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EX-32.02 - EXHIBIT 32.02 - Rovi Corpex3202-rovi9301510q.htm
EX-31.01 - EXHIBIT 31.01 - Rovi Corpex3101-rovi9301510q.htm
EX-31.02 - EXHIBIT 31.02 - Rovi Corpex3102-rovi9301510q.htm
EX-32.01 - EXHIBIT 32.01 - Rovi Corpex3201-rovi9301510q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________ 
FORM 10-Q
(Mark One)
  x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
or
  o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number: 000-53413
_____________________________________________________________ 
Rovi Corporation
(Exact name of registrant as specified in its charter)_____________________________________________________________ 
Delaware
 
26-1739297
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
2830 De La Cruz Boulevard, Santa Clara, CA
 
95050
(Address of principal executive offices)
 
(Zip Code)

(408) 562-8400
(Registrant's telephone number, including area code)
_____________________________________________________________ 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
 
Outstanding as of October 23, 2015
Common Stock
 
82,645,267






ROVI CORPORATION AND SUBSIDIARIES
INDEX
 
 
 
 
 
 
ITEM 1.
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
 



1


PART I. Financial Information

Item 1. Financial Statements

ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

September 30,
2015

December 31,
2014
ASSETS
(unaudited)


Current assets:



Cash and cash equivalents
$
65,177


$
154,568

Short-term marketable securities
82,608


183,074

Accounts receivable, net
66,398


83,514

Deferred tax assets, net
10,435


18,553

Prepaid expenses and other current assets
16,004


12,851

Total current assets
240,622


452,560

Long-term marketable securities
141,706


131,378

Property and equipment, net
32,726


37,227

Intangible assets, net
405,817


463,348

Goodwill
1,343,706


1,343,652

Other long-term assets
19,254


17,225

Total assets
$
2,183,831


$
2,445,390





LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Accounts payable and accrued expenses
$
59,882


$
83,208

Deferred revenue
18,927


18,399

Current portion of long-term debt
7,000


302,375

Total current liabilities
85,809


403,982

Taxes payable, less current portion
8,757


10,100

Deferred revenue, less current portion
12,001


15,722

Long-term debt, less current portion
969,180


804,557

Long-term deferred tax liabilities, net
75,816


80,751

Other long-term liabilities
38,563


24,014

Total liabilities
1,190,126


1,339,126

Commitments and contingencies (Note 9)





Stockholders' equity:



Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued or outstanding



Common stock, $0.001 par value, 250,000 shares authorized; 131,038 shares issued and 82,648 shares outstanding as of September 30, 2015, and 130,627 shares issued and 91,729 shares outstanding as of December 31, 2014
131


131

Treasury stock, 48,390 shares and 38,898 shares at September 30, 2015 and December 31, 2014, respectively, at cost
(1,163,386
)

(1,013,218
)
Additional paid-in capital
2,408,312


2,339,817

Accumulated other comprehensive loss
(5,603
)

(5,307
)
Accumulated deficit
(245,749
)

(215,159
)
Total stockholders’ equity
993,705


1,106,264

Total liabilities and stockholders’ equity
$
2,183,831


$
2,445,390


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

2


ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015

2014
 
2015
 
2014
Revenues
$
114,882


$
128,582

 
$
376,727

 
$
408,094

Costs and expenses:



 
 
 
 
Cost of revenues, excluding amortization of intangible assets
24,608


23,437

 
78,407

 
81,973

Research and development
23,945


25,369

 
79,087

 
79,859

Selling, general and administrative
32,148


33,172

 
110,002

 
105,576

Depreciation
4,280


4,256

 
13,098

 
13,207

Amortization of intangible assets
19,189


20,158

 
57,789

 
58,178

Restructuring and asset impairment charges
218


2,722

 
1,757

 
8,404

Gain on sale of patents

 
(500
)
 

 
(500
)
Total costs and expenses
104,388


108,614

 
340,140

 
346,697

Operating income from continuing operations
10,494


19,968

 
36,587

 
61,397

Interest expense
(11,348
)

(13,962
)
 
(35,421
)
 
(40,721
)
Interest income and other, net
586



 
1,089

 
1,835

Loss on interest rate swaps
(11,787
)

(229
)
 
(17,106
)
 
(7,565
)
Loss on debt extinguishment
(2,695
)

(5,159
)
 
(2,815
)
 
(5,159
)
Loss on debt modification

 
(3,775
)
 

 
(3,775
)
(Loss) income from continuing operations before income taxes
(14,750
)

(3,157
)
 
(17,666
)
 
6,012

Income tax expense
3,708


3,458

 
12,924

 
13,658

Loss from continuing operations, net of tax
(18,458
)

(6,615
)
 
(30,590
)
 
(7,646
)
Loss from discontinued operations, net of tax


(417
)
 

 
(56,291
)
Net loss
$
(18,458
)

$
(7,032
)
 
$
(30,590
)
 
$
(63,937
)
 
 
 
 
 
 
 
 
Basic loss per share:



 
 
 
 
Continuing operations
$
(0.22
)

$
(0.07
)
 
$
(0.36
)
 
$
(0.08
)
Discontinued operations


(0.01
)
 

 
(0.62
)
Basic loss per share
$
(0.22
)

$
(0.08
)
 
$
(0.36
)
 
$
(0.70
)
Weighted average shares used in computing basic loss per share
82,404

 
91,468

 
85,297

 
91,975

Diluted loss per share:



 
 
 
 
Continuing operations
$
(0.22
)

$
(0.07
)
 
$
(0.36
)
 
$
(0.08
)
Discontinued operations


(0.01
)
 

 
(0.62
)
Diluted loss per share
$
(0.22
)

$
(0.08
)
 
$
(0.36
)
 
$
(0.70
)
Weighted average shares used in computing diluted loss per share
82,404

 
91,468

 
85,297

 
91,975


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3


ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(18,458
)
 
$
(7,032
)
 
$
(30,590
)
 
$
(63,937
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
288

 
(741
)
 
(230
)
 
(221
)
Unrealized (losses) gains on marketable securities
(20
)
 
(131
)
 
(66
)
 
41

Other comprehensive income (loss), net of tax
268

 
(872
)
 
(296
)
 
(180
)
Comprehensive loss
$
(18,190
)
 
$
(7,904
)
 
$
(30,886
)
 
$
(64,117
)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


4


ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(30,590
)
 
$
(63,937
)
Adjustments to reconcile net loss to net cash provided by operations:
 
 
 
