"). The sole shareholders of Conifer are Thomas C.K. Yuen, a member of the Company's Board of Directors, and his spouse, Misako Yuen, as co-trustees of the Thomas Yuen Family Trust. Mr. and Mrs. Yuen also serve as the executive officers of Conifer. These offices are leased under two separate lease agreements that expire in April 2017, and rent expense for these offices was $68 from July 20, 2012 to September 30, 2012. The Company believes the terms and conditions of these leases are competitive based on a review of similar properties in the area with similar terms and conditions.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements May Prove Inaccurate

        This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as "believes," "anticipates," "estimates," "expects," "projections," "may," "potential," "plan," "continue" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding our future financial performance or position, our business strategy, plans, expectations, and our objectives for future operations, including those relating to our products and services, as well as statements about the benefits of the transaction involving us, SRS Labs, Inc. ("SRS"), Phorus, Inc. and Phorus, LLC (collectively "Phorus"), including future financial and operating results and the combined company's plans, objectives, expectations and intentions. Although forward-looking statements in this report reflect our good faith judgment, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements contained herein are inherently subject to risks and uncertainties and our actual results and outcomes may be materially different than those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those discussed under the "Risk Factors" section contained in Part II Item 1A and elsewhere in this report and in other documents we file with the Securities and Exchange Commission, or SEC. We cannot guarantee future results, levels of activity, performance or achievements. You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this report. You are urged not to place undue reliance on the forward-looking statements contained in this report, which speak only as of the date of this report. We do not undertake any obligation to revise or update these forward-looking statements to reflect future events or circumstances.

Overview

        We are a leading provider of high-definition audio technologies that are incorporated into an array of consumer electronics devices by hundreds of licensee customers around the world. Our audio technologies enable the delivery and playback of clear, compelling high-definition audio and are currently used in a variety of product applications, including audio/video receivers, soundbars, Blu-ray Disc players, DVD based products, PCs, car audio products, video game consoles, network capable televisions, digital media players or DMPs, set-top-boxes or STBs, mobile phones, tablets and home theater systems. In addition, we provide products and services to motion picture studios, radio and television broadcasters, game developers and other content creators to facilitate the inclusion of compelling, realistic DTS-encoded soundtracks in their content. We also provide a suite of audio processing technologies designed to enhance the entertainment experience for users of consumer electronics products subject to physical limitations, such as TVs, PCs and mobile electronics.

        We derive revenues from licensing our audio technologies, copyrights, trademarks, and know-how under agreements with substantially all of the major consumer audio electronics manufacturers. Our business model provides for these manufacturers to pay us a per-unit amount for DTS-enabled products that they manufacture.

        Generally, we actively engage in intellectual property compliance and enforcement activities focused on identifying third parties who have either incorporated our technologies, copyrights, trademarks or know-how without a license or who have under-reported the amount of royalties owed under license agreements with us. We continue to invest in our compliance and enforcement

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infrastructure to support the value of our intellectual property to us and our licensees and to improve the long-term realization of revenues from our intellectual property. As a result of these activities, from time to time, we recognize royalty revenues that relate to consumer electronics manufacturing activities from prior periods. These royalty recoveries may cause revenues to be higher than expected during a particular reporting period and may not occur in subsequent periods. While we consider such revenues to be a regular part of our normal operations, we cannot predict such recoveries or the amount or timing of such revenues.

        Our cost of revenues consists primarily of amortization of acquired intangibles, and also includes costs for products and materials, salaries and related benefits for operations personnel, and payments to third parties for copyrighted material.

        Our selling, general and administrative expenses consist primarily of salaries and related benefits for personnel engaged in sales and licensee support, as well as costs associated with promotional and other selling and licensing activities. Selling, general and administrative expenses also include professional fees, facility-related expenses and other general corporate expenses, including salaries and related benefits for personnel engaged in corporate administration, finance, human resources, information systems and legal.

        Our research and development costs consist primarily of salaries and related benefits for research and development personnel, engineering consulting expenses associated with new product and technology development and quality assurance and testing costs. Research and development costs are expensed as incurred.

    Acquisition of SRS Labs, Inc.

        On July 20, 2012, we completed our previously announced acquisition of SRS Labs, Inc., a Delaware corporation, pursuant to the Agreement and Plan of Merger and Reorganization, dated as of April 16, 2012 (the "Merger Agreement"), by and among us, DTS Merger Sub, Inc., a Delaware corporation and our wholly owned subsidiary ("Merger Sub"), DTS LLC, a single member limited liability company and our wholly owned subsidiary ("DTS LLC"), and SRS. Pursuant to the Merger Agreement, Merger Sub was merged with and into SRS, with SRS surviving the merger as our wholly owned subsidiary (the "Merger"). Immediately following the Merger, SRS was merged with and into DTS LLC, with DTS LLC continuing as the surviving entity and our wholly owned subsidiary. As used herein, "SRS" refers to SRS prior to the closing of the Merger and after the closing of the Merger, as the context requires.

        In connection with the Merger, we issued 2.3 million shares of our common stock and paid $66.9 million in cash to former SRS stockholders and paid $13.3 million in cash to former SRS equity award holders. Aggregate consideration for this acquisition was valued at $124.8 million, based on a $19.32 per share closing price of our common stock on July 20, 2012.

        For additional information relating to the Merger, refer to Note 6 of the consolidated financial statements, "Business Combinations."

        SRS is an industry leader in audio signal processing for consumer electronics across the four screens: TVs, PCs, mobile phones and automotive entertainment systems. SRS holds approximately 150 worldwide registered and pending patents and is recognized by the industry as an authority in research and application of audio post processing technologies based on the human auditory principles. Through partnerships with leading global consumer electronics companies, semiconductor manufacturers, software developers, and content aggregators, SRS is recognized as a leader in audio enhancement, surround sound, volume leveling, audio streaming and voice processing technologies. We plan to leverage from SRS' technologies, accomplishments, and relationships to accelerate the growth of our business.

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    Acquisition of Phorus' Assets

        On July 5, 2012, we completed our acquisition of assets from Phorus pursuant to an Asset Purchase Agreement dated as of July 5, 2012 (the "Asset Purchase Agreement"). Pursuant to the terms of the Asset Purchase Agreement, we paid initial cash consideration of $3.0 million upon the closing of the acquisition, and we may be required to pay up to an additional $10.0 million in consideration subject to the achievement of certain milestones. The Phorus business is dedicated to wireless audio solutions for connected devices with expertise in such areas as acoustic design, digital signal processing and wireless networking.

        All discussions and amounts in Management's Discussion and Analysis include SRS and Phorus from their respective dates of acquisition.

Executive Summary

Financial Highlights

    Revenues increased $1.7 million for the three months ended September 30, 2012, compared to the same prior year period. Revenues increased $3.0 million for the nine months ended September 30, 2012, compared to the same prior year period.

    Royalty recoveries from intellectual property compliance and enforcement activities increased $2.0 million for the nine months ended September 30, 2012, compared to the same prior year period. Royalty recoveries were zero for the three months ended September 30, 2012 and 2011.

    Royalties from network connected markets increased 41% and 42% for the three and nine months ended September 30, 2012, respectively, compared to the same prior year periods.

    Royalties from Blu-ray product markets decreased 3% and 7% for the three and nine months ended September 30, 2012, respectively, compared to the same prior year periods.

Trends, Opportunities, and Challenges

        Historically, our revenue has been primarily dependent upon the DVD based home theater market. The success of DVD based systems and products has fueled a demand for higher quality entertainment in the home, and this demand has extended into the car audio, PC, portable electronics, on-line networked devices, broadcast, video game console, mobile handset and tablet markets, as well. We have seen the acceleration of the market for high-definition televisions drive demand for Blu-ray Disc players and advanced home theater systems. Consumers have more broadly embraced the Blu-ray technology as prices decline and approach DVD pricing, content availability increases and as customers realize the value of the advanced features that Blu-ray provides, such as the ability to connect to the internet and ultimately playback 3D content.

        Because we are a mandatory technology in the Blu-ray Disc standard, our revenue stream from this market is closely tracking the sales trend of Blu-ray equipped players, game consoles and PCs. Further, we believe that this mandatory position in the Blu-ray Disc standard will give us the ability to extend the reach of a broad array of our technologies in several large markets, such as applications beyond optical media. For example, we have signed agreements with a number of DMP, network-connected digital television and mobile handset manufacturers to incorporate DTS decoders into their products. Also, we recently joined forces with Deluxe Digital Distribution to enhance audio experiences across the digital entertainment marketplace. Partnerships such as these will enable content delivery to as many connected devices as possible, thereby enabling growth in licensing opportunities.

        One of the largest challenges that we face is the growing consumer trend toward open platform, on-line entertainment consumption and the need to constantly and rapidly evolve our technologies to address the emerging markets. We believe that although the trend has begun, any transition to such

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open platform, on-line entertainment will take many years. Further, we believe that this trend demands that playback devices be capable of processing content originating in any form, whether disk-based or on-line, which creates a substantial opportunity for our technologies to extend into network-connected products that may not have an optical drive. During the transition period, we expect that both optical media and on-line entertainment formats will continue to thrive.

