ROVI 3.31.13 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-Q
_____________________________________________________________
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2013
or
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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)
_____________________________________________________________
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Delaware | | 26-1739297 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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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 ¨
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 ¨
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:
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Large accelerated filer | ý | Accelerated filer | o |
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Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class | | Outstanding as of April 24, 2013 |
Common stock, $0.001 par value | | 103,429,130 |
ROVI CORPORATION
FORM 10-Q
INDEX
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
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| | | | | | | |
| March 31, 2013 | | December 31, 2012 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 280,380 |
| | $ | 285,352 |
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Short-term investments | 457,387 |
| | 577,988 |
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Trade accounts receivable, net | 99,821 |
| | 106,018 |
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Taxes receivable | 13,787 |
| | 9,237 |
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Deferred tax assets, net | 20,377 |
| | 20,373 |
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Prepaid expenses and other current assets | 28,664 |
| | 26,786 |
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Assets held for sale | 57,950 |
| | 76,852 |
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Total current assets | 958,366 |
| | 1,102,606 |
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Long-term marketable investment securities | 119,764 |
| | 104,893 |
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Property and equipment, net | 31,352 |
| | 32,791 |
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Finite-lived intangible assets, net | 667,320 |
| | 689,494 |
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Other assets | 27,860 |
| | 23,862 |
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Goodwill | 1,348,641 |
| | 1,341,035 |
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Total assets | $ | 3,153,303 |
| | $ | 3,294,681 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable and accrued expenses | $ | 94,379 |
| | $ | 94,830 |
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Deferred revenue | 14,550 |
| | 16,152 |
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Current portion of long-term debt | 28,606 |
| | 106,407 |
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Liabilities held for sale | 10,826 |
| | 11,053 |
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Total current liabilities | 148,361 |
| | 228,442 |
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Taxes payable, less current portion | 50,925 |
| | 50,800 |
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Long-term debt, less current portion | 1,348,694 |
| | 1,373,818 |
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Deferred revenue, less current portion | 3,241 |
| | 3,921 |
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Long-term deferred tax liabilities, net | 43,058 |
| | 41,596 |
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Other non current liabilities | 16,340 |
| | 8,683 |
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Total liabilities | 1,610,619 |
| | 1,707,260 |
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Stockholders’ equity: | | | |
Common stock | 128 |
| | 125 |
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Treasury stock | (676,677 | ) | | (634,571 | ) |
Additional paid-in capital | 2,221,717 |
| | 2,196,567 |
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Accumulated other comprehensive loss | (3,426 | ) | | (1,375 | ) |
Retained earnings | 942 |
| | 26,675 |
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Total stockholders’ equity | 1,542,684 |
| | 1,587,421 |
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Total liabilities and stockholders’ equity | $ | 3,153,303 |
| | $ | 3,294,681 |
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See the accompanying notes to the unaudited condensed consolidated financial statements.
ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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| Three Months Ended March 31, |
| 2013 | | 2012 |
Revenues | $ | 154,730 |
| | $ | 171,727 |
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Costs and expenses: | | | |
Cost of revenues | 30,748 |
| | 25,152 |
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Research and development | 35,824 |
| | 40,165 |
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Selling, general and administrative | 41,756 |
| | 40,476 |
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Depreciation | 4,464 |
| | 5,000 |
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Amortization of intangible assets | 25,035 |
| | 25,635 |
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Restructuring and asset impairment charges | 637 |
| | 1,372 |
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Total costs and expenses | 138,464 |
| | 137,800 |
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Operating income from continuing operations | 16,266 |
| | 33,927 |
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Interest expense | (16,161 | ) | | (12,148 | ) |
Interest income and other, net | 629 |
| | 1,610 |
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Debt modification expense | (304 | ) | | (4,464 | ) |
Loss on interest rate swaps and caps, net | (1,044 | ) | | (104 | ) |
Loss on debt redemption | — |
| | (1,758 | ) |
(Loss) income from continuing operations before income taxes | (614 | ) | | 17,063 |
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Income tax (benefit) expense | (616 | ) | | 4,543 |
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Income from continuing operations, net of tax | 2 |
| | 12,520 |
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Discontinued operations, net of tax | (25,735 | ) | | (17,129 | ) |
Net loss | $ | (25,733 | ) | | $ | (4,609 | ) |
Basic earnings per share: | | | |
Basic income per share from continuing operations | $ | — |
| | $ | 0.12 |
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Basic loss per share from discontinued operations | (0.26 | ) | | (0.16 | ) |
Basic net loss per share | $ | (0.26 | ) | | $ | (0.04 | ) |
Shares used in computing basic net earnings per share | 100,565 |
| | 107,532 |
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Diluted earnings per share: | | | |
Diluted income per share from continuing operations | $ | — |
| | $ | 0.12 |
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Diluted loss per share from discontinued operations | (0.26 | ) | | (0.16 | ) |
Diluted net loss per share | $ | (0.26 | ) | | $ | (0.04 | ) |
Shares used in computing diluted net earnings per share | 100,877 |
| | 108,269 |
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See the accompanying notes to the unaudited condensed consolidated financial statements.
ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
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| Three Months Ended March 31, |
| 2013 | | 2012 |
Net loss | $ | (25,733 | ) | | $ | (4,609 | ) |
Other comprehensive loss, net of tax: | | | |
Foreign currency translation adjustment | (2,220 | ) | | (665 | ) |
Unrealized gains (losses) on investments, net | 169 |
| | (91 | ) |
Other comprehensive loss | (2,051 | ) | | (756 | ) |
Comprehensive loss | $ | (27,784 | ) | | $ | (5,365 | ) |
See the accompanying notes to the unaudited condensed consolidated financial statements.
ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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| Three Months Ended March 31, |
| 2013 | | 2012 |
Cash flows from operating activities: | | | |
Net loss | $ | (25,733 | ) | | $ | (4,609 | ) |
Adjustments to reconcile net loss to net cash provided by operations: | | | |
Loss from discontinued operations, net of tax | 25,735 |
| | 17,129 |
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Change in fair value of interest rate swaps and caps, net of premium | 4,948 |
| | 5,129 |
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Depreciation | 4,464 |
| | 5,000 |
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Amortization of intangible assets | 25,035 |
| | 25,635 |
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Debt modification expense | 304 |
| | 4,464 |
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Amortization of note issuance costs and convertible note discount | 4,261 |
| | 3,797 |
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Equity-based compensation | 15,518 |
| | 17,234 |
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Loss on debt redemption | — |
| | 1,758 |
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Deferred taxes | (1,300 | ) | | (4,451 | ) |
Other, net | 2,528 |
| | 1,604 |
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Changes in operating assets and liabilities, net of assets and liabilities acquired: | | | |
Accounts receivable, net | 6,197 |
| | (17,248 | ) |
Deferred revenue | (2,282 | ) | | (2,458 | ) |
Prepaid expenses, other current assets, and other assets | (2,702 | ) | | (10,284 | ) |
Income taxes | (4,426 | ) | | 4,066 |
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Accounts payable, accrued expenses, and other long-term liabilities | (743 | ) | | (13,399 | ) |
Net cash provided by operating activities of continuing operations | 51,804 |
| | 33,367 |
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Net cash used in operating activities of discontinued operations | (5,878 | ) | | (17,639 | ) |
Net cash provided by operating activities | 45,926 |
| | 15,728 |
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Cash flows from investing activities: | | | |
Purchases of long and short-term marketable investments | (207,077 | ) | | (93,300 | ) |
Sales or maturities of long and short-term marketable investments | 310,785 |
| | 111,461 |
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Proceeds from sale of business | — |
| | 13,500 |
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Purchases of property and equipment | (2,565 | ) | | (4,306 | ) |
Payments for acquisition, net of cash acquired | (10,000 | ) | | — |
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Other investing, net | (28 | ) | | (33 | ) |
Net cash provided by investing activities of continuing operations | 91,115 |
| | 27,322 |
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Net cash used in investing activities of discontinued operations | (495 | ) | | (2,004 | ) |
Net cash provided by investing activities | 90,620 |
| | 25,318 |
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Cash flows from financing activities: | | | |
Payments under capital lease and debt obligations | (106,407 | ) | | (320,250 | ) |
Purchase of treasury stock | (42,106 | ) | | (12,010 | ) |
Proceeds from issuance of debt, net of issuance costs | — |
| | 788,586 |
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Excess tax benefits associated with equity plans | — |
| | 286 |
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Proceeds from exercise of options and employee stock purchase plan | 8,461 |
| | 9,882 |
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Net cash (used in) provided by financing activities of continuing operations | (140,052 | ) | | 466,494 |
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Net cash used in financing activities of discontinued operations | — |
| | — |
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Net cash (used in) provided by financing activities | (140,052 | ) | | 466,494 |
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Effect of exchange rate changes on cash | (1,466 | ) | | (359 | ) |
Net (decrease) increase in cash and cash equivalents | (4,972 | ) | | 507,181 |
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Cash and cash equivalents at beginning of period | 285,352 |
| | 136,780 |
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Cash and cash equivalents at end of period | $ | 280,380 |
| | $ | 643,961 |
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See the accompanying notes to the unaudited condensed consolidated financial statements.
