UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 1, 2016
Tessera Holding Corporation
(Exact name of registrant as specified in its charter)
Delaware | 001-37956 | 81-4465732 | ||
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(I.R.S. Employer Identification No.) | ||
3025 Orchard Parkway San Jose, California 95134 |
95134 | |||
(Address of principal executive offices) | (Zip Code) |
(408) 321-6000
(Registrants telephone number, including area code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Introductory Note
On December 1, 2016, Tessera Holding Corporation (the Company) completed the acquisition of DTS, Inc. (DTS) pursuant to the terms of the Agreement and Plan of Merger, dated as of September 19, 2016, among the Company, DTS, Tessera Technologies, Inc. (Tessera) and the other parties named therein.
This Amendment No. 1 on Form 8-K/A (Amendment No. 1) is being filed solely to amend Item 9.01 of the Current Report on Form 8-K filed by the Company on December 1, 2016 (the Original Form 8-K) to provide the historical financial statements of DTS and the unaudited pro forma financial information, which were omitted from the Original Form 8-K in accordance with the instructions applicable to the form. Except for such additions, no other changes have been made to the Original Form 8-K, and this Amendment No. 1 does not amend or update any other information set forth in the Original Form 8-K.
Item 9.01. | Financial Statements and Exhibits |
(a) | Financial Statements of Business Acquired. |
The audited consolidated balance sheets of DTS as of December 31, 2015 and 2014; the audited consolidated statements of operations, comprehensive income, stockholders equity, and cash flows for the years ended December 31, 2015, 2014 and 2013; and the notes related thereto are filed as Exhibit 99.2 hereto and are incorporated herein by reference.
The unaudited condensed consolidated financial statements of DTS as of and for the nine months ended September 30, 2016 and for the nine months ended September 30, 2015, and the notes related thereto are filed as Exhibit 99.3 hereto and are incorporated herein by reference.
(b) | Pro Forma Financial Information. |
The unaudited pro forma condensed combined financial information of Tessera and DTS for the twelve months ended December 31, 2015 and as of and for the nine months ended September 30, 2016 and the notes related thereto are filed as Exhibit 99.4 hereto and are incorporated herein by reference.
(d) | Exhibits |
23.1 | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm. | |
23.2 | Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm. | |
99.2 | Audited consolidated balance sheets of DTS as of December 31, 2015 and 2014; the audited consolidated statements of operations, comprehensive income, stockholders equity, and cash flows for the years ended December 31, 2015, 2014 and 2013; and the notes related thereto. | |
99.3 | Unaudited condensed consolidated financial statements of DTS as of and for the nine months ended September 30, 2016 and for the nine months ended September 30, 2015, and the notes related thereto. | |
99.4 | Unaudited pro forma condensed combined financial information of Tessera and DTS for the twelve months ended December 31, 2015 and as of and for the nine months ended September 30, 2016 and the notes related thereto. |
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 hereunto duly authorized.
TESSERA HOLDING CORPORATION | ||||||
Date: February 3, 2017 | By: | /s/ Robert Andersen | ||||
Name: | Robert Andersen | |||||
Title: | Executive Vice President and Chief Financial Officer |
Exhibit Index
Exhibit No. |
Description | |
23.1 | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm. | |
23.2 | Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm. | |
99.2 | Audited consolidated balance sheets of DTS as of December 31, 2015 and 2014; the audited consolidated statements of operations, comprehensive income, stockholders equity, and cash flows for the years ended December 31, 2015, 2014 and 2013; and the notes related thereto. | |
99.3 | Unaudited condensed consolidated financial statements of DTS as of and for the nine months ended September 30, 2016 and for the nine months ended September 30, 2015, and the notes related thereto. | |
99.4 | Unaudited pro forma condensed combined financial information of Tessera and DTS for the twelve months ended December 31, 2015 and as of and for the nine months ended September 30, 2016 and the notes related thereto. |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-214862; 333-195948; 333-190138; 333-168597; 333-151659; 333-137933; 333-131457; 333-116369; 333-115311; and 333-112238 on Form S-8 of Tessera Holding Corporation of our report dated March 7, 2016, relating to the consolidated financial statements and financial statement schedule of DTS, Inc. for the year ended December 31, 2015 appearing in this Current Report on Form 8-K/A of Tessera Holding Corporation.
/s/ Deloitte & Touche LLP
Los Angeles, CA
February 3, 2017
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 20, 2014, with respect to the consolidated financial statements and schedule of DTS, Inc. for the year ended December 31, 2013 included in this Current Report on Form 8-K/A of Tessera Holding Corporation filed February 3, 2017. We consent to the incorporation by reference of said report in the Registration Statements of Tessera Holding Corporation on Forms S-8 (File No. 333-112238, File No. 333-115311, File No. 333-116369, File No. 333-131457, File No. 333-137933, File No. 333-151659, File No. 333-168597, File No. 333-190138, File No. 333-195948 and File No. 333-214862).
/s/ GRANT THORNTON LLP
Irvine, California
February 3, 2017
Exhibit 99.2
DTS, Inc.
Consolidated Financial Statements
As of December 31, 2015 and 2014
For the years ended December 31, 2015, 2014 and 2013
1
DTS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements: |
||||
Reports of Independent Registered Public Accounting Firms |
3 | |||
Consolidated Balance Sheets as of December 31, 2015 and 2014 |
5 | |||
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013 |
6 | |||
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2015, 2014 and 2013 |
7 | |||
Consolidated Statements of Stockholders Equity for the years ended December 31, 2015, 2014 and 2013 |
8 | |||
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 |
9 | |||
Notes to Consolidated Financial Statements |
10 | |||
Financial Statement Schedule: |
||||
Schedule IIValuation and Qualifying Accounts for the years ended December 31, 2015, 2014 and 2013 |
43 |
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of DTS, Inc.
Calabasas, California
We have audited the accompanying consolidated balance sheet of DTS, Inc. and subsidiaries (the Company) as of December 31, 2015 and December 31, 2014, and the related consolidated statements of operations, comprehensive income (loss), stockholders equity, and cash flows for the year ended December 31, 2015 and December 31, 2014. Our audit also included the financial statement schedule for the year ended December 31, 2015 and December 31, 2014. These consolidated financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of DTS, Inc. and subsidiaries as of December 31, 2015 and December 31, 2014, and the results of their operations and their cash flows for the year ended December 31, 2015 and December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Notes 1 and 6 to the consolidated financial statements, on October 1, 2015 the Company completed the acquisition of iBiquity Digital Corporation pursuant to the Agreement and Plan of Merger, dated August 31, 2015.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
March 7, 2016
3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
DTS, Inc.
We have audited the consolidated balance sheet of DTS, Inc. (the Company) as of December 31, 2013 (not presented herein), and the related consolidated statements of operations, comprehensive income, stockholders equity, and cash flows for the year then ended. Our audit of the basic consolidated financial statements included the financial statement schedule for the year ended December 31, 2013 listed in the index to the consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DTS, Inc. as of December 31, 2013, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the 2013 information set forth therein.
/s/ GRANT THORNTON LLP
Irvine, California
March 20, 2014
4
DTS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share amounts)
As of December 31, | ||||||||
2015 | 2014 | |||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 52,208 | $ | 99,435 | ||||
Short-term investments |
9,657 | | ||||||
Accounts receivable, net of allowance for doubtful accounts of $541 and $143 at December 31, 2015 and December 31, 2014, respectively |
12,454 | 12,364 | ||||||
Deferred income taxes |
| 12,095 | ||||||
Prepaid expenses and other current assets |
5,855 | 5,892 | ||||||
Income taxes receivable |
4,130 | 3,925 | ||||||
|
|
|
|
|||||
Total current assets |
84,304 | 133,711 | ||||||
Property and equipment, net |
29,022 | 27,089 | ||||||
Intangible assets, net |
157,936 | 48,543 | ||||||
Goodwill |
108,726 | 50,356 | ||||||
Deferred income taxes |
24,018 | 26,176 | ||||||
Other long-term assets |
3,934 | 2,395 | ||||||
|
|
|
|
|||||
Total assets |
$ | 407,940 | $ | 288,270 | ||||
|
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|
|
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LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 5,979 | $ | 4,492 | ||||
Accrued expenses |
22,960 | 16,761 | ||||||
Deferred revenue |
5,711 | 10,827 | ||||||
Income taxes payable |
123 | 294 | ||||||
Current portion of long-term debt |
21,486 | 5,000 | ||||||
|
|
|
|
|||||
Total current liabilities |
56,259 | 37,374 | ||||||
Long-term debt |
136,666 | 20,000 | ||||||
Other long-term liabilities |
9,983 | 11,993 | ||||||
Commitments and contingencies (Note 10) |
||||||||
Stockholders equity: |
||||||||
Preferred stock$0.0001 par value, 5,000 shares authorized at December 31, 2015 and 2014; no shares issued and outstanding |
| | ||||||
Common stock$0.0001 par value, 70,000 shares authorized at December 31, 2015 and 2014; 21,988 and 21,440 shares issued at December 31, 2015 and 2014, respectively; 17,321 and 17,373 shares outstanding at December 31, 2015 and 2014, respectively |
3 | 3 | ||||||
Additional paid-in capital |
258,660 | 241,053 | ||||||
Treasury stock, at cost4,667 and 4,067 at December 31, 2015 and 2014, respectively |
(111,331 | ) | (92,184 | ) | ||||
Accumulated other comprehensive income |
778 | 808 | ||||||
Retained earnings |
56,922 | 69,223 | ||||||
|
|
|
|
|||||
Total stockholders equity |
205,032 | 218,903 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 407,940 | $ | 288,270 | ||||
|
|
|
|
See accompanying notes to consolidated financial statements.
5
DTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
For the Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
Revenue |
$ | 138,209 | $ | 143,913 | $ | 125,148 | ||||||
Cost of revenue |
15,077 | 11,095 | 9,788 | |||||||||
|
|
|
|
|
|
|||||||
Gross profit |
123,132 | 132,818 | 115,360 | |||||||||
Operating expenses: |
||||||||||||
Selling, general and administrative |
92,276 | 78,570 | 79,753 | |||||||||
Research and development |
42,985 | 37,298 | 31,145 | |||||||||
Change in fair value of contingent consideration |
(420 | ) | 400 | (6,000 | ) | |||||||
Impairment of intangible assets |
| | 2,820 | |||||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
134,841 | 116,268 | 107,718 | |||||||||
|
|
|
|
|
|
|||||||
Operating income (loss) |
(11,709 | ) | 16,550 | 7,642 | ||||||||
Interest and other expense, net |
(2,255 | ) | (413 | ) | (521 | ) | ||||||
|
|
|
|
|
|
|||||||
Income (loss) before income taxes |
(13,964 | ) | 16,137 | 7,121 | ||||||||
Benefit for income taxes |
(1,663 | ) | (11,006 | ) | (8,634 | ) | ||||||
|
|
|
|
|
|
|||||||
Net income (loss) |
$ | (12,301 | ) | $ | 27,143 | $ | 15,755 | |||||
|
|
|
|
|
|
|||||||
Net income (loss) per common share: |
||||||||||||
Basic |
$ | (0.71 | ) | $ | 1.58 | $ | 0.87 | |||||
|
|
|
|
|
|
|||||||
Diluted |
$ | (0.71 | ) | $ | 1.55 | $ | 0.86 | |||||
|
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|
|
|
|
|||||||
Weighted average shares outstanding: |
||||||||||||
Basic |
17,396 | 17,180 | 18,097 | |||||||||
|
|
|
|
|
|
|||||||
Diluted |
17,396 | 17,561 | 18,334 | |||||||||
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
6
DTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
For the Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
Net income (loss) |
$ | (12,301 | ) | $ | 27,143 | $ | 15,755 | |||||
Other comprehensive income (loss), net of tax: |
||||||||||||
Foreign currency translation adjustments, net |
| | 94 | |||||||||
Unrealized gains and losses on available-for-sale securities and other, net |
(30 | ) | 61 | (6 | ) | |||||||
|
|
|
|
|
|
|||||||
Total comprehensive income (loss) |
$ | (12,331 | ) | $ | 27,204 | $ | 15,843 | |||||
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
7
DTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Amounts in thousands)
Common Stock | ||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-in Capital |
Treasury Stock |
Accumulated Other Comprehensive Income |
Retained Earnings |
Total Stockholders Equity |
||||||||||||||||||||||
Balance at December 31, 2012 |
18,208 | $ | 3 | $ | 213,787 | $ | (59,848 | ) | $ | 659 | $ | 26,325 | $ | 180,926 | ||||||||||||||
Exercise of options and related tax shortfall of $2,090 |
27 | | (1,673 | ) | | | | (1,673 | ) | |||||||||||||||||||
Issuance of common stock under employee stock purchase plan |
161 | | 2,059 | | | | 2,059 | |||||||||||||||||||||
Restricted stock award forfeitures and shares withheld for taxes |
(8 | ) | | (929 | ) | | | | (929 | ) | ||||||||||||||||||
Restricted stock unit vesting |
82 | | | | | | | |||||||||||||||||||||
Stock-based compensation charge |
| | 11,727 | | | | 11,727 | |||||||||||||||||||||
Stock repurchases |
(1,191 | ) | | | (24,841 | ) | | | (24,841 | ) | ||||||||||||||||||
Net income |
| | | | | 15,755 | 15,755 | |||||||||||||||||||||
Other comprehensive income |
| | | | 88 | | 88 | |||||||||||||||||||||
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Balance at December 31, 2013 |
17,279 | $ | 3 | $ | 224,971 | $ | (84,689 | ) | $ | 747 | $ | 42,080 | $ | 183,112 | ||||||||||||||
Exercise of options and related tax shortfall of $310 |
206 | | 4,174 | | | | 4,174 | |||||||||||||||||||||
Issuance of common stock under employee stock purchase plan |
172 | | 2,233 | | | | 2,233 | |||||||||||||||||||||
Shares withheld for taxes |
| | (817 | ) | | | | (817 | ) | |||||||||||||||||||
Restricted stock unit vesting |
90 | | | | | | | |||||||||||||||||||||
Stock-based compensation charge |
| | 10,492 | | | | 10,492 | |||||||||||||||||||||
Stock repurchases |
(374 | ) | | | (7,495 | ) | | | (7,495 | ) | ||||||||||||||||||
Net income |
| | | | | 27,143 | 27,143 | |||||||||||||||||||||
Other comprehensive income |
| | | | 61 | | 61 | |||||||||||||||||||||
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Balance at December 31, 2014 |
17,373 | $ | 3 | $ | 241,053 | $ | (92,184 | ) | $ | 808 | $ | 69,223 | $ | 218,903 | ||||||||||||||
Exercise of options and related tax shortfall of $733 |
319 | | 5,631 | | | | 5,631 | |||||||||||||||||||||
Issuance of common stock under employee stock purchase plan |
119 | | 2,623 | | | | 2,623 | |||||||||||||||||||||
Shares withheld for taxes |
| | (2,913 | ) | | | | (2,913 | ) | |||||||||||||||||||
Restricted stock unit vesting |
110 | | | | | | | |||||||||||||||||||||
Stock-based compensation charge |
| | 12,266 | | | | 12,266 | |||||||||||||||||||||
Stock repurchases |
(600 | ) | | | (19,147 | ) | | | (19,147 | ) | ||||||||||||||||||
Net loss |
| | | | | (12,301 | ) | (12,301 | ) | |||||||||||||||||||
Other comprehensive loss |
| | | | (30 | ) | | (30 | ) | |||||||||||||||||||
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|||||||||||||||
Balance at December 31, 2015 |
17,321 | $ | 3 | $ | 258,660 | $ | (111,331 | ) | $ | 778 | $ | 56,922 | $ | 205,032 | ||||||||||||||
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See accompanying notes to consolidated financial statements.
8
DTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
For the Years Ended December 31, |
||||||||||||
2015 | 2014 | 2013 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | (12,301 | ) | $ | 27,143 | $ | 15,755 | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
17,692 | 14,404 | 15,399 | |||||||||
Stock-based compensation charges |
12,266 | 10,492 | 11,727 | |||||||||
Deferred income taxes |
1,288 | (14,740 | ) | (14,849 | ) | |||||||
Tax benefits (shortfalls) from stock-based awards |
| (310 | ) | (2,090 | ) | |||||||
Excess tax benefits from stock-based awards |
| (518 | ) | (67 | ) | |||||||
Change in fair value of contingent consideration |
(420 | ) | 400 | (6,000 | ) | |||||||
Impairment of intangible assets |
| | 2,820 | |||||||||
Amortization of debt issuance costs |
888 | | | |||||||||
Other |
680 | 117 | 858 | |||||||||
Changes in operating assets and liabilities, net of business acquisitions: |
||||||||||||
Accounts receivable |
12,992 | (377 | ) | (2,474 | ) | |||||||
Prepaid expenses and other assets |
1,128 | (1,799 | ) | (980 | ) | |||||||
Accounts payable, accrued expenses and other liabilities |
4,026 | 6,600 | (3,568 | ) | ||||||||
Deferred revenue |
(6,135 | ) | 459 | 2,603 | ||||||||
Income taxes receivable/payable |
(8,651 | ) | (805 | ) | 2,281 | |||||||
Payment of iBiquity employee incentive plan |
(19,288 | ) | | | ||||||||
|
|
|
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|
|
|||||||
Net cash provided by operating activities |
$ | 4,165 | $ | 41,066 | $ | 21,415 | ||||||
|
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|
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|
|||||||
Cash flows from investing activities: |
||||||||||||
Purchases of available-for-sale investments |
(34,666 | ) | | (4,974 | ) | |||||||
Maturities of available-for-sale investments |
22,300 | 5,000 | 19,184 | |||||||||
Sales of available-for-sale investments |
6,502 | | | |||||||||
Cash paid for business acquisitions, net |
(156,563 | ) | (3,200 | ) | | |||||||
Sale of other assets |
| 725 | | |||||||||
Purchases of property and equipment |
(4,275 | ) | (1,579 | ) | (2,766 | ) | ||||||
Purchases of intangible assets |
(2,675 | ) | (2,025 | ) | (938 | ) | ||||||
Other investing activities |
(300 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
Net cash provided by (used in) investing activities |
$ | (169,677 | ) | $ | (1,079 | ) | $ | 10,506 | ||||
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|
|
|
|||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from long-term borrowings |
160,000 | 30,000 | | |||||||||
Repayment of long-term borrowings |
(25,000 | ) | (35,000 | ) | | |||||||
Payment of debt issuance costs |
(3,642 | ) | | | ||||||||
Payment of contingent consideration |
| (500 | ) | (500 | ) | |||||||
Proceeds from the issuance of common stock under stock-based compensation plans |
8,987 | 6,717 | 2,476 | |||||||||
Cash paid for shares withheld for taxes |
(2,913 | ) | (817 | ) | (929 | ) | ||||||
Excess tax benefits from stock-based awards |
| 518 | 67 | |||||||||
Purchases of treasury stock |
(19,147 | ) | (7,495 | ) | (24,841 | ) | ||||||
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Net cash provided by (used in) financing activities |
$ | 118,285 | $ | (6,577 | ) | $ | (23,727 | ) | ||||
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|
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|||||||
Net change in cash and cash equivalents |
(47,227 | ) | 33,410 | 8,194 | ||||||||
Cash and cash equivalents, beginning of the year |
99,435 | 66,025 | 57,831 | |||||||||
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Cash and cash equivalents, end of the year |
$ | 52,208 | $ | 99,435 | $ | 66,025 | ||||||
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Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid for interest |
$ | 1,203 | $ | 349 | $ | 363 | ||||||
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|
|||||||
Cash paid for income taxes |
$ | 1,585 | $ | 771 | $ | 1,942 | ||||||
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Significant non-cash transactions: |
||||||||||||
Accruals for purchases of intangible assets |
$ | 400 | $ | 1,000 | $ | | ||||||
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
9
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
Note 1The Company
DTS, Inc. (the Company) is a leading provider of premier audio solutions that are incorporated into an array of consumer electronics devices by hundreds of licensee customers around the world. The Companys audio technologies enable recording, delivery and playback of simple, personalized, and immersive high-definition audio and are currently used in a variety of product applications, including televisions (TVs), personal computers (PCs), smartphones, tablets, digital media players, set-top-boxes, soundbars, wireless speakers, video game consoles, Blu-ray Disc players, automotive audio systems, audio/video receivers, DVD-based products and home theater systems. In addition, the Company provides technologies and services to motion picture studios, radio and TV broadcasters, game developers and other content creators to facilitate the inclusion of compelling, realistic DTS-encoded audio in their content. The Company also provides 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 devices.
