3. Composition of Certain Financial Statement Captions

Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and investments as of September 24, 2010 and September 30, 2011 consist of the following:


	September 24, 2010		September 30, 2011
	(in thousands)
Cash and cash equivalents:
Cash	$	156,440	$	394,474
Cash equivalents:
Money market funds		354,428		142,038
U.S. agency securities		10,000		15,000
Commercial paper		19,993		—
Municipal debt securities		5,000		—

Total cash and cash equivalents		545,861		551,512

Short-term investments:
Corporate bonds		3,788		52,645
Commercial paper		9,990		—
Municipal debt securities		188,123		330,562
U.S. agency securities		70,376		8,074
U.S. government bonds		29,992		—

Total short-term investments		302,269		391,281

Long-term investments (1):
Corporate bonds		25,870		124,313
Municipal debt securities		127,458		141,639
U.S. agency securities		27,522		6,845
U.S. government bonds		9,987		—

Total long-term investments		190,837		272,797

Total cash, cash equivalents and investments	$	1,038,967	$	1,215,590

(1)	Our long-term investments have maturities that range from one to three years.

Our investment portfolio, which is recorded as cash equivalents, short-term investments, and long-term investments, consists of the following:


	September 24, 2010
	Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
	(in thousands)
Commercial paper	$	29,983	$	—	$	—		$	29,983
Corporate bonds		29,238		420		—			29,658
Money market funds		354,428		—		—			354,428
Municipal debt securities		318,825		1,781		(25	)		320,581
U.S. agency securities		107,512		390		(4	)		107,898
U.S. government bonds		39,949		30		—			39,979

Cash equivalents and investments	$	879,935	$	2,621	$	(29	)	$	882,527



	September 30, 2011
	Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
	(in thousands)
Corporate bonds	$	177,129	$	316	$	(487	)	$	176,958
Money market funds		142,038		—		—			142,038
Municipal debt securities		471,005		1,251		(55	)		472,201
U.S. agency securities		29,858		65		(4	)		29,919

Cash equivalents and investments	$	820,030	$	1,632	$	(546	)	$	821,116

We have classified all of our investments listed in the tables above as available-for-sale securities recorded at fair market value on our consolidated balance sheets, with unrealized gains and losses reported as a component of accumulated other comprehensive income. Upon sale, amounts of gains and losses reclassified into earnings are determined based on specific identification of securities sold.

The following tables show the gross unrealized losses and the fair value for those available-for-sale securities that were in an unrealized loss position:


	September 24, 2010
	Less than 12 months					12 months or greater				Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in thousands)
U.S. agency securities	$	30,112	$	(4	)	$	—	$	—	$	30,112	$	(4	)
Municipal debt securities		62,494		(25	)		—		—		62,494		(25	)

Total	$	92,606	$	(29	)	$	—	$	—	$	92,606	$	(29	)



	September 30, 2011
	Less than 12 months					12 months or greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	(in thousands)
U.S. agency securities	$	3,997	$	(4	)	$	—	$	—		$	3,997	$	(4	)
Municipal debt securities		79,466		(52	)		2,081		(3	)		81,547		(55	)
Corporate bonds		87,613		(487	)		—		—			87,613		(487	)

Total	$	171,076	$	(543	)	$	2,081	$	(3	)	$	173,157	$	(546	)

The unrealized losses on our available-for-sale securities were primarily a result of unfavorable changes in interest rates subsequent to the initial purchase of these securities. As of September 30, 2011, we owned 54 securities that were in an unrealized loss position. We do not intend to sell, nor will we need to sell, these securities before we recover the associated unrealized losses. We expect to recover the full carrying value of these securities. As a result, we do not consider any portion of the unrealized losses at September 24, 2010 and September 30, 2011 to be an other-than-temporary impairment, nor do we consider any of the unrealized losses to be credit losses.

The following tables summarize the amortized cost and estimated fair value of short-term and long-term available-for-sale investments based on stated maturities as of September 24, 2010 and September 30, 2011:


	September 24, 2010
	Amortized Cost		Fair Value
	(in thousands)
Due within 1 year	$	289,082	$	289,755
Due in 1 to 2 years		183,130		184,891
Due in 2 to 3 years		18,301		18,460

Total	$	490,513	$	493,106


	September 30, 2011
	Amortized Cost		Fair Value
	(in thousands)
Due within 1 year	$	390,559	$	391,281
Due in 1 to 2 years		213,487		213,921
Due in 2 to 3 years		58,947		58,876

Total	$	662,993	$	664,078

Accounts Receivable

Accounts receivable consists of the following:


	September 24, 2010			September 30, 2011
	(in thousands)
Trade accounts receivable	$	45,651		$	59,831
Accounts receivable related to patent administration program		10,646			4,450

Accounts receivable, gross		56,297			64,281
Less: allowance for doubtful accounts		(2,040	)		(2,466	)

