DTS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements May Prove Inaccurate This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as "believes," "anticipates," "estimates," "expects," "projections," "may," "potential," "plan," "continue" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding our future financial performance or position, our business strategy, plans, expectations, and our objectives for future operations, including those relating to our products and services, as well as statements about the benefits of the transaction involving us, SRS Labs, Inc. ("SRS"), Phorus, Inc. and Phorus, LLC (collectively "Phorus"), including future financial and operating results and the combined company's plans, objectives, expectations and intentions. Although forward-looking statements in this report reflect our good faith judgment, such statements can only be based on facts and factors currently known by us.

Consequently, forward-looking statements contained herein are inherently subject to risks and uncertainties and our actual results and outcomes may be materially different than those expressed or implied by the forward-looking statements.

Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those discussed under the "Risk Factors" section contained in Part II Item 1A and elsewhere in this report and in other documents we file with the Securities and Exchange Commission, or SEC. We cannot guarantee future results, levels of activity, performance or achievements. You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this report. You are urged not to place undue reliance on the forward-looking statements contained in this report, which speak only as of the date of this report. We do not undertake any obligation to revise or update these forward-looking statements to reflect future events or circumstances.

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

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

Generally, we actively engage in intellectual property compliance and enforcement activities focused on identifying third parties who have either incorporated our technologies, copyrights, trademarks or know-how without a license or who have under-reported the amount of royalties owed under license agreements with us. We continue to invest in our compliance and enforcement 22 -------------------------------------------------------------------------------- Table of Contents infrastructure to support the value of our intellectual property to us and our licensees and to improve the long-term realization of revenues from our intellectual property. As a result of these activities, from time to time, we recognize royalty revenues that relate to consumer electronics manufacturing activities from prior periods. These royalty recoveries may cause revenues to be higher than expected during a particular reporting period and may not occur in subsequent periods. While we consider such revenues to be a regular part of our normal operations, we cannot predict such recoveries or the amount or timing of such revenues.

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

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

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

Acquisition of SRS Labs, Inc.

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

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

For additional information relating to the Merger, refer to Note 6 of the consolidated financial statements, "Business Combinations." SRS is an industry leader in audio signal processing for consumer electronics across the four screens: TVs, PCs, mobile phones and automotive entertainment systems. SRS holds approximately 150 worldwide registered and pending patents and is recognized by the industry as an authority in research and application of audio post processing technologies based on the human auditory principles. Through partnerships with leading global consumer electronics companies, semiconductor manufacturers, software developers, and content aggregators, SRS is recognized as a leader in audio enhancement, surround sound, volume leveling, audio streaming and voice processing technologies. We plan to leverage from SRS' technologies, accomplishments, and relationships to accelerate the growth of our business.

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

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

Executive Summary Financial Highlights º • º Revenues increased $1.7 million for the three months ended September 30, 2012, compared to the same prior year period. Revenues increased $3.0 million for the nine months ended September 30, 2012, compared to the same prior year period.

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

Royalty recoveries were zero for the three months ended September 30, 2012 and 2011.

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

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

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

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

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

We believe that although the trend has begun, any transition to such 24 -------------------------------------------------------------------------------- Table of Contents open platform, on-line entertainment will take many years. Further, we believe that this trend demands that playback devices be capable of processing content originating in any form, whether disk-based or on-line, which creates a substantial opportunity for our technologies to extend into network-connected products that may not have an optical drive. During the transition period, we expect that both optical media and on-line entertainment formats will continue to thrive.

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

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

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

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

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

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

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

We make estimates and judgments when determining whether the collectibility of license fees receivable from licensees is reasonably assured. We assess the collectibility of accrued license fees based on a number of factors, including past transaction history with licensees and the credit-worthiness of licensees.

If it is determined that collection is not reasonably assured, the fee is recognized when collectibility becomes reasonably assured, assuming all other revenue recognition criteria have been met, which is generally upon receipt of cash. Management estimates regarding collectibility impact the actual revenues recognized each period and the timing of the recognition of revenues. Our assumptions and judgments regarding future collectibility could differ from actual events, thus materially impacting our consolidated financial statements.

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

Cash collections from per-unit licensing agreements acquired with SRS during the three months ended September 30, 2012 were the result of product shipments during the three months ended June 30, 2012, or prior to our acquisition of SRS.

Therefore, we have not recognized revenue from per-unit licensing agreements and certain other licensing arrangements acquired with SRS during the three months ended September 30, 2012. We will begin to recognize revenue from per-unit licensing agreements and certain other licensing arrangements acquired with SRS during the fourth quarter of 2012.