The Company commenced operations in 1990 as Digital Theater Systems Corporation (DTS Corp). In 1993, DTS Corp became the general partner of Digital Theater Systems, L.P. (the Partnership). In 1994, the Partnership formed DTS Technology, LLC to develop audio technologies for the consumer electronics and other markets. In 1997, the Company completed a reorganization and tax-free exchange with the predecessor entities and was incorporated in Delaware. In 2003, the Company completed its initial public offering, and in May 2005, the Company changed its name from Digital Theater Systems, Inc. to DTS, Inc.
Acquisitions
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. On July 20, 2012, the Company completed its acquisition of SRS Labs, Inc. (SRS), pursuant to the Agreement and Plan of Merger and Reorganization, dated April 16, 2012. On August 14, 2014, the Company acquired substantially all of the assets of Manzanita Systems, Inc. (Manzanita). The Company considers the allocation of the purchase price of Manzanita to be immaterial to the consolidated financial statements.
On October 1, 2015, the Company completed the acquisition of iBiquity Digital Corporation (iBiquity), pursuant to the Agreement and Plan of Merger, dated August 31, 2015 (the Merger Agreement), by and among the Company; Wavelength Acquisition Corp., a Delaware corporation and wholly owned subsidiary of the Company (Merger Sub); iBiquity; the lenders representative; and the lenders named therein. Pursuant to the Merger Agreement, Merger Sub was merged with and into iBiquity, with iBiquity surviving the merger as a wholly owned subsidiary of the Company (the Merger).
All of the above acquisitions were accounted for under the acquisition method of purchase accounting. For additional information, refer to Notes 2, 4 and 6, Significant Accounting Policies, Fair Value Measurements and Business Combinations, respectively.
Note 2Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. The Companys fiscal year end is December 31.
10
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 2Significant Accounting Policies (Continued)
Use of Estimates
The preparation of financial statements in accordance with US GAAP and pursuant to the rules and regulations of the SEC requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to revenue recognition, valuations of goodwill, other intangible assets, long-lived assets, stock-based compensation, income taxes and business combinations. The Company bases its estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making assumptions 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 could differ materially from those estimates.
Cash Equivalents
The Company considers all short-term highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents primarily consist of funds held in money market accounts. Cash equivalents are stated at cost plus accrued interest, which approximates fair value.
Investments
The Company considers, at the time that they are purchased, investments with maturities greater than three months, but less than one year, to be short-term investments. Investments that have maturities of more than one year are classified as long-term investments. Investments are classified as available-for-sale and are reported at fair value with unrealized gains or losses, if any, reported, net of tax, in accumulated other comprehensive income. The cost of investments sold is based on the specific identification method, and all income generated and realized gains or losses from investments are recorded to interest and other income (expense), net.
The Company reviews its investments to identify and evaluate investments that have an indication of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the Companys intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Credit losses and other-than-temporary impairments are declines in fair value that are not expected to recover and are charged to interest and other income (expense), net.
Concentration of Business and Credit Risk
The Company markets its technologies to consumer electronics products manufacturers in the US and internationally. Although the Company is generally subject to the financial well-being of the consumer electronics industry, management does not believe that the Company is subject to significant credit risk with respect to trade accounts receivable. Additionally, the Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses which, when realized, have generally been within the range of managements expectations.
11
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 2Significant Accounting Policies (Continued)
Two customers each accounted for 15% of revenues for the year ended December 31, 2015. Two customers accounted for 15% and 14%, respectively, of revenues for the year ended December 31, 2014. Three customers accounted for 21%, 12% and 12%, respectively, of revenues for the year ended December 31, 2013. The revenue from one of the customers accounting for 12% of revenues for the year ended December 31, 2013 exceeded 10% of revenues due to royalty recoveries.
As of December 31, 2015, three customers accounted for 16%, 14% and 14% of accounts receivable, respectively, each of which resulted from the normal course of business or royalty recoveries. One customer accounted for 42% of accounts receivable at December 31, 2014, which resulted from the normal course of business, and another customer accounted for 26% of accounts receivable, which resulted from royalty recoveries.
The Company deposits its cash and cash equivalents in accounts with major financial institutions worldwide. At times, such deposits may be in excess of insured limits. The Companys investment accounts are with major financial institutions and include investment grade municipal securities and US agency securities. The Company has not incurred any significant credit losses on its investments.
Allowance For Doubtful Accounts
The Company continually monitors customer payments and maintains a reserve for estimated losses resulting from its customers inability to make required payments. In determining the reserve, the Company evaluates the collectibility of its accounts receivable based upon a variety of factors. In cases where the Company becomes aware of circumstances that may impair a specific customers ability to meet its financial obligations, the Company records a specific allowance against amounts due. For all other customers, the Company recognizes allowances for doubtful accounts based on its historical write-off experience in conjunction with the length of time the receivables are past due, customer creditworthiness, geographic risk and the current business environment. Actual future losses from uncollectible accounts may differ from the Companys estimates.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the related assets estimated useful lives:
Machinery and equipment |
2 to 5 years | |
Software |
2 to 7 years | |
Office furniture and fixtures |
3 to 7 years | |
Leasehold improvements |
Lesser of useful life or related lease term | |
Building and improvements |
Up to 35 years |
Expenditures that materially increase asset life are capitalized, while ordinary maintenance and repairs are expensed as incurred.
Capitalized Software Costs
The Company capitalizes the costs of purchased software licenses, consulting costs and payroll-related costs incurred in developing or implementing internal use computer software. These costs are included in property and equipment, net on the consolidated balance sheets. Costs incurred during the preliminary project and post-implementation stages are charged to expense as incurred.
12
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 2Significant Accounting Policies (Continued)
Long-Lived Assets
The Company periodically assesses potential impairments to its long-lived assets by performing an impairment review whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. Factors considered by the Company include, but are not limited to: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for the Companys overall business; and significant negative industry or economic trends. When the Company determines that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment charge. An impairment charge is reflected as the amount by which the carrying amount exceeds the fair market value of the asset, based on the fair market value, if available, or discounted cash flows. To date, there has been no impairment of long-lived tangible assets.
Goodwill and Other Intangible Assets
The Company evaluates the carrying value of goodwill and indefinite-lived intangibles for impairment on an annual basis as of October 31 of each year at the reporting unit level, or more frequently if events or circumstances indicate that the goodwill and other intangibles might be impaired. Reporting units are identified based on the current organizational structure, availability of discrete financial information, and economic similarity of components under the Companys operating segment.
To test goodwill for impairment, the Company performs a qualitative assessment (Step 0) to determine whether further impairment testing is necessary. Qualitative factors considered include, but are not limited to, general macroeconomic conditions; industry and market conditions and trends; overall financial performance and trends in cash flows or revenue; changes in strategy or customers; and changes in share price.
If further testing is necessary, a Step 1 test is performed to evaluate the recoverability of goodwill, which includes valuation of the underlying reporting unit using fair value techniques, which may include both income and market approaches. If the carrying value of the reporting unit exceeds its estimated fair value, or if the reporting unit has a negative carrying value and the Company believes it is more likely than not that a goodwill impairment exists, the Company would proceed to Step 2 and estimate the fair value of the goodwill itself and compare it to the carrying value. The Company would record an impairment charge in an amount equal to the excess of the carrying value of the goodwill over the estimated fair value. Goodwill impairment is measured subsequent to the completion of any impairment of all other intangible and long-lived assets associated with the reporting unit.
Similar to goodwill, impairment of indefinite-lived intangibles is tested by estimating the fair value of the assets, and an impairment charge would be recorded to the extent that the carrying amount of such assets exceeds the estimated fair value.
The Companys definite-lived intangibles principally consist of customer relationships, acquired technology, tradenames, contractual rights arrangements, patents and trademarks, which are being amortized over their respective estimated useful lives. Costs incurred in securing patents and trademarks and protecting the Companys proprietary technology and brand names paid to third parties are capitalized and internal costs are expensed as incurred. Patent and trademark costs are amortized over their
13
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 2Significant Accounting Policies (Continued)
estimated useful lives, typically five and ten years, respectively. The amortization period commences when the patent or trademark is issued. The Company reviews such assets for impairment whenever events or changes in circumstances indicate an assets carrying value may not be recoverable. Factors considered include, but are not limited to, significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or projected future operating results; significant changes in the strategy of the overall business; and significant negative industry or economic trends. Recoverability of an intangible is measured by comparing its carrying amount to the expected future undiscounted cash flows that the asset is expected to generate. If it is determined that an asset is not recoverable, an impairment charge is recorded in the amount by which the carrying amount of the asset exceeds its fair value.
If the Company is unable to finalize the results of impairment tests prior to the issuance of the financial statements and an impairment charge is probable and can be reasonably estimated, the Company recognizes its best estimate of the loss in the current period financial statements and discloses that the amount is an estimate. The Company would then recognize any adjustments to that estimate in subsequent reporting periods, once the results of the impairment tests have been finalized.
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 certain licensing agreements acquired from iBiquity until the first quarter of 2016.
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 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 statement of operations in the period it is abandoned. The fair value of contingent consideration associated with acquisitions is remeasured each reporting period and adjusted accordingly. 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 buyers price is fixed or determinable and collection is reasonably assured. Determining whether and when these criteria have been satisfied may involve assumptions and judgments that can have a significant impact on the timing and amount of revenue that is reported.
Revenue from licensing audio technology, trademarks and know-how is generated from licensing agreements with consumer electronics products manufacturers, IC manufacturers and other customers that pay a license fee for products manufactured or sold. Licensees with a per-unit arrangement pay a per-unit license fee for each product manufactured or sold, as set forth in each license agreement. Licensees generally report manufacturing or sales information in the quarter subsequent to when such activity takes place. Consequently, the Company recognizes revenue from these per-unit licensing agreements in the quarter following the quarter of manufacture or sold, 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 quarter lag method allows for the receipt of licensee royalty reports prior to the recognition of revenue.
14
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 2Significant Accounting Policies (Continued)
Certain cash collections from licensing agreements acquired from iBiquity during the year ended December 31, 2015 were the result of products sold prior to October 1, 2015, the acquisition date. Therefore, the Company did not recognize revenue from these licensing agreements acquired from iBiquity during the year ended December 31, 2015. Accordingly, the Company only recognized revenue from licensing agreements acquired from iBiquity that resulted from products sold after the acquisition date.
Certain licensees have entered into minimum guarantee arrangements, whereby licensees pay a minimum fee for the right to license certain technology over the contract term. These agreements stipulate a fee that corresponds to a minimum number of units or dollars that the customers must produce or pay, with additional per-unit fees for any units or dollars exceeding the minimum. For these agreements, the Company recognizes the minimum amount on these agreements as revenue ratably over the contract term. Consistent with the aforementioned policy for per-unit license fee agreements, the Company recognizes revenue relating to any additional per-unit fees on a quarter lag basis, since the Company cannot reliably estimate the amount of revenue earned from additional units manufactured or sold prior to the receipt of licensee reports.
The Company actively polices and enforces its intellectual property, and pursues third parties who have under-reported the amount of royalties owed under a license agreement or who utilize its intellectual property without a license. As a result of these activities, from time to time, the Company may recognize royalty revenues that relate to infringements or under-reporting 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 from payments for licensing audio technology and for other services received in advance of the culmination of the earnings process. Deferred revenues are recognized as revenue in future periods when the applicable revenue recognition criteria are met. Typically, deferred revenues arise from upfront payments for minimum guarantee arrangements that allow licensees to manufacture an unlimited or specified number of units over a specified term, and accordingly, these deferred revenues will be recognized as revenue ratably over the term of the arrangement.
Licensing revenue is recognized gross of withholding taxes that are remitted by the Companys licensees directly to their local tax authorities. For the years ended December 31, 2015, 2014 and 2013, withholding taxes were $2,498, $3,377, and $5,610, respectively. Withholding taxes were lower in 2015 compared to 2014 and 2013 due to the elimination of withholding taxes on licensing revenue from Japan as a result of the one-time transfer of intellectual property rights from Ireland to the US on January 1, 2014. The impact of this transfer is reflected for a full year in 2015 and only three quarters of 2014, due to the Companys quarter lag revenue policy.
Research and Development (R&D) Costs
The Company conducts its R&D internally and expenses are primarily comprised of the following costs incurred in performing research and development activities: salaries and benefits, related employee expenses, allocated overhead, contract services, and consultants. R&D costs are expensed as incurred.
15
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 2Significant Accounting Policies (Continued)
Foreign Currency Translation
The functional currency of all the Companys wholly-owned subsidiaries is the US dollar. Certain subsidiaries have monetary assets and liabilities that are denominated in a currency that is different than the functional currency. The gains and losses resulting from this remeasurement and translation of monetary assets denominated in a currency that is different than the functional currency are reflected in the determination of net income (loss) and included in interest and other income (expense), net.
Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in stockholders equity during a period from non-owner sources. To date, accumulated other comprehensive income has been comprised mostly of foreign currency translation, as a result of certain wholly-owned subsidiaries having a non-US dollar functional currency in prior years.
Advertising Expenses
Advertising and promotional costs are expensed as incurred and amounted to $6,263, $4,489, and $4,408, for the years ended December 31, 2015, 2014 and 2013, respectively.
Stock Repurchases
Repurchased shares of the Companys common stock are held as treasury shares until they are reissued or retired. When the Company reissues treasury stock, and the proceeds from the sale exceed the average price that was paid by the Company to acquire the shares, the Company records such excess as an increase in additional paid-in capital. Conversely, if the proceeds from the sale are less than the average price the Company paid to acquire the shares, the Company records such difference as a decrease in additional paid-in capital to the extent of increases previously recorded, with the balance recorded as a decrease in retained earnings.
Stock-Based Compensation
The Company accounts for stock-based compensation using the fair value recognition approach. The Company uses the Black-Scholes option-pricing model to determine the fair value of any stock options granted, which requires the Company to make estimates regarding dividend yields, expected price volatility, risk free interest rates, forfeiture rates and the expected life of the option. The fair value of any restricted stock awarded is calculated using the closing market price of the Companys common stock on the date of grant. The Company recognizes these compensation costs net of estimated forfeitures and for only those shares expected to vest on a straight-line basis over the requisite service period of each award, which is generally four years. The Company estimates the forfeiture rate based on its historical experience.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, the deferred tax assets and liabilities are measured each year based on the difference between the financial statement and tax basis of assets and liabilities at the applicable enacted tax rates. The deferred tax provision is primarily the result of changes in the deferred tax assets and liabilities. The Company recognizes interest and penalties related to income taxes in the provision for income taxes. Additionally, a valuation allowance is recorded for that portion of deferred tax assets for which it is more likely than not that the assets will not be realized. In assessing the need for a valuation allowance, the Company considers all available positive and
16
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 2Significant Accounting Policies (Continued)
negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. In the event that all, or part, of the deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance may be necessary. A valuation allowance adjustment would be recorded in the provision for income taxes in the period such determination is made.
The Company presents unrecognized tax benefits as a reduction to deferred tax assets for net operating loss carryforwards or tax credit carryforwards, except in the case where the net operating loss carryforward or tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose.
Fair Value of Financial Instruments
The carrying amount of cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term nature of these instruments. Long-term debt approximates fair value due to the variable rate nature of the debt.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-9, Revenue from Contracts with Customers (Topic 606). This ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. For public entities, this ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is not permitted. Entities have the option of applying either a full retrospective approach or a modified approach. The Company is evaluating the potential impact of adoption of this ASU on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, InterestImputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs. This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. For public entities, this ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. In August 2015, the FASB issued ASU 2015-15, InterestImputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. This ASU clarifies ASU 2015-03 to note that the SEC staff would not object to an entity presenting debt issuance costs related to line-of-credit agreements as an asset regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted these ASUs in the fourth quarter of 2015. As of December 31, 2015, $224 and $839 of debt issuance costs related to the Companys new revolving line of credit are presented in the consolidated balance sheet as other current assets and other long-term assets, respectively. As of December 31, 2015, $389 and $1,459 of debt issuance costs related to the Companys new term loan are presented in the consolidated balance sheet as a deduction from the carrying amount of the current portion of long-term debt and long-term debt, respectively. These ASUs do not have a material impact on the Companys consolidated balance sheet as of December 31, 2014. For additional information on this new credit facility, refer to Note 9, Long-term Debt.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments. The ASU requires that adjustments to provisional amounts identified during the measurement period be recognized in the reporting period in which the adjustment amounts are determined. For public entities,
17
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 2Significant Accounting Policies (Continued)
the ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The ASU must be applied prospectively to adjustments to provisional amounts that occur after the effective date. Early application is permitted for financial statements that have not been issued. The Company expects to adopt this ASU for any measurement period adjustments relating to the acquisition of iBiquity Digital Corporation. For additional information on this acquisition, refer to Note 6, Business Combinations.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. The ASU simplifies the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be classified as noncurrent on the balance sheet. For public entities, the ASU is effective for financial statements issued for annual periods beginning after December 31, 2016 and interim periods within those annual periods, and early adoption is permitted. The ASU may be applied either prospectively or retrospectively. In the fourth quarter of 2015, the Company has adopted this ASU, and as such all deferred tax assets and liabilities have been classified as noncurrent on the consolidated balance sheet as of December 31, 2015. The Company has elected to apply this ASU on a prospective basis, and thus the presentation of deferred tax assets and liabilities as of December 31, 2014 has not been retrospectively adjusted.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ASU requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous US GAAP. For public entities, this ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. Entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is evaluating the impact of adoption of this ASU on its consolidated financial statements.
Note 3Cash, Cash Equivalents and Investments
Cash, cash equivalents and investments consist of the following:
As of December 31, | ||||||||
2015 | 2014 | |||||||
Cash and cash equivalents: |
||||||||
Cash |
$ | 16,257 | $ | 17,899 | ||||
Money market accounts |
35,951 | 81,536 | ||||||
|
|
|
|
|||||
Total cash and cash equivalents |
$ | 52,208 | $ | 99,435 | ||||
|
|
|
|
|||||
Short-term investments: |
||||||||
Corporate bonds |
$ | 9,657 | $ | | ||||
|
|
|
|
|||||
Total short-term investments |
$ | 9,657 | $ | | ||||
|
|
|
|
The Company had no material gross realized or unrealized holding gains or losses from its investments for the years ended December 31, 2015, 2014 and 2013.
18
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 4Fair Value Measurements
The Companys investments are required to be measured and recorded at fair value on a recurring basis. The Companys 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. 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 remittance of payments.
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 Companys 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 Companys 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 Company classifies the fair value of the contingent consideration liability within Level 3 of the fair value hierarchy, as the fair value is based upon unobservable inputs supported by no market activity. As of December 31, 2014, the Company measured the fair value of the remaining contingent consideration using an income approach, based on an analysis of projected cash flows using a discount rate of 15%. As of December 31, 2015, the Company determined the payout under the final milestone of the contingent consideration to be $480. The Company paid this amount in the first quarter of 2016.
