
[Federal Register: October 7, 2010 (Volume 75, Number 194)]
[Notices]               
[Page 62157-62159]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07oc10-88]                         


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29454; 812-13582]

 
Dolby Laboratories, Inc.; Notice of Application

October 1, 2010.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application under section 3(b)(2) of the Investment 
Company Act of 1940 (the ``Act'').

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    Summary of Application: Dolby Laboratories, Inc. (``Dolby'') seeks 
an order under section 3(b)(2) of the Act declaring it to be primarily 
engaged in a business other than that of investing, reinvesting, 
owning, holding or trading in securities. Dolby, directly and through 
its wholly-owned subsidiaries, develops and delivers products and 
technologies that are used throughout the entertainment industry to 
produce a more immersive and enjoyable experience.
    Filing Date: The application was filed on September 26, 2008, and 
amended on April 7, 2009, April 22, 2010, and September 30, 2010.
    Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on October 26, 2010, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090. Applicant, 100 Potrero Avenue, San 
Francisco, CA 94103.

FOR FURTHER INFORMATION CONTACT: Jaea F. Hahn, Senior Counsel, at (202) 
551-6870, or Jennifer L. Sawin, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site by searching for the file number, or applicant 
using the Company name box, at http://www.sec.gov/search/search.htm or 
calling (202) 551-8090.
    Applicant's Representations:
    1. Dolby, a Delaware corporation, directly and through its wholly-
owned subsidiaries, develops and delivers innovative products and 
technologies that are used throughout the entertainment industry to 
produce a more immersive and enjoyable experience. Dolby generates 
revenue by licensing its technologies to manufacturers of consumer 
electronics products and software vendors and selling professional 
products and related services to entertainment content creators, 
producers and distributors. Dolby works across the global entertainment 
industry by offering products and services for content creators, such 
as studios and broadcasters, to encode content in Dolby's formats, by 
licensing Dolby technology to consumer electronics manufacturers and 
software vendors so that consumers can enjoy the content that has been 
encoded in Dolby's proprietary formats, and by working directly with 
standards bodies in an effort to have Dolby's formats adopted in their 
specifications to ensure a common standard across devices and to 
improve the overall consumer experience.
    2. Dolby states that its business is highly capital intensive, 
highly cyclical and requires research and development of new 
technologies. As a result, Dolby represents that it maintains a 
substantial amount of cash, and various short-term investment 
securities, to run its operations, including research and development 
activities,\1\ and to be available for strategic acquisitions. Dolby 
also states that it seeks to preserve capital and maintain liquidity by 
investing in short-term fixed income and money market investments that 
are investment grade, liquid, and that earn competitive market returns 
and provide a low level of credit risk in order to conserve capital and 
liquidity until the funds are used in Dolby's primary business or 
businesses (``Capital Preservation Investments''). Dolby states that it 
does not invest in securities for short-term speculative purposes.
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    \1\ In fiscal years 2007, 2008 and 2009, Dolby's research and 
development expenses were $44.1 million, $62.1 million and $66.7 
million, respectively, and accounted for roughly 14.9%, 17.6% and 
18.7% of Dolby's total expenses (including the cost of revenues), 
respectively.
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    3. Dolby also states that a significant portion of its assets 
consist of intangible assets, such as internally-generated intellectual 
property and other intangibles that may not appear on its balance 
sheet. Dolby states that because it holds its internally-developed 
intangible assets through wholly-owned subsidiaries, the value of its 
investment securities is (and likely will remain) well below 40% of its 
total assets (excluding Government securities and cash items) on an 
unconsolidated basis. Dolby states, however, that valuation of 
internally-developed intangible assets is difficult and inherently 
subjective, and Dolby believes that it cannot rely on the fact that it 
does not meet the definition of investment company found in section 
3(a)(1)(C) of the Act because third parties such as underwriters will 
not accept investment company status representations based on 
unconsolidated calculations that rely on Dolby's valuations of those 
assets. Because Dolby cannot rely on the fact that it does not meet the 
definition of investment company found in section 3(a)(1)(C) in 
circumstances requiring an unqualified opinion that Dolby is not an 
investment company under the Act, it seeks an order of the Commission 
pursuant to section 3(b)(2) of the Act.
    Applicant's Legal Analysis:
    1. Dolby seeks an order under section 3(b)(2) of the Act declaring 
that it is primarily engaged in a business other than that of 
investing, reinvesting, owning, holding or trading in securities, and 
therefore not an investment company as defined in the Act.
    2. Under section 3(a)(1)(C) of the Act, an issuer is an investment 
company if it is engaged or proposes to engage in the business of 
investing, reinvesting, owning, holding, or trading in securities, and 
owns or proposes to acquire investment securities having a value in 
excess of 40 percent of the value of the issuer's total assets 
(exclusive of Government securities and cash items) on an 
unconsolidated basis. Section 3(a)(2) of the Act defines ``investment 
securities'' to include all securities except Government securities, 
securities issued by employees' securities companies, and securities 
issued by majority-owned subsidiaries of the owner which (a) are not 
investment companies, and (b) are not relying on the exclusions from 
the definition of investment company in section 3(c)(1) or 3(c)(7) of 
the Act. Dolby states that as of June 25, 2010, the value of its total 
assets on an unconsolidated basis (exclusive of Government securities 
and cash items) was approximately $7.5 billion, the value of Dolby's 
investment securities (as defined in section 3(a)(2) of the Act) on an 
unconsolidated basis was approximately $0 and constituted approximately 
0.0% of Dolby's total

