Mail Stop 4-7
December 17, 2004
N.W. Jasper, Jr.
President and Chief Executive Officer
Dolby Laboratories, Inc.
100 Potrero Avenue
San Francisco, California 94103-4813
RE: Dolby Laboratories, Inc.
Registration Statement on Form S-1
Filed November 19, 2004
File No. 333-120614
Dear Mr. Jasper:
We have reviewed your filing and have the following comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may raise additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with applicable disclosure
requirements
and to enhance the overall disclosure in your filing. We look
forward to working with you in these respects. We welcome any
questions you may have about our comments or any other aspect of
our
review. Feel free to call us at the telephone numbers listed at
the
end of this letter.
Form S-1
General
1. We note a number of blank spaces throughout your registration
statement for information that you are not entitled to omit under
Rule 430A, such as the anticipated price range. Please note that
we
may have additional comments once you have provided this
disclosure.
Therefore, please allow us sufficient time to review your complete
disclosure prior to any distribution of preliminary prospectuses.
2. We encourage you to file all exhibits with your next amendment
or
otherwise furnish us drafts of your legality opinion and
underwriting
agreement. We must review these documents before the registration
statement is declared effective, and we may have additional
comments.
3. We note the growth estimate data and other figures cited
throughout the document, such as those provided by IDC and CEA.
Please provide us with marked copies of any materials that support
these and other third party statements, clearly cross-referencing
each statement with the underlying factual support. Confirm for
us
that these documents are publicly available. To the extent that
any
of these reports have been prepared specifically for you, file a
consent from the third party.
4. We note that you plan to file a confidential treatment request
for
a license agreement with GTE Laboratories, Inc. Comments on your
application for confidential treatment will follow under separate
cover. Since the application review process often results in
significant revisions to the disclosure in the prospectus, we
suggest
that you wait to circulate a preliminary prospectus until you have
received comments on your application. We will not consider a
request for acceleration of effectiveness of the registration
statement until we resolve these comments.
Inside cover page
5. Limit the inside cover page to the information required by Item
502 of Regulation S-K. In this regard, please reposition the
second
and third paragraphs following the table of contents to another
location in the registration statement. In addition, delete the
last
sentence of the first paragraph following the table of contents.
Once you make your disclosure clear from the context, you will not
need to define terms such as "we," "us" and "our."
Prospectus Summary, page 1
6. As currently drafted, this summary section is very long.
Consider
eliminating some of the detail. In order to make it more of a
summary, focus only on the most material terms of the Offering.
In
this regard, reduce your description of the company to one or two
paragraphs summarizing your business operations. In addition,
delete
or substantially reduce the subsections addressing your Key Dolby
Strengths, Our Strategy, and Industry. Appropriate revisions
should
enable you to shorten the length of the summary section. Further,
as
part of your revisions, we remind you to ensure your disclosure
provides a balanced picture of your operations, financial
condition,
and structure.
7. Please limit the promotional nature of this section. For
example,
we note the use of such promotional terms as "innovative,"
"trusted,"
and "excellence." Please revise to limit your summary to a brief,
factual description of your operations.
8. Disclosure of your revenues should be balanced with disclosure
of
your corresponding net income (loss) and income (loss) per share
numbers. Please revise.
The Offering, page 5
9. Disclose that the number of shares being offered represents __%
of
your shares outstanding.
Risk Factors, page 8
10. Please delete the second sentence of the introductory
paragraph.
Once you describe all material risks, and tailor each one to your
specific facts and circumstances, you will not need this generic
risk
disclosure.
11. Provide only that amount of detail necessary to understand the
risk faced by investors. In this regard, the amount of detail
that
you provide in many of your risk factors overwhelms the risk you
are
trying to convey. See, for example:
* "If our products and technologies fail to be adopted as industry
standards ..."
* "We face significant competition in various markets ..."
* "If the market for digital cinema does not develop ..."
* "We may become subject to a personal holding company tax ..."