The Companys financial assets and liabilities, measured at fair value on a recurring basis, were:
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 December 31, 2015 |
||||||||||||||||
Corporate bonds |
$ | 9,657 | $ | | $ | 9,657 | $ | | ||||||||
Contingent consideration(1)(2) |
$ | (480 | ) | $ | | $ | | $ | (480 | ) | ||||||
As of December 31, 2014 |
||||||||||||||||
Contingent consideration(1) |
$ | (900 | ) | $ | | $ | | $ | (900 | ) |
(1) | The full balance was classified in accrued expenses on the consolidated balance sheet. |
(2) | Represents the actual determined payout of the final milestone, which was paid in the first quarter of 2016. |
19
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 4Fair Value Measurements (Continued)
The changes in the fair value of liabilities categorized as Level 3 were:
For the Years Ended December 31, |
||||||||
2015 | 2014 | |||||||
Balance, beginning of year |
$ | (900 | ) | $ | (1,000 | ) | ||
Payment of contingent consideration(1) |
| 500 | ||||||
Change in fair value of contingent consideration(2) |
420 | (400 | ) | |||||
|
|
|
|
|||||
Balance, end of year |
$ | (480 | )(3) | $ | (900 | ) | ||
|
|
|
|
(1) | Resulted from achievement of the second milestone in the fourth quarter of 2014. |
(2) | These changes are reflected within operating expenses in the consolidated statements of operations. |
(3) | Represents the actual determined payout of the final milestone, which was paid in the first quarter of 2016. |
Note 5Property and Equipment
Property and equipment was:
As of December 31, | ||||||||
2015 | 2014 | |||||||
Land |
$ | 6,600 | $ | 6,600 | ||||
Building and improvements |
21,423 | 21,407 | ||||||
Machinery and equipment |
7,707 | 5,520 | ||||||
Office furniture and fixtures |
8,780 | 7,988 | ||||||
Leasehold improvements |
5,320 | 4,418 | ||||||
Software |
8,639 | 7,188 | ||||||
|
|
|
|
|||||
58,469 | 53,121 | |||||||
Less: Accumulated depreciation |
(29,447 | ) | (26,032 | ) | ||||
|
|
|
|
|||||
Property and equipment, net |
$ | 29,022 | $ | 27,089 | ||||
|
|
|
|
Depreciation expense was $4,131, $4,587, and $5,550, for the years ended December 31, 2015, 2014 and 2013, respectively.
20
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 6Business Combinations
Acquisition of SRS
On July 20, 2012, the Company completed its acquisition of SRS, which was accounted for using the acquisition method of accounting. The Company completed the final allocation of the purchase price in 2013.
The consolidated statement of operations for the year ended December 31, 2013 included $1,520 and $38 of acquisition and integration related costs in selling, general and administrative and research and development expense, respectively. Acquisition and integration related costs included severance costs, change in control costs, banker fees, legal fees, other professional fees, contract termination costs and other administrative costs.
Acquisition of Manzanitas Assets
On August 14, 2014, the Company acquired substantially all of the assets of Manzanita. This asset purchase was accounted for using the acquisition method of accounting. The allocation of the purchase price, which the Company considers to be immaterial to the consolidated financial statements, was completed in 2014.
Acquisition of iBiquity
On October 1, 2015, the Company completed the acquisition of iBiquity. iBiquity is the exclusive developer and licensor of HD Radio technology, the sole FCC-approved method for upgrading AM/FM broadcasting from analog to digital. HD Radio technology provides compelling benefits, including improved audio quality, expanded content choices and new digital data services such as album cover art, weather and real-time traffic updates. iBiquitys partners include leading automakers, consumer electronics and broadcast equipment manufacturers, radio broadcasters, semiconductor and electronic component manufacturers and retailers. The Company believes that this Merger will extend its strategy of delivering a personalized, immersive and compelling audio experience across the network-connected entertainment value chain, and will complement its existing suite of technology and content delivery solutions while enabling it to strengthen its position in the large automotive market.
At the effective time of the Merger, each share of common and preferred stock of iBiquity issued, outstanding and held in treasury was canceled and ceased to exist, and each holder of the common and preferred stock ceased to have any rights with respect thereto.
21
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 6Business Combinations (Continued)
The Merger was accounted for under the acquisition method of accounting. The preliminary aggregate consideration for the Merger was $177,770. The final consideration for the Merger is subject to certain working capital and other adjustments. The preliminary allocation of the purchase price, which was based on preliminary estimates and valuations of management, was:
Weighted Average Estimated Useful Life (years) |
Estimated Fair Value |
|||||||||||
Cash and cash equivalents (1) |
$ | 20,837 | ||||||||||
Short-term investments (2) |
4,000 | |||||||||||
Accounts receivable |
13,468 | |||||||||||
Prepaid expenses and other current assets |
1,058 | |||||||||||
Property and equipment |
1,656 | |||||||||||
Goodwill |
58,370 | |||||||||||
Identifiable intangible assets: |
||||||||||||
Customer relationships |
10 | 70,225 | ||||||||||
Developed technology |
10 | 33,590 | ||||||||||
Tradenames |
10 | 9,590 | ||||||||||
IPR&D |
7,583 | |||||||||||
|
|
|||||||||||
Total identifiable intangible assets |
120,988 | |||||||||||
Other long-term assets |
190 | |||||||||||
Accounts payable |
(535 | ) | ||||||||||
Accrued expenses (1) |
(21,402 | ) | ||||||||||
Deferred revenue |
(1,019 | ) | ||||||||||
Deferred tax liabilities, net |
(13,058 | ) | ||||||||||
Other long-term liabilities |
(6,783 | ) | ||||||||||
|
|
|||||||||||
Total preliminary purchase price |
$ | 177,770 | ||||||||||
|
|
(1) | $19,288 of acquired cash and cash equivalents was used to pay iBiquitys employee incentive plan, which is included within accrued expenses in the allocation above. The liability was paid immediately following consummation of the Merger. Payment of this liability is reflected within operating cash flows in the consolidated statement of cash flows for the year ended December 31, 2015. |
(2) | All acquired short-term investments were liquidated shortly after the consummation of the Merger. |
Customer relationships represent existing relationships with the suppliers of auto receivers, automakers, integrated circuit and electronic component manufacturers, broadcast equipment manufacturers, radio broadcasters and others. Developed technology relates to the underlying HD Radio technology and existing features that have reached technological feasibility. Tradenames are primarily related to the HD Radio consumer brand name. In process research and development (IPR&D) represents assets that are currently being developed and have not yet been completed or fully commercialized. The Company will test these intangible assets for impairment in accordance with its policy in Note 2, Significant Accounting Policies.
The fair values of the customer relationships were determined using the multi-period excess earnings and replacement cost methods. The fair values of the developed technology and tradenames were determined using the relief-from-royalty
22
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 6Business Combinations (Continued)
method. The discount rate utilized for these intangible assets was 17%, which 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 fair value of IPR&D was determined using the replacement cost method, the value of which reflects the riskier profile of incomplete 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, and it includes the value of the synergies between the iBiquity and the Company and the acquired assembled workforce, neither of which qualities as an identifiable intangible asset. None of the goodwill recognized upon the acquisition is deductible for tax purposes.
Certain amounts of assets and liabilities recorded in the preliminary purchase price allocation above are provisional, as the Company has not yet obtained all available information necessary to finalize the measurement of such assets and liabilities. The measurement of royalty recoveries remains provisional, because there may have been underreported royalty recoveries owed to iBiquity prior to the close of the acquisition, and the Company has not yet obtained the necessary information to determine such amounts. The Company is also waiting on information necessary to determine the fair value of certain rebate accruals and related indemnification assets. The measurement of legal contingencies has not yet been finalized because the Company has not yet received the information necessary to determine the fair value of any such contingencies. The measurement of acquired deferred income taxes has not been finalized as the Company is currently in the process of obtaining the necessary information to complete the analysis related to acquired net operating loss carryforwards. In addition, the Company is waiting on information related to certain pre-acquisition income tax filing positions of iBiquity that will assist the Company in finalizing the amounts to record for the acquired deferred income taxes. The Company is also waiting on information to assist the Company in finalizing the recording of any assumed uncertain income tax positions. 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.
Unless otherwise stated, the Companys financial results for 2015 include iBiquity from October 1, 2015 through December 31, 2015. $9,950 of cash collected during the fourth quarter of 2015 was from licensing agreements earned by iBiquity during the third quarter of 2015. The related customer reporting did not occur until the fourth quarter of 2015 for these amounts. Under normal circumstances, the Company would recognize these revenues when reported, which would have resulted in the recording of $9,950 of additional revenues during the fourth quarter of 2015 under the Companys revenue recognition policy discussed in Note 2, Significant Accounting Policies. However, due to the application of the acquisition method of accounting, the Company recorded a receivable of $9,950 in the iBiquity opening balance sheet since the revenues were earned prior to October 1, 2015 and represent an acquired asset. Revenues recognized from licensing agreements acquired from iBiquity amounted to $4,602 for the year ended December 31, 2015. Loss before income taxes of iBiquity included in the consolidated statement of operations for the year ended December 31, 2015 was $8,836.
Transaction costs to consummate the Merger, which primarily included adviser and legal fees, were $3,192. Additionally, the Company incurred other acquisition and integration costs, which included certain employee compensation and related costs, professional service fees and other administrative costs. In total, acquisition and integration costs, including transaction costs to consummate the Merger, included in the Companys consolidated statement of operations were:
For the Year Ended December 31, 2015 |
||||
Selling, general and administrative |
$ | 8,556 | ||
Research and development |
2,487 | |||
|
|
|||
Total acquisition and integration related costs |
$ | 11,043 | ||
|
|
23
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 6Business Combinations (Continued)
In connection with the Merger, the Company evaluated the potential synergies of the combined entity and implemented a restructuring plan (see Note 10, Commitments and Contingencies).
The pro forma financial information as presented below is for informational purposes only and is based on estimates and assumptions that have been made solely for purposes of developing such pro forma information. This is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of 2014, nor is it necessarily indicative of future results. The following table presents the pro forma operating results as if iBiquity had been included in the Companys consolidated statements of operations as of January 1, 2014:
For the Years Ended December 31, | ||||||||
2015 | 2014 | |||||||
Revenue |
$ | 185,371 | $ | 181,883 | ||||
Net income (loss) |
$ | (5,118 | ) | $ | 21,231 | |||
Net income (loss) per common share - basic |
$ | (0.29 | ) | $ | 1.24 | |||
Net income (loss) per common share - diluted |
$ | (0.29 | ) | $ | 1.21 |
The pro forma financial information assumes the companies were combined as of January 1, 2014 and includes the impact of purchase accounting and other material nonrecurring items directly attributable to the acquisition, which include the following: adjustments to reflect the impact of revenues earned prior to the acquisition date; adjustments to revenue resulting from the adjustment of the acquired deferred revenue balance to fair value as part of purchase accounting; amortization expense from acquired intangible assets; interest expense for the new debt obtained to help finance the acquisition; amortization of additional debt issuance costs; stock-based compensation expense associated with stock awards granted to new employees from iBiquity; transaction costs; and the related tax impact of the above adjustments estimated using a statutory tax rate of 35%.
Note 7Goodwill and Other Intangibles
During the years ended December 31, 2015 and 2014, the Company did not identify any events or changes in circumstances that indicated the carrying value of its intangibles may not be recoverable. As such, there was no impairment of intangibles for the years ended December 31, 2015 and 2014. In the fourth quarter of 2015 and 2014, the Company performed its annual assessment of goodwill impairment as of October 31, 2015 and 2014. The Company performed a qualitative assessment (Step 0) to determine whether further impairment testing was necessary using the qualitative factors as discussed in Note 2, Significant Accounting Policies. Based on these assessments, no goodwill impairment was identified for the years ended December 31, 2015 and 2014.
During the year ended December 31, 2013, the Company performed an interim impairment test of goodwill and certain intangibles associated with the Phorus reporting unit as a result of revised forecasts and lower than expected results. For the definite-lived intangibles, the Company first performed an undiscounted cash flow analysis which indicated the definite-lived intangible assets were not fully recoverable, and then used a discounted cash flow method to estimate the fair value, resulting in an impairment charge for the amount that the carrying amount of the definite-lived intangible assets exceeded the fair value. For the indefinite-lived intangibles, the Company used a discounted cash flow method to estimate the fair value of the assets and recognized an impairment charge for the amount that the carrying amount of the assets exceeded the fair value. As a result, the Company recorded an impairment charge of $2,820 in the consolidated statement of operations. For goodwill, due to the negative carrying value of the Phorus reporting unit, the Company performed a qualitative assessment and determined that it
24
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 7Goodwill and Other Intangibles (Continued)
was more likely than not that a goodwill impairment existed. As such, the Company proceeded to Step 2 of the goodwill impairment test, and estimated the fair value of the reporting unit using both income and market approaches, including a discounted cash flow method. The Company determined that the fair value of goodwill associated with the Phorus reporting unit substantially exceeded the carrying value. As such, no goodwill impairment was recognized for the year ended December 31, 2013.
The changes in the Companys goodwill were:
Goodwill | ||||
Balance at December 31, 2013 |
$ | 48,418 | ||
Increase related to business acquisitions |
1,938 | |||
|
|
|||
Balance at December 31, 2014 |
$ | 50,356 | ||
Increase related to business acquisitions |
58,370 | |||
|
|
|||
Balance at December 31, 2015 |
$ | 108,726 | ||
|
|
To date, there has been no impairment of goodwill.
The Companys other intangible assets were:
As of December 31, 2015 | As of December 31, 2014 | |||||||||||||||||||||||||||
Weighted Average Life (Years) |
Gross Amount(1) |
Accumulated Amortization |
Net Carrying Amount |
Gross Amount(1) |
Accumulated Amortization |
Net Carrying Amount |
||||||||||||||||||||||
Customer relationships |
9 | $ | 116,026 | $ | (22,039 | ) | $ | 93,987 | $ | 45,801 | $ | (14,525 | ) | $ | 31,276 | |||||||||||||
Acquired technology |
9 | 52,073 | (14,071 | ) | 38,002 | 18,483 | (10,575 | ) | 7,908 | |||||||||||||||||||
Tradenames |
9 | 12,851 | (2,452 | ) | 10,399 | 3,261 | (1,581 | ) | 1,680 | |||||||||||||||||||
Contractual Rights |
5 | 7,713 | (2,527 | ) | 5,186 | 6,288 | (1,299 | ) | 4,989 | |||||||||||||||||||
Patents |
5 | 3,805 | (1,538 | ) | 2,267 | 3,405 | (1,233 | ) | 2,172 | |||||||||||||||||||
Trademarks |
10 | 894 | (417 | ) | 477 | 785 | (357 | ) | 428 | |||||||||||||||||||
Non-compete |
2 | 492 | (457 | ) | 35 | 492 | (402 | ) | 90 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total amortizable intangible assets |
193,854 | (43,501 | ) | 150,353 | 78,515 | (29,972 | ) | 48,543 | ||||||||||||||||||||
IPR&D |
7,583 | | 7,583 | | | | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total intangible assets |
$ | 201,437 | $ | (43,501 | ) | $ | 157,936 | $ | 78,515 | $ | (29,972 | ) | $ | 48,543 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Includes write-downs of $2,304 for acquired technology, $156 for non-compete, and $360 for IPR&D, which are reflected within operating expenses in the consolidated statement of operations for the year ended December 31, 2013. |
25
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 7Goodwill and Other Intangibles (Continued)
Amortization of intangibles included in the consolidated statements of operations was:
For the Years Ended December 31, |
||||||||||||
2015 | 2014 | 2013 | ||||||||||
Cost of revenue |
$ | 12,245 | $ | 8,793 | $ | 8,848 | ||||||
Operating expenses |
1,316 | 1,024 | 1,001 | |||||||||
|
|
|
|
|
|
|||||||
Total amortization of intangible assets |
$ | 13,561 | $ | 9,817 | $ | 9,849 | ||||||
|
|
|
|
|
|
The Company expects the future amortization of amortizable intangible assets held at December 31, 2015, excluding IPR&D, to be:
Years Ending December 31, |
Estimated Amortization Expense |
|||
2016 |
$ | 22,060 | ||
2017 |
21,526 | |||
2018 |
19,578 | |||
2019 |
18,298 | |||
2020 |
14,936 | |||
2021 and thereafter |
53,955 | |||
|
|
|||
Total |
$ | 150,353 | ||
|
|
Note 8Accrued Expenses
Accrued expenses consisted of:
As of December 31, | ||||||||
2015 | 2014 | |||||||
Accrued payroll and related benefits |
$ | 17,998 | $ | 13,893 | ||||
Contingent consideration |
480 | 900 | ||||||
Other |
4,482 | 1,968 | ||||||
|
|
|
|
|||||
Total accrued expenses |
$ | 22,960 | $ | 16,761 | ||||
|
|
|
|
Note 9Long-term Debt
On October 1, 2015, in connection with the consummation of the Merger, the Company entered into a credit agreement (the Credit Agreement), by and among the Company, Wells Fargo Bank, National Association (Wells Fargo), Wells Fargo Securities, LLC, and other lenders referred to therein (collectively, the Lenders). The Credit Agreement provides the Company with (i) a $50,000 revolving line of credit (the Revolver), with a $2,500 sublimit for the issuance of standby and commercial letters of credit and a $10,000 sublimit for swingline loans; and (ii) a $125,000 secured term loan (the Term Loan). Subject to certain conditions set forth in the Credit Agreement, the Company may request additional term loans and/or increases to the Revolver in an aggregate principal amount up to $50,000.
26
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 9Long-term Debt (Continued)
In connection with the closing of the Credit Agreement, the Company borrowed $125,000 under the Term Loan and $35,000 under the Revolver. The proceeds of the Term Loan and Revolver were used on October 1, 2015, together with cash and cash equivalents, to (i) finance the Merger and (ii) repay the $25,000 of debt outstanding under the previous credit agreement with Wells Fargo, entered into on September 29, 2014. The Credit Agreement will also be used to finance ongoing working capital requirements and other general corporate purposes.
Amounts borrowed under the Credit Agreement will bear interest, at the option of the Company, at either (i) LIBOR plus an applicable margin ranging from 1.50% to 2.25% (the LIBOR Option); or (ii) the highest of (a) the Federal Funds Rate plus 0.5%, (b) the prime commercial lending rate publicly announced by Wells Fargo or (c) the daily LIBOR for a one month interest period plus 1%, plus an applicable margin ranging from 0.50% to 1.25% (the Base Rate Option). Pursuant to the Credit Agreement, the Company is required to pay a quarterly commitment fee on the unused portion of the Revolver ranging from 0.25% to 0.45%. This commitment fee and applicable margin used for the interest rates under the LIBOR Option and Base Rate Option are calculated based on the level of the Companys consolidated total leverage ratio, as defined in the Credit Agreement. Interest expense, including amortization of debt issuance costs, was $2,091, $349 and $363 for the years ended December 31, 2015, 2014 and 2013, respectively.
The Company ability to borrow amounts under the Credit Agreement is conditioned upon its compliance with specified covenants, including certain reporting covenants and financial covenants that require the Company to maintain for each consecutive four fiscal quarter period (i) a maximum consolidated total leverage ratio ranging from 2.75 to 3.25 and (ii) a minimum consolidated fixed charge coverage ratio ranging from 1.25 to 1.50, both of which are defined in the Credit Agreement. In addition, the Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among others, restrictions on the Companys ability to dispose of certain assets, enter into mergers, acquisitions or other business combination transactions, incur additional indebtedness, grant liens and make certain other restricted payments. The Credit Agreement allows the Company to pay dividends on its stock provided that after giving effect to any such dividend, the Company is in compliance with the financial covenants set forth in the Credit Agreement, maintains certain leverage ratios provided in the Credit Agreement, maintains cash and cash equivalents of not less than $30,000 and has not undergone an event of default.
The Credit Agreement contains customary events of default. All advances under the Revolver will become due and payable on October 1, 2020 or earlier in the event of a default. $5,469 of the principal amount of the Term Loan will be due and payable in quarterly installments starting on March 31, 2016, with the remaining balance due and payable on October 1, 2020. Upon the occurrence and during the continuance of an event of default, the Lenders may declare all outstanding amounts under the Revolver and the Term Loan immediately due and payable, and may terminate commitments to make any additional advances thereunder.
In connection with the Credit Agreement, the Company and certain of its US subsidiaries entered into a collateral agreement dated as of October 1, 2015 with Wells Fargo as administrative agent for the Lenders pursuant to which the Company and certain of its US subsidiaries granted the Lenders a first priority perfected security interest in (i) 100% of the equity interests of certain current and future domestic subsidiaries, (ii) up to 65% of the voting equity interests and 100% of the non-voting equity interests of certain current and future foreign subsidiaries, (iii) all their respective current and later acquired tangible and intangible assets, and (iv) all products, profits and proceeds of the foregoing.