Accounts receivable, net	$	54,257		$	61,815


Allowance for Doubtful Accounts	Balance at Beginning of Fiscal Year		Charged to Operations		Deductions			Balance at End of Fiscal Year
	(in thousands)
For fiscal year ended September 25, 2009	$	1,799	$	1,392	$	(969	)	$	2,222
For fiscal year ended September 24, 2010		2,222		365		(547	)		2,040
For fiscal year ended September 30, 2011		2,040		772		(346	)		2,466

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:


	September 24, 2010		September 30, 2011
	(in thousands)
Raw materials	$	10,314	$	10,821
Work in process		3,109		2,942
Finished goods		14,915		12,481

Inventories	$	28,338	$	26,244

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:


	September 24, 2010		September 30, 2011
	(in thousands)
Prepaid assets	$	16,191	$	19,915
Other current assets		1,650		7,667
Income tax receivable		3,497		7,829
Assets held for sale		5,592		1,466

Prepaid expenses and other current assets	$	26,930	$	36,877

Assets held for sale represent digital cinema equipment that we leased to exhibitors beginning in fiscal 2005 in an effort to encourage the cinema industry to transition to digital cinema. In fiscal 2010, management committed to a plan to sell some of this leased equipment, which required us to classify these assets as held for sale as of September 24, 2010. Consequently, we have classified the equipment within current assets in our consolidated balance sheets as of September 24, 2010 and September 30, 2011. During fiscal 2011 we sold the majority of these assets, and expect to sell the remaining assets in fiscal 2012. We have reviewed the carrying value of remaining assets classified as held for sale against recent sales prices and expect to recover the current carrying value of the assets.

We also hold digital cinema equipment that we lease to exhibitors with a carrying value of approximately $1.1 million that is not yet classified as held for sale since it does not meet all the held for sale criteria. These assets are classified as products provided under operating leases and held for use, and remain within property, plant and equipment. We are currently exploring future uses and options for these assets, and have not yet committed to a plan of sale. We believe that the remaining carrying value of our products provided under operating leases included in property, plant and equipment is recoverable as of September 30, 2011.

We enter into foreign currency forward contracts to hedge against assets and liabilities for which we have foreign currency exchange rate exposure in an effort to reduce the risk that our earnings will be adversely affected by foreign currency exchange rate fluctuations. As of September 30, 2011, the total notional amounts of outstanding contracts were $4.7 million on our consolidated balance sheets, and are included in other current assets and other accrued liabilities. See Note 4 "Fair Value Measurements" for additional information related to our foreign currency forward contracts.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and consist of the following:


	September 24, 2010			September 30, 2011
	(in thousands)
Land	$	12,835		$	12,778
Buildings		27,029			26,623
Leasehold improvements		33,264			44,021
Machinery and equipment		16,080			20,845
Computer systems and software		43,611			71,220
Furniture and fixtures		9,440			10,537
Products provided under operating leases		1,209			1,060

		143,468			187,084
Less: accumulated depreciation		(49,371	)		(69,977	)

Property, plant and equipment, net	$	94,097		$	117,107

Depreciation expense for property, plant and equipment was $13.5 million, $17.8 million and $24.1 million in fiscal 2009, 2010 and 2011, respectively, and is included in cost of products, cost of services, research and development expenses, sales and marketing expenses, and general and administrative expenses in the accompanying consolidated statements of operations.

Our products provided under operating leases represent digital cinema equipment that we leased to exhibitors beginning in fiscal 2005 in an effort to encourage the cinema industry to transition to digital cinema.

During fiscal 2010, certain events occurred that indicated that the carrying value of our products provided under operating leases may not be recoverable. These events included a reduction in expected virtual print fees and a reduction in market prices for digital cinema equipment. As a result, we concluded that sufficient indicators existed to require an impairment analysis during fiscal 2010.

Based on our estimates of the undiscounted future cash flows from virtual print fees and the potential sale value of the equipment, our analysis determined that the equipment was impaired. Accordingly, we estimated the fair market value of the equipment based on potential sale price estimates and recorded the excess of the carrying value over the fair market value as an impairment charge. During fiscal 2010, we recorded an impairment charge of $9.6 million related to our products provided under operating leases, which is included in the impairment of products provided under operating leases line item in the accompanying consolidated statement of operations.

During fiscal 2010, management committed to a plan to sell one of our properties in the U.K. that indicated that the carrying value of the land and building may not be recoverable. Based on our estimates of the undiscounted future cash flows from this building, our analysis determined that the building was impaired. Accordingly, we estimated the fair market value of the property based on potential sales price estimates. We recorded the excess of the carrying value over the fair market value of the land and building as impairment charges of $1.1 million and $2.3 million, respectively, within the restructuring charges line item in the accompanying consolidated statement of operations. The building is held by an entity where we are the managing member and our principal stockholder is the limited member, but with a majority ownership of the entity. Therefore, the impairment amount reflected in our restructuring charges line item for fiscal 2010 is offset by the share of the charge attributable to the limited member, or $1.7 million, in our net income attributable to controlling interest line item in the accompanying consolidated statement of operations. Based on the current facts and circumstances, the property does not meet the criteria for held for sale classification.