Move extraneous information and background to your business or
MD&A
sections, as appropriate. To the extent that these risk factors
relate to multiple risks, consider discussing each risk separately
in
its own risk factor.
Our business and prospects depend on the strength of our
brand,
page 8
Awareness of our brand, page 14
12. Consider combining these two risk factors, as they appear to
discuss similar risks.
The licensing of patents constitutes a significant source of
our
revenue ..., page 10
13. It appears that a significant number of your patents are
scheduled to expire between 2005 and 2007. Revise your MD&A to
discuss this fact and if estimable, disclose the portion of your
licensing revenues currently derived from these patents.
We are, and may in the future be subject to intellectual property
rights claims ..., page 10
14. We note your statement that you "believe you properly allocate
these (third) parties` respective shares of the licensing revenue
you
receive from your customers." Tell us how you account for these
arrangements. More specifically, tell us how you present them in
the
Consolidated Statements of Operations. Refer to EITF 99-19 in
your
response.
We rely on the timeliness and accuracy of our licensees` royalty
reports, page 11
15. This risk factor is dense and difficult to read. Consider
eliminating any excess detail and splitting the body into multiple
paragraphs.
Our licensing revenue depends in large part upon IC manufacturers,
page 12
16. Please re-define IC, as it is the focus of this risk factor.
We face a number of risks in conducting business in China, page 14
17. Revise the caption of this risk factor to clearly state the
risk
to investors.
Our licensing of industry standard technologies can be subject
to
limitations ..., page 16
18. We note that Via Licensing Corporation licenses "patent
pools,"
which include certain of your patents. Provide us with more
details
of the licensing of these patents. Further:
* Tell us in more detail how you account for these licensing
arrangements and refer to your basis in the accounting literature.
Your response should also provide a discussion of the initial
contract fees for the administration of licensing patent pools as
described on page F-9.
* Tell us how you present license revenues and license fees
payable
to third parties within your Consolidated Statements of
Operations.
We may become subject to a personal holding company tax..., page
23
19. Tell us in more detail why you believe that neither you, nor
any
of your subsidiaries, are subject to, or liable for, the personal
holding company tax. Based on your tax position with respect to
the
likelihood of a personal holding company tax assessment, tell us
how
you have evaluated paragraphs 9-10 of SFAS 5. Please provide the
appropriate disclosure in your financial statements.
20. To provide investors with a meaningful understanding of this
risk, provide a reference to a revised section in your MD&A that
quantifies the "substantial additional taxes" for which you could
be
liable or the amount of the dividend you might pay in lieu of
paying
the personal holding company tax and discuss how you expect to pay
for them.
Acquisitions could result in operating difficulties..., page
24
21. Clarify whether or not you are currently contemplating any
strategic transactions or acquisitions. If so, describe the
status
of any discussions, negotiations, agreements, etc.
We will incur increased costs and demands upon management...,
page 25
22. If material, include on page 42 of your MD&A a quantified
discussion of the expected increase to your general and
administrative expenses associated with the increase in your legal
and compliance costs, to the extent known.
We are exposed to foreign currency and interest rate risks,
page 27
23. Isn`t this risk already disclosed in the risk factor on page
15?
Purchasers in this offering will experience immediate and
substantial
dilution..., page 29
24. Please disclose that purchasers in this offering will
contribute
___ % of the total amount of your funding but will own only ___ %
of
the shares outstanding.
Future sales of shares by existing stockholders may cause our
stock
price to decline, page 29
25. Quantify the percentage increase in your outstanding shares
upon
the completion of this offering.
Use of Proceeds, page 32
26. Disclose the amount that you expect to receive if the
underwriters exercise their over-allotment option. Also include
in
your table how you expect to allocate the net proceeds of the
offering if the underwriters exercise their over-allotment option.
Pro Forma Unaudited Consolidated Statements of Operations Data,
page
37
27. Please revise to delete the pro forma statement of operations
for
the years ended September 27, 2002 and September 26, 2003. Pro
forma
information may be presented for only the most recent fiscal year
and
interim period. See Rule 11-02(c) of Regulation S-X. Please make
this revision throughout your registration statement, including
your
presentation and discussion of the respective quarterly.