Loss from discontinued operations, net of tax

 
56,291

Depreciation
13,098

 
13,207

Amortization of intangible assets
57,789

 
58,178

Asset impairment charge

 
1,115

Amortization of convertible note discount and note issuance costs
10,462

 
12,993

Decrease in fair value of interest rate swaps, net of settlements
14,055

 
285

Loss on debt extinguishment
2,815

 
5,159

Loss on debt modification

 
3,775

Equity-based compensation
31,044

 
31,818

Deferred income taxes
3,676

 
(4,458
)
Other operating, net
4,182

 
4,245

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
16,429

 
26,620

Prepaid expenses and other current assets and other long-term assets
(2,230
)
 
3,722

Accounts payable and accrued expenses and other long-term liabilities
(16,652
)
 
(24,276
)
Accrued income taxes
153

 
4,316

Deferred revenue
(3,193
)
 
21,569

Net cash provided by operating activities of continuing operations
101,038

 
150,622

Net cash used in operating activities of discontinued operations
(199
)
 
(5,300
)
Net cash provided by operating activities
100,839

 
145,322

Cash flows from investing activities:
 
 
 
Purchases of short- and long-term marketable securities
(169,986
)
 
(229,255
)
Sales or maturities of short- and long-term marketable securities
258,430

 
356,214

Purchases of property and equipment
(8,345
)
 
(13,891
)
Payments for acquisitions, net of cash acquired
(5,140
)
 
(60,707
)
Payments for purchase of patents

 
(28,000
)
Proceeds from sale of business

 
50,298

Other investing, net
3

 
(812
)
Net cash provided by investing activities of continuing operations
74,962

 
73,847

Net cash provided by investing activities of discontinued operations

 

Net cash provided by investing activities
74,962

 
73,847

Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility
100,000

 

Payments on revolving credit facility
(100,000
)
 

Proceeds from issuance of long-term debt, net of issuance costs
335,616

 
812,001

Principal payments on long-term debt
(421,240
)
 
(915,756
)
Proceeds from sale of warrants
31,326

 

Payments for purchase of call options
(64,825
)
 

Payments for purchase of treasury stock
(154,519
)
 
(123,139
)
Proceeds from exercise of options and employee stock purchase plan
8,767

 
16,784

Net cash used in financing activities of continuing operations
(264,875
)
 
(210,110
)
Net cash used in financing activities of discontinued operations

 

Net cash used in financing activities
(264,875
)
 
(210,110
)
Effect of exchange rate changes on cash and cash equivalents
(317
)
 
53

Net (decrease) increase in cash and cash equivalents
(89,391
)
 
9,112

Cash and cash equivalents at beginning of period
154,568

 
156,487

Cash and cash equivalents at end of period
$
65,177

 
$
165,599


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

5


ROVI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation and Significant Accounting Policies

Description of Business

Rovi Corporation (the “Company”) is focused on powering the discovery and personalization of digital entertainment. The Company provides a broad set of integrated solutions that are embedded in its customers' products and services, connecting consumers with entertainment. Content discovery solutions include interactive program guides (“IPGs”), search and recommendation services, cloud data services and the Company's extensive database of "Metadata" (i.e., descriptive information, promotional images or other content that describes or relates to television shows, videos, movies, music, books, games or other entertainment content). In addition to offering Company developed IPGs, customers may also license the Company's patents and deploy their own IPG or a third party IPG. The Company also offers advertising and analytics services. The Company's solutions are deployed globally in the cable, satellite, consumer electronics, entertainment, media and online distribution markets.

Basis of Presentation
    
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted in accordance with such rules and regulations. However, the Company believes the disclosures made are adequate to make the information not misleading. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management, are considered necessary to present fairly the results for the periods presented.

The information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto and other disclosures contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2015, for any future year, or for any other future interim period.

The accompanying Condensed Consolidated Financial Statements include the accounts of Rovi Corporation and subsidiaries and affiliates in which the Company has a controlling financial interest or is the primary beneficiary after the elimination of intercompany accounts and transactions.
    
Use of Estimates

The preparation of Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statements and the reported results of operations for the reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, long-lived asset impairment, including goodwill and intangible assets, equity-based compensation and income taxes. Actual results may differ from those estimates.

Major Customers

Customers, and concentrations of customers, representing 10% or more of revenue were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
AT&T Inc. / DIRECTV
14
%
 
13
%
 
13
%
 
12
%
Aggregate of AT&T Inc. / DIRECTV, Comcast Corporation and Time Warner Cable Inc.
27
%
 
24
%
 
25
%
 
23
%


6


Substantially all of the Company's revenue from AT&T Inc. / DIRECTV is reported in the Intellectual Property Licensing segment. In September 2015, the Company's contract with Time Warner Cable Inc. was extended from September 2015 to March 2016. The Company's contracts with DIRECTV and Comcast Corporation expire in December 2015 and March 2016, respectively.

Related Party Transaction

During the three months ended June 30, 2015, the Company recorded $1.5 million in expenses related to the reimbursement of costs incurred by Engaged Capital, LLC (“Engaged”) in connection with the contested proxy election. Such costs were paid to Engaged during the three months ended September 30, 2015. Engaged is a related party as Glenn W. Welling is a member of the Company’s Board of Directors and is also a Principal and the Chief Investment Officer at Engaged. 

Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (the "FASB") issued guidance to help entities evaluate whether fees paid in a cloud computing arrangement include a software license. Pursuant to this guidance, when a cloud computing arrangement includes a software license, the customer accounts for the software license element of the arrangement consistent with the acquisition of other software licenses. When a cloud computing arrangement does not include a software license, the customer accounts for the arrangement as a service contract. The guidance is effective beginning January 1, 2016, with early adoption permitted. The guidance can be applied prospectively to all arrangements entered into or materially modified after the effective date or on a retrospective basis. The Company is currently evaluating the effect the guidance and transition alternatives will have on its Condensed Consolidated Financial Statements.

In April 2015, the FASB amended its existing accounting standards for the presentation of debt issuance costs in the statement of financial position. The amendments generally require that debt issuance costs related to a recognized debt obligation be presented as a deduction from the carrying amount of the debt obligation, with the associated amortization recognized as a component of interest expense. The Company expects to retrospectively apply the amendments in the first quarter of 2016. As of September 30, 2015 and December 31, 2014, the Company presented $10.8 million and $7.6 million, respectively, of debt issuance costs in Other long-term assets in the Condensed Consolidated Balance Sheets.

In May 2014, the FASB amended its existing accounting standards for revenue recognition. The amendments provide enhancements to the quality and consistency of how revenue is recognized while also improving comparability between the financial statements of companies applying U.S. GAAP and International Financial Reporting Standards. The core principle of the amended standard is for an entity to recognize revenue to depict the transfer of promised goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments are effective for the Company in the first quarter of 2018 and may be applied on a full retrospective or modified retrospective approach. Early adoption is permitted beginning in the first quarter of 2017. The Company is currently evaluating the effect the amendments and transition alternatives will have on its Condensed Consolidated Financial Statements.