        Further, we currently face challenges regarding the impact of the ongoing global economic downturn on consumer buying patterns. While we do not have visibility into the timing or extent of an economic recovery, we continue to remain optimistic that our revenues from both Blu-ray enabled products and our newer markets will continue to grow.

Critical Accounting Policies and Estimates

        Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America, or GAAP, and pursuant to the rules and regulations of the SEC. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an on-going basis, estimates and judgments are evaluated, including those related to revenue recognition, allowance for doubtful accounts, impairment of long-lived assets, stock-based compensation and income taxes. These estimates and judgments are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may materially differ from these estimates. With the exception of our critical accounting policies and estimates related to our recent business combinations, there has been no material change to our critical accounting policies and estimates from the information provided in our Form 10-K filed on March 2, 2012.

    Business Combinations

        We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired, including in-process research and development, or IPR&D, based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. We engage independent consultants to assist us in determining the fair values of assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets and contingent consideration.

        Critical estimates in valuing certain intangible assets include, but are not limited to: future expected cash flows from customer contracts, customer lists, and acquired developed technologies and patents; expected costs to develop IPR&D into commercially viable products and estimating cash flows from projects when completed; brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in our product portfolio; and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

        Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed, as more fully discussed in Notes 2 and 6 of the consolidated financial statements, "Significant Accounting Policies" and "Business Combinations", respectively.

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    Revenue Recognition

        Revenues from arrangements involving license fees, up-front payments and milestone payments, which are received or billable by us in connection with other rights and services that represent continuing obligations of ours, are deferred until all of the elements have been delivered or until we have established objective and verifiable evidence of the fair value of the undelivered elements.

        We are responsible for the licensing and enforcement of our patented technologies and pursue third parties that are utilizing our intellectual property without a license or who have under-reported the amount of royalties owed under a license agreement with us. As a result of these activities, from time to time, we may recognize royalty revenues that relate to infringements that occurred in prior periods. These royalty recoveries may cause revenues to be higher than expected during a particular reporting period and may not occur in subsequent periods. Differences between amounts initially recognized and amounts subsequently audited or reported as an adjustment to those amounts due from licensees, will be recognized in the period such adjustment is determined or contracted, as appropriate, as a change in accounting estimate.

        We make estimates and judgments when determining whether the collectibility of license fees receivable from licensees is reasonably assured. We assess the collectibility of accrued license fees based on a number of factors, including past transaction history with licensees and the credit-worthiness of licensees. If it is determined that collection is not reasonably assured, the fee is recognized when collectibility becomes reasonably assured, assuming all other revenue recognition criteria have been met, which is generally upon receipt of cash. Management estimates regarding collectibility impact the actual revenues recognized each period and the timing of the recognition of revenues. Our assumptions and judgments regarding future collectibility could differ from actual events, thus materially impacting our consolidated financial statements.

        Revenues from licensing audio technology, trademarks, and know-how are generated from licensing agreements with consumer electronics products manufacturers that generally pay a per-unit license fee for products manufactured (or upon shipment for those licensing agreements acquired with SRS) under those license agreements. Licensees generally report manufacturing or shipping information within 30 to 60 days after the end of the quarter in which such activity takes place. Consequently, we recognize revenue from these licensing agreements on a three-month lag basis, generally in the quarter following the quarter of manufacture or shipment, provided amounts are fixed or determinable and collection is reasonably assured, since we cannot reliably estimate the amount of revenue earned prior to our receipt of such reports. Use of this lag method allows for the receipt of licensee royalty reports prior to the recognition of revenue.

        Cash collections from per-unit licensing agreements acquired with SRS during the three months ended September 30, 2012 were the result of product shipments during the three months ended June 30, 2012, or prior to our acquisition of SRS. Therefore, we have not recognized revenue from per-unit licensing agreements and certain other licensing arrangements acquired with SRS during the three months ended September 30, 2012. We will begin to recognize revenue from per-unit licensing agreements and certain other licensing arrangements acquired with SRS during the fourth quarter of 2012.

        Generally, consumer electronics manufacturing activities are lowest in the first calendar quarter of each year, and increase progressively throughout the remainder of the year. The third and fourth quarters are typically the strongest in terms manufacturing output as our technology licensees increase their manufacturing output to prepare for the holiday buying season. Since recognition of revenues in our business generally lags manufacturing activity by one quarter, our revenues and earnings are generally lowest in the second quarter. In general, the introduction and inclusion of DTS technologies in new and rapidly growing markets can have a material effect on quarterly revenues and profits, and can distort the moderate seasonality described above.

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Results of Operations

    Revenues

 
   
   
  Change  
 
  2012   2011   $   %  
 
  ($ in thousands)
 

Three months ended September 30,

  $ 22,235   $ 20,546   $ 1,689     8 %

Nine months ended September 30,

  $ 70,874   $ 67,910   $ 2,964     4 %

        Revenues for the nine months ended September 30, 2012, compared to the same prior year period, included an increase of $2.0 million in royalties recovered through intellectual property compliance and enforcement activities, which we characterize as "royalty recoveries." Royalty recoveries may cause revenues to be higher than expected during a particular period and may not occur in subsequent periods. Therefore, unless otherwise noted, the impact of royalty recoveries has been excluded from our revenue discussions in order to provide a more meaningful and comparable analysis.

        Revenues from licensing agreements acquired with SRS amounted to $0.9 million for the three and nine months ended September 30, 2012, however as noted above, we will begin to recognize revenue from per-unit licensing agreements and certain other licensing arrangements acquired with SRS in the fourth quarter of 2012.

        Excluding royalty recoveries, the increase in revenues for the three months ended September 30, 2012, compared to the same prior year period, was largely attributable to continued growth in royalties from network connected markets and royalties from licensing agreements acquired with SRS. In dollar terms, these royalties were up 41% for the three months ended September 30, 2012, compared to the same prior year period. Also, these royalties comprised over 25% and 20% of revenues for the three months ended September 30, 2012 and 2011, respectively. The growth in network connected markets was primarily driven by increased royalties from connected TVs. Royalties from the car market also increased for the three months ended September 30, 2012, compared to the same prior year period, due to continued expansion of our technology into new car models. Partially offsetting the increase in network connected markets were declines in the DVD, broadcast and Blu-ray markets. DVD related royalties continue to decline as Blu-ray and network connected devices become more mainstream. In dollar terms, DVD related royalties declined 8% for the three months ended September 30, 2012, compared to the same prior year period. The decline in royalties from the broadcast market primarily relates to the termination of an arrangement with a certain customer. These royalties comprised less than 5% percent of revenues for the three months ended September 30, 2012 and 2011. The decline in royalties from the Blu-ray market was largely the result of supply chain disruptions caused by the flooding in Thailand last year and other macroeconomic factors impacting certain segments of the consumer electronics industry. Blu-ray related royalties comprised over 30% of revenues for the three months ended September 30, 2012 and 2011. In dollar terms, these royalties were down 3% for the three months ended September 30, 2012, compared to the same prior year period. We remain cautious regarding the outlook for the consumer electronics industry as a whole, and the revenues we derive from that industry, in light of ongoing global economic challenges. However, we expect technology licensing revenues to grow as wider availability of Blu-ray enabled players, PCs and game consoles, coupled with expected aggressive pricing and promotion of these products by retailers and consumer electronics product manufacturers, should result in increasing licensing revenues from the Blu-ray format. In addition, we expect to see continued growth from the network connected markets, as we expand our footprint in terms of both products and geographies served.

        Excluding royalty recoveries, the increase in revenues for the nine months ended September 30, 2012, compared to the same prior year period, was largely attributable to continued growth in royalties from network connected markets and royalties from licensing agreements acquired with SRS. In dollar terms, these royalties were up 42% for the nine months ended September 30, 2012, compared to the

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same prior year period. Also, these royalties comprised over 25% and 15% of revenues for the nine months ended September 30, 2012 and 2011, respectively. The growth in network connected markets was primarily driven by increased royalties from connected TVs and mobile devices. Royalties from the car market also increased for the nine months ended September 30, 2012, compared to the same prior year period, due to continued expansion of our technology into new car models. Partially offsetting the increase in network connected markets were declines in the broadcast, Blu-ray and DVD markets. Due to the aforementioned arrangement termination, royalties from the broadcast market were below 5% of revenues for the nine months ended September 30, 2012, compared to over 5% of revenues for the same prior year period. For the reasons mentioned above, royalties from the Blu-ray market were below 35% of revenues for the nine months ended September 30, 2012, compared to over 35% of revenues for the same prior year period. In dollar terms, these royalties were down 7% for the nine months ended September 30, 2012, compared to the same prior year period. DVD related royalties continued to decline as Blu-ray and network connected devices become more mainstream. In dollar terms, DVD related royalties declined 9% for the nine months ended September 30, 2012, compared to the same prior year period.