28. Since you are presenting a limited number of pro forma
adjustments in your pro forma statement of operations for the year
ended September 24, 2004, revise to provide a narrative
description
of the pro forma effects of the transactions on the respective
line
items. Refer to Rule 11-02(b)(1) of Regulation S-X.
29. Revise to provide a more detailed explanation of what the pro
forma presentation shows. More specifically, your pro forma
unaudited consolidated statements of operations data should be
accompanied by an introductory paragraph similar to that provided
on
pages 38-39. Refer to Rule 11-02(b)(2) of Regulation S-X.
Management`s Discussion and Analysis, page 38
Pro Forma Presentation, page 39
30. We note that prior to the completion of this offering, Ray
Dolby
will contribute all intellectual property rights he holds related
to
your business. We further note your statement that there will be
no
material change to your balance sheet as a result of the asset
contribution. Tell us, and revise to disclose, how you intend to
account for this transaction.
Critical Accounting Policies, page 42
31. We note your numerous references throughout your registration
statement to valuation analyses provided by an independent third
party valuation firm. While you are not required to make
reference
to these independent valuations, when you do you should
specifically
identify each appraiser as an expert and include their consent in
the
registration statement. Alternatively, you should revise to
eliminate these references and to clearly disclose that management
is
primarily responsible for determining fair values. We will not
object if you wish to state in revised disclosure that management
considered a number of factors, including valuations or
appraisals,
when making these determinations. In any case, your disclosure
should clearly indicate that management is responsible for these
valuations.
Results of Operations, page 45
Revenue, page 46
32. Quantify the percentage of your licensing revenue that is
related
to DVD players sales versus other products. In addition, clarify
the
extent to which changes in licensing revenues are attributable to
changes in volume versus changes in price.
33. We note that you identify a number of factors that affected
the
increase in revenues. Revise your discussion to quantify the
impact
of each factor.
Gross Margin, page 47
34. We note that your cost of production services includes
"reimbursable expenses incurred on behalf of the customer." Tell
us
how you evaluated EITF 01-14 with regard to your income statement
classification of these reimbursable expenses.
Operating Expenses, page 48
35. Disclose more details regarding the nature of the
reengineering
project related to your royalty reporting process. Also, discuss
how
it will impact your accounting for license revenues.
Research and Development, page 48
36. Address how you intend to pay for the anticipated increase in
research and development expense. In this regard, we note the
risk
factor discussion on page 19 of the "considerable resources" you
will
need to spend on research and development.
Liquidity, Capital Resources and Financial Condition, page 57
37. Describe and quantify the impact of this offering on your
liquidity and results of operations.
Business, page 60
38. Revise to include the financial information about geographic
areas required by Item 101(d) of Regulation S-K or include a cross
reference to the relevant information appearing in the financial
statements. For example, we are unable to locate any discussion
of
the material portion of your revenues attributable to your
customers
in Japan or your basis for attributing revenues from external
customers to individual countries.
Key Dolby Strengths, page 60
Our Strategy, page 62
39. Currently, you discuss your competitive strengths and strategy
prior to discussing your actual business operations. So that
readers
have the appropriate context and background in assessing your
strengths and strategy, consider moving these sections so that
they
follow the discussion of your products and services.
Customers, page 78
40. When you name specific customers, you should also provide
disclosure addressing their significance to you. For each
category
listed, indicate the percentage of your revenues the customers
represent individually or in the aggregate.
Competition, page 82
41. To the extent reasonably known, provide quantified disclosure
of
your market shares in each of your markets. See Item 101(c)(x) of
Regulation S-K.
Description of Capital Stock, page 104
42. Please explain why, prior to the completion of the offering,
all
outstanding shares of common stock will be converted into Class B
common stock and how the terms of conversion were determined.