Generally, consumer electronics manufacturing activities are lowest in the first calendar quarter of each year, and increase progressively throughout the remainder of the year. The third and fourth quarters are typically the strongest in terms manufacturing output as our technology licensees increase their manufacturing output to prepare for the holiday buying season. Since recognition of revenues in our business generally lags manufacturing activity by one quarter, our revenues and earnings are generally lowest in the second quarter.

In general, the introduction and inclusion of DTS technologies in new and rapidly growing markets can have a material effect on quarterly revenues and profits, and can distort the moderate seasonality described above.

26 -------------------------------------------------------------------------------- Table of Contents Results of Operations Revenues Change 2012 2011 $ % ($ in thousands) Three months ended September 30, $ 22,235 $ 20,546 $ 1,689 8 % Nine months ended September 30, $ 70,874 $ 67,910 $ 2,964 4 % Revenues for the nine months ended September 30, 2012, compared to the same prior year period, included an increase of $2.0 million in royalties recovered through intellectual property compliance and enforcement activities, which we characterize as "royalty recoveries." Royalty recoveries may cause revenues to be higher than expected during a particular period and may not occur in subsequent periods. Therefore, unless otherwise noted, the impact of royalty recoveries has been excluded from our revenue discussions in order to provide a more meaningful and comparable analysis.

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

Excluding royalty recoveries, the increase in revenues for the three months ended September 30, 2012, compared to the same prior year period, was largely attributable to continued growth in royalties from network connected markets and royalties from licensing agreements acquired with SRS. In dollar terms, these royalties were up 41% for the three months ended September 30, 2012, compared to the same prior year period. Also, these royalties comprised over 25% and 20% of revenues for the three months ended September 30, 2012 and 2011, respectively.

The growth in network connected markets was primarily driven by increased royalties from connected TVs. Royalties from the car market also increased for the three months ended September 30, 2012, compared to the same prior year period, due to continued expansion of our technology into new car models.

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

Excluding royalty recoveries, the increase in revenues for the nine months ended September 30, 2012, compared to the same prior year period, was largely attributable to continued growth in royalties from network connected markets and royalties from licensing agreements acquired with SRS. In dollar terms, these royalties were up 42% for the nine months ended September 30, 2012, compared to the 27 -------------------------------------------------------------------------------- Table of Contents same prior year period. Also, these royalties comprised over 25% and 15% of revenues for the nine months ended September 30, 2012 and 2011, respectively.

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

Gross Profit 2012 % 2011 % ($ in thousands) Three months ended September 30, $ 20,130 91 % $ 20,329 99 % Nine months ended September 30, $ 68,381 96 % $ 67,267 99 % Our gross margins for the three and nine months ended September 30, 2012, compared to the same prior year period, have been affected by the additional amortization of intangibles from the SRS and Phorus acquisitions.

Selling, General and Administrative ("SG&A") Change 2012 2011 $ % ($ in thousands) Three months ended September 30, $ 25,322 $ 12,784 $ 12,538 98 % % of Revenue 114 % 62 % Nine months ended September 30, $ 57,311 $ 39,608 $ 17,703 45 % % of Revenue 81 % 58 % The dollar increase in SG&A for the three and nine months ended September 30, 2012, compared to the same prior year periods, was primarily due to costs associated with our acquisition of SRS. Total acquisition and integration related costs included in SG&A were $7.3 million and $10.1 million for the three and nine months ended September 30, 2012, respectively. We continue to experience increases in employee related costs primarily due to increases in headcount and stock-based compensation in support of our growth.

The dollar increase in SG&A for the nine months ended September 30, 2012, compared to the same prior year period, was also due to a 2012 brand marketing campaign and tradeshow related activities.

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

28 -------------------------------------------------------------------------------- Table of Contents Research and Development ("R&D") Change 2012 2011 $ % ($ in thousands) Three months ended September 30, $ 7,625 $ 3,364 $ 4,261 127 % % of Revenue 34 % 16 % Nine months ended September 30, $ 16,915 $ 9,759 $ 7,156 73 % % of Revenue 24 % 14 % The dollar increase in R&D for the three and nine months ended September 30, 2012, compared to the same prior year periods, was primarily due to employee related costs associated with our recent acquisitions of SRS and Phorus. We continue to experience increases in employee related costs primarily due to increases in headcount and stock-based compensation in support of our growth.

Other increases include consultant and travel related expenses to support our growth.