In April 2014, the FASB issued guidance which modified the criteria for identifying a discontinued operation. The modification limited the definition of a discontinued operation to the disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has, or will have, a major effect on an entity's operations and financial results. Application of the modified criteria on January 1, 2015 did not have a material effect on the Condensed Consolidated Financial Statements.

(2) Acquisitions

2014 Acquisitions

Fanhattan Acquisition

On October 31, 2014, the Company acquired Fanhattan, Inc. ("Fanhattan"), and its cloud-based Fan TV branded products, for $12.0 million in cash.

The unaudited pro forma financial information presented below (in thousands, except per share amounts) presents the combined results of operations as if the acquisition of Fanhattan had been completed on January 1, 2014. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the acquisition had been completed on the date indicated, nor is it indicative of

7


future results of operations. The unaudited pro forma financial information does not include any cost saving synergies from operating efficiencies or the effect of the incremental costs incurred in integrating the companies.
 
Three Months Ended September 30, 2014
 
Nine Months Ended September 30, 2014
Net revenue
$
128,584

 
$
408,101

Operating income from continuing operations
$
15,778

 
$
50,606

Loss from continuing operations, net of tax
$
(10,836
)
 
$
(18,474
)
Basic loss per share from continuing operations
$
(0.12
)
 
$
(0.20
)
Diluted loss per share from continuing operations
$
(0.12
)
 
$
(0.20
)

Veveo Acquisition

On February 28, 2014, the Company acquired Veveo Inc. ("Veveo") for $67.6 million in cash, plus up to an additional $7.0 million in contingent consideration if certain sales and engineering goals are met. Veveo is a provider of intuitive and personalized entertainment discovery solutions. In April 2015, a portion of the contingency period concluded and $2.1 million of contingent consideration was paid as certain engineering goals were satisfied. In September 2015, the Company determined it was no longer probable that certain post-acquisition Veveo sales goals would be met and reduced the contingent consideration liability by $0.9 million which was recognized in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. At December 31, 2014, the contingent consideration was included in Accounts payable and accrued expenses on the Condensed Consolidated Balance Sheets at its estimated fair value of $3.0 million.
    
Patent Acquisition

On July 7, 2014, the Company purchased a portfolio of patents for $28.0 million in cash. The portfolio includes approximately 500 issued and pending patents, with slightly more than half being issued U.S. patents. The Company accounted for the patent portfolio purchase as an asset acquisition and is amortizing the purchase price over ten years.

2013 Acquisition

On March 8, 2013, the Company acquired IntegralReach Corporation ("IntegralReach") for $10.0 million in cash, plus up to an additional $3.0 million in contingent consideration if certain customer attainment goals were met. IntegralReach is an analytics technology company with core technology built for analyzing large amounts of data. In March 2015, the contingency period concluded and $3.0 million of contingent consideration was paid as certain customer attainment goals were satisfied.

(3) Discontinued Operations and Assets Held for Sale

DivX and MainConcept

During the fourth quarter of 2013, the Company determined it would pursue selling its DivX and MainConcept businesses. DivX and MainConcept were providers of high-quality video compression-decompression software and a software library that enabled the distribution of content across the internet and through recordable media, in either physical or streamed forms. On March 31, 2014, the Company sold its DivX and MainConcept businesses for $52.5 million in cash, plus up to $22.5 million in additional payments based on the achievement of certain revenue milestones over the three years following the acquisition. The first revenue milestone was measured on March 31, 2015, and no additional payment was received. The results of operations and cash flows of the DivX and MainConcept businesses have been presented in discontinued operations for all periods presented.

Nowtilus

In March 2014, the Company sold its Nowtilus business. Nowtilus was a provider of video-on-demand solutions in Germany. The results of operations and cash flows of the Nowtilus business have been presented in discontinued operations for all periods presented.


8


Results of Discontinued Operations

The results of discontinued operations consist of the following (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
DivX and MainConcept
$

 
$

 
$

 
$
14,952

Nowtilus

 

 

 
100

Income (loss) from operations before tax:
 
 
 
 
 
 
 
DivX and MainConcept

 

 

 
1,873

Nowtilus

 

 

 
(562
)
Loss on disposal before tax

 
(471
)
 

 
(55,119
)
Income tax benefit (expense)

 
54

 

 
(2,483
)
Loss from discontinued operations, net of tax
$

 
$
(417
)
 
$

 
$
(56,291
)

(4) Investments
The amortized cost and fair value of cash, cash equivalents and marketable securities by significant investment category were as follows (in thousands):
 
 
September 30, 2015
 
Amortized Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
19,923

 
$

 
$

 
$
19,923

Cash equivalents - Money market funds
45,254

 

 

 
45,254

Cash and cash equivalents
$
65,177

 
$

 
$

 
$
65,177

 
 
 
 
 
 
 
 
Auction rate securities
$
10,800

 
$

 
$
(324
)
 
$
10,476

Corporate debt securities
76,752

 
18

 
(98
)
 
76,672

Foreign government obligations
11,954

 
1

 
(16
)
 
11,939

U.S. Treasuries / Agencies
125,208

 
70

 
(51
)
 
125,227

Marketable securities
$
224,714

 
$
89

 
$
(489
)
 
$
224,314

Total cash, cash equivalents and marketable securities
 
 
 
 
 
 
$
289,491


 
 
December 31, 2014
 
Amortized Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
63,622

 
$

 
$

 
$
63,622

Cash equivalents - Money market funds
90,946

 

 

 
90,946

Cash and cash equivalents
$
154,568

 
$

 
$

 
$
154,568

 
 
 
 
 
 
 
 
Auction rate securities
$
10,800

 
$

 
$
(162
)
 
$
10,638

Corporate debt securities
98,379

 
13

 
(116
)
 
98,276

Foreign government obligations
10,551

 

 
(4
)
 
10,547

U.S. Treasuries / Agencies
195,077

 
37

 
(123
)
 
194,991

Marketable securities
$
314,807

 
$
50

 
$
(405
)
 
$
314,452

Total cash, cash equivalents and marketable securities
 
 
 
 
 
 
$
469,020


9


The Company has designated its marketable securities as available-for-sale.
Fair value is estimated, and realized gains and losses are calculated, based on the specific identification method. 
The Company attributes the unrealized losses on its auction rate securities to liquidity issues rather than credit issues. The Company’s auction rate securities at September 30, 2015 are comprised solely of AAA-rated investments in federally insured student loans. The Company continues to earn interest on its auction rate securities and has the ability and intent to hold these securities until they recover their amortized cost.
As of September 30, 2015, the amortized cost and fair value of marketable securities, by contractual maturity, were as follows (in thousands): 
 