Underwriters, page 110
43. Revise the underwriters` compensation table so that it
complies
with the requirements of Item 508(e) of Regulation S-K and its
instructions. For instance, the table should show separately the
cash commissions to be paid and indicate the amount of the
underwriters` compensation to be paid by the selling shareholders
separate from the company.
44. Please furnish to us supplementally a statement as to whether
or
not the amount of compensation to be allowed or paid to the
underwriters has been cleared with the NASD. Prior to the
effectiveness of this registration statement, the staff requests
that
we be provided with a copy of the letter or a call from the NASD
informing us that they have no additional concerns.
45. State that the selling stockholders may be deemed to be
underwriters or advise us why you believe such a statement is
unnecessary.
46. Disclose how many shares are subject to the lock-up. Indicate
any current intention to release the shares subject to the lock-
up,
and disclose what factors will be used in any determination to
release those shares.
47. Briefly describe any electronic distribution of the filing and
identify any members of the underwriting syndicate that will
engage
in any electronic offer, sale or distribution of the shares and
supplementally describe their procedures to us. If you become
aware
of any additional members of the underwriting syndicate that may
engage in electronic offers, sales or distributions after you
respond
to this comment, promptly supplement your response to identify
those
members and provide us with a description of their procedures.
Also, tell us how your procedures ensure that the distribution
complies with Section 5 of the Securities Act. In particular,
please
address:
* the communications used;
* the availability of the preliminary prospectus;
* the manner of conducting the distribution and sale, such as the
use
of indications of interest or conditional offers; and
* the funding of an account and payment of the purchase price.
To the extent that the SEC Division of Corporation Finance has
already reviewed these procedures, please confirm this and tell us
whether you have changed or revised your procedures subsequent to
our
clearance.
Further, tell us whether you or the underwriters have any
arrangements with a third party to host or access your preliminary
prospectus on the Internet. If so, identify the party and the
website, describe the material terms of your agreement, and
provide
us with a copy of any written agreement. Provide us also with
copies
of all information concerning your company or prospectus that have
appeared on their website. Again, if you subsequently enter into
any
such arrangements, promptly supplement your response.
Finally, tell us whether any members of the selling group have
made
copies of the preliminary prospectus available over the Internet.
If
so, tell us when. If not, tell us whether they intend to do so.
In
this regard, please note that we would consider this posting a
circulation of the preliminary prospectus.
We may have further comment.
48. Supplementally tell us whether you intend to reserve shares
for
sale to your directors, officers, employees and related persons.
If
you do, describe the mechanics of how and when these shares were
or
will be offered and sold to investors in the directed share
program
for this offering. In addition, discuss the procedures that
investors must follow in order to purchase the offered securities,
including how and when the underwriter or the company receives any
communications or funds.
Financial Statements
?? Summary of Business and Significant Accounting Policies
Goodwill and Intangible Assets, page F-8
49. We note that you determine the fair value of your reporting
units
principally based upon the valuation analysis of Dolby
Laboratories
as a whole. Provide us with more details of what you mean by this
statement. Addressing paragraph 30 of SFAS 142 and EITF D-101,
tell
us how you determined your reporting units and tell us what those
reporting units are. Additionally, please identify the reporting
unit(s) to which you assigned goodwill. Refer to paragraphs 19
and
34 of SFAS 142.
50. We note that you "would record an impairment charge in an
amount
equal to the excess of the carrying value of goodwill over its
estimated fair value." Please revise to clarify that the second
step
of the goodwill impairment test compares the implied fair value of
reporting unit goodwill with the carrying amount of that goodwill.
51. Further, tell us how you considered paragraph 21 of SFAS 142
and
EITF 2-17 with regard to the allocation of the fair value of
previously unrecognized intangible assets to the reporting unit.
Revenue Recognition, page F-9
52. We note that "royalties are deemed fixed and determinable upon
the earlier of payment by the licensee or receipt of the
licensee`s
period statement if all other revenue recognition criteria have
been
met." Clarify your policy to indicate what you mean by this
statement. As currently presented, your policy indicates that
royalties are deemed fixed and determinable...if all other revenue
recognition criteria are met. Also, revise to clarify what you
mean
by "licensee`s period statement."