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

Interest and Other Income (Expense), Net Change 2012 2011 $ % ($ in thousands) Three months ended September 30, $ 19 $ 348 $ (329 ) (95 )% Nine months ended September 30, $ (67 ) $ 322 $ (389 ) 121 % Interest and other income (expense), net, for the three months ended September 30, 2012 is lower because of interest income, partially offset by the effects of translation for certain foreign subsidiaries to the U.S. dollar or functional currency and interest expense associated with new debt.

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

Income Taxes 2012 2011 ($ in thousands) Three months ended September 30, $ 6,288 $ 1,627 Effective tax rate (49 )% 36 % Nine months ended September 30, $ 9,884 $ 7,030 Effective tax rate (167 )% 39 % The effective tax rates for the three and nine months ended September 30, 2012 differed from the U.S. statutory rate of 35% primarily due to the effects of foreign operations, as our tax rates on those operations are generally lower than the U.S. statutory rate, non-creditable foreign withholding taxes, certain non-deductible transaction costs associated with our acquisition of SRS and reserves for U.S. federal and state tax audits, partially offset by state research and development tax credits. Our effective tax rates for the three and nine months ended September 30, 2011 differed from the U.S. statutory rate of 35% primarily due to state income taxes and reserves for U.S. federal and state audits, partially offset by the effects of foreign operations, as our tax rates on those operations are generally lower than the U.S. statutory rate, and by the reversal of reserves for U.S. federal and foreign audit issues that have been effectively settled.

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

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

The cash used in investing activities is typically used to purchase office equipment, fixtures, computer hardware and software and engineering and certification equipment, for securing patent and trademark protection for our proprietary technologies and brand name and to purchase investments such as bank certificates of deposit and municipal bonds. Net cash used in investing activities totaled $32.3 million for the nine months ended September 30, 2012.

These cash flows were primarily impacted by the acquisition of SRS, partially offset by net proceeds from investment maturities and sales. Further, under existing arrangements, we may acquire additional contractual rights, and as a result, we could make payments up to $8.3 million over the next three years if certain milestones are achieved. Net cash provided by investing activities totaled $3.4 million for the nine months ended September 30, 2011. These cash flows were primarily impacted by net proceeds from investment maturities. For additional information relating to the aforementioned acquisition of SRS, refer to the "Acquisitions" discussion below.

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

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

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

For additional information relating to these acquisitions, refer to Note 6 of the consolidated financial statements, "Business Combinations." 30 -------------------------------------------------------------------------------- Table of Contents New Credit Facility In connection with the consummation of the Merger, we entered into a Loan Agreement, dated as of July 18, 2012 (the "Loan Agreement"), between us and Union Bank, N.A. ("Union Bank"), together with the other lenders thereunder from time to time (collectively, the "Lenders"). The Loan Agreement provides us with a $30.0 million revolving line of credit (the "Revolver"), with a five million sublimit for the issuance of standby and commercial letters of credit, to use to finance permitted acquisitions and for working capital and general corporate purposes. We may increase the Revolver by up to $20.0 million subject to certain conditions. Proceeds from the Revolver were used to finance the cash portion of the Merger consideration as mentioned above. All advances under the Revolver will become due and payable on July 18, 2015, or earlier in the event of a default. As of and for the three months ended September 30, 2012, the Company was in compliance with all loan covenants.

For additional information relating to the Loan Agreement, refer to Note 8 of the consolidated financial statements, "Long-term Debt." Common Stock Repurchases In February 2012, our Board of Directors authorized, subject to certain business and market conditions, the purchase of up to two million shares of our common stock in the open market or in privately negotiated transactions. As of September 30, 2012, we repurchased 0.2 million shares of our common stock, for an aggregate of $5.9 million, under this authorization.

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

Contractual obligations With the exception of the increased obligations associated with our gross unrecognized tax benefits, there have been no material changes to our contractual obligations since December 31, 2011. As of September 30, 2012, our total amount of unrecognized tax benefits was $15.7 million and was considered a long-term obligation. We are currently unable to make reasonably reliable estimates of the periods of cash settlements associated with these obligations.

However, we believe that it is reasonably possible that our unrecognized tax benefits will decrease by up to $4.4 million in the next twelve months as a result of certain transfer pricing adjustments that may be necessary due to a favorable settlement of the 2007 Internal Revenue Service audit. More information regarding our contractual obligations associated with our recent business combinations will follow in our upcoming Annual Report on Form 10-K for the year ended December 31, 2012.

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