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assets (exclusive of Government securities and cash items).
    3. Rule 3a-1 under the Act provides an exemption from the 
definition of investment company if no more than 45% of a company's 
total assets consist of, and not more than 45% of its net income over 
the last four quarters is derived from, securities other than 
Government securities, securities of majority-owned subsidiaries and 
primarily controlled companies. These percentages are determined on a 
consolidated basis with the company's wholly-owned subsidiaries. Dolby 
states that it currently relies on rule 3a-1 and limits its investment 
in Capital Preservation Investments, investing its liquid capital more 
heavily in Government securities and cash items to ensure that its 
investment securities remain within the limits of the asset component 
of rule 3a-1's 45% test. Dolby believes that limiting its Capital 
Preservation Investments to meet the constraints of rule 3a-1 greatly 
underutilizes Dolby's cash management potential to the detriment of 
Dolby and its shareholders.\2\
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    \2\ Rule 3a-8 under the Act provides an exemption for certain 
companies whose research and development expenses are a substantial 
percentage of their total expenses. Dolby does not rely on rule 3a-8 
because its research and development expenses have in recent years 
accounted for less than 20 percent of its total expenses (including 
the cost of revenues).
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    4. Section 3(b)(2) of the Act provides that, notwithstanding 
section 3(a)(1)(C) of the Act, the Commission may issue an order 
declaring an issuer to be primarily engaged in a business or businesses 
other than that of investing, reinvesting, owning, holding, or trading 
in securities either directly or through majority-owned subsidiaries or 
through controlled companies conducting similar types of businesses. 
Dolby requests an order under section 3(b)(2) of the Act declaring that 
it is primarily engaged in a business other than that of investing, 
reinvesting, owning, holding or trading in securities, and therefore 
not an investment company as defined in the Act.
    5. In determining whether a company is primarily engaged in a non-
investment company business under section 3(b)(2), the Commission 
considers: (a) The issuer's historical development; (b) its public 
representations of policy; (c) the activities of its officers and 
directors; (d) the nature of its present assets; and (e) the sources of 
its present income.\3\
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    \3\ Tonopah Mining Company of Nevada, 26 SEC 426, 427 (1947).
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    a. Historical Development. Dolby states that since its founding in 
1965, it has been engaged in delivering products and technologies that 
are employed throughout the entertainment creation, distribution and 
playback process to enhance the entertainment experience. In recent 
years, Dolby has expanded its focus on developing and delivering new 
audio and video technologies that enhance the entertainment experience. 
Dolby's revenue comes almost exclusively from its licensing, sales and 
services of its technologies to manufacturers of consumer electronics 
products and software vendors.
    b. Public Representations of Policy. Dolby states that it has never 
represented that it is involved in any business other than developing 
and delivering products and technologies for the entertainment 
creation, distribution and playback process. Dolby asserts that it has 
consistently stated in its annual reports, stockholder letters, 
prospectuses, filings with the Commission, press releases, marketing 
materials, and website that it is engaged in the business of developing 
and delivering products and technology that improve the entertainment 
experience. Dolby states that it generally does not make public 
representations regarding its investment securities except as required 
by its obligation to file periodic reports to comply with federal 
securities laws. Dolby further states that it has emphasized operating 
results and has never emphasized either its investment income or the 
possibility of significant appreciation from its cash management 
investment strategies as a material factor in its business or future 
growth.
    c. Activities of Officers and Directors. Dolby states that its 