53. Tell us why you believe it is appropriate to recognize royalty
revenue once the report is received, considering the fact that in
the
past you have received royalty reports that include corrective or
retroactive royalties that cover extended periods of time.
54. We note on page 80 that you sell to a combination of dealers,
distributors and original equipment manufacturers, as well as
directly to theaters. Tell us how you evaluate product sales
through
your dealer and distribution network in determining the amount of
revenue to recognize and the related accrual for estimated product
returns. Describe the significant terms of your distribution
agreements, including the right of return provisions. Describe
for
us how you consider significant increases in or excess levels of
inventory in a distribution channel in determining the required
accrual for returns or whether revenue recognition is appropriate.
Your response should include a discussion of how you are able to
monitor purchases and the related sales to end users by your
distributors in order to determine any increase in or excess
inventory levels. Refer to the guidance in SAB Topic 13A.4b and
SFAS
48.
55. Tell us in more detail how you account for your arrangements
that
include up-front fees, such as from your system licensees and your
independent software vendors. Address the factors you consider
with
regards to the timing and measurement of revenues. Refer to SAB
Topic 13.A.3 (f).
56. We further note on page 80 that companies to whom you sell
equipment must typically first attend a training course in
installation and alignment. Tell us how this requirement impacts,
if
at all, the timing of revenues recognized from product sales.
57. We refer to your revenue recognition policy for product sales.
Remove the qualifier "generally" from your discussion and revise
to
address the instances, other than upon shipment, in which the risk
of
ownership is transferred. Also, tell us why you believe risk of
ownership has transferred in those instances.
Stock-based Compensation, page F-12
58. We are still evaluating your submission dated November 29,
2004
regarding your consideration of issues relating to stock-based
compensation expenses.
?? Segment Information, page F-25
59. Provide us with more details regarding what you mean by the
statement that your "CEO evaluates results in a number of
different
ways." Tell us in detail how you evaluated paragraphs 10-15 when
identifying your operating segments and 16-24 when identifying
your
reportable segments.
60. Revise to report total assets for each reportable segment to
comply with paragraph 27 of SFAS 131. Also, revise to disclose
depreciation and amortization expense for each reportable segment.
??. Related Party Transactions, page F-25
61. We note your early adoption of FIN 46(R) with respect to the
consolidation of certain affiliated VIEs into your consolidated
financial statements. Please comply with all disclosures required
under paragraphs 23 and 25 of FIN 46 (R).
11. Legal Proceedings, page F-26
62. We note your settlement of a dispute whereby you agreed to pay
$30 million over a period of 10 years. Tell us in more detail the
nature of the lawsuit and the settlement.
* * * *
Please amend your Form S-1 in response to these comments.
You
may wish to provide us with marked copies of the amendment to
expedite our review. Please furnish a cover letter with your
amendment that keys your responses to our comments and provides
any
requested supplemental information. Detailed cover letters
greatly
facilitate our review. Please understand that we may have
additional
comments after reviewing your amendment and responses to our
comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the Company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures that
they have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the Company may not assert this action as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they may relate to the proposed public
offering of the securities specified in the above registration
statement. We will act on the request and, pursuant to delegated
authority, grant acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact Kathryn Jacobson, Staff Accountant, at (202)
824-5332 or Kyle Moffatt, Accountant Branch Chief, at (202) 942-
1990
if you have questions regarding comments on the financial
statements
and related matters. Please contact Joshua Englard, Staff
Attorney,
at (202) 942-2832, Michele Anderson, Legal Branch Chief, at (202)
942-1990, or me at (202) 942-1990 with any other questions.
Sincerely,
Larry Spirgel
Assistant Director
cc: Mark B. Baudler, Esq.
Fax: 650-493-6811
??
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N.W. Jasper, Jr.
Dolby Laboratories, Inc.
December 13, 2004
Page 13