Amortized Cost
 
Fair Value
Due in 1 year or less
$
82,598

 
$
82,608

Due in 1-2 years
129,728

 
129,658

Due in more than 2 years
12,388

 
12,048

Total
$
224,714

 
$
224,314


(5) Fair Value Measurements
Fair Value Hierarchy
The Company uses valuation techniques that are based on observable and unobservable inputs to measure fair value. Observable inputs are developed using market data such as publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use. Fair value measurements are classified in a hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Inputs other than Level 1 inputs that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or market-corroborated inputs.
Level 3. Unobservable inputs for the asset or liability.
Assets and liabilities reported at fair value on a recurring basis in the Condensed Consolidated Balance Sheets were classified in the fair value hierarchy as follows (in thousands):

10


 
 
September 30, 2015
 
 
Total
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
 
Money market funds
$
45,254

 
$
45,254

 
$

 
$

 
Short-term marketable securities
 
 
 
 
 
 
 
 
Corporate debt securities
33,938

 

 
33,938

 

 
Foreign government obligations
1,009

 

 
1,009

 

 
U.S. Treasuries / Agencies
47,661

 

 
47,661

 

 
Long-term marketable securities
 
 
 
 
 
 
 
 
Auction rate securities
10,476

 

 

 
10,476

 
Corporate debt securities
42,734

 

 
42,734

 

 
Foreign government obligations
10,930

 

 
10,930

 

 
U.S. Treasuries / Agencies
77,566

 

 
77,566

 

 
Total Assets
$
269,568

 
$
45,254

 
$
213,838

 
$
10,476

Liabilities
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
 
 
 
 
 
 
 
Interest rate swaps
(869
)
 

 
(869
)
 

 
Other long-term liabilities
 
 
 
 
 
 
 
 
Interest rate swaps
(29,974
)
 

 
(29,974
)
 

 
Total Liabilities
$
(30,843
)
 
$

 
$
(30,843
)
 
$

 
 
 
December 31, 2014
 
 
Total
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
 
Money market funds
$
90,946

 
$
90,946

 
$

 
$

 
Short-term marketable securities
 
 
 
 
 
 
 
 
Corporate debt securities
73,499

 

 
73,499

 

 
Foreign government obligations
9,534

 

 
9,534

 

 
U.S. Treasuries / Agencies
100,041

 

 
100,041

 

 
Long-term marketable securities
 
 

 

 

 
Auction rate securities
10,638

 

 

 
10,638

 
Corporate debt securities
24,777

 

 
24,777

 

 
Foreign government obligations
1,013

 

 
1,013

 

 
U.S. Treasuries / Agencies
94,950

 

 
94,950

 

 
Total Assets
$
405,398

 
$
90,946

 
$
303,814

 
$
10,638

Liabilities
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
 
 
 
 
 
 
 
IntegralReach contingent consideration
$
(3,000
)
 
$

 
$

 
$
(3,000
)
 
Veveo contingent consideration
(3,000
)
 

 

 
(3,000
)
 
Other long-term liabilities
 
 
 
 
 
 
 
 
Interest rate swaps (1)
(16,788
)
 

 
(16,788
)
 

 
Total Liabilities
$
(22,788
)
 
$

 
$
(16,788
)
 
$
(6,000
)


11


(1)
As of December 31, 2014, the fair value of interest rate swaps in an asset position was $5.8 million and in a liability position was $22.6 million. These amounts have been recorded on a net basis in the Condensed Consolidated Balance Sheets.
The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting period. For the three and nine months ended September 30, 2015 and 2014, there were no transfers between levels of the fair value hierarchy.
Changes in the fair value of assets and liabilities classified in Level 3 of the fair value hierarchy were as follows (in thousands): 
 
Three Months Ended September 30, 2015
 
Three Months Ended September 30, 2014
 
Auction rate securities
 
Veveo contingent consideration
 
Auction rate securities
 
IntegralReach contingent consideration
 
Veveo contingent consideration
Balance at beginning of period
$
10,584

 
$
(860
)
 
$
15,145

 
$
(3,000
)
 
$
(5,700
)
Gain included in earnings

 
860

 

 

 

Unrealized loss included in accumulated other comprehensive loss
(108
)
 

 
(66
)
 

 

Balance at end of period
$
10,476

 
$

 
$
15,079

 
$
(3,000
)
 
$
(5,700
)
 
Nine Months Ended September 30, 2015
 
Nine Months Ended September 30, 2014
 
Auction rate securities
 
IntegralReach contingent consideration
 
Veveo contingent consideration
 
Auction rate securities
 
IntegralReach contingent consideration
 
Veveo contingent consideration
Balance at beginning of period
$
10,638

 
$
(3,000
)
 
$
(3,000
)
 
$
14,903

 
$
(3,000
)
 
$

Purchases

 

 

 

 

 
(5,700
)
Settlements

 
3,000

 
2,140

 

 

 

Gain included in earnings

 

 
860

 

 

 

Unrealized (loss) gain included in accumulated other comprehensive loss
(162
)
 

 

 
176

 

 

Balance at end of period
$
10,476

 
$

 
$

 
$
15,079

 
$
(3,000
)
 
$
(5,700
)
Valuation Techniques
The fair value of marketable securities, other than auction rate securities, is estimated using observable market-corroborated inputs, such as quoted prices in active markets for similar assets, obtained from a third party pricing service.
The fair value of auction rate securities is estimated using a discounted cash flow analysis or other type of valuation model. These estimates are highly judgmental and consider, among other items, the likelihood of redemption, credit quality, duration, insurance wraps and expected future cash flows. These securities were also compared, when possible, to other observable market data with characteristics similar to the securities held by the Company.
The fair value of interest rate swaps is estimated using widely accepted valuation techniques, including a discounted cash flow analysis on the expected cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swap, including the remaining period to maturity, and uses market-corroborated inputs, including forward interest rate curves and implied volatilities. The fair value of an interest rate swap is estimated by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are estimated based on an expectation of future interest rates derived from forward interest rate curves. The fair value of an interest rate swap also incorporates credit valuation adjustments that reflect the nonperformance risk of the Company and the respective counterparty. In adjusting the fair value of its interest rate swaps for the effect of nonperformance risk, the Company has considered the impact of its master netting agreements.
The fair value of contingent consideration related to acquisitions is estimated utilizing a probability-weighted discounted cash flow analysis based on the terms of the underlying purchase agreement. The significant unobservable inputs used in calculating the fair value of the contingent consideration include financial performance scenarios, the probability of achieving those scenarios and the discount rate.