    Gross Profit

 
  2012   %   2011   %  
 
  ($ in thousands)
 

Three months ended September 30,

  $ 20,130     91 % $ 20,329     99 %

Nine months ended September 30,

  $ 68,381     96 % $ 67,267     99 %

        Our gross margins for the three and nine months ended September 30, 2012, compared to the same prior year period, have been affected by the additional amortization of intangibles from the SRS and Phorus acquisitions.

    Selling, General and Administrative ("SG&A")

 
   
   
  Change  
 
  2012   2011   $   %  
 
  ($ in thousands)
 

Three months ended September 30,

  $ 25,322   $ 12,784   $ 12,538     98 %

% of Revenue

    114 %   62 %            

Nine months ended September 30,

  $ 57,311   $ 39,608   $ 17,703     45 %

% of Revenue

    81 %   58 %            

        The dollar increase in SG&A for the three and nine months ended September 30, 2012, compared to the same prior year periods, was primarily due to costs associated with our acquisition of SRS. Total acquisition and integration related costs included in SG&A were $7.3 million and $10.1 million for the three and nine months ended September 30, 2012, respectively. We continue to experience increases in employee related costs primarily due to increases in headcount and stock-based compensation in support of our growth. The dollar increase in SG&A for the nine months ended September 30, 2012, compared to the same prior year period, was also due to a 2012 brand marketing campaign and tradeshow related activities.

        We expect dollars spent on SG&A expenses to continue to increase, primarily to support activities such as new technology initiatives, international expansion and intellectual property enforcement.

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    Research and Development ("R&D")

 
   
   
  Change  
 
  2012   2011   $   %  
 
  ($ in thousands)
 

Three months ended September 30,

  $ 7,625   $ 3,364   $ 4,261     127 %

% of Revenue

    34 %   16 %            

Nine months ended September 30,

  $ 16,915   $ 9,759   $ 7,156     73 %

% of Revenue

    24 %   14 %            

        The dollar increase in R&D for the three and nine months ended September 30, 2012, compared to the same prior year periods, was primarily due to employee related costs associated with our recent acquisitions of SRS and Phorus. We continue to experience increases in employee related costs primarily due to increases in headcount and stock-based compensation in support of our growth. Other increases include consultant and travel related expenses to support our growth.

        We intend to continue to invest in R&D to support the activities mentioned above, and thus expect to see growth in dollars spent through the remainder of the year.

    Interest and Other Income (Expense), Net

 
   
   
  Change  
 
  2012   2011   $   %  
 
  ($ in thousands)
 

Three months ended September 30,

  $ 19   $ 348   $ (329 )   (95 )%

Nine months ended September 30,

  $ (67 ) $ 322   $ (389 )   121 %

        Interest and other income (expense), net, for the three months ended September 30, 2012 is lower because of interest income, partially offset by the effects of translation for certain foreign subsidiaries to the U.S. dollar or functional currency and interest expense associated with new debt.

        Interest and other income (expense), net, for the nine months ended September 30, 2012 is lower because of the effects of translation for certain foreign subsidiaries to the U.S. dollar or functional currency and interest expense associated with our new debt, partially offset by interest income.

    Income Taxes

 
  2012   2011  
 
  ($ in thousands)
 

Three months ended September 30,

  $ 6,288   $ 1,627  

Effective tax rate

    (49 )%   36 %

Nine months ended September 30,

  $ 9,884   $ 7,030  

Effective tax rate

    (167 )%   39 %

        The effective tax rates for the three and nine months ended September 30, 2012 differed from the U.S. statutory rate of 35% primarily due to the effects of foreign operations, as our tax rates on those operations are generally lower than the U.S. statutory rate, non-creditable foreign withholding taxes, certain non-deductible transaction costs associated with our acquisition of SRS and reserves for U.S. federal and state tax audits, partially offset by state research and development tax credits. Our effective tax rates for the three and nine months ended September 30, 2011 differed from the U.S. statutory rate of 35% primarily due to state income taxes and reserves for U.S. federal and state audits, partially offset by the effects of foreign operations, as our tax rates on those operations are generally lower than the U.S. statutory rate, and by the reversal of reserves for U.S. federal and foreign audit issues that have been effectively settled.

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Liquidity and Capital Resources

        At September 30, 2012, we had cash, cash equivalents and short-term investments of $80.7 million, compared to $85.6 million at December 31, 2011. At September 30, 2012, $46.0 million of cash, cash equivalents, and short-term investments was held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., they would be subject to U.S. federal and state income taxes, less applicable foreign tax credits. However, our intent is to permanently reinvest funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.

        Net cash provided by operating activities was $17.3 million and $14.5 million for the nine months ended September 30, 2012 and 2011, respectively. Cash flows from operating activities consisted of net income (loss) adjusted for certain non-cash items, including stock-based compensation, depreciation and amortization and the effect of changes in working capital and other operating activities. The operating cash flows during the nine months ended September 30, 2012 and 2011, were largely impacted by income (loss) from operations, partially offset by certain non-cash items. These cash flows were also impacted by the cash flows from accounts receivable due to the timing of collections and the timing of payment for certain liabilities. The operating cash flows during the nine months ended September 30, 2012 and 2011 were also impacted by the timing of deferred revenue recognition and the timing of payment for certain liabilities.

        The cash used in investing activities is typically used to purchase office equipment, fixtures, computer hardware and software and engineering and certification equipment, for securing patent and trademark protection for our proprietary technologies and brand name and to purchase investments such as bank certificates of deposit and municipal bonds. Net cash used in investing activities totaled $32.3 million for the nine months ended September 30, 2012. These cash flows were primarily impacted by the acquisition of SRS, partially offset by net proceeds from investment maturities and sales. Further, under existing arrangements, we may acquire additional contractual rights, and as a result, we could make payments up to $8.3 million over the next three years if certain milestones are achieved. Net cash provided by investing activities totaled $3.4 million for the nine months ended September 30, 2011. These cash flows were primarily impacted by net proceeds from investment maturities. For additional information relating to the aforementioned acquisition of SRS, refer to the "Acquisitions" discussion below.

        Net cash provided by financing activities totaled $24.9 million for the nine months ended September 30, 2012, which resulted primarily from a new credit facility, partially offset by purchases of treasury stock. Net cash used in financing activities totaled $24.7 million for the nine months ended September 30, 2011, which resulted primarily from purchases of treasury stock, partially offset by proceeds from the issuance of common stock under stock-based compensation plans, including the related tax benefits. For additional information relating to the aforementioned credit facility, refer to the "New Credit Facility" discussion below.

    Acquisitions

        On July 20, 2012, we completed our previously announced acquisition of SRS for an aggregate of $80.2 million in cash and 2.3 million shares of our common stock. The purchase price was funded with our existing cash, liquidated investments, borrowings of $30.0 million under a new credit facility described below and the issuance of common stock from treasury.

        On July 5, 2012, we completed our acquisition of assets from Phorus for initial cash consideration of $3.0, and we may be required to pay up to an additional $10.0 million in consideration subject to the achievement of certain milestones.

        For additional information relating to these acquisitions, refer to Note 6 of the consolidated financial statements, "Business Combinations."

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    New Credit Facility

        In connection with the consummation of the Merger, we entered into a Loan Agreement, dated as of July 18, 2012 (the "Loan Agreement"), between us and Union Bank, N.A. ("Union Bank"), together with the other lenders thereunder from time to time (collectively, the "Lenders"). The Loan Agreement provides us with a $30.0 million revolving line of credit (the "Revolver"), with a five million sublimit for the issuance of standby and commercial letters of credit, to use to finance permitted acquisitions and for working capital and general corporate purposes. We may increase the Revolver by up to $20.0 million subject to certain conditions. Proceeds from the Revolver were used to finance the cash portion of the Merger consideration as mentioned above. All advances under the Revolver will become due and payable on July 18, 2015, or earlier in the event of a default. As of and for the three months ended September 30, 2012, the Company was in compliance with all loan covenants.

        For additional information relating to the Loan Agreement, refer to Note 8 of the consolidated financial statements, "Long-term Debt."

    Common Stock Repurchases

        In February 2012, our Board of Directors authorized, subject to certain business and market conditions, the purchase of up to two million shares of our common stock in the open market or in privately negotiated transactions. As of September 30, 2012, we repurchased 0.2 million shares of our common stock, for an aggregate of $5.9 million, under this authorization.

        We believe that our cash, cash equivalents, short-term investments and cash flows from operations will be sufficient to satisfy our working capital and capital expenditure requirements for at least the next twelve months. However, as a result our acquisition of SRS, we entered into a new credit facility during the third quarter of 2012 as noted above. Changes in our operating plans, including lower than anticipated revenues, increased expenses, acquisitions of businesses, products or technologies or other events, including those described in "Risk Factors" included elsewhere herein and in other filings, may cause us to seek additional debt or equity financing on an accelerated basis. Financing may not be available on acceptable terms, or at all, particularly given current economic conditions, including lack of confidence in the financial markets and limited availability of capital and demand for debt and equity securities. Our failure to raise capital when needed could negatively impact our growth plans and our financial condition and results of operations. Additional equity financing may be dilutive to the holders of our common stock and debt financing, if available, and may involve significant cash payment obligations and financial or operational covenants that restrict our ability to operate our business.