27
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 10Commitments and Contingencies
In connection with the acquisition of iBiquity, the Company evaluated the potential synergies of the combined entity and implemented a restructuring plan in the fourth quarter of 2015. As a result, the Company recorded severance and related costs of $5,524 relating to approximately 70 employees, of which $4,392 and $1,132 were included in selling, general and administrative and research and development expenses, respectively, in the consolidated statement of operations for the year ended December 31, 2015. As of December 31, 2015, $5,517 of severance and related costs were accrued on the consolidated balance sheet. The unpaid amounts are expected to be paid during 2016.
Office facilities and certain office equipment are leased under operating leases expiring in various years through 2029. Some leases contain renewal options and escalation clauses including increases in annual rents based upon increases in the consumer price index. Minimum future rental payments under non-cancelable operating leases are as follows:
Years Ending December 31, |
||||
2016 |
$ | 3,662 | ||
2017 |
2,988 | |||
2018 |
2,428 | |||
2019 |
2,091 | |||
2020 |
1,956 | |||
2021 and thereafter |
2,063 | |||
|
|
|||
$ | 15,188 | |||
|
|
Rent expense amounted to $2,932, $2,388, and $2,270 for the years ended December 31, 2015, 2014 and 2013, respectively.
As of December 31, 2015, the Company has accrued $400 of payments due under certain contractual rights arrangements. Additionally, under existing contractual rights arrangements, the Company may be obligated to pay up to approximately $8,100 over an estimated period of five years if certain milestones are achieved.
During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. Those indemnities include intellectual property indemnities to the Companys customers in connection with the sale of its products and the licensing of its technology, indemnities for liabilities associated with the infringement of other parties technology based upon the Companys products and technology, and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. 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. To date, the Company has not been required to make any payments and has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable.
In the normal course of business, the Company is subject to certain claims and litigation, including unasserted claims. The Company is of the opinion that, based on information presently available, the outcome of any such legal matters will not have a material adverse effect on the Companys consolidated financial statements.
28
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 11Income Taxes
US and foreign income (loss) before income taxes and details of the benefit for income taxes were:
For the Years Ended December 31, |
||||||||||||
2015 | 2014 | 2013 | ||||||||||
US |
$ | (12,358 | ) | $ | 6,032 | $ | (18,019 | ) | ||||
Foreign |
(1,606 | ) | 10,105 | 25,140 | ||||||||
|
|
|
|
|
|
|||||||
Income (loss) before income taxes |
$ | (13,964 | ) | $ | 16,137 | $ | 7,121 | |||||
|
|
|
|
|
|
|||||||
Current: |
||||||||||||
Federal |
$ | (4,995 | ) | $ | 498 | $ | (1,135 | ) | ||||
State |
(1,326 | ) | (918 | ) | 19 | |||||||
Foreign |
3,370 | 4,154 | 7,331 | |||||||||
|
|
|
|
|
|
|||||||
Total current |
(2,951 | ) | 3,734 | 6,215 | ||||||||
|
|
|
|
|
|
|||||||
Deferred: |
||||||||||||
Federal |
2,262 | (15,127 | ) | (13,301 | ) | |||||||
State |
452 | 568 | (1,133 | ) | ||||||||
Foreign |
(1,426 | ) | (181 | ) | (415 | ) | ||||||
|
|
|
|
|
|
|||||||
Total deferred |
1,288 | (14,740 | ) | (14,849 | ) | |||||||
|
|
|
|
|
|
|||||||
Benefit for income taxes |
$ | (1,663 | ) | $ | (11,006 | ) | $ | (8,634 | ) | |||
|
|
|
|
|
|
29
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 11Income Taxes (Continued)
The components of temporary differences that gave rise to deferred income taxes were:
As of December 31, | ||||||||
2015 | 2014 | |||||||
Deferred tax assets: |
||||||||
Accrued revenues |
$ | 6,000 | $ | 7,899 | ||||
Net operating loss carryforwards, net of unrecognized tax benefits |
18,825 | 559 | ||||||
Credit carryforwards, net of unrecognized tax benefits |
12,567 | 14,418 | ||||||
Depreciation and amortization |
1,748 | 933 | ||||||
Stock-based compensation |
10,509 | 8,893 | ||||||
Accruals, reserves and other |
6,422 | 2,084 | ||||||
Capitalized R&D |
6,057 | | ||||||
Acquired intangibles |
| 17,424 | ||||||
|
|
|
|
|||||
Total gross deferred tax assets |
62,128 | 52,210 | ||||||
Valuation allowance |
| (494 | ) | |||||
|
|
|
|
|||||
Total deferred tax assets |
62,128 | 51,716 | ||||||
|
|
|
|
|||||
Deferred tax liabilities: |
||||||||
Acquired intangibles |
38,110 | 13,410 | ||||||
Prepaid expenses |
| 35 | ||||||
|
|
|
|
|||||
Total deferred tax liabilities |
38,110 | 13,445 | ||||||
|
|
|
|
|||||
Deferred tax assets, net |
$ | 24,018 | $ | 38,271 | ||||
|
|
|
|
|||||
Current deferred tax assets, net |
$ | | $ | 12,095 | ||||
Non-current deferred tax assets, net |
24,018 | 26,176 | ||||||
|
|
|
|
|||||
Deferred tax assets, net |
$ | 24,018 | $ | 38,271 | ||||
|
|
|
|
The Company regularly evaluates the need for a valuation allowance against its deferred tax assets. As of December 31, 2015, the Company believed it was more likely than not that its future taxable income will be sufficient to realize all of its deferred tax assets.
As of December 31, 2015, the Company had approximately $57,078 in US federal net operating loss carryforwards (federal NOLs) and $76,027 in state net operating loss carryforwards (state NOLs), which begin to expire in 2029 and 2017, respectively. The federal and state NOLs each include $53,300 acquired from iBiquity (the iBiquity NOLs), which are subject to one or more limitations under section 382 of the Internal Revenue Code (IRC) of 1986, as amended (Section 382). In general, Section 382 may limit utilization of a loss companys tax attributes upon the occurrence of an ownership change within the meaning of Section 382.
In determining the iBiquity NOLs for which deferred tax assets were recorded, the Company estimated the consequences of the application of Section 382 to the Merger and prior iBiquity Section 382 ownership changes. As a result, the Company currently estimates that approximately $53,300 of the iBiquity federal and state NOLs are more likely than not to be realized and have recorded federal and state deferred tax assets for those amounts on a provisional basis. The iBiquity federal NOLs for which a deferred tax asset was recorded begin to expire in 2029. Although the Company projects future taxable income sufficient to realize the Companys NOLs, it is possible that some or all of these NOL carryforwards could ultimately expire unused. As discussed in Note 6, Business Combinations, the measurement of acquired deferred tax assets may change as the
30
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 11Income Taxes (Continued)
Company is in the process of obtaining the necessary information to complete the analysis related to the iBiquity acquired NOLs and is waiting on information to assist the Company in finalizing the recording of assumed uncertain tax positions. Finalization of the purchase price allocation for these items is expected to alter the iBiquity NOLs presented within the Companys deferred tax assets when completed.
As of December 31, 2015, the Company had federal foreign tax credit carryforwards of $11,813 and federal R&D and other tax credit carryforwards of $5,477, which both begin to expire in 2017. In addition, the Company had state R&D tax credit carryforwards of $3,628, which do not expire. Utilization of certain credit carryforwards are subject to an annual limitation under Section 382.
Included in these carryforwards are stock-based compensation deductions that, when fully utilized, reduce cash income taxes and will result in a financial statement income tax benefit of $2,703. The future income tax benefit, if realized, will be recorded to additional paid-in capital on the consolidated balance sheet. The Company follows the with-and-without approach for determining when the stock-based compensation deductions are considered realized.
The income tax benefit excludes the current year income tax deductions related to the issuance of common stock from the exercise of stock options for which no compensation expense was recorded for financial statement purposes or for which the income tax deduction exceeded the expense recorded in the financial statements.
31
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 11Income Taxes (Continued)
The benefit for income taxes differs from the amount obtained by applying the federal statutory income tax rate to income (loss) before income taxes as follows:
For the Years Ended December 31, |
||||||||||||
2015 | 2014 | 2013 | ||||||||||
Statutory federal rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State income taxes, net |
6.2 | (0.6 | ) | (5.5 | ) | |||||||
Effect of varying foreign rates |
(3.2 | ) | (15.5 | ) | (96.5 | ) | ||||||
Foreign withholding taxes |
(17.9 | ) | 20.9 | 78.8 | ||||||||
Non-deductible transaction costs |
(3.9 | ) | | | ||||||||
Unremitted earnings of foreign subsidiary |
| | (3.4 | ) | ||||||||
Foreign IP transfer to US |
| 147.4 | | |||||||||
Amortization of acquired foreign intangibles |
| (103.5 | ) | | ||||||||
Non-deductible meals and entertainment |
(0.5 | ) | 0.4 | 1.0 | ||||||||
Stock-based compensation expense |
(1.8 | ) | 5.1 | 7.0 | ||||||||
Foreign tax credits |
7.6 | (131.4 | ) | | ||||||||
Research and development credits |
4.1 | (4.5 | ) | (11.9 | ) | |||||||
Domestic production activities deduction |
| (2.5 | ) | | ||||||||
Unrecognized tax benefits |
(8.4 | ) | 6.6 | 8.0 | ||||||||
Tax audit settlements |
| (20.6 | ) | (11.6 | ) | |||||||
Deferred tax asset adjustment |
(1.7 | ) | (2.0 | ) | (12.0 | ) | ||||||
Prepaid income taxes |
(1.1 | ) | (4.2 | ) | | |||||||
Valuation allowance |
| | (111.2 | ) | ||||||||
Other |
(2.5 | ) | 1.2 | 1.1 | ||||||||
|
|
|
|
|
|
|||||||
Effective tax rate |
11.9 | % | (68.2 | )% | (121.2 | )% | ||||||
|
|
|
|
|
|
The effective tax rate for the year ended December 31, 2015 differed from the US statutory rate primarily due to non-creditable foreign withholding taxes, unrecognized tax benefits, non-deductible transaction costs and the effect of varying foreign tax rates, partially offset by foreign tax credits not utilized and federal and state research development tax credits.
The effective tax rate for the year ended December 31, 2014 differed from the US statutory rate largely due to the net tax benefit of $12,612 associated with a one-time transfer of certain Japan and Taiwan intellectual property licensing rights on January 1, 2014, which allowed the Company to utilize certain foreign taxes paid as credits in the US, and to amortize the Companys basis in the intellectual property over 15 years for tax purposes.
The effective tax rate for the year ended December 31, 2013 differed from the US statutory rate largely due to the release of the valuation allowance on US federal deferred tax assets. As a result of the US taxable income expected from the planned transfer of intellectual property rights on January 1, 2014, the Company concluded that it was more likely than not that the valuation allowance on US federal deferred tax assets was no longer necessary. Accordingly, the Company released all of the US federal valuation allowance against net US federal deferred tax assets resulting in a $7,919 increase in the benefit for income taxes for the year ended December 31, 2013.
32
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 11Income Taxes (Continued)
The Company has not provided for US income taxes or foreign withholding taxes in its effective tax rate on approximately $82,763 of undistributed earnings of foreign subsidiaries as of December 31, 2015. It is not practicable to calculate the unrecognized deferred tax liability on the unremitted earnings. The Company intends to reinvest these earnings indefinitely in operations outside of the US, and accordingly, no deferred tax liability has been established relative to these earnings.
As of December 31, 2015 and 2014, the Companys uncertain tax positions were $19,454 and $11,246, respectively, of which $9,112 and $9,194, respectively, were recorded in other long-term liabilities. The remaining amounts were recorded as a reduction to non-current deferred tax assets. These amounts include $24 and $136, respectively, for accrued interest. The increase in unrecognized tax benefits during the year ended December 31, 2015 was primarily attributable to uncertain tax positions relating to certain tax deductions related to the iBiquity acquisition recorded through purchase accounting and transfer pricing positions taken with respect to the Companys foreign subsidiaries. These unrecognized tax benefits would affect the Companys effective tax rate if recognized. The Company believes that it has adequately provided for all tax positions based on its assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter. However, due to inherent uncertainties in estimating accruals for uncertain tax positions, amounts asserted by tax authorities could be materially different than the amounts accrued by the Company. Accordingly, the Companys provision on federal, state and foreign tax-related matters may be impacted in the future as revised estimates are made or the underlying matters are settled or otherwise resolved. As of December 31, 2015, the Company does not believe that its estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.
The following is a reconciliation of the gross unrecognized tax benefits:
Unrecognized Tax Benefits |
||||
Balance at January 1, 2013 |
$ | 11,057 | ||
Additions for tax positions of prior years |
100 | |||
Additions for tax positions of the current year |
804 | |||
Settlements |
(2,135 | ) | ||
Lapse of applicable statutes |
(246 | ) | ||
|
|
|||
Balance at December 31, 2013 |
9,580 | |||
Additions for tax positions of prior years |
876 | |||
Additions for tax positions of the current year |
919 | |||
Lapse of applicable statutes |
(265 | ) | ||
|
|
|||
Balance at December 31, 2014 |
11,110 | |||
Additions for tax positions of prior years |
998 | |||
Additions for tax positions of the current year |
1,143 | |||
Additions for tax positions from current year acquisition |
6,783 | |||
Settlements |
(604 | ) | ||
|
|
|||
Balance at December 31, 2015 |
$ | 19,430 | ||
|
|
The Company may, from time to time, be assessed interest or penalties by any of its tax jurisdictions, although any such assessments historically have been minimal and immaterial to the Companys consolidated financial statements. The unrecognized tax benefits related to the current year acquisition are provisional, as the Company has not yet obtained all available information necessary to finalize the measurement of such liabilities.
33
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 11Income Taxes (Continued)
The Company, or one of its subsidiaries, files income tax returns in the US and other foreign jurisdictions. With few exceptions, the Company is no longer subject to US federal income tax examinations by the IRS for the years prior to 2012 or state examinations by the California Franchise Tax Board (FTB) for the years prior to 2011, including certain prior period carryforwards. Significant judgment is required in determining the consolidated provision for income taxes as the Company considers its worldwide taxable earnings and the impact of the audit process conducted by various tax authorities. The final outcome of tax audits by various foreign jurisdictions, the IRS, the FTB, and various state governments could differ materially from that recorded in the consolidated financial statements.
34
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 12Stock-Based Compensation
The Company measures and recognizes compensation expense on a straight-line basis over the requisite service period for all share-based payment awards made to employees and directors in the consolidated financial statements.
Stock-based compensation costs and related income tax benefits were:
For the Years Ended December 31, |
||||||||||||
2015 | 2014 | 2013 | ||||||||||
Stock-based compensation cost: |
||||||||||||
Selling, general and administrative |
$ | 9,112 | $ | 7,819 | $ | 8,872 | ||||||
Research and development |
3,154 | 2,673 | 2,855 | |||||||||
|
|
|
|
|
|
|||||||
Total stock-based compensation expense |
$ | 12,266 | $ | 10,492 | $ | 11,727 | ||||||
|
|
|
|
|
|
|||||||
Income tax benefit |
$ | 3,702 | $ | 3,070 | $ | 4,779 | ||||||
|
|
|
|
|
|
Stock Plans
In April 2003, the Company adopted the 2003 Equity Incentive Plan (the 2003 Plan) under which a total of 3,000 shares were authorized for future issuances of common stock. The 2003 Plan contained a provision for an automatic increase in the number of shares available for grant starting January 1, 2004 and each January thereafter until and including January 1, 2013, subject to certain limitations, by a number of shares equal to the lesser of: (i) four percent of the number of shares issued and outstanding on the immediately preceding December 31, (ii) 1,500 shares, or (iii) a number of shares set by the Board of Directors.
In May 2012, the Company adopted the 2012 Equity Incentive Plan (the 2012 Plan). The shares available for issuances of common stock under the 2003 Plan were transferred to the 2012 Plan for future issuances of common stock. The total number of shares of common stock that may be issued under the 2012 Plan amounted to a maximum of 1,500. In May 2015, the Companys stockholders approved an increase to the number of common stock that may be issued under this plan by 1,000 shares.
In July 2012, the Company acquired SRS 2006 Stock Incentive Plan (the 2006 Plan) under which 234 shares were authorized for future issuances of common stock to: (i) former employees of SRS, and (ii) employees hired by the Company after the acquisition date, July 20, 2012. At the acquisition date, all outstanding equity awards under the 2006 Plan were tendered for cash.
In August 2014, the Companys Board of Directors adopted the DTS, Inc. 2014 New Employee Incentive Plan (the 2014 Plan) without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules. The total number of common stock that may be issued under the 2014 Plan is 300.
Options granted under all the plans may be non-qualified options. Furthermore, options granted under all the plans other than the 2014 Plan may be incentive stock options intended to satisfy the requirements of Section 422 of the IRC and the regulations thereunder. Options generally become exercisable over a four-year period and expire in 10 years. Restricted stock units granted under the plans generally vest over a four-year period.
35
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 12Stock-Based Compensation (Continued)
Stock Options
The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average key assumptions:
Years Ended December 31, |
||||||||||||
2015 | 2014 | 2013 | ||||||||||
Risk free interest rate |
1.3 | % | 1.1 | % | 0.7 | % | ||||||
Expected lives (years) |
3.8 | 4.3 | 4.2 | |||||||||
Dividend yield |
| % | | % | | % | ||||||
Expected volatility |
43 | % | 43 | % | 44 | % |
The risk-free interest rate was the average interest rate of US government bonds of comparable term to the options on the dates of the grants. The expected life of the options granted was derived from the historical activity of the Companys options and represented the period of time that options granted were expected to be outstanding. The dividend yield was not calculated because the Company does not currently expect to pay a dividend. The expected volatility was based on the historical volatility of the Companys common stock.
The following summarizes stock option activity:
Number of Options |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Life (Years) |
Aggregate Intrinsic Value |
|||||||||||||
Options outstanding at December 31, 2014 |
3,313 | $ | 24.33 | |||||||||||||
Granted |
9 | 28.50 | ||||||||||||||
Exercised |
(413 | ) | 20.64 | |||||||||||||
Forfeited |
(24 | ) | 21.95 | |||||||||||||
Expired |
(28 | ) | 38.57 | |||||||||||||
|
|
|||||||||||||||
Options outstanding at December 31, 2015 |
2,857 | $ | 24.75 | 5.5 | $ | 4,701 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Options exercisable at December 31, 2015 |
2,038 | $ | 25.76 | 4.7 | $ | 3,238 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Options vested and expected to vest at December 31, 2015 |
2,849 | $ | 24.76 | 5.5 | $ | 4,682 | ||||||||||
|
|
|
|
|
|
|
|
There were 9, 439, and 724 options granted during the years ended December 31, 2015, 2014 and 2013, respectively. The weighted-average grant-date fair value of options granted during the years ended December 31, 2015, 2014 and 2013 was $9.86, $7.66, and $7.24, respectively. The aggregate intrinsic value of options exercised during the years ended December 31, 2015, 2014 and 2013 was $5,613, $1,438, and $152, respectively.
Compensation expense for stock options was $4,195, $5,040, and $5,507 for the years ended December 31, 2015, 2014 and 2013, respectively. As of December 31, 2015, total remaining unrecognized compensation expense related to unvested stock options was approximately $3,489, which will be amortized over the weighted-average remaining service period of 1.3 years.
36
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 12Stock-Based Compensation (Continued)
Restricted Stock
The following summarizes restricted stock activity:
Number of Shares |
Weighted- Average Grant-Date Fair Value |
|||||||
Unvested stock at December 31, 2014 |
488 | $ | 22.27 | |||||
Granted |
545 | 27.48 | ||||||
Vested |
(166 | ) | 23.89 | |||||
Forfeited |
(30 | ) | 21.38 | |||||
|
|
|||||||
Unvested stock at December 31, 2015 |
837 | $ | 25.42 | |||||
|
|
|
|
The weighted-average grant-date fair value of restricted stock granted during the years ended December 31, 2015, 2014 and 2013 was $27.48, $20.54 and $19.95, respectively.
Compensation expense on restricted stock units was $6,501, $3,902, and $3,529 for the years ended December 31, 2015, 2014 and 2013, respectively. As of December 31, 2015, total remaining unrecognized compensation expense related to restricted stock was $16,791, which will be amortized over the weighted-average remaining service period of 2.0 years.