12


Other Fair Value Disclosures
The carrying amount and fair value of debt issued by the Company were as follows (in thousands): 
 
September 30, 2015
 
December 31, 2014
 
Carrying Amount
 
Fair Value (1)
 
Carrying Amount
 
Fair Value (1)
2020 Convertible Notes
$
287,854

 
$
266,944

 
$

 
$

Term Loan Facility A

 

 
124,580

 
120,000

Term Loan Facility B
688,326

 
675,697

 
693,227

 
679,958

2040 Convertible Notes

 

 
289,125

 
291,354

Total
$
976,180

 
$
942,641

 
$
1,106,932

 
$
1,091,312


(1)
The fair value of debt issued by the Company is estimated using quoted prices for the identical instrument in a market that is not active or an expected present value technique, which is based on observable market inputs using interest rates currently available to companies of similar credit standing for similar terms and remaining maturities, and considering its own credit risk. If reported at fair value in the Condensed Consolidated Balance Sheets, debt issued by the Company would be classified in Level 2 of the fair value hierarchy.

(6) Goodwill and Intangible Assets, Net

Goodwill allocated to the reportable segments as of September 30, 2015 and changes in the carrying amount of goodwill during the nine months ended September 30, 2015 were as follows (in thousands):
 
 
Balance at
Beginning of
Period
 
Foreign Currency Translation
 
Balance at End
of Period
Intellectual Property Licensing
 
$
1,184,500

 
$

 
$
1,184,500

Product
 
159,152

 
54

 
159,206

Total
 
$
1,343,652

 
$
54

 
$
1,343,706

    
Goodwill is evaluated for potential impairment annually and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. Goodwill is evaluated annually for potential impairment at the reporting unit level as of the beginning of the fourth quarter.

Qualitative factors are first assessed to determine whether events or changes in circumstances indicate it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If, based on the qualitative assessment, it is considered more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then a quantitative two-step impairment test is performed. In the first step of the quantitative impairment test, the fair value of each reporting unit is compared to its carrying amount. The fair value of the Intellectual Property Licensing reporting unit is estimated using an income approach and the fair value of the Product reporting unit is estimated by weighting the fair values derived from an income approach and a market approach. Under the income approach, the fair value of a reporting unit is estimated based on the present value of estimated future cash flow and considers estimated revenue growth rates, future operating margins and risk-adjusted discount rates. Under the market approach, fair value is estimated based on market multiples of revenue or earnings derived from comparable publicly-traded companies. The carrying amount of a reporting unit is determined by assigning the assets and liabilities, including goodwill and intangible assets, to the reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not impaired and no further testing is performed.

If the fair value of the reporting unit is less than its carrying amount, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. In the second step, the reporting unit's assets, including any unrecognized intangible assets, liabilities and non-controlling interests are measured at fair value in a hypothetical analysis to calculate the implied fair value of goodwill for the reporting unit in the same manner as if the reporting unit was being acquired in a business combination. If the carrying amount of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the difference is recorded.

During the three months ended September 30, 2015, the extent and duration of the decline in our stock price, among other factors, indicated that it was more-likely-than-not that the fair value of our reporting units was less than their carrying amount and, as a result, a quantitative interim goodwill impairment test was performed. The results of the quantitative interim

13


goodwill impairment test indicated that the estimated fair value for each reporting unit exceeded its carrying amount and, accordingly, no impairment charges were recognized.

Intangible assets consist of the following (in thousands): 
 
September 30, 2015
 
Gross
 
Accumulated
Amortization
 
Net
Developed technology and patents
$
875,187

 
$
(495,084
)
 
$
380,103

Existing contracts and customer relationships
47,524

 
(35,712
)
 
11,812

Content databases and other
58,912

 
(45,010
)
 
13,902

Trademarks / Tradenames
8,300

 
(8,300
)
 

Total
$
989,923

 
$
(584,106
)
 
$
405,817

 
 
 
 
 
 
 
December 31, 2014
 
Gross
 
Accumulated
Amortization
 
Net
Developed technology and patents
$
875,187

 
$
(443,986
)
 
$
431,201

Existing contracts and customer relationships
47,524

 
(32,010
)
 
15,514

Content databases and other
58,638

 
(42,005
)
 
16,633

Trademarks / Tradenames
8,300

 
(8,300
)
 

Total
$
989,649

 
$
(526,301
)
 
$
463,348

As of September 30, 2015, future estimated amortization expense for finite-lived intangible assets was as follows (in thousands): 
Remainder of 2015
$
19,190

2016
75,325

2017
73,131

2018
69,722

2019
67,895

Thereafter
100,554

Total
$
405,817


(7) Restructuring and Asset Impairment Charges

In conjunction with the disposition of the Rovi Entertainment Store, DivX and MainConcept businesses and the Company's narrowed business focus on discovery, in 2014 the Company conducted a review of its remaining product development, sales, data operations and general and administrative functions to identify potential cost efficiencies. As a result of this analysis, the Company took cost reduction actions that resulted in restructuring and asset impairment charges. Amounts recorded in 2015 represent adjustments to the amounts originally recorded in connection with the 2014 restructuring actions.

Components of the restructuring and asset impairment charges were as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Present value of future minimum lease payments for abandoned office space
$
435

 
$
95

 
$
1,934

 
$
1,492

Severance
(217
)
 
2,627

 
(177
)
 
5,574

Asset impairment

 

 

 
1,115

Contract termination

 

 

 
223

Restructuring and asset impairment charges
$
218

 
$
2,722

 
$
1,757

 
$
8,404


As of September 30, 2015, $2.1 million in future minimum lease payments for abandoned office space and $0.4 million of severance remains accrued.

14



(8) Debt and Interest Rate Swaps

Details of the Company's financing arrangements were as follows (dollars in thousands):
 
 
 
 
September 30, 2015
 
December 31, 2014
 
Interest Rate
Issue Date
Maturity Date
Outstanding Principal
Carrying Amount
 
Outstanding Principal
Carrying Amount
2020 Convertible Notes
0.500%
March 4, 2015
March 1, 2020
$
345,000

$
287,854

 
$

$

Term Loan Facility A
Variable
July 2, 2014
July 2, 2019


 
125,000

124,580

Term Loan Facility B
Variable
July 2, 2014
July 2, 2021
691,250

688,326

 
696,500

693,227

2040 Convertible Notes
2.625%
March 17, 2010
February 15, 2040


 
290,990

289,125

Total Long-term debt
 
 
 
$
1,036,250

976,180

 
$
1,112,490

1,106,932

Less: Current portion of long-term debt
 
 
 
 
7,000

 
 
302,375

Long-term debt, less current portion
 
 
 
 
$
969,180

 
 
$
804,557


2020 Convertible Notes

The Company issued $345.0 million in aggregate principal of 0.500% Convertible Senior Notes that mature March 1, 2020 (the “2020 Convertible Notes”) at par pursuant to an Indenture dated March 4, 2015 (the "2015 Indenture"). The 2020 Convertible Notes were sold in a private placement and bear interest at a rate of 0.500% payable semi-annually in arrears on March 1 and September 1 of each year, commencing September 1, 2015.