    Contractual obligations

        With the exception of the increased obligations associated with our gross unrecognized tax benefits, there have been no material changes to our contractual obligations since December 31, 2011. As of September 30, 2012, our total amount of unrecognized tax benefits was $15.7 million and was considered a long-term obligation. We are currently unable to make reasonably reliable estimates of the periods of cash settlements associated with these obligations. However, we believe that it is reasonably possible that our unrecognized tax benefits will decrease by up to $4.4 million in the next twelve months as a result of certain transfer pricing adjustments that may be necessary due to a favorable settlement of the 2007 Internal Revenue Service audit. More information regarding our contractual obligations associated with our recent business combinations will follow in our upcoming Annual Report on Form 10-K for the year ended December 31, 2012.

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk

        Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates.

        Our interest rate risk relates primarily to interest income from investments and interest expense from debt. Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since a significant portion of our investments were and may in the future be in short-term and long-term marketable securities, U.S. government securities and corporate bonds. Due to the nature and maturity of our short-term investments, we have concluded that there is no material market risk exposure to our principal at September 30, 2012. The average maturity of our investment portfolio is less than one year. As of September 30, 2012, a one percentage point change in interest rates for cash and investments throughout a one-year period would have an annual effect of approximately $0.8 million on our income or loss before income taxes. In connection with the consummation of the Merger, we entered into a Loan Agreement that provides a $30.0 million Revolver. We may increase the Revolver by up to $20.0 million subject to certain conditions. As of September 30, 2012, a one percentage point change in interest rates for debt throughout a one-year period would have an immaterial annual effect on our consolidated statement of operations.

        During the nine months ended September 30, 2012, we derived nearly 90% of our revenues from sales outside the United States, and maintain international research, sales, marketing and business development offices. Therefore, our results could be negatively affected by such factors as changes in foreign currency exchange rates, trade protection measures, longer accounts receivable collection patterns and changes in regional or worldwide economic or political conditions. The risks of our international operations are mitigated in part by the extent to which our revenues are denominated in U.S. dollars and, accordingly, we are not exposed to significant foreign currency risk on these items. We do have foreign currency risk on certain revenues and operating expenses such as salaries and overhead costs of our foreign operations and cash maintained by these operations. Revenues denominated in foreign currencies accounted for approximately 7% of total revenues during the nine months ended September 30, 2012. Operating expenses, including cost of sales, of our foreign subsidiaries were approximately $17.0 million for the nine months ended September 30, 2012. Based upon the expenses for the nine months ended September 30, 2012, a 10% or greater change in foreign currency rates throughout a one-year period could have a material impact on our operating income or loss.

        Our international business is subject to risks, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility when compared to the United States dollar. Accordingly, our future results could be materially impacted by changes in these or other factors.

        We are also affected by exchange rate fluctuations as the financial statements of our foreign subsidiaries are translated into the United States dollar in consolidation. As exchange rates fluctuate, these results, when translated, may vary from expectations and could adversely or positively impact overall profitability. During the nine months ended September 30, 2012, the impact of foreign exchange rate fluctuations related to translation of our foreign subsidiaries' financial statements was immaterial to comprehensive income or loss.

Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

        We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms

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of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

        We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

Changes in Internal Control over Financial Reporting

        There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

        In the ordinary course of our business, we actively pursue legal remedies to enforce our intellectual property rights and to stop unauthorized use of our technologies and trademarks.

        We are not currently a party to any material legal proceedings. We may, however, become subject to lawsuits from time to time in the course of our business.

Item 1A.    Risk Factors

        Set forth below and elsewhere in this report and in other documents we file with the SEC are risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report and other public statements we make. If any of the following risks actually occurs, our business, financial condition, or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

        We have marked with an asterisk (*) those risks described below that reflect substantive changes from the risks included in Part I, Item 1A. "Risk Factors" in our annual report on Form 10-K for the year ended December 31, 2011, as supplemented and updated by the risk factors included in Part II, Item 1A. "Risk Factors" in our quarterly reports on Form 10-Q for the periods ended March 31, 2012 and June 30, 2012.

Risks Related to Our Business

    *Although we expect to realize certain benefits as a result of the SRS acquisition, there is the possibility that we may be unable to successfully integrate the businesses of DTS and SRS, or to do so within the intended timeframe.

        Following completion of our acquisition of SRS on July 20, 2012, SRS has been operated as a wholly owned subsidiary of ours. We are required to devote significant management attention and resources to integrating the business practices and operations of SRS with ours. Potential difficulties we may encounter as part of the integration process include the following:

    any delay in the integration of management teams, strategies, operations, products and services;

    loss in sales and customers as a result of certain of our or SRS' customers deciding not to do business with us after the acquisition;

    diversion of the attention of each company's management as a result of the acquisition;

    differences in business backgrounds, corporate cultures and management philosophies that may delay successful integration;

    the ability to retain key employees;

    the ability to create and enforce uniform standards, controls, procedures, policies and information systems;

    the achievement of anticipated synergies;

    complexities associated with managing SRS as our subsidiary, including the challenge of integrating complex systems, technology, networks and other assets of SRS into those of ours in a seamless manner that minimizes any adverse impact on customers, suppliers, employees and other constituencies;

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    potential unknown liabilities and unforeseen increased expenses or delays associated with the integration; and

    the disruption of, or the loss of momentum in, each company's ongoing businesses or inconsistencies in standards, controls, procedures and policies,

any of which could adversely affect each company's ability to maintain relationships with customers, suppliers, employees and other constituencies or our ability to achieve the anticipated benefits of the acquisition or could reduce each company's earnings or otherwise adversely affect our business and financial results following the completion of the acquisition.

        In addition to integration related issues, the acquisition of SRS has significantly increased the size of our business, augmenting a number of the risks included in these risk factors. Future success depends, in part, upon our ability to manage this expanded business, which will pose substantial challenges for management. There can be no assurance that we will be successful realizing the expected benefits from this acquisition.

    We may not be able to evolve our technologies, products, and services or develop new technology, products, and services that are acceptable to our customers or the changing market.

        The market for our technologies, products, and services is characterized by:

    rapid technological change;

    new and improved product introductions;

    changing customer demands;

    increasingly competitive product landscape;

    evolving industry standards; and

    product obsolescence.

        Our future success depends upon our ability to enhance our existing technologies, products, and services and to develop acceptable new technologies, products, and services on a timely basis. The development of enhanced and new technologies, products, and services is a complex and 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, market, or support new or enhanced technologies, products, or services on a timely basis, if at all. Furthermore, our new technologies, products, and services may never gain market acceptance, and we may not be able to respond effectively to evolving consumer demands, technological changes, product announcements by competitors, or emerging industry standards. Any failure to respond to these changes or concerns would likely prevent our technologies, products, and services from gaining market acceptance or maintaining market share and could lead to our technologies, products and services becoming obsolete.

    If we fail to protect our intellectual property rights, our ability to compete could be harmed.

        Protection of our intellectual property is critical to our success. Copyright, trademark, patent, and trade secret laws and confidentiality and other contractual provisions afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. We face numerous risks in protecting our intellectual property rights, including the following:

    our competitors may produce competitive products or services that do not unlawfully infringe upon our intellectual property rights;

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    the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States, and mechanisms for enforcement of intellectual property rights may be inadequate in foreign countries;

    we may be unable to successfully identify or prosecute unauthorized uses of our technologies;

    efforts to identify and prosecute unauthorized uses of our technologies are time consuming, expensive, and divert resources from the operation of our business;

    our patents may be challenged, found unenforceable or invalidated by our competitors;

    our pending patent applications may not issue, or if issued, may not provide meaningful protection for related products or proprietary rights;

    we may not be able to practice our trade secrets as a result of patent protection afforded a third-party for such product, technique or process; and

    we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by employees, consultants, and advisors.

        As a result, our means of protecting our intellectual property rights and brands may not be adequate. Furthermore, despite our efforts, third parties may violate, or attempt to violate, our intellectual property rights. Enforcement, including infringement claims and lawsuits would likely be expensive to resolve and would require management's time and resources. In addition, we have not sought, and do not intend to seek, patent and other intellectual property protections in all foreign countries. In countries where we do not have such protection, products incorporating our technology may be lawfully produced and sold without a license.

    We have limited control over existing and potential customers' and licensees' decisions to include our technologies in their product offerings.

        Except for Blu-ray products, where our technology is mandatory, we are dependent upon our customers and licensees—including consumer electronics product manufacturers, semiconductor manufacturers, producers and distributors of content for music, videos, and games—to incorporate our technologies into their products, purchase our products and services, or release their content in our proprietary DTS audio format. Although we have contracts and license agreements with many of these companies, these agreements do not require any minimum purchase commitments, are on a non-exclusive basis, and do not typically require incorporation or use of our technologies, trademarks or services. Furthermore, the decision by a party dominant in the entertainment value chain to provide audio technology at very low or no cost could impact a licensee's decision to use our technology. Our customers, licensees and other manufacturers might not utilize our technologies or services in the future.