Market Stock Units
On February 27, 2011, the Compensation Committee of the Board of Directors (the Committee) of the Company approved market stock unit agreements (MSU Agreements) for the grant of certain performance-based equity awards under the Companys 2003 Plan. Pursuant to the MSU Agreements, units payable in shares of common stock would vest based on the attainment of certain performance criteria regarding both the Companys total shareholder return and the performance of the Company as measured against the performance of the Nasdaq Composite Total Return Index over a 3-year performance period from January 1, 2011 to December 31, 2013. The Company granted 199 units on February 27, 2011, which had an aggregate grant-date fair value of $5,287, which was measured on the date of grant using the Monte Carlo simulation model. The aggregate grant-date fair value for these awards was recognized as compensation expense on a straight-line basis over the requisite service period, which began on the date of grant and ended on December 31, 2013. Compensation expense on shares of market stock units was $1,820 for the year ended December 31, 2013. As of December 31, 2013, the performance criteria were not met and the units expired.
Performance-Based Restricted Stock Units (PSUs)
On March 13, 2014, the Committee granted 134 PSUs to certain employees under the 2012 Plan (the 2014 PSUs). On February 11, 2015, the Committee approved grants of 99 PSUs under the 2012 Plan (the 2015 PSUs). The PSUs will vest in two equal installments upon achievement of certain internal performance goals, with one-half vesting two years from the date of grant and the remaining vesting three years from the date of grant, in each case assuming the specified performance goals are achieved and the service conditions are met. The performance goals for the 2014 PSUs and 2015 PSUs are based on performance during the two-year periods ending December 31, 2015 and 2016, respectively. Each PSU represents the contingent right to receive between zero and two shares of the Companys common stock upon vesting, subject to the level of achievement of the specified performance goals. Any portion of the PSUs that do not vest due to performance below the minimum required level for vesting will be forfeited. No PSUs vested or were forfeited in 2015.
37
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 12Stock-Based Compensation (Continued)
The grant-date fair value of 2015 PSUs and 2014 PSUs was $27.68 and $20.37, respectively. The related compensation expense is calculated using the number of shares of common stock expected to vest based on the probability and estimated level of achievement of the performance goals. Compensation expense is recognized over the requisite service period, and is adjusted in subsequent reporting periods if the assessed probability or estimated level of achievement of the performance goals changes.
For the years ended December 31, 2015 and 2014, compensation expense for PSUs was $632 and $578, respectively. As of December 31, 2015, total remaining unrecognized compensation expense related to PSUs was estimated to be $1,404, which will be amortized over the weighted-average remaining service period of 1.6 years.
Considerable judgment is required in assessing the probability and estimated level of achievement of the performance goals. Accordingly, use of different assumptions or estimates could result in materially different compensation expense.
Employee Stock Purchase Plan
On April 17, 2003, the Company adopted the 2003 Employee Stock Purchase Plan and the 2003 Foreign Subsidiary Employee Stock Purchase Plan, under which, subject to certain limitations, the initial aggregate number of shares of stock that may be issued is 500, with a provision that provides for an automatic increase in the number of shares available for issuance on January 1, 2004 and each January 1 thereafter until and including January 1, 2013 by the lesser of: (i) 500 shares, (ii) one percent of the number of shares of all classes of common stock of the Company outstanding on that date, or (iii) a lesser amount determined by the Board of Directors.
On November 13, 2012, the Company adopted the 2013 Employee Stock Purchase Plan and the 2013 Foreign Subsidiary Employee Stock Purchase Plan (collectively, the ESPP). Both plans were approved by the stockholders of the Company at the annual meeting on June 6, 2013. Subject to certain limitations, the aggregate number of shares of stock that may be issued under both plans is 750. Under the ESPP, each eligible employee may authorize payroll deductions of up to 15% of their compensation to purchase shares of the Companys common stock on two purchase dates during the second and fourth quarter of each year. Each offering period has a 24-month duration with purchase periods of six month intervals. The purchase price per share for the common stock is equal to 85% of the lower of the closing market price per share of the Companys common stock on (i) the participants entry date into the two-year offering period, or (ii) the end of each six-month purchase period within the offering period. The ESPP has a two-year look-back feature, whereby the offering period resets if the fair value of the Companys common stock on the first day of any purchase period is less than that on the original offering date. Each eligible employees purchases are subject to a maximum of $25 in fair market value in any calendar year or 2.5 shares on any single purchase date.
38
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 12Stock-Based Compensation (Continued)
The fair values for the ESPP were estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
For the Years Ended December 31, |
||||||||||||
2015 | 2014 | 2013 | ||||||||||
Risk free interest rate |
0.3 | % | 0.1 | % | 0.2 | % | ||||||
Expected lives (years) |
0.8 | 1.2 | 1.2 | |||||||||
Dividend yield |
| % | | % | | % | ||||||
Expected volatility |
40 | % | 39 | % | 52 | % |
The risk-free interest rate was the average interest rate of US government bonds of comparable term to the expected life. The expected life represents the estimated length of each offering period. The dividend yield was not calculated because the Company does not currently expect to pay a dividend. The expected volatility was based on the historical volatility of the Companys common stock.
Compensation expense under the ESPP was $938, $972, and $871 for the years ended December 31, 2015, 2014 and 2013, respectively.
39
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 13Defined Contribution Plan
The Company has savings and investment plans, including a savings plan that qualifies as a defined contribution plan under Section 401(k) of the IRC. The Company allows eligible employees to allocate up to 100% of the participants eligible compensation through payroll deductions. All regular, full time US employees are eligible to participate in the plan. The Company provides a discretionary match of up to 100% of the first 4% of salary contributed to the plan and may match up to 6% of salary if certain financial targets are met. In 2010, the Company adopted a Roth 401(k) option. For the years ended December 31, 2015, 2014 and 2013, the costs of the Companys matching contributions were $1,492, $1,100, and $859, respectively.
Note 14Common Stock Repurchases
In February 2014, the Companys Board of Directors authorized, subject to certain business and market conditions, the purchase of up to 2,000 shares of the Companys common stock in the open market or in privately negotiated transactions. As of December 31, 2015, the Company had repurchased 974 shares of common stock under this authorization for an aggregate of $26,642. All shares repurchased under this authorization were accounted for as treasury stock.
Note 15Segment and Geographic Information
The Company operates as a single reportable segment on an enterprise-wide basis. The Company primarily generates revenue by licensing its technologies to consumer electronics manufacturers.
Revenue by geographical area, based on the customers country of domicile, was:
For the Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
US |
$ | 26,941 | $ | 21,227 | $ | 12,998 | ||||||
Japan |
45,334 | 57,156 | 42,256 | |||||||||
South Korea |
30,700 | 33,952 | 45,051 | |||||||||
China |
18,423 | 16,126 | 12,690 | |||||||||
Other international |
16,811 | 15,452 | 12,153 | |||||||||
|
|
|
|
|
|
|||||||
Total international |
111,268 | 122,686 | 112,150 | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
$ | 138,209 | $ | 143,913 | $ | 125,148 | ||||||
|
|
|
|
|
|
Long-lived tangible assets, net of accumulated depreciation, by geographic region were:
As of December 31, | ||||||||
2015 | 2014 | |||||||
US |
$ | 27,408 | $ | 25,494 | ||||
International |
1,614 | 1,595 | ||||||
|
|
|
|
|||||
Total long-lived tangible assets, net |
$ | 29,022 | $ | 27,089 | ||||
|
|
|
|
40
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 16Net Income (Loss) Per 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 any outstanding stock options, unvested restricted stock, any unvested PSUs for which the performance conditions have been satisfied at the reporting date, and ESPP using the treasury stock method. Due to the net loss for the year ended December 31, 2015, all potential common shares are excluded from the diluted shares outstanding for that period.
The computation of basic and diluted net income (loss) per share was:
For the Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
Numerator: |
||||||||||||
Net income (loss) |
$ | (12,301 | ) | $ | 27,143 | $ | 15,755 | |||||
|
|
|
|
|
|
|||||||
Denominator: |
||||||||||||
Weighted average shares outstanding |
17,396 | 17,180 | 18,097 | |||||||||
Effect of dilutive securities: |
||||||||||||
Stock options |
| 267 | 153 | |||||||||
Restricted stock |
| 95 | 67 | |||||||||
ESPP |
| 19 | 17 | |||||||||
|
|
|
|
|
|
|||||||
Diluted shares outstanding |
17,396 | 17,561 | 18,334 | |||||||||
|
|
|
|
|
|
|||||||
Basic net income (loss) per common share |
$ | (0.71 | ) | $ | 1.58 | $ | 0.87 | |||||
|
|
|
|
|
|
|||||||
Diluted net income (loss) per common share |
$ | (0.71 | ) | $ | 1.55 | $ | 0.86 | |||||
|
|
|
|
|
|
|||||||
Anti-dilutive shares excluded from the determination of diluted net income (loss) per share |
3,840 | 2,331 | 3,163 | |||||||||
|
|
|
|
|
|
41
DTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except per share data)
Note 17Selected Quarterly Data (Unaudited)
For the Quarter Ended | ||||||||||||||||
Mar. 31, | June 30, | Sep. 30, | Dec. 31, | |||||||||||||
2015 |
||||||||||||||||
Revenue |
$ | 33,937 | $ | 34,426 | $ | 30,673 | $ | 39,173 | (1) | |||||||
Gross profit |
$ | 31,153 | $ | 31,683 | $ | 27,971 | $ | 32,325 | (1) | |||||||
Net income (loss) |
$ | 1,054 | $ | 2,287 | $ | (2,802 | )(2) | $ | (12,840 | )(2) | ||||||
Basic earnings (loss) per share |
$ | 0.06 | $ | 0.13 | $ | (0.16 | )(2) | $ | (0.74 | )(2) | ||||||
Diluted earnings (loss) per share |
$ | 0.06 | $ | 0.12 | $ | (0.16 | )(2) | $ | (0.74 | )(2) | ||||||
2014 |
||||||||||||||||
Revenue |
$ | 36,835 | $ | 36,189 | $ | 35,676 | $ | 35,213 | ||||||||
Gross profit |
$ | 34,504 | $ | 33,729 | $ | 32,374 | $ | 32,211 | ||||||||
Net income |
$ | 14,311 | (3) | $ | 7,015 | $ | 3,869 | $ | 1,948 | |||||||
Basic earnings per share |
$ | 0.83 | (3) | $ | 0.41 | $ | 0.23 | $ | 0.11 | |||||||
Diluted earnings per share |
$ | 0.81 | (3) | $ | 0.41 | $ | 0.22 | $ | 0.11 |
(1) | Includes $4,602 of revenue from licensing arrangements acquired from iBiquity, which represents only a partial quarter of revenue earned. For additional information, refer to Note 6, Business Combinations. |
(2) | Includes $5,255 and $11,312 in the third and fourth quarter of 2015, respectively, of costs incurred in connection with the iBiquity acquisition. For additional information, refer to Notes 6 and 10, Business Combinations and Commitments and Contingencies, respectively. |
(3) | Includes a net tax benefit of $12,246 associated with a one-time transfer of certain Japan and Taiwan intellectual property licensing rights to the US on January 1, 2014. |
42
DTS, INC.
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
For the Years Ended December 31, |
Balance at Beginning of Year |
Charged to Costs and Other |
Deductions From Reserves |
Balance at End of Year |
||||||||||||
Allowance for doubtful accounts (1): |
||||||||||||||||
2015 |
$ | 143 | $ | 563 | $ | 165 | $ | 541 | ||||||||
2014 |
$ | 1,388 | $ | 29 | $ | 1,274 | $ | 143 | ||||||||
2013 |
$ | 679 | $ | 709 | $ | | $ | 1,388 | ||||||||
Deferred tax assetsvaluation allowance (2): |
||||||||||||||||
2015 |
$ | 494 | $ | | $ | 494 | $ | | ||||||||
2014 |
$ | 579 | $ | | $ | 85 | $ | 494 | ||||||||
2013 |
$ | 8,702 | $ | | $ | 8,123 | $ | 579 |
(1) | The additions to the allowance for doubtful accounts represent the estimates of bad debt expense based upon the factors for which the Company evaluates the collectability of our accounts receivable, as well as recoveries of previously reserved receivables. Deductions are the actual write-offs of the receivables. |
(2) | The additions to and reductions in the deferred tax assetsvaluation allowance represent the portion of a deferred tax asset for which either: (i) it is more likely than not that a tax benefit will not be realized, or (ii) it is more likely than not a tax benefit will be realized. |
43
Exhibit 99.3
DTS, INC.
Unaudited Condensed Consolidated Financial Statements
September 30, 2016 and 2015
DTS, INC.
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets |
3 | |||
Condensed Consolidated Statements of Operations |
4 | |||
Condensed Consolidated Statements of Comprehensive Income (Loss) |
5 | |||
Condensed Consolidated Statements of Cash Flows |
6 | |||
Notes to Condensed Consolidated Financial Statements |
7 |
DTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except per share data)
As of September 30, 2016 |
As of December 31, 2015 |
|||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 26,686 | $ | 52,208 | ||||
Short-term investments |
13,083 | 9,657 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $245 and $541 at September 30, 2016 and December 31, 2015, respectively |
26,911 | 12,454 | ||||||
Prepaid expenses and other current assets |
7,832 | 5,855 | ||||||
Income taxes receivable |
2,276 | 4,130 | ||||||
|
|
|
|
|||||
Total current assets |
76,788 | 84,304 | ||||||
Property and equipment, net |
28,076 | 29,022 | ||||||
Intangible assets, net |
144,907 | 157,936 | ||||||
Goodwill |
90,692 | 108,726 | ||||||
Deferred income taxes |
41,866 | 24,018 | ||||||
Other long-term assets |
9,348 | 3,934 | ||||||
|
|
|
|
|||||
Total assets |
$ | 391,677 | $ | 407,940 | ||||
|
|
|
|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 6,792 | $ | 5,979 | ||||
Accrued expenses |
17,963 | 22,960 | ||||||
Deferred revenue |
3,096 | 5,711 | ||||||
Income taxes payable |
80 | 123 | ||||||
Current portion of long-term debt, net |
26,486 | 21,486 | ||||||
|
|
|
|
|||||
Total current liabilities |
54,417 | 56,259 | ||||||
Long-term debt, net |
100,552 | 136,666 | ||||||
Other long-term liabilities |
12,419 | 9,983 | ||||||
Commitments and contingencies (Note 9) |
||||||||
Stockholders equity: |
||||||||
Preferred stock$0.0001 par value, 5,000 shares authorized at September 30, 2016 and December 31, 2015; no shares issued and outstanding |
| | ||||||
Common stock$0.0001 par value, 70,000 shares authorized at September 30, 2016 and December 31, 2015; 22,501 and 21,988 shares issued at September 30, 2016 and December 31, 2015, respectively; 17,834 and 17,321 shares outstanding at September 30, 2016 and December 31, 2015, respectively |
3 | 3 | ||||||
Additional paid-in capital |
272,479 | 258,660 | ||||||
Treasury stock, at cost4,667 at September 30, 2016 and December 31, 2015 |
(111,331 | ) | (111,331 | ) | ||||
Accumulated other comprehensive income |
778 | 778 | ||||||
Retained earnings |
62,360 | 56,922 | ||||||
|
|
|
|
|||||
Total stockholders equity |
224,289 | 205,032 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 391,677 | $ | 407,940 | ||||
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
3
DTS, INC.
CONDENSED 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, |
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Revenue |
$ | 48,749 | $ | 30,673 | $ | 142,599 | $ | 99,036 | ||||||||
Cost of revenue |
6,449 | 2,702 | 18,751 | 8,229 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
42,300 | 27,971 | 123,848 | 90,807 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative |
26,283 | 21,348 | 71,563 | 59,317 | ||||||||||||
Research and development |
13,489 | 9,320 | 38,788 | 28,559 | ||||||||||||
Change in fair value of contingent consideration |
| (400 | ) | | (400 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
39,772 | 30,268 | 110,351 | 87,476 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income (loss) |
2,528 | (2,297 | ) | 13,497 | 3,331 | |||||||||||
Interest and other expense, net |
(1,234 | ) | (173 | ) | (3,633 | ) | (792 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
1,294 | (2,470 | ) | 9,864 | 2,539 | |||||||||||
Provision for income taxes |
724 | 332 | 4,072 | 2,000 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 570 | $ | (2,802 | ) | $ | 5,792 | $ | 539 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) per common share: |
||||||||||||||||
Basic |
$ | 0.03 | $ | (0.16 | ) | $ | 0.33 | $ | 0.03 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted |
$ | 0.03 | $ | (0.16 | ) | $ | 0.32 | $ | 0.03 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
17,701 | 17,255 | 17,560 | 17,431 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted |
18,637 | 17,255 | 18,126 | 18,167 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Cash dividend declared per common share |
$ | 0.02 | $ | | $ | 0.02 | $ | | ||||||||
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
4
DTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Amounts in thousands)
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net income (loss) |
$ | 570 | $ | (2,802 | ) | $ | 5,792 | $ | 539 | |||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Unrealized gains and losses on available-for-sale securities and other, net |
(4 | ) | 1 | | 3 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total comprehensive income (loss) |
$ | 566 | $ | (2,801 | ) | $ | 5,792 | $ | 542 | |||||||
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
DTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
For the Nine Months Ended September 30, |
||||||||
2016 | 2015 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 5,792 | $ | 539 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
20,103 | 10,838 | ||||||
Stock-based compensation charges |
9,581 | 8,678 | ||||||
Deferred income taxes |
(3,317 | ) | (5,310 | ) | ||||
Excess tax benefits from stock-based awards |
(486 | ) | (914 | ) | ||||
Change in fair value of contingent consideration |
| (400 | ) | |||||
Amortization of debt issuance costs |
460 | | ||||||
Other |
45 | 353 | ||||||
Changes in operating assets and liabilities, net of business combinations: |
||||||||
Accounts receivable |
(13,015 | ) | (669 | ) | ||||
Prepaid expenses and other assets |
(2,658 | ) | 881 | |||||
Accounts payable, accrued expenses and other liabilities |
(4,277 | ) | (1,884 | ) | ||||
Deferred revenue |
(2,615 | ) | (2,831 | ) | ||||
Income taxes receivable/payable |
4,790 | 4,758 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities |
$ | 14,403 | $ | 14,039 | ||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Purchases of available-for-sale investments |
(26,718 | ) | (34,666 | ) | ||||
Maturities of available-for-sale investments |
11,125 | 8,800 | ||||||
Sales of available-for-sale investments |
12,125 | 2,502 | ||||||
Cash paid for business combinations, net |
(2,404 | ) | | |||||
Purchases of property and equipment |
(2,530 | ) | (2,525 | ) | ||||
Purchases of intangible assets |
(2,429 | ) | (1,853 | ) | ||||
Other investing activities |
| (300 | ) | |||||
|
|
|
|
|||||
Net cash used in investing activities |
$ | (10,831 | ) | $ | (28,042 | ) | ||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Repayments of long-term borrowings |
(31,406 | ) | | |||||
Payment of contingent consideration |
(480 | ) | | |||||
Holdback and other payments related to business combinations |
(1,170 | ) | | |||||
Proceeds from the issuance of common stock under stock-based compensation plans |
6,138 | 7,962 | ||||||
Cash paid for shares withheld for taxes |
(2,308 | ) | (2,864 | ) | ||||
Dividend payments |
(354 | ) | | |||||
Excess tax benefits from stock-based awards |
486 | 914 | ||||||
Purchases of treasury stock |
| (19,147 | ) | |||||
|
|
|
|
|||||
Net cash used in financing activities |
$ | (29,094 | ) | $ | (13,135 | ) | ||
|
|
|
|
|||||
Net change in cash and cash equivalents |
(25,522 | ) | (27,138 | ) | ||||
Cash and cash equivalents, beginning of period |
52,208 | 99,435 | ||||||
|
|
|
|
|||||
Cash and cash equivalents, end of period |
$ | 26,686 | $ | 72,297 | ||||
|
|
|
|
|||||
Significant non-cash transactions: |
||||||||
Holdbacks for business combinations |
$ | 1,658 | $ | | ||||
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except per share data)
Note 1Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of DTS, Inc. (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair statement of the Companys financial position at September 30, 2016, and the results of operations and cash flows for the periods presented. All 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 year. The information included herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission on March 7, 2016.