ROVI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION
Rovi Corporation and its subsidiaries (collectively “Rovi” or the “Company”) are focused on powering the discovery, delivery, display and monetization 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. Company offerings enable discovery, advertising and video display and delivery. Content discovery solutions include interactive program guides (“IPGs”), search and recommendations, cloud data services and the Company's extensive database of descriptive information about television, movies, music, books, and game content (“metadata”). In addition to offering IPGs developed by the Company, our customers may also license our patents and deploy their own IPG or a third party IPG. Advertising solutions include the Rovi Advertising Network and the Rovi Advertising Service, delivering advertising to IPGs, devices connected to the Internet, interactive applications and advertising on consumer websites operated by the Company. Video display and delivery solutions include video compression-decompression technology (“codecs”) and content protection technologies and services. The Company's solutions are deployed globally in the cable, satellite, consumer electronics, entertainment and online distribution markets.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted in accordance with such rules and regulations. However, the Company believes the disclosures 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. 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 2012 Annual Report on Form 10-K.
The Condensed Consolidated Statements of Operations for the interim periods presented are not necessarily indicative of the results expected for the entire year ending December 31, 2013, for any future year, or for any other future interim period. Certain prior period amounts have been reclassified to conform to the current period presentation.
NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to the Company’s significant accounting policies, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, other than the adoption of the accounting standard updates listed below.
On January 1, 2013, the Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). The new guidance requires entities to present, in one place, information about reclassification adjustments out of accumulated other comprehensive income. ASU 2013-02 only relates to disclosure requirements and its adoption did not have a material effect on the Company's results from operations or financial position.
On January 1, 2013, the Company adopted FASB Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities ("ASU 2011-11") and Accounting Standards Update No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The new guidance requires the disclosure of the gross amounts subject to rights of set off, amounts offset in accordance with the accounting standards followed, and the related net exposure. The new guidance only relates to disclosure requirements and its adoption did not have a material effect on the Company's results from operations or financial position.
NOTE 3 – ACQUISITIONS
2013 Acquisitions
On March 8, 2013, the Company acquired IntegralReach Corporation ("IntegralReach") for approximately $10.0 million, plus an additional $3.0 million in contingent consideration that will be paid if certain customer attainment goals are met. IntegralReach is an analytics technology company with core technology built for analyzing large amounts of data. The contingent consideration has been included in other non current liabilities on the Condensed Consolidated Balance Sheet at its estimated fair value of $3.0 million.
2012 Acquisitions
On May 21, 2012, the Company acquired Snapstick, Inc. ("Snapstick") for approximately $20.0 million in cash. Snapstick has developed a software platform that allows consumers to use a mobile device or laptop to make content available on a TV monitor.
NOTE 4 – DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
On February 1, 2012, the Company sold its Roxio Consumer Software business for approximately $17.5 million. The results of operations and cash flows of the Roxio Consumer Software business have been reclassified to discontinued operations for all periods presented.
During the fourth quarter of 2012, the Company made a determination that it would pursue selling its Rovi Entertainment Store business. The Company has therefore classified the assets and liabilities of the Rovi Entertainment Store to held for sale as of March 31, 2013 and December 31, 2012, and recorded the operations and cash flows of the Rovi Entertainment Store business as discontinued operations. Based on the initial indications of interest the Company received from potential buyers of the Rovi Entertainment Store business in the second half of the first quarter, the Company determined a $16.0 million impairment was required to the goodwill of the Rovi Entertainment Store business to reduce the carrying value of the asset group to fair value less costs to sell.