    If we are unable to maintain a sufficient amount of entertainment content released with DTS audio soundtracks, demand for the technologies, products, and services that we offer to consumer electronics product manufacturers may significantly decline.

        We expect to derive a significant percentage of our revenues from the technologies, products, and services that we offer to manufacturers of consumer electronics products. To date, the most significant driver for the use of our technologies in the home theater market has been the release of major movie titles with DTS audio soundtracks. We also believe that demand for our DTS audio technologies in growing markets for multi-channel audio, including cars, personal computers, video game consoles, digital media players and mobile handsets will be based on the number, quality, and popularity of the Blu-ray Disc titles, computer software programs, and video games either released with DTS audio soundtracks or capable of being coded and played in DTS format. Although we have existing

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relationships with many leading providers of movie, music, computer, and video game content, we generally do not have contracts that require these parties to develop and release content with DTS audio soundtracks. In addition, we may not be successful in maintaining existing relationships or developing relationships with other existing providers or new market entrants that provide content. As a result, we cannot assure you that a significant amount of content in movies, Blu-ray Disc titles, computer software programs, video games, or other entertainment mediums will be released with DTS audio soundtracks. If the amount, variety, and popularity of entertainment content released with DTS audio soundtracks do not increase, consumer electronics products manufacturers that pay us per-unit licensing fees may discontinue offering DTS playback capabilities in the consumer electronics products that they sell.

    The on-line content delivery market could impact our ability to grow.

        Movie and music content for the last 15 years has been primarily purchased and consumed via optical media, such as Blu-ray, DVD, and CD. Today, these are still the dominant way consumers purchase and watch or listen to their favorite content. However, the growth of the internet and home computer usage, and a shift to home network and cloud-based content acquisition has occurred, including the recent trend to full movie download and streaming services becoming mainstream with consumers in various parts of the world.

        The services that provide movie content from the cloud are not generally governed by international or national standards and are thus free to choose any media format(s) in order to deliver their product and/or service. This freedom of choice on the part of the content provider could limit DTS' ability to grow if such content providers do not incorporate DTS' technologies into their movies.

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

        Standards-setting bodies may require the use of so-called "open standards," meaning that the technologies necessary to meet those standards are publicly available free of charge and often on an "open source" basis. These standards are a relatively recent and limited occurrence and have primarily been focused on markets and regions traditionally adverse to the notion of intellectual property ownership and the associated royalties. If the concept of "open standards" gains industry momentum in the future, the use of open standards may reduce our opportunity to generate revenue, as open standards technologies are based upon non-proprietary technology platforms in which no one company maintains ownership over the dominant technologies.

    Our business is partially dependent upon the growth in Blu-ray Disc products, and to the extent that consumer adoption of Blu-ray Disc products fails to materialize, our business will be adversely affected.

        Past growth in our business has been due in large part to the rapid growth in sales of DVD based products and home theater systems incorporating our technologies. As the markets for DVD based products mature, we are seeing sales of these products declining and growth in our business shifting to Blu-ray Disc based products. While the release and consumer adoption of Blu-ray Disc players continues to ramp up, potentially slow adoption by consumers of Blu-ray Disc players, particularly in the PC market, could adversely affect our business. In addition, if new technologies, including content streaming on direct downloads of content, are developed or deployed that substantially compete with or replace Blu-ray Disc products as a dominant medium for consumer video entertainment, our business, operating results and prospects could be adversely affected.

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    We may have difficulty managing any growth that we might experience.

        As a result of a combination of internal growth and growth through acquisitions, such as our recent acquisition of SRS, we expect to continue to experience growth in the scope of our operations and the number of our employees. If our growth continues, it may place a significant strain on our management team and on our operational and financial systems, procedures, and controls. Our future success will depend in part upon the ability of our management team to manage any growth effectively. This will require our management to:

    hire and train additional personnel in the United States and internationally;

    implement and improve our operational and financial systems, procedures, and controls;

    maintain our cost structure at an appropriate level based on the revenues we generate;

    manage multiple concurrent development projects; and

    manage operations in multiple time zones with different cultures and languages.

        Any failure to successfully manage our growth could distract management's attention, and result in our failure to execute our business plan.

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

        Establishing, maintaining and strengthening our "DTS" brand is critical to our success. Our brand identity is key to maintaining and expanding our business and entering new markets. Our success depends in large part upon our reputation for providing high-quality products, services and technologies to the consumer electronics products industry and the entertainment industry. Our recent acquisition of SRS may cause new challenges to our brand. If we fail to promote and maintain our brand successfully, our business and prospects may suffer. Moreover, we believe that the likelihood that our technologies will be adopted in industry standards depends, in part, upon the strength of our brand, because professional organizations and industry participants are more likely to incorporate technologies developed by a well-respected and well-known brand into standards.

    Unanticipated changes in our tax provisions or adverse outcomes resulting from examination of our income tax returns could adversely affect our net income.

        We are subject to income taxes in both the United States and foreign jurisdictions. Our effective income tax rates could in the future be adversely affected by changes in tax laws or interpretations of those tax laws, by changes in the mix of earnings in countries with differing statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We may come under audit by tax authorities. For instance, the Internal Revenue Service is examining our 2007 federal income tax return, including certain prior period carryforwards, and the State of California is examining our 2004 and 2005 corporate tax returns. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. Based on the results of an audit or litigation, a material effect on our income tax provision, net income or cash flows in the period or periods for which that determination is made could result. In addition, changes in tax rules may adversely affect our future reported financial results or the way we conduct our business. For example, we consider the operating earnings of our foreign subsidiaries to be invested indefinitely outside the United States. We have not provided for United States federal or foreign withholding taxes that may result on future remittances of

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undistributed earnings of foreign subsidiaries. Our future reported financial results may be adversely affected if tax or accounting rules regarding unrepatriated earnings change.

    Current and future governmental and industry standards may significantly limit our business opportunities.

        Technology standards are important in the audio and video industry as they help to assure compatibility across a system or series of products. Generally, standards adoption occurs on either a mandatory basis, requiring a particular technology to be available in a particular product or medium, or an optional basis, meaning that a particular technology may be, but is not required to be, utilized. For example, both our digital multi-channel audio technology and Dolby's have optional status in Blu-ray Disc, while both our two-channel output and Dolby's technologies have been selected as mandatory standards in Blu-ray Disc. However, if either or both of these standards are re-examined or a new standard is developed, we may not be included as mandatory in any such new or revised standard which would cause revenue growth in our consumer business to be significantly lower than expected and could have a material adverse affect on our business.

        Various national governments have adopted or are in the process of adopting standards for all digital television broadcasts, including cable, satellite, and terrestrial. In the United States, Dolby's audio technology has been selected as the sole, mandatory audio standard for terrestrial digital television broadcasts. As a result, the audio for all digital terrestrial television broadcasts in the United States must include Dolby's technology and must exclude any other format, including ours. We do not know whether this standard will be reopened or amended. If it is not, our audio technology may never be included in that standard. Certain large and developing markets, such as China, have not fully developed their digital television standards. Our technology may or may not ultimately be included in these standards.

        As new technologies and entertainment media emerge, new standards relating to these technologies or media may develop. New standards may also emerge in existing markets that are currently characterized by competing formats, such as the market for personal computers. We may not be successful in our efforts to include our technology in any such standards.

    We are dependent upon our management team and technical talent.

        Our success depends, in part, upon the continued availability and contributions of our management team and engineering and technical personnel because of the complexity of our products and services. Important factors that could cause the loss of key personnel include:

    our existing employment agreements with the members of our management team allow such persons to terminate their employment with us at any time;

    we do not have employment agreements with a majority of our key engineering and technical personnel;

    significant portions of the equity awards held by the members of our management team are vested;

    equity awards held by some of our executive officers provide for accelerated vesting in the event of a sale or change of control of our company; and

    dissatisfaction as a result of the business following our recent acquisitions.

        The loss of key personnel or an inability to attract qualified personnel in a timely manner could slow our technology and product development and harm our ability to execute our business plan.

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    Our technologies and products are complex and may contain errors that could cause us to lose customers, damage our reputation, or incur substantial costs.

        Our technologies or products could contain errors that could cause our products or technologies to operate improperly and could cause unintended consequences. If our products or technologies contain errors we, could be required to replace them, and if any such errors cause unintended consequences, we could face claims for product liability. Although we generally attempt to contractually limit our exposure to incidental and consequential damages, as well as provide insurance coverage for such events, if these contract provisions are not enforced or are unenforceable for any reason, if liabilities arise that are not effectively limited, or if our insurance coverage is inadequate to satisfy the liability, we could incur substantial costs in defending and/or settling product liability claims.

    We may be sued by third parties for alleged infringement of their proprietary rights, and we may be subject to litigation proceedings that could harm our business.