The preparation of financial statements in conformity with US GAAP 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.
Pending Acquisition by Tessera Technologies, Inc.
On September 19, 2016, the Company entered into the Merger Agreement, which provides, upon the terms and subject to the conditions thereof, Merger Sub will merge with and into the Company, with the Company surviving the DTS Merger as a wholly owned subsidiary of Holdco. Following the completion of the DTS Merger, DTS common stock will cease to be listed on the Nasdaq Global Select Market.
At the effective time of the DTS Merger, each outstanding share of DTS common stock (other than shares that are held by Tessera or Holdco, or any of their respective subsidiaries or held by DTS as treasury stock, or that are owned by DTS, Merger Sub or any wholly owned subsidiary of DTS, and shares with respect to which appraisal rights pursuant to Section 262 of the Delaware General Corporation Law are properly exercised and not withdrawn) will be automatically converted into the right to receive $42.50 in cash, without interest and less any required tax withholding. The Special Meeting is scheduled to be held on December 1, 2016 to consider and vote upon, among other things, a proposal to adopt the Merger Agreement.
At the effective time of the DTS Merger, (i) each then outstanding, in-the-money, vested option to purchase shares of DTS common stock will be canceled, and the holder of such option will be entitled to receive cash as set forth in the Merger Agreement; (ii) each then outstanding, out-of-the-money, vested or unvested option and each then outstanding, in-the-money, unvested option to purchase shares of DTS common stock will be assumed by Holdco and converted into an option to purchase shares of Holdco common stock pursuant to the exchange ratio set forth in the Merger Agreement; (iii) each vested DTS restricted stock unit award will be canceled, and the holder of such restricted stock unit award will be entitled to receive cash as set forth in the Merger Agreement; (iv) each unvested DTS restricted stock unit award will be assumed by Holdco and converted into a Holdco restricted stock unit award pursuant to the exchange ratio set forth in the Merger Agreement; and (v) each then outstanding DTS performance-based restricted stock unit (PSU) award (treating for this purpose any performance-based vesting condition to which such PSU award is subject as of the effective time of the DTS Merger or was as of the date of the Merger Agreement as having been attained at the target level) will become fully vested and canceled, and the holder of such PSU award will be entitled to receive cash as set forth in the Merger Agreement.
7
DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)
Note 1Basis of Presentation (Continued)
The transaction is expected to close in December 2016. Consummation of the transaction remains subject to customary closing conditions, including, among other things, (i) adoption of the Merger Agreement by the Companys stockholders; (ii) the absence of any injunctions or any other legal order prohibiting or restraining the DTS Merger; (iii) subject to certain exceptions, the accuracy of the Companys and Tesseras representations and warranties in the Merger Agreement; (iv) performance by the Company and Tessera of their respective obligations, covenants and agreements contained in the Merger Agreement; and (v) the absence of any material adverse effect on the Company.
The Merger Agreement contains customary representations and warranties made by each of the Company and Tessera, and also contains customary pre-closing covenants, including covenants, among others, (i) for each of the parties to use its reasonable best efforts to cause the DTS Merger to be consummated; (ii) for the Company to operate its businesses in the ordinary course consistent with past practice and to refrain from taking certain actions without Tesseras consent; (iii) for the Company not to declare or pay any dividend (whether in cash, stock, property or otherwise) in respect of any shares of DTS common stock and (iv) for the Company not to solicit, initiate or knowingly take any action to facilitate or encourage any alternative acquisition proposal or proposal or inquiry that constitutes, or would reasonably be expected to lead to, an alternative acquisition proposal.
The Merger Agreement contains certain termination rights for each of the Company and Tessera, including in the event that (i) the DTS Merger is not consummated on or before February 28, 2017; (ii) the approval of the stockholders of the Company is not obtained at the Special Meeting; or (iii) the Company terminates the Merger Agreement to enter into a binding agreement providing for a superior proposal. The Merger Agreement further provides that, upon termination of the Merger Agreement under specified circumstances, including a termination of the Merger Agreement by the Company to enter into a binding agreement providing for a superior proposal, the Company must pay to Tessera a termination fee equal to $25,500 in cash.
The description of the Merger Agreement herein does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is attached as Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on September 20, 2016, and is hereby incorporated by reference. Additionally, the Proxy Statement filed by the Company on October 21, 2016 describes the Merger Agreement and the DTS Merger in more detail. Investors and stockholders of DTS are urged to read the Proxy Statement and any other relevant documents that have been or will be filed with the SEC carefully and in their entirety because they contain or will contain important information about the DTS Merger.
For both the three and nine months ended September 30, 2016, the Companys condensed consolidated statements of operations included $3,116 of operating expenses associated with the DTS Merger.
Acquisitions
In the third quarter of 2016, the Company completed two immaterial acquisitions related to the Companys HD Radio technology. Both purchases were accounted for using the acquisition method of accounting. The Company considers the allocations of the purchase price for both acquisitions to be immaterial to the condensed consolidated financial statements. The Companys financial results include these acquisitions from their dates of acquisition.
8
DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)
Note 2Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseded the then most current revenue recognition guidance, including industry-specific guidance. As updated in ASU 2015-14, for public entities, this ASU will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The FASB has further clarified Topic 606 by issuing ASU 2016-08 (principal versus agent considerations), ASU 2016-10 (identifying performance obligations and licensing), and ASU 2016-12 (narrow-scope improvements and practical expedients). Entities have the option of applying either a full retrospective approach or a modified approach to adopt the ASU. The Company is evaluating the impact of adoption of this ASU on its consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments. The ASU requires that adjustments to provisional amounts identified during the measurement period be recognized in the reporting period in which the adjustment amounts are determined. For public entities, the ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The ASU must be applied prospectively to adjustments to provisional amounts that occur after the effective date. The Company adopted this ASU in the first quarter of 2016. For information on measurement period adjustments relating to the acquisition of iBiquity Digital Corporation, refer to Note 5, Business Combination.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous US GAAP. For public entities, this ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, but entities may elect certain practical expedients when implementing the ASU. The Company is evaluating the impact of adoption of this ASU on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Based Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of accounting for stock-based compensation transactions, including income tax consequences and presentation on the statement of cash flows. For public business entities, this ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the impact of adoption of this ASU on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. This ASU requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements have not been issued. The Company is evaluating the impact of adoption of this ASU on its consolidated financial statements.
9
DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)
Note 3Cash, Cash Equivalents and Investments
Cash, cash equivalents and investments, classified as available-for-sale, consisted of:
As of September 30, 2016 |
As of December 31, 2015 |
|||||||
Cash and cash equivalents: |
||||||||
Cash |
$ | 13,765 | $ | 16,257 | ||||
Money market accounts |
10,923 | 35,951 | ||||||
Commercial paper |
1,998 | | ||||||
|
|
|
|
|||||
Total cash and cash equivalents |
$ | 26,686 | $ | 52,208 | ||||
|
|
|
|
|||||
Short-term investments: |
||||||||
Corporate bonds |
$ | 12,091 | $ | 9,657 | ||||
Commercial paper |
992 | | ||||||
|
|
|
|
|||||
Total short-term investments |
$ | 13,083 | $ | 9,657 | ||||
|
|
|
|
The Company had no material gross realized or unrealized holding gains or losses from its investments for the periods presented herein. The contractual maturities of investments as of September 30, 2016 were all due within one year.
10
DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)
Note 4Fair Value Measurements
The Companys investments are required to be measured and recorded at fair value on a recurring basis. The Company obtains 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 Companys 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 Companys 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 classifies its available-for-sale securities within Level 2 of the fair value hierarchy.
The Companys financial assets and liabilities, measured at fair value on a recurring basis, were:
Fair Value Measurements | ||||||||||||||||
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, 2016 |
||||||||||||||||
Corporate bonds |
$ | 12,091 | $ | | $ | 12,091 | $ | | ||||||||
Commercial paper |
$ | 992 | $ | | $ | 992 | $ | | ||||||||
As of December 31, 2015 |
||||||||||||||||
Corporate bonds |
$ | 9,657 | $ | | $ | 9,657 | $ | | ||||||||
Contingent consideration(1) |
$ | (480 | ) | $ | | $ | | $ | (480 | ) |
(1) | Represents the final payment under the contingent consideration related to the acquisition of assets from Phorus, Inc. and Phorus, LLC, which was classified in accrued expenses on the consolidated balance sheet as of December 31, 2015. In the first quarter of 2016, the Company paid this remaining liability in full. |
11
DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)
Note 5Business Combination
On October 1, 2015, the Company completed the acquisition of iBiquity Digital Corporation (iBiquity), pursuant to the Agreement and Plan of Merger, dated August 31, 2015. The acquisition was accounted for under the acquisition method of accounting. On September 30, 2016, the Company finalized the purchase price allocation:
Weighted Average Estimated Useful Life (years) |
Preliminary Fair Value as of December 31, 2015 |
Measurement Period Adjustments (1) |
Final Fair Value |
|||||||||||||||||
Cash and cash equivalents |
$ | 20,837 | $ | 20,837 | ||||||||||||||||
Short-term investments |
4,000 | 4,000 | ||||||||||||||||||
Accounts receivable |
13,468 | 644 | (2) | 14,112 | ||||||||||||||||
Prepaid expenses and other current assets |
1,058 | 131 | (3) | 1,189 | ||||||||||||||||
Property and equipment |
1,656 | 1,656 | ||||||||||||||||||
Goodwill |
58,370 | (20,299 | ) (4) | 38,071 | ||||||||||||||||
Identifiable intangible assets: |
||||||||||||||||||||
Customer relationships |
10 | 70,225 | ||||||||||||||||||
Developed technology |
10 | 33,590 | ||||||||||||||||||
Tradenames |
10 | 9,590 | ||||||||||||||||||
IPR&D |
7,583 | |||||||||||||||||||
|
|
|||||||||||||||||||
Total identifiable intangible assets |
120,988 | 120,988 | ||||||||||||||||||
Other long-term assets |
190 | (60 | ) (3) | 130 | ||||||||||||||||
Deferred tax assets (liabilities), net |
(13,058 | ) | 21,258 | (5) | 8,200 | |||||||||||||||
Accounts payable |
(535 | ) | (535 | ) | ||||||||||||||||
Accrued expenses |
(21,402 | ) | (1,882 | ) (6) | (23,284 | ) | ||||||||||||||
Deferred revenue |
(1,019 | ) | (1,019 | ) | ||||||||||||||||
Other long-term liabilities |
(6,783 | ) | 208 | (5) | (6,575 | ) | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total purchase price |
$ | 177,770 | | $ | 177,770 | |||||||||||||||
|
|
|
|
|
|
(1) | All adjustments were recorded prospectively within the Companys condensed consolidated balance sheet. |
(2) | Primarily consists of the recognition of underreported royalty recoveries owed to iBiquity prior to the close of the acquisition, which were collected during the measurement period. |
(3) | Consists of miscellaneous working capital and other immaterial adjustments. |
(4) | Represents the net impact to goodwill of all measurement period adjustments recorded. |
12
DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)
Note 5Business Combination (Continued)
(5) | Primarily consists of the finalization of the measurement of acquired net operating loss carryforwards (NOLs) that can be realized, subject to the limitations under Section 382 of the Internal Revenue Code of 1986, as amended (Section 382). During the measurement period, the Company was in the process of determining the amount of additional NOLs that would be available if certain unrealized gains attributed to periods before the ownership change date are recognized. In connection with the intercompany transfer of intellectual property rights discussed in Note 10, Income Taxes, the Company finalized the measurement of the amount of additional NOLs that are available if certain unrealized gains attributable to periods before the ownership change date are recognized. The decrease to other long-term liabilities is primarily due to the finalization of the measurement of certain uncertain tax positions. |
(6) | Primarily consists of adjustments to the estimated fair value of certain acquired legal contingencies and certain rebate accruals, determined based on information obtained during the measurement period. |
13
DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)
Note 6Goodwill and Other Intangible Assets
The changes in the Companys goodwill were:
Goodwill | ||||
Balance at December 31, 2015 |
$ | 108,726 | ||
Purchase price allocation adjustments, net |
(20,299 | ) | ||
Increase due to current period business combinations |
2,265 | |||
|
|
|||
Balance at September 30, 2016 |
$ | 90,692 | ||
|
|
The Companys other intangible assets were:
Weighted Average Life (Years) |
As of September 30, 2016 | As of December 31, 2015 | ||||||||||||||||||||||||||
Gross Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||||||||||||||||||
Customer relationships |
9 | $ | 116,838 | $ | (31,513 | ) | $ | 85,325 | $ | 116,026 | $ | (22,039 | ) | $ | 93,987 | |||||||||||||
Acquired technology |
9 | 56,151 | (18,375 | ) | 37,776 | 52,073 | (14,071 | ) | 38,002 | |||||||||||||||||||
Tradenames |
9 | 12,912 | (3,683 | ) | 9,229 | 12,851 | (2,452 | ) | 10,399 | |||||||||||||||||||
Contractual rights |
5 | 8,363 | (3,833 | ) | 4,530 | 7,713 | (2,527 | ) | 5,186 | |||||||||||||||||||
Patents |
5 | 5,155 | (1,821 | ) | 3,334 | 3,805 | (1,538 | ) | 2,267 | |||||||||||||||||||
Trademarks |
10 | 919 | (468 | ) | 451 | 894 | (417 | ) | 477 | |||||||||||||||||||
Non-compete |
2 | 553 | (496 | ) | 57 | 492 | (457 | ) | 35 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total amortizable intangible assets |
$ | 200,891 | $ | (60,189 | ) | $ | 140,702 | $ | 193,854 | $ | (43,501 | ) | $ | 150,353 | ||||||||||||||
IPR&D |
4,205 | | 4,205 | 7,583 | | 7,583 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total other intangible assets |
$ | 205,096 | $ | (60,189 | ) | $ | 144,907 | $ | 201,437 | $ | (43,501 | ) | $ | 157,936 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2016, the Company reclassified $3,378 of IPR&D assets not previously subject to amortization to amortizable intangible assets.
Amortization of intangible assets included in the Companys condensed consolidated statements of operations was:
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Cost of revenue |
$ | 5,111 | $ | 2,392 | $ | 15,085 | $ | 7,146 | ||||||||
Operating expenses |
543 | 266 | 1,620 | 792 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total amortization of intangible assets |
$ | 5,654 | $ | 2,658 | $ | 16,705 | $ | 7,938 | ||||||||
|
|
|
|
|
|
|
|
14
DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)
Note 6Goodwill and Other Intangible Assets (Continued)
The Company expects the future amortization of amortizable intangible assets held at September 30, 2016 to be as follows:
Years Ending December 31, |
Estimated Amortization Expense |
|||
2016 (remaining 3 months) |
$ | 5,775 | ||
2017 |
22,640 | |||
2018 |
20,559 | |||
2019 |
19,142 | |||
2020 |
15,676 | |||
2021 and thereafter |
56,910 | |||
|
|
|||
Total |
$ | 140,702 | ||
|
|
Note 7Accrued Expenses
Accrued expenses consisted of:
As of September 30, 2016 |
As of December 31, 2015 |
|||||||
Accrued payroll and related benefits |
$ | 13,670 | $ | 17,998 | ||||
Contingent consideration |
| 480 | ||||||
Other |
4,293 | 4,482 | ||||||
|
|
|
|
|||||
Total accrued expenses |
$ | 17,963 | $ | 22,960 | ||||
|
|
|
|
Note 8Long-term Debt
On October 1, 2015, the Company entered into a credit agreement with Wells Fargo Bank, National Association and other lenders (the Credit Agreement), which provided the Company with a term loan and a revolver. On June 24, 2016, the Company entered into the First Amendment to Credit Agreement (the Amendment) in connection with the intercompany transfer of intellectual property rights discussed in Note 10, Income Taxes. The Amendment requires the Company to make prepayments of $20,000 of the term loan in 2016. During the three months ended June 30 and September 30, 2016, the Company made prepayments of $10,000 and $5,000, respectively, in addition to the scheduled quarterly principal payments of $5,469 in each quarter. Under the Amendment, the final prepayment of $5,000 is due by December 30, 2016. These prepayments will be applied to the scheduled principal installments under the Credit Agreement in inverse order of maturity, beginning with the final principal balance due on October 1, 2020. The original scheduled quarterly principal installment payments under the Credit Agreement are unchanged by the Amendment.
15
DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)
Note 8Long-term Debt (Continued)
The Companys outstanding balances under the Credit Agreement, presented net of certain debt issuance costs on the condensed consolidated balance sheets, were:
As of September 30, 2016 |
As of December 31, 2015 |
|||||||
Debt outstanding under term loan, current portion |
$ | 26,875 | $ | 21,875 | ||||
Debt issuance costs, current portion |
(389 | ) | (389 | ) | ||||
|
|
|
|
|||||
Current portion of long-term debt, net |
$ | 26,486 | $ | 21,486 | ||||
|
|
|
|
|||||
Debt outstanding under term loan, long-term |
$ | 66,719 | $ | 103,125 | ||||
Debt outstanding under revolver, long-term |
35,000 | 35,000 | ||||||
Debt issuance costs, long-term |
(1,167 | ) | (1,459 | ) | ||||
|
|
|
|
|||||
Long-term debt, net |
$ | 100,552 | $ | 136,666 | ||||
|
|
|
|
Future long-term debt principal payments are as follows:
Years Ending December 31, |
||||
2016 (remaining 3 months) |
$ | 10,469 | ||
2017 |
21,876 | |||
2018 |
21,876 | |||
2019 |
21,876 | |||
2020 |
52,497 | |||
|
|
|||
Total |
$ | 128,594 | ||
|
|
Interest expense, including amortization of debt issuance costs, was:
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, | |||||
2016 |
2015 |
2016 |
2015 | |||
$ 983 | $ 75 | $ 3,276 | $ 223 |
Note 9Commitments and Contingencies
During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. Those indemnities include intellectual property indemnities to the Companys customers in connection with the sale of its products and the licensing of its technology, indemnities for liabilities associated with the infringement of other parties technology based upon the Companys products and technology, and indemnities to the Companys directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. 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. To date, the Company has not been required to make any payments and has not recorded any liability for these indemnities, commitments and guarantees in its consolidated balance sheets. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable.
16
DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)
Note 9Commitments and Contingencies (Continued)
Under certain contractual rights arrangements, the Company may be obligated to pay up to approximately $7,200 over an estimated period of approximately four years if certain milestones are achieved.
In connection with the acquisition of iBiquity, the Company evaluated the potential synergies and future operations of the combined entity and implemented a restructuring plan in the fourth quarter of 2015, impacting approximately 70 employees. As of December 31, 2015, the Company had accrued $5,517 of severance and related costs. For the nine months ended September 30, 2016, the Company recorded additional severance and related costs of $200 within operating expenses in the condensed consolidated statement of operations. During the nine months ended September 30, 2016, the Company paid $4,682 of severance and related costs, and as of September 30, 2016, $1,035 remained accrued under certain separation agreements, which is expected to be paid within the next nine months.
Litigation
Robert Garfield v. DTS, Inc.
On October 26, 2016, an alleged stockholder of the Company filed a putative class action lawsuit, captioned Robert Garfield v. DTS, Inc., et al., Case Number TBD, in the Superior Court of California, Ventura County. The defendants are the Company, the members of its Board of Directors, the Companys financial advisor in connection with the DTS Merger, and Tessera. The complaint alleges that the Companys directors breached their fiduciary duties by agreeing to inadequate merger consideration and engaging in a sales process that is in their best interests, but not the interests of the Companys other stockholders, and that the Company and its directors committed a breach of fiduciary duty by causing the issuance of a Proxy Statement that fails to disclose all material facts concerning the DTS Merger. The complaint alleges that the Companys financial advisor and Tessera abetted the purported breaches. The complaint seeks an order enjoining the merger or, if it is consummated, an order rescinding it. The complaint also seeks a reduction in the termination fee payable by the Company to Tessera, plus damages and attorneys fees. The Company believes the complaint is meritless and intends to defend the action.