The assets and liabilities attributable to the Company's Rovi Entertainment Store business unit classified in the Condensed Consolidated Balance Sheet as held for sale at March 31, 2013 and December 31, 2012, consist of the following (in thousands):
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| March 31, 2013 | | December 31, 2012 |
Trade accounts receivable, net | $ | 5,163 |
| | $ | 8,746 |
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Prepaid and other assets | 2,224 |
| | 1,255 |
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Property and equipment, net | 6,599 |
| | 6,637 |
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Intangible assets | 23,246 |
| | 23,246 |
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Goodwill | 20,716 |
| | 36,941 |
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Other long-term assets | 2 |
| | 27 |
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Accounts payable and other liabilities | (7,803 | ) | | (8,013 | ) |
Deferred revenue | (3,023 | ) | | (3,040 | ) |
Total net assets held for sale | $ | 47,124 |
| | $ | 65,799 |
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During the three months ended March 31, 2013 and 2012, the Company recorded $0.5 million and $0.7 million, respectively, in expenses related to indemnification for IP infringement claims relating to the Company's previous software business which included FLEXnet, InstallShield and AdminStudio software tools, which was sold in 2008.
The results of operations of the Company’s discontinued businesses consist of the following (in thousands):
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| Three Months Ended March 31, |
| 2013 | | 2012 |
Net revenue: | | | |
Roxio Consumer Software | $ | — |
| | $ | 5,295 |
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Rovi Entertainment Store | 3,089 |
| | 3,264 |
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Pre-tax (loss) income from operations: | | | |
Previous Software | $ | (448 | ) | | $ | (749 | ) |
Roxio Consumer Software | — |
| | 403 |
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Rovi Entertainment Store (1) | (25,336 | ) | | (11,103 | ) |
Pre-tax gain on disposal of business units | — |
| | 363 |
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Income tax benefit (expense) (2) | 49 |
| | (6,043 | ) |
Loss from discontinued operations, net of tax | $ | (25,735 | ) | | $ | (17,129 | ) |
(1) Rovi Entertainment Store pre-tax loss for the three months ended March 31, 2013, included $16.0 million in goodwill impairment charges.
(2) The income tax expense recorded in discontinued operations for the three months ended March 31, 2012, is primarily the result of establishing a deferred tax liability to reflect the disposal of tax basis goodwill in the Roxio Consumer Software business which was sold in the first quarter of 2012.
NOTE 5 – DEBT
Convertible Senior Notes Due 2040
In March 2010, the Company issued $460.0 million in 2.625% convertible senior notes (the “2040 Convertible Notes”) due in 2040 at par. The 2040 Convertible Notes may be converted, under the circumstances described below, based on an initial conversion rate of 21.1149 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $47.36 per share).
Prior to November 15, 2039, holders may convert their 2040 Convertible Notes into cash and the Company’s common stock, at the applicable conversion rate, under any of the following circumstances: (i) during any fiscal quarter after the calendar quarter ending June 30, 2010, if the last reported sale price of the Company’s common stock for at least 20 trading days during the 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 applicable conversion price in effect on each applicable trading day; (ii) during the five business-day period after any ten consecutive trading-day period (the “measurement period”) in which the trading price per note for each day of such measurement period 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 day; (iii) upon the occurrence of specified corporate transactions, as described in the indenture, or (iv) if the Company calls any or all of the notes for redemption, at any time prior to the close of business on the third scheduled trading day prior to that redemption date. From November 15, 2039 until the close of business on the scheduled trading day immediately preceding the maturity date of February 15, 2040, holders may convert their 2040 Convertible Notes into cash and shares of the Company’s common stock at the applicable conversion rate, at any time, regardless of the foregoing circumstances. After February 20, 2015, the Company has the right to call for redemption all, or a portion, of the 2040 Convertible Notes at 100% of the principal amount of notes to be redeemed, plus accrued interest to, but excluding, the redemption date. Holders have the right to require the Company to repurchase the 2040 Convertible Notes on February 20, 2015, 2020, 2025, 2030 and 2035 for cash equal to 100% of the principal amount of the notes to be repurchased, plus accrued interest to, but excluding, the repurchase date.
Upon conversion, a holder will receive the conversion value of the 2040 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 following the conversion date. The conversion value of each 2040 Convertible Note will be paid in cash up to the aggregate principal amount of the 2040 Convertible Notes to be converted and shares of common stock to the extent the conversion value exceeds the principal amount of the converted note. Upon the occurrence of a fundamental change (as defined in the indenture), the holders may require the Company to repurchase for cash all or a portion of their 2040 Convertible Notes at a price equal to 100% of the principal amount of the 2040 Convertible Notes being repurchased plus accrued interest, if any. In addition, following certain corporate events that occur prior to February 20, 2015, the conversion rate will be increased for holders who elect to convert their notes in connection with such a corporate event in certain circumstances.