        Companies that participate in the digital audio, digital image processing, consumer electronics, and entertainment industries hold a large number of patents, trademarks, and copyrights, and are frequently involved in litigation based on allegations of patent infringement or other violations of intellectual property rights. Intellectual property disputes frequently involve highly complex and costly scientific matters, and each party generally has the right to seek a trial by jury which adds additional costs and uncertainty. Accordingly, intellectual property disputes, with or without merit, could be costly and time consuming to litigate or settle, and could divert management's attention from executing our business plan. In addition, our technologies and products may not be able to withstand any third-party claims or rights against their use. If we were unable to obtain any necessary license following a determination of infringement or an adverse determination in litigation or in interference or other administrative proceedings, we may need to redesign some of our products to avoid infringing a third party's rights and could be required to temporarily or permanently discontinue licensing our products.

        In the past, we have been a party to litigation related to protection and enforcement of our intellectual property, and we may be a party to additional litigation in the future. Litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages (including treble damages under the Clayton Act) and an injunction prohibiting us from licensing our technologies in particular ways or at all. Were an unfavorable ruling to occur, our business and results of operations could be materially harmed. In addition, any protracted litigation could divert management's attention from our day-to-day operations, disrupt our business and cause our operating results to suffer.

    We rely on the accuracy of our customers' manufacturing reports for reporting and collecting our revenues, and if these reports are untimely or incorrect, our revenues could be delayed or inaccurately reported.

        Most of our revenues are generated from consumer electronics product manufacturers who license and incorporate our technology in their consumer electronics products. Under our existing agreements, these customers pay us per-unit licensing fees based on the number of consumer electronics products manufactured that incorporate our technology. We rely on our customers to accurately report the number of units manufactured in collecting our license fees, preparing our financial reports, projections, budgets, and directing our sales and product development efforts. Most of our license agreements permit us to audit our customers, but audits are generally expensive, time consuming, difficult to manage effectively, dependent in large part upon the cooperation of our licensees and the quality of the records they keep, and could harm our customer relationships. If any of our customer reports understate the number of products they manufacture, we may not collect and recognize revenues to which we are entitled, or may endure significant expense to obtain compliance.

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

        From time to time, one or a small number of our customers or licensees may represent a significant percentage of our revenue. For instance, in 2011, two customers accounted for 16% and 12%, respectively, of revenues from our continuing operations. Although we have agreements with many of our customers, these agreements typically do not require any material minimum purchases or minimum royalty fees and do not prohibit customers from purchasing products and services from competitors. A decision by any of our major customers or licensees not to use our technologies, or their failure or inability to pay amounts owed to us in a timely manner, or at all, could have a significant adverse effect on our business.

    We face intense competition. Certain of our competitors have greater resources than we do.

        The digital audio, consumer electronics and entertainment markets are intensely competitive, subject to rapid change, and significantly affected by new product introductions and other market activities of industry participants. Our principal competitor is Dolby Laboratories, Inc., who competes with us in most of our markets. We also compete with other companies offering digital audio technology incorporated into consumer electronics product and entertainment mediums, including Fraunhofer Institut Integrierte Schaltungen, Koninklijke Philips Electronics N.V. (Philips), Microsoft Corporation, Sony Corporation and Thomson.

        Certain of our current and potential competitors may enjoy substantial competitive advantages, including:

    greater name recognition;

    a longer operating history;

    more developed distribution channels and deeper relationships with our common customer base;

    a more extensive customer base;

    digital technologies that provide features that ours do not;

    broader product and service offerings;

    greater resources for competitive activities, such as research and development, strategic acquisitions, alliances, joint ventures, sales and marketing, and lobbying industry and government standards;

    more technicians and engineers;

    greater technical support; and

    open source or free codecs.

        As a result, these current and potential competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements.

        In addition to the competitive advantages described above, Dolby also enjoys other unique competitive strengths relative to us. For example, it introduced multi-channel audio technology before we did. It has also achieved mandatory standard status in product categories that we have not, including terrestrial digital television broadcasts in the United States. As a result of these factors, Dolby has a competitive advantage in selling its digital multi-channel audio technology to consumer electronics products manufacturers.

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    We have a limited operating history in certain new and evolving markets.

        Our technologies have only recently been incorporated into certain markets, such as digital media players, televisions, personal computers, digital satellite and cable broadcast products, portable electronics devices and mobile handsets. We do not have the same experience in these markets as in our traditional consumer electronics business, nor do we have as much operating history as companies such as Dolby Laboratories, Inc.. As a result, the demand for our technologies, products, and services and the income potential of these businesses is unproven. In addition, because our participation in these markets is relatively new and rapidly evolving, we may have limited insight into trends that may emerge and affect our business. We may make errors in predicting and reacting to relevant business trends, which could harm our business. Before investing in our common stock, you should consider the risks, uncertainties, and difficulties frequently encountered by companies in new and rapidly evolving markets such as ours. We may not be able to successfully address any or all of these risks.

    Declining retail prices for consumer electronics products could force us to lower the license or other fees we charge our customers.

        The market for consumer electronics products is intensely competitive and price sensitive. Retail prices for consumer electronics products that include our audio technologies have decreased significantly and we expect prices to continue to decrease for the foreseeable future. Declining prices for consumer electronics products could create downward pressure on the licensing fees we currently charge our customers who integrate our technologies into the consumer electronics products that they sell and distribute. Most of the consumer electronics products that include our audio technologies also include Dolby's multi-channel audio technology. As a result of pricing pressure, consumer electronics products manufacturers who manufacture products in which our audio technologies are not a mandatory standard could decide to exclude our audio technologies from their products altogether.

    Economic downturns could disrupt and materially harm our business.

        Negative trends in the general economy could cause a downturn in the market for our technologies, products and services. The recent financial disruption affecting the global financial markets and the concern whether investment banks and other financial institutions will continue operations in the foreseeable future have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets and extreme volatility in credit and equity markets. The recent financial crisis may adversely affect our operating results if it results, for example, in the insolvency of a key licensee or other customer, the inability of our licensees and/or other customers to obtain credit to finance their operations, including to finance the manufacture of products containing our technologies, and delays in reporting and/or payments from our licensees. Tight credit markets could also delay or prevent us from acquiring or making investments in other technologies, products or businesses that could enhance our technical capabilities, complement our current products and services, or expand the breadth of our markets. If we are unable to execute such acquisitions and/or strategic investments, our operating results and business prospects may suffer.

        In addition, global economic conditions, including the credit crisis, increased cost of commodities, widespread employee layoffs, actual or threatened military action by the United States and the continued threat of terrorism, have resulted in decreased consumer spending and may continue to negatively impact consumer confidence and spending. Any reduction in consumer confidence or disposable income, in general, may negatively affect the demand for consumer electronics products that incorporate our digital audio technologies.

        We cannot predict other negative events that may have adverse effects on the global economy in general and the consumer electronics industry specifically. However, the factors described above and such unforeseen events could negatively affect our revenues and operating results.

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    Natural or other disasters could disrupt our business and negatively impact our operating results and financial condition.

        Natural or other disasters such as earthquakes, hurricanes, tsunamis or other adverse weather and climate conditions, whether occurring in the U.S. or abroad, and the consequences and effects thereof, including energy shortages and public health issues, could disrupt our operations, or the operations of our business partners and customers, or result in economic instability that may negatively impact our operating results and financial condition. Our corporate headquarters and many of our operations are located in California, a seismically active region, potentially exposing us to greater risk of natural disasters.

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

        Our licensing revenue from consumer electronics product manufacturers depends in large part upon the availability of ICs that implement our technologies. IC manufacturers incorporate our technologies into these ICs, which are then incorporated into consumer electronics products. We do not manufacture these ICs, but rather depend upon IC manufacturers to develop, produce and then sell them to licensed consumer electronics product manufacturers. We do not control the IC manufacturers' decisions whether or not to incorporate our technologies into their ICs, and we do not control their product development or commercialization efforts. If these IC manufacturers are unable or unwilling, for any reason, to implement our technologies into their ICs, or if, for any reason, they sell fewer ICs incorporating our technologies, our operating results will be adversely affected.

    We may not successfully address problems encountered in connection with acquisitions.

        We expect to consider opportunities to acquire or make investments in other technologies, products, and businesses that could enhance our technical capabilities, complement our current products and services, or expand the breadth of our markets. While we recently acquired SRS and Phorus, our history of acquiring and integrating businesses is limited. Acquisitions, including those of SRS and Phorus, and strategic investments involve numerous risks, including:

    problems assimilating the purchased technologies, products, or business operations;

    significant future charges relating to in-process research and development and the amortization of intangible assets;

    significant amount of goodwill that is not amortizable and is subject to annual impairment review;

    problems maintaining uniform standards, procedures, controls, and policies;

    unanticipated costs associated with the acquisition, including accounting and legal charges, capital expenditures, and transaction expenses;

    diversion of management's attention from our core business;

    adverse effects on existing business relationships with suppliers and customers;

    risks associated with entering markets in which we have no or limited prior experience;

    unanticipated or unknown liabilities relating to the acquired businesses;

    the need to integrate accounting, management information, manufacturing, human resources and other administrative systems to permit effective management; and

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    potential loss of key employees of acquired organizations.