Paul Parshall v. DTS, Inc.
On November 2, 2016, an alleged stockholder of the Company filed a putative class action lawsuit, captioned Paul Parshall v. DTS, Inc., et al., Case Number 12870-CB, in the Court of Chancery of the State of Delaware. The defendants are the Company, the members of its Board of Directors, Tessera, Tempe Holdco Corporation, Tempe Merger Sub Corporation, and Arizona Merger Sub Corporation. The complaint alleges that the Companys directors breached their fiduciary duties by causing the issuance of a Proxy Statement that fails to disclose all material facts concerning the DTS Merger. The complaint alleges that the Company, Tessera, Tempe Holdco Corporation, Tempe Merger Sub Corporation, and Arizona Merger Sub Corporation abetted the individuals purported breaches. The complaint seeks an order enjoining the merger or, if it is consummated, an order rescinding it, plus rescissory damages and attorneys fees. The Company believes the complaint is meritless and intends to defend the action.
Note 10Income Taxes
Income taxes for quarterly periods are computed using the estimated annual effective tax rate for the year along with discrete items identified in the quarter.
17
DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)
Note 10Income Taxes (Continued)
For the nine months ended September 30, 2016 and 2015, the Companys effective tax rate was approximately 41% and 79%, respectively. The effective tax rate for 2016 differed from the US statutory rate of 35% primarily due to the impact of a foreign loss in a jurisdiction that will not result in a tax benefit, non-creditable foreign withholding taxes and non-deductible transaction costs, partially offset by certain foreign earnings subject to lower tax rates and research and development tax credits. The effective tax rate for 2015 differed from the US statutory rate primarily due to the impact of a foreign loss in a jurisdiction that will not result in a tax benefit, non-creditable foreign withholding taxes and non-deductible transaction costs, partially offset by certain foreign earnings subject to lower tax rates, the federal tax deduction for domestic production activities and state research and development tax credits.
The Company has a strategy of commercializing certain non-US intellectual property rights from outside the US. In line with this strategy, in June 2016, the Company completed the implementation of an intercompany transfer of certain intellectual property licensing rights acquired from iBiquity to certain of the Companys foreign subsidiaries. The transaction was implemented to align with the Companys current operating processes, to optimize the global legal, operational and tax structure, and to allow for the efficient recovery of net operating loss carryforwards acquired from iBiquity. The transaction will not have a material impact on the Companys effective tax rate in 2016 but should benefit future periods as a result of the non-US income being subject to lower tax rates and the ability to amortize the intellectual property for tax purposes in the foreign jurisdictions.
As of September 30, 2016 and December 31, 2015, the Companys uncertain tax positions were $18,743 and $19,454, respectively, of which $9,604 and $9,112, respectively, were recorded in other long-term liabilities. The remaining amounts were recorded as a reduction to non-current deferred tax assets. The decrease was primarily due to the reversal of an uncertain tax position relating to the deductibility of certain expenses. The Company believes that within the next twelve months it is reasonably possible that unrecognized tax benefits will decrease by approximately $300 due to the expiration of certain statutes of limitations. Any resolution of the Companys uncertain tax positions may impact the Companys effective tax rate. 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 Companys consolidated 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 US and other foreign jurisdictions. The Company is no longer subject to income tax examinations by the Internal Revenue Service (IRS) for years prior to 2013 and by the California Franchise Tax Board (FTB) for years prior to 2011 except for certain prior period carryforwards. Significant judgment is required in determining the consolidated provision for income taxes as the Company considers each tax jurisdictions taxable earnings and the impact of the tax audit process. The final outcome of tax audits by the IRS, the FTB or other state tax authorities, and various foreign tax authorities could differ materially from amounts reflected in the condensed consolidated financial statements.
Licensing revenue is recognized gross of withholding taxes that are remitted by the Companys licensees directly to the local tax authorities. For the three months ended September 30, 2016 and 2015, withholding taxes were $711 and $632,
18
DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)
Note 10Income Taxes (Continued)
respectively. For the nine months ended September 30, 2016 and 2015, withholding taxes were $2,522 and $1,614, respectively. The increase in withholding taxes for the nine month period is primarily due to increases in revenue resulting from the iBiquity acquisition in October 2015.
19
DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)
Note 11Net 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 any outstanding stock options, unvested restricted stock, any unvested PSUs for which the performance conditions have been satisfied at the reporting date, and the Companys employee stock purchase plan (ESPP) using the treasury stock method. Due to the net loss for the three months ended September 30, 2015, all potential common shares were excluded from the diluted shares outstanding for this period.
The computation of basic and diluted net income (loss) per common share was:
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) |
$ | 570 | $ | (2,802 | ) | $ | 5,792 | $ | 539 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Denominator: |
||||||||||||||||
Weighted average shares outstanding |
17,701 | 17,255 | 17,560 | 17,431 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Stock options |
638 | | 363 | 568 | ||||||||||||
Restricted stock |
278 | | 192 | 159 | ||||||||||||
ESPP |
20 | | 11 | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average diluted shares outstanding |
18,637 | 17,255 | 18,126 | 18,167 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic net income (loss) per common share |
$ | 0.03 | $ | (0.16 | ) | $ | 0.33 | $ | 0.03 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted net income (loss) per common share |
$ | 0.03 | $ | (0.16 | ) | $ | 0.32 | $ | 0.03 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Anti-dilutive shares excluded from the determination of diluted net income (loss) per share |
305 | 3,779 | 1,475 | 535 | ||||||||||||
|
|
|
|
|
|
|
|
20
DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)
Note 12 Dividend
On August 8, 2016, the Company announced that the Board of Directors approved a cash dividend of $0.02 per common share, which was paid on August 31, 2016 to stockholders of record on August 22, 2016. Dividend payments for the three and nine months ended September 30, 2016 were $354, and were recorded as a reduction to retained earnings. Pursuant to the Merger Agreement with Tessera, the Company is not permitted to declare or pay any dividend without Tesseras consent.
21
Exhibit 99.4
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On December 1, 2016, as described in the Agreement and Plan of Merger (the Merger Agreement), dated as of September 19, 2016, among Tessera Technologies, Inc. (Tessera), DTS, Inc. (DTS), Tessera Holding Corporation (f/k/a Tempe Holdco Corporation) (the Company), and the other parties named therein, the Company completed its acquisition of DTS (the Transaction). As previously disclosed, as a result of the Transaction, both DTS and Tessera became wholly owned subsidiaries of the Company, and the Company became the successor issuer to Tessera pursuant to Rule 12g-3(a) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act).
In connection with the Transaction, the Company paid approximately $941.6 million in cash, which included payoff of approximately $129 million of existing DTS debt. Approximately $893.2 million was paid on the day the Transaction was consummated and the remaining $48.4 million was paid shortly afterwards per the terms of the Merger Agreement. Additionally, the Company assumed unvested equity awards from DTS with a fair value relating to pre-combination services equal to approximately $13.1 million. As such, the total merger consideration was approximately $954.7 million.
In connection with the Transaction, on December 1, 2016, the Company entered into a Credit Agreement (the Credit Agreement) among the Company, Royal Bank of Canada, as administrative agent and collateral agent, and the lenders party thereto. The Credit Agreement provides for a $600 million seven-year term B loan facility (the Term B Loan Facility). The interest rates applicable to loans outstanding under the Credit Agreement with respect to the Term B Loan Facility are (i) until the delivery of financial statements for the first full fiscal quarter ending after December 1, 2016 equal to, at the Companys option, either a base rate plus a margin of 2.25% per annum or LIBOR plus a margin of 3.25% per annum (the Effective Date Margin) and (ii) thereafter, (x) the Effective Date Margin or (y) so long as the ratio of consolidated indebtedness of the Company and its subsidiaries (minus all unrestricted cash and cash equivalents) to consolidated EBITDA (subject to other customary adjustments) is equal to or less than 1.50 to 1.00, equal to, at the Companys option either a base rate plus a margin of 2.00% per annum or LIBOR plus a margin of 3.00% per annum. Commencing March 31, 2017, the Term B Loan Facility will amortize in equal quarterly installments in aggregate quarterly amount equal to 0.25% of the original principal amount of the Term B Loan Facility, with the balance payable on the maturity date of the Term B Loan Facility (in each case subject to adjustment for prepayments).
The following unaudited pro forma condensed combined financial information (pro forma financial information) has been prepared in accordance with Article 11 of SEC Regulation S-X, and combines the historical consolidated financial statements of Tessera and DTS. The historical consolidated financial information has been adjusted to reflect factually supportable items that are directly attributable to the Transaction, and with respect to the statements of operations only, expected to have a continuing impact on consolidated results of operations. Specifically, the pro forma financial information gives effect to the following:
| The consummation of the Transaction; |
| Allocation of purchase price and estimated purchase accounting adjustments; and |
| The receipt of $600 million in new borrowings to finance the Transaction and payment of associated debt issuance costs. |
The unaudited pro forma condensed combined statements of operations are presented as if the Transaction had occurred on January 1, 2015. The unaudited pro forma condensed combined balance sheet as of September 30, 2016 is presented as if the Transaction occurred on September 30, 2016.
This pro forma financial information should be read in conjunction with:
| the accompanying notes to the pro forma financial information; |
| Tesseras separate audited historical consolidated financial statements and notes as of and for the year ended December 31, 2015 (included on Form 10-K filed with the Securities and Exchange Commission on February 22, 2016) and unaudited historical condensed consolidated financial statements and notes as of and for the period ended September 30, 2016 (included on Form 10-Q filed with the Securities and Exchange Commission on November 1, 2016); and |
1
| DTSs separate audited historical consolidated financial statements and notes for the years ended December 31, 2015, 2014 and 2013 (included as Exhibit 99.2 to this Amendment No. 1) and unaudited historical condensed consolidated financial statements and notes as of and for the period ended September 30, 2016 (included as Exhibit 99.3 to this Amendment No. 1). |
The pro forma financial information has been prepared for illustrative purposes only. The pro forma adjustments are based on estimates using information available at the time of this report. The pro forma financial information is not necessarily indicative of what the financial position or results of operations actually would have been had the Transaction been completed at the dates indicated, and include pro forma adjustments which are preliminary and may be revised. There can be no assurance that such revisions will not result in material changes. The financial position and results of operations shown are not necessarily indicative of what the past financial position and results of operations of the combined company would have been nor indicative of the financial position and results of operations of future periods. Additionally, the pro forma condensed combined income tax provision does not necessarily reflect the amounts that would have resulted had Tessera and DTS filed consolidated income tax returns during the periods presented. The pro forma financial information does not give consideration to the impact of possible revenue enhancements, synergies, expense efficiencies, strategy modifications, asset dispositions or other actions that may result from the Transaction.
2
Unaudited Pro Forma Condensed Combined Balance Sheet
As of September 30, 2016
(Amounts in thousands)
Tessera | DTS | Pro Forma Reclassifications |
Pro Forma Adjustments |
Combined Pro Forma |
||||||||||||||||||
(See Note 1) | (See Note 3) | |||||||||||||||||||||
ASSETS | ||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||
Cash and cash equivalents |
$ | 50,401 | $ | 26,686 | $ | | $ | (17,487 | ) | (a) | $ | 59,600 | ||||||||||
Short-term investments |
345,854 | 13,083 | | (313,083 | ) | (b) | 45,854 | |||||||||||||||
Accounts receivable, net |
2,640 | 26,911 | | | 29,551 | |||||||||||||||||
Unbilled contract receivable |
| | | 63,400 | (c) | 63,400 | ||||||||||||||||
Other current assets |
24,540 | 7,832 | (19,315 | ) | (925 | ) | (d) | 12,132 | ||||||||||||||
Income taxes receivable |
| 2,276 | 19,315 | | 21,591 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current assets |
423,435 | 76,788 | | (268,095 | ) | 232,128 | ||||||||||||||||
Property and equipment, net |
| 28,076 | 5,416 | 6,724 | (e) | 40,216 | ||||||||||||||||
Intangible assets, net |
76,963 | 144,907 | | 324,171 | (f) | 546,041 | ||||||||||||||||
Goodwill |
| 90,692 | 10,137 | 303,110 | (g) | 403,939 | ||||||||||||||||
Long-term deferred tax assets |
6,093 | 41,866 | | (45,959 | ) | (l) | 2,000 | |||||||||||||||
Other assets |
18,042 | 9,348 | (15,553 | ) | 8,258 | (h) | 20,095 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 524,533 | $ | 391,677 | $ | | $ | 328,209 | $ | 1,244,419 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||
Accounts payable |
$ | 803 | $ | 6,792 | $ | (1,946 | ) | $ | | $ | 5,649 | |||||||||||
Accrued legal fees |
3,792 | | 1,946 | | 5,738 | |||||||||||||||||
Accrued liabilities |
10,866 | 17,963 | | 50,734 | (i) | 79,563 | ||||||||||||||||
Deferred revenue |
1,934 | 3,096 | | (2,036 | ) | (j) | 2,994 | |||||||||||||||
Income taxes payable |
| 80 | | | 80 | |||||||||||||||||
Current portion of long-term debt, net |
| 26,486 | | (20,486 | ) | (k) | 6,000 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
17,395 | 54,417 | | 28,212 | 100,024 | |||||||||||||||||
Long-term debt, net |
| 100,552 | | 476,485 | (k) | 577,037 | ||||||||||||||||
Long-term deferred tax liabilities |
| | 255 | 41,016 | (l) | 41,271 | ||||||||||||||||
Other liabilities |
2,675 | 12,419 | (255 | ) | 3,000 | (m) | 17,839 | |||||||||||||||
Stockholders equity: |
||||||||||||||||||||||
Common stock |
59 | 3 | | (3 | ) | (n) | 59 | |||||||||||||||
Additional paid-in capital |
621,113 | 272,479 | | (259,355 | ) | (n) | 634,237 | |||||||||||||||
Treasury stock, at cost |
(299,555 | ) | (111,331 | ) | | 111,331 | (n) | (299,555 | ) | |||||||||||||
Accumulated other comprehensive income |
33 | 778 | | (778 | ) | (n) | 33 | |||||||||||||||
Retained earnings |
182,813 | 62,360 | | (71,699 | ) | (o) | 173,474 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total stockholders equity |
504,463 | 224,289 | | (220,504 | ) | 508,248 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and stockholders equity |
$ | 524,533 | $ | 391,677 | $ | | $ | 328,209 | $ | 1,244,419 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited pro forma condensed combined financial information.
3
Unaudited Pro Forma Condensed Combined Statements of Operations
For the Nine Months Ended September 30, 2016
(Amounts in thousands, except per share amounts)
Tessera | DTS | Pro Forma Reclassifications |
Pro Forma Adjustments |
Combined Pro Forma |
||||||||||||||||||
(See Note 1) | (See Note 3) | |||||||||||||||||||||
Revenues |
$ | 189,430 | $ | 142,599 | $ | | $ | (12,865 | ) | (p) | $ | 319,164 | ||||||||||
Cost of revenues |
18,751 | (18,751 | ) | |||||||||||||||||||
|
|
|||||||||||||||||||||
Gross profit |
123,848 | |||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||
Cost of revenues |
238 | | 3,666 | | 3,904 | |||||||||||||||||
Research, development and other related costs |
28,997 | 38,788 | | 1,351 | (q) | 69,136 | ||||||||||||||||
Selling, general and administrative |
34,751 | 71,563 | (2,370 | ) | (1,703 | ) | (r) | 102,241 | ||||||||||||||
Amortization expense |
18,126 | | 16,705 | 47,551 | (s) | 82,382 | ||||||||||||||||
Litigation expense |
12,422 | | 750 | | 13,172 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total operating expenses |
94,534 | 110,351 | 18,751 | 47,199 | 270,835 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income |
94,896 | 13,497 | | (60,064 | ) | 48,329 | ||||||||||||||||
Other income and expense, net |
2,473 | (3,633 | ) | | (20,014 | ) | (t) | (21,174 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before taxes |
97,369 | 9,864 | | (80,078 | ) | 27,155 | ||||||||||||||||
Provision for income taxes |
31,977 | 4,072 | | (18,418 | ) | (u) | 17,631 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
$ | 65,392 | $ | 5,792 | $ | | $ | (61,660 | ) | $ | 9,524 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income per share: |
||||||||||||||||||||||
Net income |
$ | 1.33 | $ | 0.33 | $ | 0.19 | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Basic |
$ | 1.31 | $ | 0.32 | $ | 0.19 | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Diluted |
||||||||||||||||||||||
Weighted average number of shares used in per share calculations: |
||||||||||||||||||||||
Basic |
49,096 | 17,560 | 49,096 | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Diluted |
49,803 | 18,126 | 49,803 | |||||||||||||||||||
|
|
|
|
|
|
See accompanying notes to the unaudited pro forma condensed combined financial information.
4
Unaudited Pro Forma Condensed Combined Statements of Operations
For the Year Ended December 31, 2015
(Amounts in thousands, except per share amounts)
Tessera | DTS | Pro Forma Reclassifications |
Pro Forma Adjustments |
Combined Pro Forma |
||||||||||||||||||
(See Note 1) | (See Note 3) | |||||||||||||||||||||
Revenues |
$ | 273,300 | $ | 138,209 | $ | | $ | (52,598 | ) | (p) | $ | 358,911 | ||||||||||
Cost of revenues |
15,077 | (15,077 | ) | |||||||||||||||||||
|
|
|||||||||||||||||||||
Gross profit |
123,132 | |||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||
Cost of revenue Cost of revenues |
566 | | 2,832 | | 3,398 | |||||||||||||||||
Research, development and other related costs |
32,181 | 42,985 | | 2,320 | (q) | 77,486 | ||||||||||||||||
Selling, general and administrative |
43,592 | 92,276 | (3,940 | ) | 6,150 | (r) | 138,078 | |||||||||||||||
Change in fair value of contingent consideration |
| (420 | ) | 420 | | | ||||||||||||||||
Amortization expense |
20,624 | | 13,561 | 74,344 | (s) | 108,529 | ||||||||||||||||
Litigation expense |
14,135 | | 2,204 | | 16,339 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total operating expenses |
111,098 | 134,841 | 15,077 | 82,814 | 343,830 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income (loss) |
162,202 | (11,709 | ) | | (135,412 | ) | 15,081 | |||||||||||||||
Other income and expense, net |
3,432 | (2,255 | ) | | (28,964 | ) | (t) | (27,787 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) before taxes from continuing operations |
165,634 | (13,964 | ) | | (164,376 | ) | (12,706 | ) | ||||||||||||||
Provision for (benefit from) income taxes |
48,517 | (1,663 | ) | | (37,806 | ) | (u) | 9,048 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from continuing operations |
117,117 | (12,301 | ) | | (126,570 | ) | (21,754 | ) | ||||||||||||||
Loss from discontinued operations, net of tax |
(101 | ) | | | | (101 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
$ | 117,016 | $ | (12,301 | ) | $ | | $ | (126,570 | ) | $ | (21,855 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) per share: |
||||||||||||||||||||||
Income (loss) from continuing operations |
||||||||||||||||||||||
Basic |
$ | 2.26 | $ | (0.71 | ) | $ | (0.42 | ) | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Diluted |
$ | 2.23 | $ | (0.71 | ) | $ | (0.42 | ) | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Loss from discontinued operations |
||||||||||||||||||||||
|
|
|||||||||||||||||||||
Basic |
$ | | $ | | $ | | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Diluted |
$ | | $ | | $ | | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Net income (loss) |
||||||||||||||||||||||
|
|
|||||||||||||||||||||
Basic |
$ | 2.26 | $ | (0.71 | ) | $ | (0.42 | ) | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Diluted |
$ | 2.23 | $ | (0.71 | ) | $ | (0.42 | ) | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Weighted average number of shares used in per share calculations: |
||||||||||||||||||||||
Basic |
51,802 | 17,396 | 51,802 | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Diluted |
52,586 | 17,396 | 51,802 | |||||||||||||||||||
|
|
|
|
|
|
See accompanying notes to the unaudited pro forma condensed combined financial information.