The 2020 Convertible Notes are convertible at an initial conversion rate of 34.5968 shares of common stock per $1,000 of principal of notes, which is equivalent to an initial conversion price of $28.9044 per share of common stock. Holders may convert the 2020 Convertible Notes, prior to the close of business on the business day immediately preceding December 1, 2019, in multiples of $1,000 of principal under the following circumstances:

during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 of principal of 2020 Convertible Notes for each trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or
on the occurrence of specified corporate events.
    
On or after December 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert the 2020 Convertible Notes, in multiples of $1,000 of principal, at any time.

On conversion, a holder will receive the conversion value of the 2020 Convertible Notes converted based on the conversion rate multiplied by the volume-weighted average price of the Company’s common stock over a specified observation period. On conversion, the Company will pay cash up to the aggregate principal amount of the 2020 Convertible Notes converted and deliver shares of the Company’s common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal of the 2020 Convertible Notes being converted.

The initial conversion rate will be subject to adjustment in certain events, including certain events that constitute a make-whole fundamental change (as defined in the 2015 Indenture). In addition, if the Company undergoes a fundamental change (as defined in the 2015 Indenture) prior to March 1, 2020, holders may require the Company to repurchase for cash all or a portion of the 2020 Convertible Notes at a repurchase price equal to 100% of the principal of the repurchased 2020 Convertible Notes, plus accrued and unpaid interest. The initial conversion rate is also subject to customary anti-dilution adjustments.

The 2020 Convertible Notes are not redeemable prior to maturity by the Company and no sinking fund is provided. The 2020 Convertible Notes are unsecured and do not contain financial covenants or restrictions on the payment of dividends, the incurrence of indebtedness or the repurchase of other securities by the Company. The 2015 Indenture includes customary

15


terms and covenants, including certain events of default after which the 2020 Convertible Notes may be due and payable immediately.

The Company has separately accounted for the liability and equity components of the 2020 Convertible Notes. The initial carrying amount of the liability component was calculated by estimating the value of the 2020 Convertible Notes using the Company’s estimated non-convertible borrowing rate of 4.75% at the time the instrument was issued. The carrying amount of the equity component, representing the value of the conversion option, was determined by deducting the liability component from the principal amount of the 2020 Convertible Notes. The difference between the principal amount of the 2020 Convertible Notes and the liability component is considered a debt discount which is being amortized to interest expense using the effective interest method over the expected term of the 2020 Convertible Notes. The equity component of the 2020 Convertible Notes was recorded as a component of Additional paid-in capital in the Condensed Consolidated Balance Sheets and will not be remeasured as long as it continues to meet the conditions for equity classification. Related to the 2020 Convertible Notes, the Condensed Consolidated Balance Sheets include the following (in thousands):
 
September 30, 2015
 
December 31, 2014
Liability Component
 
 
 
Principal outstanding
$
345,000

 
$

Less: Unamortized debt discount
57,146

 

Carrying amount
$
287,854

 
$

 
 
 
 
Equity Component
$
63,854

 
$


Components of interest expense related to the 2020 Convertible Notes were as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Stated interest
$
417

 
$

 
$
992

 
$

Amortization of debt discount
2,897

 

 
6,708

 

Total interest expense
$
3,314

 
$

 
$
7,700

 
$


The Company incurred $9.3 million in transaction costs related to the issuance of the 2020 Convertible Notes which were allocated to liability and equity components based on the relative amounts calculated for the 2020 Convertible Notes at the date of issuance. Transaction costs of $7.6 million attributable to the liability component were recorded in Other long-term assets in the Condensed Consolidated Balance Sheets and are being amortized to interest expense using the effective interest method over the expected term of the 2020 Convertible Notes. Transaction costs of $1.7 million attributable to the equity component were recorded as a component of Additional paid-in capital in the Condensed Consolidated Balance Sheets.

Purchased Call Options and Sold Warrants

Concurrent with the issuance of the 2020 Convertible Notes, the Company paid $64.8 million to purchase call options with respect to its common stock. The call options give the Company the right, but not the obligation, to purchase up to 11.9 million shares of the Company's common stock at a strike price of $28.9044 per share, which corresponds to the initial conversion price of the 2020 Convertible Notes, and are exercisable by the Company on conversion of the 2020 Convertible Notes. The call options are intended to reduce the potential dilution from conversion of the 2020 Convertible Notes. The purchased call options are separate transactions from the 2020 Convertible Notes and holders of the 2020 Convertible Notes do not have any rights with respect to the purchased call options.

Concurrent with the issuance of the 2020 Convertible Notes, the Company received $31.3 million from the sale of warrants that provide the holder of the warrant the right, but not the obligation, to purchase up to 11.9 million shares of common stock at a strike price of $40.1450 per share. The warrants are exercisable beginning June 1, 2020 and can be settled in cash or shares at the Company's election. The warrants were entered into to offset the cost of the purchased call options. The warrants are separate transactions from the 2020 Convertible Notes and holders of the 2020 Convertible Notes do not have any rights with respect to the warrants.

The amounts paid to purchase the call options and received to sell the warrants were recorded in Additional paid-in capital in the Condensed Consolidated Balance Sheets.

16



Senior Secured Credit Facility

On July 2, 2014, the Company, as parent guarantor, and two of its wholly-owned subsidiaries, Rovi Solutions Corporation and Rovi Guides, Inc., as borrowers, and certain of its other subsidiaries, as subsidiary guarantors, entered into a Credit Agreement (the “Credit Agreement”). The Credit Agreement provided for a (i) five-year $125.0 million term loan A facility (“Term Loan Facility A”), (ii) seven-year $700.0 million term loan B facility (“Term Loan Facility B” and together with Term Loan Facility A, the “Term Loan Facility”) and (iii) five-year $175.0 million revolving credit facility (including a letter of credit sub-facility) (the "Revolving Facility” and together with the Term Loan Facility, the “Senior Secured Credit Facility”). Loans under Term Loan Facility A bore interest, at the Company's option, at a rate equal to either the London Interbank Offering Rate ("LIBOR"), plus an applicable margin equal to 2.25% per annum, or the prime lending rate, plus an applicable margin equal to 1.25% per annum. Loans under Term Loan Facility B bear interest, at the Company's option, at a rate equal to either LIBOR, plus an applicable margin equal to 3.00% per annum (subject to a 0.75% LIBOR floor) or the prime lending rate, plus an applicable margin equal to 2.00% per annum. Loans under the Revolving Facility bore interest, at the Company's option, at a rate equal to either LIBOR, plus an applicable margin equal to 2.25% per annum, or the prime lending rate, plus an applicable margin equal to 1.25% per annum, subject to reduction by 0.25% or 0.50% based upon the Company's total secured leverage ratio (as defined in the Credit Agreement).