        If we fail to properly evaluate and execute acquisitions and strategic investments, our management team may be distracted from our day-to-day operations, our business may be disrupted, and our operating results may suffer. In addition, if we finance acquisitions by issuing equity or convertible debt securities, our existing stockholders would be diluted. Foreign acquisitions involve unique risks in addition to those mentioned above, including those related to integration of operations across different geographies, cultures and languages, currency risks and risks associated with the particular economic, political and regulatory environment in specific countries. Also, the anticipated benefit of our acquisitions may not materialize, whether because of failure to obtain stockholder approval or otherwise. Future acquisitions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our operating results or financial condition. Future acquisitions may also require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all.

    *We have incurred a significant amount of indebtedness to pay the cash consideration to SRS stockholders and to pay related fees and expenses. Our level of indebtedness, and covenant restrictions under such indebtedness, could adversely affect our operations and liquidity.

        We financed the cash consideration of the SRS acquisition through a combination of existing cash balances, liquidated investments and a new credit facility, which we entered into on July 18, 2012. This credit facility provides us with a $30.0 million revolving line of credit, with a five million sublimit for the issuance of standby and commercial letters of credit, to use to finance permitted acquisitions and for working capital and general corporate purposes.

        Our increased indebtedness could adversely affect our operations and liquidity, by, among other things:

    making it more difficult for us to pay or refinance our debts as they become due during adverse economic and industry conditions because we may not have sufficient cash flows to make our scheduled debt payments;

    causing us to use a larger portion of our cash flow to fund interest and principal payments, reducing the availability of cash to fund working capital and capital expenditures and other business activities;

    making it more difficult for us to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions; and

    limiting our ability to borrow additional monies in the future to fund working capital, capital expenditures and other general corporate purposes.

        The terms of our indebtedness include covenants that, among other things, restrict our ability to: (i) dispose of assets, (ii) incur additional indebtedness, (iii) incur guarantee obligations, (iv) prepay certain other indebtedness or amend other financing arrangements, (v) pay dividends, (vi) create liens on assets, (vii) enter into sale and leaseback transactions, (viii) make investments, loans or advances, (ix) make acquisitions, (x) engage in mergers or consolidations, (xi) change the business conducted and (xii) engage in certain transactions with affiliates.

    We are subject to additional risks associated with our international operations.

        Our licensing headquarters are located in Limerick, Ireland, and we market and sell our products and services outside the United States. We currently have employees located in eight countries, and many of our customers and licensees are located outside the United States. As a key component of our business strategy, we intend to expand our international sales and customer support. During the nine

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months ended September 30, 2012, nearly 90% of our revenues were derived internationally. We face numerous risks in doing business outside the United States, including:

    unusual or burdensome foreign laws or regulatory requirements or unexpected changes to those laws or requirements;

    tariffs, trade protection measures, import or export licensing requirements, trade embargos, and other trade barriers;

    difficulties in attracting and retaining qualified personnel and managing foreign operations;

    competition from foreign companies;

    dependence upon foreign distributors and their sales channels;

    longer accounts receivable collection cycles and difficulties in collecting accounts receivable;

    less effective and less predictable protection and enforcement of our intellectual property;

    changes in the political or economic condition of a specific country or region, particularly in emerging markets;

    fluctuations in the value of foreign currency versus the U.S. dollar and the cost of currency exchange;

    potentially adverse tax consequences; and

    cultural differences in the conduct of business.

        Such factors could cause our future international sales to decline.

        Our business practices in international markets are also subject to the requirements of the Foreign Corrupt Practices Act. If any of our employees is found to have violated these requirements, we and our employees could be subject to significant fines, criminal sanctions and other penalties.

        Our international revenue is mostly denominated in U.S. dollars. As a result, fluctuations in the value of the U.S. dollar and foreign currencies may make our technology, products, and services more expensive for international customers, which could cause them to decrease their purchases from us. Expenses for our subsidiaries are denominated in their respective local currencies. As a result, if the U.S. dollar weakens against the local currency, the translation of our foreign-currency-denominated expenses will result in higher operating expense without a corresponding increase in revenue. Significant fluctuations in the value of the U.S. dollar and foreign currencies could have a material impact on our consolidated financial statements. The main foreign currencies we encounter in our operations are the Yen, Euro, RMB, KRW, HKD, TWD, SGD and GBP. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations.

    *We expect our operating expenses to increase in the future, which may impact profitability.

        We expect our operating expenses to increase as we, among other things:

    integrate the business of SRS;

    expand our sales and marketing activities, including the continued development of our international operations;

    adopt a more customer-focused business model which is expected to entail additional hiring;

    acquire businesses or technologies and integrate them into our existing organization;

    increase our research and development efforts to advance our existing technologies, products, and services and develop new technologies, products, and services;

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    hire additional personnel, including engineers and other technical staff;

    expand and defend our intellectual property portfolio;

    upgrade our operational and financial systems, procedures, and controls; and

    continue to assume the responsibilities of being a public company.

        As a result, we will need to grow our revenues and manage our costs in order to positively impact profitability. In addition, we may fail to accurately estimate and assess our increased operating expenses as we grow.

    Compliance with changing securities laws, regulations and financial reporting standards will increase our costs and pose challenges for our management team.

        Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Sarbanes-Oxley Act of 2002, and the rules and regulations promulgated thereunder have created uncertainty for public companies and significantly increased the costs and risks associated with operating as a publicly traded company in the United States. Our management team will need to devote significant time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities. Furthermore, with such uncertainties, we cannot assure you that our system of internal control will be effective or satisfactory to our independent registered public accounting firm. As a result, our financial reporting may not be timely and/or accurate and we may be issued an adverse or qualified opinion by our independent registered public accounting firm. If reporting delays or errors actually occur, we could be subject to sanctions or investigation by regulatory authorities, such as the SEC, and could adversely affect our financial results or result in a loss of investor confidence in the reliability of our financial information, which could materially and adversely affect the market price of our common stock.

        Further, the SEC has passed, promulgated and proposed new rules on a variety of subjects including the requirement that we must file our financial statements with the SEC using the interactive data format eXtensible Business Reporting Language, or XBRL, and the possibility that we would be required to adopt International Financial Reporting Standards, or IFRS. In order to comply with XBRL and IFRS requirements, we may have to add additional accounting staff, engage consultants or change our internal practices, standards and policies which could significantly increase our costs.

        We believe that these new and proposed laws and regulations could make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve on our audit committee, and qualified executive officers.

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

        When a standards-setting body adopts our technologies as explicit industry standards, we generally must agree to license such technologies on a fair, reasonable and non-discriminatory basis, which we believe means that we treat similarly situated licensees similarly. In these situations, we may be required to limit the royalty rates we charge for these technologies, which could adversely affect our business. Furthermore, we may have limited control over whom we license such technologies to, and may be unable to restrict many terms of the license. From time to time, we may be subject to claims that our licenses of our industry standard technologies may not conform to the requirements of the standards-setting body. Claimants in such cases could seek to restrict or change our licensing practices or our ability to license our technologies in ways that could injure our reputation and otherwise materially and adversely affect our business, operating results and prospects.

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    We may experience fluctuations in our operating results.

        We have historically experienced moderate seasonality in our business due to our business mix and the nature of our products. Consumer electronics manufacturing activities are generally lowest in the first calendar quarter of each year, and increase progressively throughout the remainder of the year. Manufacturing output is generally strongest in the third and fourth quarters as our technology licensees increase manufacturing to prepare for the holiday buying season. Since recognition of revenues generally lags manufacturing activity by one quarter, our revenues and earnings are generally lowest in the second quarter. The introduction of new products and inclusion of our technologies in new and rapidly growing markets can distort and amplify the seasonality described above. Our revenues may continue to be subject to fluctuations, seasonal or otherwise, in the future. Unanticipated fluctuations, whether due to seasonality, economic downturns, product cycles, or otherwise, could cause us to miss our earnings projections, or could lead to higher than normal variation in short-term earnings, either of which could cause our stock price to decline.

        In addition, we actively engage in intellectual property compliance and enforcement activities focused on identifying third parties who have either incorporated our technologies, trademarks, or know-how without a license or who have underreported to us the amount of royalties owed under license agreements with us. As a result of these activities, from time to time, we may recognize royalty revenues that relate to manufacturing activities from prior periods and we may incur expenditures related to enforcement activity. These royalty recoveries and expenditures, as applicable, may cause revenues to be higher than expected, or net profit to be lower than expected, during a particular reporting period and may not recur in future reporting periods. Such fluctuations in our revenues and operating results may cause declines in our stock price.

    The licensing of patents constitutes a significant source of our revenue. If we do not replace expiring patents with new patents or proprietary technologies, our revenue could decline.

        We hold patents covering much of the technologies that we license to system licensees, and our licensing revenue is tied in large part to the life of those patents. Our right to receive royalties related to our patents terminates with the expiration of the last patent covering the relevant technologies. Accordingly, to the extent that we do not replace licensing revenue from technologies covered by expiring patents with licensing revenue based on new patents and proprietary technologies, our revenue could decline.

    *Our future capital needs are uncertain and we may need to raise additional funds in the future, and such funds may not be available on acceptable terms or at all.