directors spend substantially all of their time as directors for Dolby 
overseeing Dolby's business of developing and delivering products and 
technologies for the entertainment creation, distribution and playback 
process. Dolby states that its executive officers spend substantially 
all of their time managing Dolby's business of developing and 
delivering innovative products and technologies that are used 
throughout the entertainment industry. Dolby's Chief Financial Officer 
spends less than 5% of his time monitoring Dolby's cash balances and 
managing short-term investment securities in accordance with Dolby's 
investment policies. None of Dolby's executive officers, other than the 
Chief Financial Officer, spend time monitoring cash balances and 
managing short-term investment securities.
    As of September 25, 2009, Dolby had approximately 1,135 employees 
in locations throughout the world, consisting of 388 employees in sales 
and marketing, 421 employees in products and technology (including 345 
employees in research and development) and 326 employees in general and 
administrative functions. In addition to the Chief Financial Officer, 
only three employees spend a small portion of time on matters relating 
to the management of Dolby's investment securities: The Vice President, 
Tax and Treasury spends less than 10% of his time on investment 
matters. The Director of Treasury spends about one-third of her time on 
investment matters and the Treasury Manager spends approximately 20% of 
his time on investment matters.
    d. Nature of Assets. Dolby states that as of June 25, 2010, the 
value of its investment securities (as defined in section 3(a)(2) of 
the Act) was approximately $411 million, which constituted 
approximately 39.2% of its total assets on a consolidated basis 
(exclusive of Government securities and cash items) in accordance with 
rule 3a-1.\4\ Dolby states that its investments in ``investment 
securities'' that are not Capital Preservation Instruments will be no 
more than 10 percent of its total assets (other than Government 
securities and cash items) on a consolidated basis. Dolby further 
states that it owns, through its wholly-owned subsidiaries, a 
significant amount of intangible assets, including internally-developed 
intellectual property. Dolby states that notwithstanding the value of 
its internally-developed intellectual property to its business, that 
value is not recorded on Dolby's consolidated balance sheet as it is 
not treated as an asset under Generally Accepted Accounting Principles. 
Dolby also states that the asset tests used in connection with sections 
3(a)(1)(C), 3(b)(1) and 3(b)(2) of the Act and rule 3a-1 under the Act 
thus significantly understate the relative value of Dolby's internally-
developed intellectual property assets and significantly overstate the 
relative value of investment securities.
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    \4\ For purposes of determining its primary business, Dolby 
believes that consolidating its financial results with those of its 
wholly-owned subsidiaries presents a more accurate view of Dolby's 
business and financial position and a more reliable basis for 
evaluating its assets and income.
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    e. Sources of Income and Revenue. Dolby states that for the four 
fiscal quarters ended June 25, 2010, most of Dolby's net income before 
taxes was generated by its operating activities. At the end of the 
third quarter of fiscal 2010, Dolby had net income of $405 million for 
the last four fiscal quarters combined, of which net investment income 
was $8 million or 2% of income before taxes. Dolby states that the 
overwhelming majority of its income is

[[Page 62159]]

operating income generated by its licensing and products and services 
sales activities.
    6. Dolby thus asserts that it satisfies the standards for an order 
under section 3(b)(2) of the Act.
    Applicant's Conditions:
    Dolby agrees that any order granted pursuant to the application 
will be subject to the following conditions:
    1. Dolby will continue to allocate and utilize its accumulated cash 
and investment securities for bona fide business purposes.
    2. Dolby will refrain from investing or trading in securities for 
short-term speculative purposes.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-25292 Filed 10-6-10; 8:45 am]
BILLING CODE 8011-01-P