In June 2015 and September 2015, the Company made voluntary principal prepayments of $50.0 million and $75.0 million, respectively, on Term Loan Facility A. The September 2015 voluntary principal prepayment extinguished Term Loan Facility A. As of September 30, 2015, no amounts related to Term Loan Facility A remain outstanding.

In February 2015, $100.0 million was borrowed against the Revolving Facility, in part, to extinguish a portion of the 2040 Convertible Notes. In March 2015, using a portion of the proceeds from the 2020 Convertible Notes issuance, all outstanding borrowings under the Revolving Facility were repaid. In September 2015, the Revolving Facility was terminated at the Company's election.

The voluntary principal prepayments on Term Loan Facility A and the termination of the Revolving Facility resulted in a Loss on debt extinguishment of $2.7 million for the three and nine months ended September 30, 2015 related to the unamortized debt discount and unamortized debt issuance costs.

The July 2014 issuance of the Senior Secured Credit Facility and the subsequent repayment of a previous credit facility were accounted for partially as a debt extinguishment and partially as a debt modification. Creditors in the previous credit facility that elected not to participate in the Senior Secured Credit Facility were extinguished and a $5.2 million Loss on debt extinguishment was recognized in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014 related to unamortized debt issuance costs and unamortized debt discount.

Creditors in the previous credit facility that elected to participate in the Senior Secured Credit Facility and the present value of future cash flows were not substantially different, were accounted for as a debt modification with $1.0 million and $1.7 million of unamortized debt issuance costs related to the previous credit facility to be amortized to Term Loan Facility A and Term Loan Facility B interest expense, respectively, using the effective interest method. Additionally, debt issuance costs of $3.8 million related to the issuance of the Senior Secured Credit Facility to creditors from the previous credit facility were recognized as a Loss on debt modification in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014.

The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, and dividends and other distributions. Term Loan Facility A and the Revolving Facility contained financial covenants that required the Company to maintain a minimum consolidated interest coverage ratio and a maximum total leverage ratio. Term Loan Facility B does not contain a minimum consolidated interest coverage ratio or a maximum total leverage ratio covenant. The Company may be required to make an additional payment on the Term Loan Facility each February. This payment is calculated as a percentage of the prior year's Excess Cash Flow as defined in the Credit Agreement. No additional payment was required in February 2015.

Convertible Senior Notes Due 2040

The Company issued $460.0 million in aggregate principal of 2.625% Convertible Senior Notes due in 2040 at par (the “2040 Convertible Notes”) pursuant to an Indenture dated March 17, 2010 (the "2010 Indenture"). On February 20, 2015,

17


holders of $287.4 million of outstanding principal exercised their right to require the Company to repurchase their 2040 Convertible Notes for cash. On June 30, 2015, the Company redeemed the remaining $3.6 million of outstanding principal. In connection with these transactions, $0.1 million was recorded as Loss on debt extinguishment in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2015. As of September 30, 2015, no amounts related to the 2040 Convertible Notes remain outstanding.

In accounting for the 2040 Convertible Notes, the Company separately accounted for the liability and equity components to reflect its non-convertible borrowing rate of 7.75% at the time the instrument was issued. The debt discount was amortized through February 2015, which was first date the 2040 Convertible Notes could be called by the Company or put to the Company by the holders.

Related to the 2040 Convertible Notes, the Condensed Consolidated Balance Sheets include the following (in thousands):
 
September 30, 2015
 
December 31, 2014
Principal outstanding
$

 
$
290,990

Less: Unamortized debt discount

 
1,865

Carrying amount
$

 
$
289,125


Components of interest expense related to the 2040 Convertible Notes were as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Stated interest
$

 
$
1,910

 
$
1,114

 
$
5,729

Amortization of debt discount

 
3,521

 
1,865

 
10,365

Total interest expense
$

 
$
5,431

 
$
2,979

 
$
16,094


Debt Maturities

As of September 30, 2015, aggregate future principal payments on long-term debt, including the current portion of long-term debt, were as follows (in thousands):
Remainder of 2015
$
1,750

2016
7,000

2017
7,000

2018
7,000

2019 (1)
352,000

Thereafter
661,500

Total
$
1,036,250


(1)
Aggregate future principal payments on the 2020 Convertible Notes have been included based on the date they can be freely converted by holders, which is December 1, 2019. However, the 2020 Convertible Notes may be converted by holders prior to December 1, 2019 in certain circumstances.

Interest Rate Swaps

The Company issues long-term debt denominated in U.S. dollars based on market conditions at the time of financing and may enter into interest rate swaps to achieve a primarily fixed interest rate. Alternatively, the Company may choose not to enter into interest rate swaps or may terminate a previously executed swap if it believes a larger proportion of floating-rate debt would be beneficial. The Company has not designated any of its interest rate swaps as hedges for accounting purposes. The Company records interest rate swaps in the Condensed Consolidated Balance Sheets at fair value with changes in fair value recorded as Loss on interest rate swaps in the Condensed Consolidated Statements of Operations. During the three months ended September 30, 2015 and 2014, the Company recorded losses of $11.8 million and $0.2 million, respectively, on its interest rate swaps. During the nine months ended September 30, 2015 and 2014, the Company recorded losses of $17.1 million and $7.6 million, respectively, on its interest rate swaps.

18



In connection with the repayment of the Company's previous credit facility during the third quarter of 2014, $7.6 million was paid to terminate interest rate swaps with a notional of $300.0 million.