Goodwill and Intangible Assets

Intangible assets consist of the following:


	September 24, 2010							September 30, 2011
	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
	(in thousands)
Intangible assets subject to amortization:
Acquired patents and technology	$	61,767	$	(24,986	)	$	36,781	$	61,611	$	(32,146	)	$	29,465
Customer relationships		30,790		(10,095	)		20,695		30,748		(12,821	)		17,927
Customer contracts		5,973		(4,483	)		1,490		6,063		(6,063	)		—
Other intangibles		20,307		(12,254	)		8,053		20,308		(16,127	)		4,181

Total	$	118,837	$	(51,818	)	$	67,019	$	118,730	$	(67,157	)	$	51,573

Amortization expense for our intangible assets was $15.2 million, $17.3 million and $19.8 million in fiscal 2009, 2010 and 2011, respectively, and is included in cost of licensing, cost of products, research and development, and sales and marketing expenses in the accompanying consolidated statements of operations.

The expected future annual amortization expense of our intangible assets is as follows:


	Amortization
Fiscal Year	Expense
	(in thousands)
2012	$	12,697
2013		11,923
2014		10,279
2015		7,823
2016		5,654
Thereafter		3,197

Total	$	51,573

The following table outlines changes to the carrying amount of goodwill:


	Total
	(in thousands)
Balance at September 25, 2009	$	261,121
Acquired goodwill		3,266
Translation adjustments and other		193

Balance at September 24, 2010	$	264,580
Acquired goodwill		182
Translation adjustments and other		(1,502	)

Balance at September 30, 2011	$	263,260

Accrued Liabilities

Accrued liabilities consist of the following:


	September 24, 2010		September 30, 2011
	(in thousands)
Accrued royalties	$	4,140	$	1,947
Amounts payable to joint licensing program partners		42,837		42,502
Accrued compensation and benefits		62,044		41,168
Accrued professional fees		8,078		5,727
Current portion of litigation settlement (see Note 12)		2,890		—
Other accrued liabilities		24,619		25,691

Accrued liabilities	$	144,608	$	117,035

Other Non-Current Liabilities

Other non-current liabilities consist of the following:


	September 24, 2010		September 30, 2011
	(in thousands)
Supplemental retirement plan obligations	$	2,118	$	1,811
Non-current tax liabilities		20,036		13,070
Other liabilities		4,861		8,574

Other non-current liabilities	$	27,015	$	23,455

See Note 7 "Income Taxes" for additional information related to tax liabilities.

Accumulated Other Comprehensive Income

Accumulated other comprehensive income consists of the following:


	September 24, 2010		September 30, 2011
	(in thousands)
Accumulated foreign currency translation gains, net of tax of ($2,655) and ($2,653)	$	6,195	$	6,834
Accumulated unrealized gains on available-for-sale securities, net of tax of ($986) and ($387)		1,606		699

Total accumulated other comprehensive income	$	7,801	$	7,533

Per Share Data

We compute basic earnings per share by dividing net income attributable to Dolby Laboratories, Inc. by the weighted average number of shares of Class A and Class B common stock outstanding during the period. For diluted earnings per share, we divide net income attributable to Dolby Laboratories, Inc. by the sum of the weighted average number of shares of Class A and Class B common stock outstanding and the potential number of dilutive shares of Class A and Class B common stock outstanding during the period.

The following table sets forth the computation of basic and diluted earnings per share attributable to Dolby Laboratories, Inc.:


	Fiscal Year Ended
	September 25, 2009		September 24, 2010		September 30, 2011
	(in thousands, except per share amounts)
Numerator:
Net income attributable to Dolby Laboratories, Inc.	$	242,991	$	283,447	$	309,267

Denominator:
Weighted-average shares outstanding—basic		113,101		113,452		111,444
Potential common shares from options to purchase Class A and Class B common stock		2,167		1,769		941
Potential common shares from restricted stock units		99		167		169

Weighted-average shares outstanding—diluted		115,367		115,388		112,554

Net income per share attributable to Dolby Laboratories, Inc.—basic	$	2.15	$	2.50	$	2.78
Net income per share attributable to Dolby Laboratories, Inc.—diluted	$	2.11	$	2.46	$	2.75
Antidilutive options excluded from calculation		3,409		2,074		3,289
Antidilutive restricted stock units excluded from calculation		148		457		535

Sales Tax

We account for sales tax on a net basis by excluding sales tax from our revenue.

Release of Value-Added Tax ("VAT") Reserves

During fiscal 2011 we completed our analysis of recent VAT law changes enacted in the European Union and other foreign jurisdictions. Based on this analysis, we released $3.2 million of VAT reserves and related estimated penalties which were recorded as reductions of general and administrative expense. Additionally, we released $1.4 million of VAT-related interest reserves, which was recorded as a reduction of interest expense. These liabilities were previously included in other accrued liabilities in our consolidated balance sheets.