        Our capital requirements will depend upon many factors, including:

    costs associated with the integration of SRS;

    acceptance of, and demand for, our products and technologies;

    the costs of developing new products or technologies;

    the extent to which we invest in new technologies and research and development projects;

    the number and timing of acquisitions and other strategic transactions;

    the costs associated with our expansion, if any; and

    the costs of litigation and enforcement activities to defend our intellectual property.

        In the future, we may need to raise additional funds, and such funds may not be available on favorable terms, or at all, particularly given the continuing credit crisis and downturn in the overall global economy. Furthermore, if we issue equity or debt securities to raise additional funds, our existing

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stockholders may experience dilution, and the new equity or debt securities may have rights, preferences, and privileges senior to those of our existing stockholders. If we cannot raise funds on acceptable terms, or at all, we may not be able to develop or enhance our products and services, execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. This may materially harm our business, results of operations, and financial condition.

    Our business and operations could suffer in the event of security breaches.

        Attempts by others to gain unauthorized access to information technology systems are becoming more sophisticated and successful. These attempts can include introducing malware to computers and networks, impersonating authorized users, overloading systems and servers and data theft. While we seek to detect and investigate any security issue, in some cases, we might be unaware of an incident or its magnitude and effects. The theft, unauthorized use or publication of our intellectual property and/or confidential business information could harm our competitive position, reduce the value of our investment in research and development and other strategic initiatives or otherwise adversely affect our business. To the extent that any security breach results in inappropriate disclosure of our customers' or licensees' confidential information, we may incur liability as a result.

Risks Related to Our Common Stock

    Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control and could also limit the market price of our stock.

        Our Restated Certificate of Incorporation and Restated Bylaws contain provisions that could delay or prevent a change of control of our company or changes in our Board of Directors that our stockholders might consider favorable. Some of these provisions:

    authorize the issuance of preferred stock which can be created and issued by the Board of Directors without prior stockholder approval, with rights senior to those of the common stock;

    provide for a classified Board of Directors, with each director serving a staggered three-year term;

    prohibit stockholders from filling Board vacancies, calling special stockholder meetings, or taking action by written consent; and

    require advance written notice of stockholder proposals and director nominations.

        In addition, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our Restated Certificate of Incorporation, Restated Bylaws and Delaware law could make it more difficult for stockholders or potential acquirors to obtain control of our Board or initiate actions that are opposed by the then-current Board, and could delay or impede a merger, tender offer, or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our Board could cause the market price of our common stock to decline.

    We expect that the price of our common stock will fluctuate substantially.

        The market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including:

    actual or anticipated fluctuations in our results of operations;

    market perception of our progress toward announced objectives;

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    announcements of technological innovations by us or our competitors or technology standards;

    announcements of significant contracts by us or our competitors;

    changes in our pricing policies or the pricing policies of our competitors;

    developments with respect to intellectual property rights;

    the introduction of new products or product enhancements by us or our competitors;

    the commencement of or our involvement in litigation;

    resolution of significant litigation in a manner adverse to our business;

    our sale or purchase of common stock or other securities in the future;

    conditions and trends in technology industries;

    changes in market valuation or earnings of our competitors;

    the trading volume of our common stock;

    announcements of potential acquisitions;

    the adoption rate of new products incorporating our or our competitors' technologies, including Blu-ray Disc players;

    changes in the estimation of the future size and growth rate of our markets; and

    general economic conditions.

        In addition, the stock market in general, and the NASDAQ Global Select Market and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, the market prices of securities of technology companies have been particularly volatile. These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management's attention and resources.

    Shares of our common stock are relatively illiquid.

        As a result of our relatively small public float, our common stock may be less liquid than the common stock of companies with broader public ownership. Among other things, trading of a relatively small volume of our common shares may have a greater impact on the trading price for our shares than would be the case if our public float were larger.

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Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

(c)   Purchases of Equity Securities by the Issuer and Affiliated Purchasers

        Stock repurchase activity during the quarter ended September 30, 2012 was as follows:

Period
  Total
Number
of Shares
Purchased(1)
  Average
Price Paid
per Share
  Total Number
of Shares
Purchased as
Part of Publicly
Announced Plan
  Maximum Number
of Shares that May
Yet Be Purchased
Under the Plan(2)
 

July 1, 2012 through July 31, 2012

                1,928,400  

August 1, 2012 through August 31, 2012

    105,390   $ 21.90     104,876     1,823,524  

September 1, 2012 through September 30, 2012

    68,577   $ 22.60     68,577     1,754,947  
                     

Total

    173,967   $ 22.17 (3)   173,453     1,754,947  
                     

Notes:

(1)
Consists of (i) shares repurchased in open market transactions pursuant to a Board of Directors authorization in February 2012 for us to repurchase up to two million shares of our common stock in the open market or in privately negotiated transactions, depending upon market conditions and other factors, and (ii) shares repurchased from employees and effectively retired to satisfy statutory withholding requirements upon the vesting of restricted stock.

(2)
On February 22, 2012, we announced a Board of Directors authorization for us to repurchase up to two million shares of our common stock in the open market or in privately negotiated transactions, depending upon market conditions and other factors.

(3)
Represents weighted average price paid per share during the quarter ended September 30, 2012.

Item 3.    Defaults Upon Senior Securities

        None.

Item 4.    Mine Safety Disclosures

        None.

Item 5.    Other Information

        None.

Item 6.    Exhibits

        Refer to the "Exhibit Index" immediately following the signature page.

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    DTS, Inc.

Date: November 8, 2012

 

by:

 

/s/ JON E. KIRCHNER

Jon E. Kirchner
Chairman and Chief Executive Officer
(Duly Authorized Officer)

Date: November 8, 2012

 

by:

 

/s/ MELVIN L. FLANIGAN

Melvin L. Fanigan
Executive Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

 
   
  Filed with
this
Form
10-Q
  Incorporated by Reference  
Exhibit
Number
   
 
  Exhibit Title   Form   File No.   Date Filed  
  10.1   Loan Agreement, dated as of July 18, 2012, by and between DTS, Inc. and Union Bank, N.A., together with any other lender thereunder from time to time.         8-K   000-50335-
12977271
    7/24/12  

 

10.2

 

Security Agreement, dated July 18, 2012, by and among DTS, Inc., and each other guarantor thereunder and Union Bank, N.A.

 

 

 

 

8-K

 

000-50335-
12977271

 

 

7/24/12

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended

 

X

 

 

 

 

 

 

 

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended

 

X

 

 

 

 

 

 

 

 

 

 

32.1‡

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. section 1350

 

X

 

 

 

 

 

 

 

 

 

 

32.2‡

 

Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. section 1350

 

X

 

 

 

 

 

 

 

 

 

 

101.INS**

 

XBRL Instance Document

 

X

 

 

 

 

 

 

 

 

 

 

101.SCH**

 

XBRL Taxonomy Extension Schema Document

 

X

 

 

 

 

 

 

 

 

 

 

101.CAL**

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

X

 

 

 

 

 

 

 

 

 

 

101.DEF**

 

XBRL Extension Definition

 

X

 

 

 

 

 

 

 

 

 

 

101.LAB**

 

XBRL Taxonomy Extension Label Linkbase Document

 

X

 

 

 

 

 

 

 

 

 

 

101.PRE**

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

X

 

 

 

 

 

 

 

 

 

This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

**
XBRL information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.



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EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECURITIES ACT RULES 13a-14(a) OR 15d-14(a)

        I, Jon E. Kirchner, certify that:

        1.     I have reviewed this quarterly report on Form 10-Q of DTS, Inc.;

        2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

        3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

        4.     The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

        5.     The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

Date: November 8, 2012        
    By:   /s/ JON E. KIRCHNER

Jon E. Kirchner
Chairman and Chief Executive Officer



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EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECURITIES ACT RULES 13a-14(a) OR 15d-14(a)

        I, Melvin L. Flanigan, certify that:

        1.     I have reviewed this quarterly report on Form 10-Q of DTS, Inc.;

        2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

        3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

        4.     The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

        5.     The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

Date: November 8, 2012        
    By:   /s/ MELVIN L. FLANIGAN

Melvin L. Flanigan
Chief Financial Officer



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EXHIBIT 32.1

CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(b) OR 15d-14(b)
AND 18 U.S.C. SECTION 1350

        In connection with the quarterly report on Form 10-Q of DTS, Inc. (the "Company") for the quarterly period ended September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jon E. Kirchner, Chairman and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

Date: November 8, 2012        
    By:   /s/ JON E. KIRCHNER

Jon E. Kirchner
Chairman and Chief Executive Officer

        A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to DTS, Inc. and will be retained by DTS, Inc. and furnished to the Securities and Exchange Commission upon request.




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EXHIBIT 32.2

CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(b) OR 15d-14(b)
AND 18 U.S.C. SECTION 1350

        In connection with the quarterly report on Form 10-Q of DTS, Inc. (the "Company") for the quarterly period ended September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Melvin L. Flanigan, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

Date: November 8, 2012        
    By:   /s/ MELVIN L. FLANIGAN

Melvin L. Flanigan
Chief Financial Officer

        A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to DTS, Inc. and will be retained by DTS, Inc. and furnished to the Securities and Exchange Commission upon request.




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