Details of the Company's interest rate swaps as of September 30, 2015 and December 31, 2014 were as follows (dollars in thousands):
 
 
 
Notional
 
 
Contract Inception
Contract Effective Date
Contract Maturity
September 30, 2015
December 31, 2014
Interest Rate Paid
Interest Rate Received
2040 Convertible Notes
 
 
 
 
 
March 2010
March 2010
February 2015
$

$
460,000

(1)
2.625%
November 2010
August 2010
February 2015

460,000

(2)
(3)
Senior Secured Credit Facility
 
 
 
 
May 2012
January 2014
January 2016
197,000

197,000

(4)
One month USD-LIBOR
May 2012
April 2014
March 2017
215,000

215,000

(5)
One month USD-LIBOR
June 2013
January 2016
March 2019
250,000

250,000

2.23%
One month USD-LIBOR
September 2014
January 2016
July 2021
125,000

125,000

2.66%
One month USD-LIBOR
September 2014
March 2017
July 2021
200,000

200,000

2.93%
One month USD-LIBOR

(1)
The Company paid a weighted average of six month USD-LIBOR minus 0.342%, set in arrears.
(2)
The Company paid a fixed interest rate which gradually increased from 0.203% for the six-month settlement period ended in February 2011 to 2.619% for the six-month settlement period ended February 2015.
(3)
The Company received a weighted average of six month USD-LIBOR minus 0.342%, set in arrears.
(4)
The Company pays a fixed interest rate which gradually increases from 0.58% for the three-month settlement period ended in June 2014 to 1.65% for the settlement period ending in January 2016.
(5)
The Company pays a fixed interest rate which gradually increases from 0.65% for the three-month settlement period ended in June 2014 to 2.11% for the settlement period ending in March 2017.

(9) Commitments and Contingencies

Lease Commitments
The Company leases facilities and certain equipment pursuant to noncancelable operating lease agreements expiring through 2025. Rent expense is recognized on a straight-line basis over the lease term. Lease incentives are amortized over the lease term on a straight-line basis. Leasehold improvements are capitalized and amortized over the shorter of the useful life of the asset or the remaining term of the lease.
Future minimum payments for operating leases as of September 30, 2015 were as follows (in thousands):
Remainder of 2015
$
5,493

2016
17,842

2017
13,286

2018
11,863

2019
10,023

Thereafter
42,963

Gross future minimum lease payments
$
101,470

Less: Sublease revenues
(7,609
)
Net future minimum lease payments
$
93,861


Indemnifications

In the normal course of business, the Company provides indemnifications of varying scopes and amounts to certain of its licensees against claims made by third parties arising out of the use and / or incorporation of the Company's products, intellectual property, services and / or technologies into the licensees' products and services. In some cases, the Company may

19


receive tenders of defense and indemnity arising out of products, intellectual property services and / or technologies that are no longer provided by the Company due to having divested certain assets, but which were previously licensed or provided by the Company. The Company's indemnification obligations are typically limited to the cumulative amount paid to the Company by the licensee under the license agreement; however, some license agreements, including those with the Company's largest multiple system operators and digital broadcast satellite providers, have larger limits or do not specify a limit on amounts that may be payable under the indemnity arrangements. The Company cannot estimate the possible range of losses that may affect its financial position, results of operations or cash flows in a given period or the maximum potential impact of these indemnification provisions on its financial position, results of operations or cash flows.

Legal Proceedings

The Company is party to various legal actions, claims and proceedings as well as other actions, claims and proceedings incidental to its business. The Company accrues a liability for matters in which losses are considered probable and the amount of loss can be reasonably estimated. Some of the matters pending against the Company involve potential compensatory, punitive or treble damage claims or sanctions, that, if granted, could require the Company to pay damages or make other expenditures in amounts that could have a material adverse effect on its financial position, results of operations or cash flows. As of September 30, 2015, the Company does not believe any litigation matters, individually or in the aggregate, will have a material adverse effect on its Condensed Consolidated Financial Statements.


20



(10) Stockholders' Equity

Changes in Stockholders' Equity

Stockholders’ equity as of September 30, 2015 and 2014 and changes in stockholders’ equity during the three months ended September 30, 2015 and 2014 were as follows (in thousands):
  
 
Common stock
 
Treasury stock
 
Additional paid-in capital
 
Accumulated other comprehensive loss
 
Accumulated deficit
 
Total stockholders’ equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balances as of June 30, 2015
 
130,756

 
$
131

 
(43,898
)
 
$
(1,113,386
)
 
$
2,397,069

 
$
(5,871
)
 
$
(227,291
)
 
$
1,050,652

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(18,458
)
 
(18,458
)
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
268

 
 
 
268

Issuance of common stock upon exercise of options
 
13

 

 
 
 
 
 
184

 
 
 
 
 
184

Issuance of common stock under employee stock purchase plan
 
291

 

 
 
 
 
 
2,716

 
 
 
 
 
2,716

Cancellation of restricted stock, net
 
(22
)
 

 
 
 
 
 

 
 
 
 
 

Equity-based compensation
 
 
 
 
 
 
 
 
 
8,328

 
 
 
 
 
8,328

Excess tax benefit associated with stock plans
 
 
 
 
 
 
 
 
 
15

 
 
 
 
 
15

Stock repurchases
 
 
 
 
 
(4,492
)
 
(50,000
)
 
 
 
 
 
 
 
(50,000
)
Balances as of September 30, 2015
 
131,038

 
$
131

 
(48,390)

 
$
(1,163,386
)
 
$
2,408,312

 
$
(5,603
)
 
$
(245,749
)
 
$
993,705


  
 
Common stock
 
Treasury stock
 
Additional paid-in capital
 
Accumulated other comprehensive loss
 
Accumulated deficit
 
Total stockholders’ equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balances as of June 30, 2014
 
130,407

 
$
130

 
(35,570
)
 
$
(939,833
)
 
$
2,313,770

 
$
(3,307
)
 
$
(202,320
)
 
$
1,168,440

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(7,032
)
 
(7,032
)
Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
(872
)
 
 
 
(872
)
Issuance of common stock upon exercise of options
 
44

 

 
 
 
 
 
757

 
 
 
 
 
757

Issuance of common stock under employee stock purchase plan
 
350

 

 
 
 
 
 
4,387

 
 
 
 
 
4,387

Cancellation of restricted stock, net
 
(83
)
 
1

 
 
 
 
 
(1
)
 
 
 
 
 

Equity-based compensation
 
 
 
 
 
 
 
 
 
9,658

 
 
 
 
 
9,658

Excess tax benefit associated with stock plans
 
 
 
 
 
 
 
 
 
37

 
 
 
 
 
37

Balances as of September 30, 2014
 
130,718

 
$
131

 
(35,570)

 
$
(939,833
)
 
$
2,328,608

 
$
(4,179
)
 
$
(209,352
)
 
$
1,175,375


21



Stockholders’ equity as of September 30, 2015 and 2014 and changes in stockholders’ equity during the nine months ended September 30, 2015 and 2014 were as follows (in thousands):
  
 
Common stock
 
Treasury stock
 
Additional paid-in capital
 
Accumulated other comprehensive loss
 
Accumulated deficit
 
Total stockholders’ equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balances as of December 31, 2014
 
130,627

 
$
131

 
(38,898
)
 
$
(1,013,218
)
 
$
2,339,817

 
$
(5,307
)
 
$
(215,159
)
 
$
1,106,264