5
Notes to the Unaudited Pro Forma Condensed Combined Financial Information
Note 1Pro Forma Basis of Presentation
The Transaction is reflected in the unaudited pro forma condensed combined financial statements as being accounted for under the acquisition method of purchase accounting in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business Combinations (ASC 805). Under the acquisition method, the total estimated purchase price of the acquired company is allocated to the assets acquired and the liabilities assumed based on their fair values at the date of acquisition. In determining the preliminary allocation of the purchase price in the unaudited pro forma condensed combined financial statements, the Company has assumed the Transaction was completed on September 30, 2016 and has made other significant estimates and assumptions. Due to the fact that the unaudited pro forma condensed combined financial statements have been prepared based on preliminary estimates, the final amounts recorded may differ materially from the information presented. The allocation of purchase consideration is subject to change based on further review of the fair value of the assets acquired and liabilities assumed. A final determination of purchase price allocation and fair values will be based on the assets acquired and the liabilities assumed on the actual date of consummation of the Transaction, which was December 1, 2016.
Under ASC 805, acquisition-related transaction costs (such as advisory, legal or other professional fees) are not included as a component of consideration transferred and have been excluded from the unaudited pro forma condensed combined statements of operations. Estimated transaction costs that would have been paid or accrued by the Company and DTS upon consummation of the Transaction are reflected in the unaudited pro forma condensed combined balance sheet.
DTSs standalone historical statement of operations for the year ended December 31, 2015 presented in the pro forma financial information includes approximately $16.6 million of acquisition and integration related costs associated with DTSs acquisition of iBiquity Digital Corporation on October 1, 2015, which consist primarily of employee compensation and severance related costs and professional service fees. These amounts were not adjusted in the calculation of the pro forma condensed combined statement of operations for the year ended December 31, 2015.
There were no intercompany balances or transactions between Tessera and DTS as of the dates and for the periods of these unaudited pro forma combined financial statements.
Tessera, together with the management of DTS, is developing a plan to integrate the operations of the two companies after the Transaction. In connection with that plan, management anticipates that certain non-recurring charges, such as operational relocation expenses, employee severance costs, product rebranding and consulting expenses, may be incurred in connection with this integration. Any such charge will affect the results of the combined company in the future period in which such charges are incurred. The pro forma financial information does not include the effects of the costs associated with any restructuring or other integration activities resulting from the Transaction. Additionally, the pro forma financial information does not include the realization of any cost savings from anticipated operating efficiencies, synergies or other activities which might result from the Transaction.
Financial Statement Reclassification Adjustments
Certain reclassification adjustments have been made to Tessera and DTSs standalone historical financial statements presented within the pro forma financial information to conform the presentation of historical balances.
The following reclassification adjustments were made to the unaudited pro forma condensed combined balance sheet:
| On its historical condensed consolidated balance sheet, Tessera presented income taxes receivable within other current assets. This balance has been presented as a separate line item on the pro forma condensed combined balance sheet. |
6
| On its historical condensed consolidated balance sheet, Tessera presented property and equipment, net and goodwill within other assets. These balances have been presented as separate line items on the pro forma condensed combined balance sheet. |
| On its historical condensed consolidated balance sheet, Tessera presented long-term deferred tax liabilities and other liabilities as a single line item. These balances have been presented as separate line items on the pro forma condensed combined balance sheet. |
| On its historical condensed consolidated balance sheet, DTS did not separately present accrued legal fees. This balance has been presented as a separate line item on the pro forma condensed combined balance sheet. |
The following reclassification adjustments were made to the unaudited pro forma condensed combined statements of operations:
| On its historical statements of operations, DTS presented cost of revenues separately from operating expenses and presented a separate gross profit measure. Cost of revenues has been reclassified into operating expenses and the gross profit measure has been removed on the pro forma condensed combined statements of operations. |
| On its historical statements of operations, DTS included amortization expense within cost of revenues and selling, general and administrative expense. These amounts have been presented as a separate line item in amortization expense on the pro forma condensed statements of operations. |
| On its historical statements of operations, DTS included litigation expense within selling, general and administrative expense. This amount has been presented as a separate line item on the pro forma condensed combined statements of operations. |
| On its historical statements of operations for the year ended December 31, 2015, DTS presented change in fair value of contingent consideration as a separate line item. This amount has been reclassified to selling, general and administrative expense on the pro forma condensed combined statements of operations. |
There were no adjustments presented to conform DTSs historical accounting policies to those of Tessera as such adjustments were considered immaterial for the periods presented.
7
Note 2Preliminary Allocation of Purchase Price
The preliminary purchase price for the Transaction is as follows (amounts in thousands):
Cash paid for payoff of existing DTS debt |
$ | 128,855 | ||
Cash paid for DTS common stock outstanding |
764,331 | |||
Cash paid for DTS vested equity awards, paid shortly after consummation of Transaction |
48,395 | |||
Fair value of assumed DTS unvested equity awards relating to pre-acquisition |
13,124 | |||
|
|
|||
Total preliminary purchase price |
$ | 954,705 | ||
|
|
As discussed in Note 1, the Company has made a preliminary allocation of the estimated purchase price to the tangible and intangible assets acquired and liabilities assumed based on various preliminary estimates assuming the Transaction was completed on September 30, 2016. These preliminary estimates are subject to change and the final purchase price allocation may differ significantly from the information presented herein.
The preliminary purchase price allocation is as follows (amounts in thousands):
Weighted Average Estimated Useful Life (years) |
Net Assets of DTS as of September 30, 2016 |
|||||||||||
Cash and cash equivalents |
$ | 26,348 | ||||||||||
Accounts receivable |
26,911 | |||||||||||
Unbilled contracts receivable |
63,400 | |||||||||||
Other current assets |
6,907 | |||||||||||
Income taxes receivable |
2,276 | |||||||||||
Property and equipment, net |
34,800 | |||||||||||
Goodwill |
393,802 | |||||||||||
Identifiable intangible assets: |
||||||||||||
Customer contracts and relationships |
6 | 281,567 | ||||||||||
Developed technology |
5 | 143,639 | ||||||||||
Trademarks and tradenames |
8 | 38,484 | ||||||||||
Noncompete agreements |
1 | 2,231 | ||||||||||
In-process research and development (IPR&D) |
3,157 | |||||||||||
|
|
|||||||||||
Total identifiable intangible assets |
469,078 | |||||||||||
Other assets |
17,606 | |||||||||||
Accounts payable |
(6,792 | ) | ||||||||||
Accrued liabilities |
(17,963 | ) | ||||||||||
Deferred revenue |
(1,060 | ) | ||||||||||
Other liabilities |
(15,419 | ) | ||||||||||
Income taxes payable |
(80 | ) | ||||||||||
Long-term deferred income tax liabilities, net |
(45,109 | ) | ||||||||||
|
|
|||||||||||
Total preliminary purchase price |
$ | 954,705 | ||||||||||
|
|
Note 3Pro Forma Adjustments
The pro forma adjustments included in the unaudited pro forma condensed combined financial statements are as follows (amounts in thousands):
8
(a) | The pro forma financial information reflects that the Company financed the Transaction with a combination of cash and debt. The pro forma adjustments to the cash balance are summarized as follows: |
Sources of Cash |
||||
Debt issuance from new Company credit agreement (refer to note (k)) |
$ | 600,000 | ||
Estimated liquidation of investments |
313,083 | |||
|
|
|||
Total sources of cash |
913,083 | |||
|
|
|||
Uses of Cash |
||||
Payment of estimated debt issuance costs (refer to note (k)) |
(16,963 | ) | ||
Payment of merger consideration in cash |
(893,186 | ) | ||
Payment of estimated transaction costs for DTS upon consummation of the Transaction |
(13,421 | ) | ||
Payment of estimated transaction costs for the Company upon consummation of the Transaction |
(7,000 | ) | ||
|
|
|||
Total uses of cash |
(930,570 | ) | ||
|
|
|||
Total adjustments to cash |
$ | (17,487 | ) | |
|
|
(b) | To reflect an estimate of the investments that would have been liquidated by the Company and DTS to pay for the merger consideration and transaction costs. |
(c) | To reflect adjustments to receivable balances as a result of purchase accounting, as follows: |
Adjustment for estimated per-unit royalties associated with licensee products manufactured or sold prior to September 30, 2016, for which royalty reports and cash collections are expected to be received subsequent to September 30, 2016. |
$ | 35,500 | ||
Creation of unbilled contract receivable balance for estimated remaining payments under existing minimum guarantee arrangements acquired from DTS, expected to be received subsequent to the date of acquisition. Amount represents short-term portion of estimated receivable balance. |
27,900 | |||
|
|
|||
Total impact on unbilled contract receivable |
$ | 63,400 | ||
|
|
(d) | To reflect adjustments to other current assets: |
To reflect the write-off of existing DTS debt issuance costs classified as current assets |
$ | (336 | ) | |
To reflect the write-off of current portion of prepaid income taxes through purchase accounting |
(589 | ) | ||
|
|
|||
Total impact on other current assets |
$ | (925 | ) | |
|
|
(e) | To reflect an adjustment to the fair value of acquired property and equipment as part of purchase accounting. |
The remaining useful lives of property and equipment acquired are as follows:
Machinery and equipment - Up to 5 years |
Software - Up to 7 years |
Office furniture and fixtures - Up to 7 years |
Leasehold improvements - Lesser of useful life or related lease term |
Building and improvements - Up to 35 years |
(f) | To reflect adjustments in acquired intangible assets, net: |
To eliminate DTS historical acquired intangible assets |
$ | (144,907 | ) | |
To record the estimated fair value of acquired identifiable intangible assets |
469,078 | |||
|
|
|||
Net impact on intangible assets, net |
$ | 324,171 | ||
|
|
(g) | To reflect adjustments in goodwill: |
To eliminate DTS historical acquired goodwill |
$ | (90,692 | ) | |
To record the estimated fair value of acquired goodwill |
393,802 | |||
|
|
|||
Net impact on goodwill |
$ | 303,110 | ||
|
|
9
(h) | To reflect adjustments to other assets, as follows: |
To reflect the write-off of existing DTS debt issuance costs classified as non-current assets |
$ | (672 | ) | |
To reflect the write-off of the long-term portion of prepaid income taxes through purchase accounting |
(3,570 | ) | ||
Creation of unbilled contract receivable balance for estimated remaining payments under existing minimum guarantee arrangements acquired from DTS, expected to be received subsequent to the date of acquisition. Amount represents long-term portion of estimated receivable balance. |
12,500 | |||
|
|
|||
Net impact on other long-term assets |
$ | 8,258 | ||
|
|
(i) | To reflect adjustments to accrued liabilities: |
To reflect accrual for estimated Tessera transaction costs that had not been accrued or paid in cash as of September 30, 2016 |
$ | 2,339 | ||
To reflect estimated liability for payment for vested DTS stock awards pursuant to the Merger Agreement, which was paid shortly after consummation of the transaction. |
48,395 | |||
|
|
|||
Total impact on accrued expenses |
$ | 50,734 | ||
|
|
(j) | To reflect an adjustment to the fair value of acquired deferred revenue as part of purchase accounting. |
(k) | The pro forma financial information reflects the impact of the new credit facility entered into by the Company which helped finance the Transaction and pay off DTSs historical existing credit facility. New Company debt issuance costs are assumed to be recorded as a reduction to the carrying value of debt liability and amortized on a straight-line basis over the term of the loan, which is assumed to be 7 years. The pro forma financial information also reflects the elimination of DTS historical existing debt balances and associated debt issuance costs, which were paid-off through the Transaction. |
The adjustments to debt are summarized as follows:
Current portion of long-term debt |
||||
New Company debt issuance |
$ | 6,000 | ||
Pay-off of DTS existing debt |
(26,875 | ) | ||
Write-off of DTS existing debt issuance costs classified as reduction to liability |
389 | |||
|
|
|||
Net adjustment to outstanding debt, current portion |
$ | (20,486 | ) | |
|
|
|||
Long-term debt |
||||
New Company debt issuance |
$ | 594,000 | ||
Pay-off of DTS existing debt |
(101,719 | ) | ||
New Company debt issuance costs classified as reduction to liability |
(16,963 | ) | ||
Write-off of DTS existing debt issuance costs classified as reduction to liability |
1,167 | |||
|
|
|||
Net adjustment to outstanding debt, long-term |
$ | 476,485 | ||
|
|
(l) | To reflect estimated adjustments to deferred income tax assets and liabilities: |
To reflect estimated deferred income tax liability associated with purchase accounting adjustments, calculated using the statutory tax rate on a jurisdictional basis:
Estimated deferred income tax liability related to intangible assets |
$ | 74,020 | ||
Estimated deferred income tax liability related to deferred revenue |
713 | |||
Estimated deferred income tax liability related to fixed assets |
2,353 | |||
Estimated deferred income tax liability related to receivables |
16,389 | |||
|
|
|||
Estimated purchase accounting adjustments impacting deferred income tax liabilities |
93,475 | |||
|
|
|||
Estimated increase to deferred tax assets relating to excess tax benefits relating to stock-based compensation |
(6,500 | ) | ||
Reclass of acquired deferred tax assets to present net of deferred tax liabilities |
(45,959 | ) | ||
|
|
|||
Total impact on deferred income tax liabilities, net |
$ | 41,016 | ||
|
|
10
(m) | To reflect estimated increase to FIN 48 reserves classified in other liabilities. |
(n) | To reflect the elimination of DTS historical equity balances. |
Additional paid-in capital includes an adjustment to reflect the estimated fair value of DTS historical stock awards assumed by the Company attributable to pre-acquisition services. The total adjustment to additional paid-in-capital is summarized as follows:
To eliminate DTSs historical additional paid-in-capital |
$ | (272,479 | ) | |
Increase in APIC for DTS historical stock awards assumed by the Company |
13,124 | |||
|
|
|||
Total adjustment to additional paid-in-capital |
$ | (259,355 | ) | |
|
|
(o) | To reflect adjustments to retained earnings: |
To eliminate of DTSs historical retained earnings |
$ | (62,360 | ) | |
Additional Company transaction costs not reflected in historical balance sheet |
(9,339 | ) | ||
|
|
|||
Total adjustment to retained earnings |
$ | (71,699 | ) | |
|
|
(p) | To reflect adjustments to revenue as a result of purchase accounting adjustments. |
For the nine months ended September 30, 2016: |
||||
To reflect estimated DTS revenue amortized from deferred revenue balance adjusted to fair value through purchase accounting |
$ | 325 | ||
To eliminate estimated DTS revenue amortized from historical deferred revenue balance |
(190 | ) | ||
To reflect elimination of estimated revenue recognized for minimum guarantee contracts acquired from DTS existing as of acquisition date |
(13,000 | ) | ||
|
|
|||
Net impact to revenue |
$ | (12,865 | ) | |
|
|
|||
For the year ended December 31, 2015: |
||||
To reflect estimated DTS revenue amortized from deferred revenue balance adjusted to fair value through purchase accounting |
$ | 522 | ||
To reflect elimination of estimated revenue recognized for per-unit royalties associated with licensee products manufactured or sold prior to January 1, 2015 |
(23,300 | ) | ||
To eliminate estimated DTS revenue amortized from historical deferred revenue balance, which primarily consists of revenue from minimum guarantee contracts |
(11,420 | ) | ||
To reflect elimination of estimated revenues recognized for minimum guarantee contracts acquired from DTS existing as of acquisition date, that are not reflected in the adjustment above |
(18,400 | ) | ||
|
|
|||
Net impact to revenue |
$ | (52,598 | ) | |
|
|
(q) | To reflect adjustments to R&D as a result of purchase accounting. |
For the nine months ended September 30, 2016: |
||||
To reflect estimated incremental depreciation expense resulting from acquired property and equipment adjusted to fair value through purchase accounting |
$ | 326 | ||
To reflect estimated incremental stock-based compensation expense associated with historical DTS stock awards assumed by the Company pursuant to the Merger Agreement, which were remeasured at fair value on the acquisition date. |
1,025 | |||
|
|
|||
Total adjustments to R&D for the nine months ended September 30, 2016 |
$ | 1,351 | ||
|
|
|||
For the year ended December 31, 2015: |
||||
To reflect estimated incremental depreciation expense resulting from acquired property and equipment adjusted to fair value through purchase accounting |
$ | 549 | ||
To reflect estimated incremental stock-based compensation expense associated with historical DTS stock awards assumed by the Company pursuant to the Merger Agreement, which were remeasured at fair value on the acquisition date. |
1,771 | |||
|
|
|||
Total adjustments to R&D for the year ended December 31, 2015 |
$ | 2,320 | ||
|
|
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(r) | To reflect adjustments to SG&A as a result of purchase accounting. |
For the nine months ended September 30, 2016: |
||||
To reflect estimated incremental depreciation expense resulting from acquired property and equipment adjusted to fair value through purchase accounting |
$ | 613 | ||
To reflect estimated incremental stock-based compensation expense associated with historical DTS stock awards assumed by the Company pursuant to the Merger Agreement, which were remeasured at fair value on the acquisition date. |
2,561 | |||
To eliminate transaction related costs included in Tesseras historical SG&A expense |
(1,761 | ) | ||
To eliminate transaction related costs included in DTSs historical SG&A expense |
(3,116 | ) | ||
|
|
|||
Total adjustments to SG&A for the nine months ended September 30, 2016 |
$ | (1,703 | ) | |
|
|
|||
For the year ended December 31, 2015: |
||||
To reflect estimated incremental depreciation expense resulting from acquired property and equipment adjusted to fair value through purchase accounting |
$ | 1,033 | ||
To reflect estimated incremental stock-based compensation expense associated with historical DTS stock awards assumed by the Company pursuant to the Merger Agreement, which were remeasured at fair value on the acquisition date. |
5,117 | |||
|
|
|||
Total adjustments to SG&A for the year ended December 31, 2015 |
$ | 6,150 | ||
|
|
(s) | To reflect adjustments to amortization expense as a result of purchase accounting. |
For the nine months ended September 30, 2016: |
||||
To eliminate historical DTS amortization of finite-lived intangibles |
$ | (16,705 | ) | |
To reflect estimated amortization of acquired finite lived intangibles measured at fair value |
64,256 | |||
|
|
|||
Total adjustments to amortization expense for the nine months ended September 30, 2016 |
$ | 47,551 | ||
|
|
|||
For the year ended December 31, 2015: |
||||
To eliminate historical DTS amortization of finite-lived intangibles |
$ | (13,561 | ) | |
To reflect estimated amortization of acquired finite lived intangibles measured at fair value |
87,905 | |||
|
|
|||
Total adjustments to amortization expense for the year ended December 31, 2015 |
$ | 74,344 | ||
|
|
(t) | To reflect adjustments to other income and expense, net |
For the nine months ended September 30, 2016: |
||||
To eliminate DTS interest expense and amortization of debt issuance costs on historical debt |
$ | 3,276 | ||
To reflect estimated Company interest expense associated with the new debt (assuming an estimated interest rate of 4.25%) |
(19,125 | ) | ||
To reflect estimated Company amortization of debt issuance costs associated with the new debt |
(1,817 | ) | ||
To reflect estimated reduction in interest income due to lower investment holdings (assuming an estimated average interest rate of 1%) |
(2,348 | ) | ||
|
|
|||
Total adjustment to other income and expense, net |
$ | (20,014 | ) | |
|
|
|||
For the year ended December 31, 2015: |
||||
To eliminate DTS interest expense and amortization of debt issuance costs on historical debt |
$ | 2,090 | ||
To reflect estimated Company interest expense associated with the new debt (assuming an estimated interest rate of 4.25%) |
(25,500 | ) | ||
To reflect estimated Company amortization of debt issuance costs associated with the new debt |
(2,423 | ) | ||
To reflect estimated reduction in interest income due to lower investment holdings (assuming an estimated average interest rate of 1%) |
(3,131 | ) | ||
|
|
|||
Total adjustment to other income and expense, net |
$ | (28,964 | ) | |
|
|
The interest rate on the new debt is variable and fluctuates based upon changes in various underlying interest rates and other factors. A 1/8 percent (or 0.125%) variance in interest rates would result in a change in interest expense of approximately $0.8 million and $0.6 million for twelve months and nine months, respectively.
(u) | To reflect the tax effects of P&L adjustments using an estimated weighted-average statutory tax rate of 23%. |
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