In accordance with ASC 470, related to accounting for convertible debt instruments that may be settled in cash upon conversion, the Company separately accounted for the liability and equity components of the 2040 Convertible Notes to reflect its non-convertible debt borrowing rate of 7.75%, at the time the instrument was issued, when interest cost is recognized. The debt discount is being amortized through February 2015, which represents the first date the 2040 Convertible Notes can be called by the Company or put to the Company by the noteholders. The Company did not repurchase any of the 2040 Convertible Notes during the three months ended March 31, 2013 and 2012.
As of March 31, 2013 and December 31, 2012, the principal amount of the Company’s 2040 Convertible Notes was $291.0 million and $291.0 million, respectively. As of March 31, 2013 and December 31, 2012, the unamortized discount on the 2040 Convertible Notes was $25.6 million and $28.8 million, respectively, resulting in a carrying amount of $265.4 million and $262.2 million, respectively. During the three months ended March 31, 2013 and 2012, the Company recorded $3.1 million and $2.9 million of interest expense, respectively for the 2040 Convertible Notes related to the amortization of the discount.
Senior Secured Term Loans
On February 7, 2011, the Company, as guarantor, two of the Company’s subsidiaries, Rovi Solutions Corporation and Rovi Guides Inc. (collectively, the "Borrowers") and certain of the Company's other subsidiaries, as subsidiary guarantors (together with the Company and the Borrowers, the "Loan Parties"), entered into a credit agreement (the "Initial Credit Agreement"), pursuant to which the Borrowers jointly borrowed $750 million. The Initial Credit Agreement provided for a 5-year $450 million term loan (“Term Loan A-1”) and a 7-year $300 million term loan (“Term Loan B-1”). The term loans are secured by substantially all of the Loan Parties assets. On March 29, 2012, the Initial Credit Agreement was amended and restated (the "Amended and Restated Credit Agreement") to provide for two new tranches of term loans totaling $800 million: (i) a 5-year $215 million term loan (“Term Loan A-2”), and (ii) a 7-year $585 million term loan (“Term Loan B-2”). The proceeds of the two new tranches of term loans were partially used to pay off the remaining $297.8 million balance of Term Loan B-1. The Term Loan A-1 and Term Loan A-2 require annual amortization payments and mature on February 7, 2016 and March 29, 2017, respectively. Term Loan B-2 requires quarterly amortization payments and matures on March 29, 2019. Term Loan A-1 bears interest, at the Company’s election, at either prime rate plus an applicable margin equal to 1.5% per annum or LIBOR plus an applicable margin equal to 2.5% per annum, and was issued at a discount of $2.8 million to par value. Term Loan A-2 bears interest, at the Company's election, at either the prime rate plus an applicable margin equal to 1.25% per annum or LIBOR plus an applicable margin equal to 2.25% per annum, and was issued at a discount of $1.0 million to par value. Term Loan B-2 bears interest, at the Company's election, at either the prime rate plus an applicable margin equal to 2.0% per annum or LIBOR plus an applicable margin equal to 3.0% per annum (subject to a 1.0% LIBOR floor) and was issued at a discount of $2.9 million to par value (See Note 16 for information on the Refinancing Amendment entered into in April 2013). On February 13, 2013, the Company amended the Amended and Restated Credit Agreement to expand the permitted investments under the Amended and Restated Credit Agreement. In connection with this amendment, the Company recorded $0.3 million in debt modification expenses during the three months ended March 31, 2013.
The Amended and Restated 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. The Amended and Restated Credit Agreement contains financial covenants that require the Company and its subsidiaries to maintain a minimum consolidated interest coverage ratio and a maximum total leverage ratio. The Company may be required to make an additional payment on the Senior Secured Term Loan each February. This payment is a percentage of the prior year's Excess Cash Flow as defined in the Amended and Restated Credit Agreement. In February 2013, the Company made a $83.9 million Excess Cash Flow payment based on its 2012 results. As of March 31, 2013, the carrying values of Term Loan A-1, Term Loan A-2 and Term Loan B-2 were $375.2 million, $199.2 million and $537.5 million, net of discount, respectively.
The Company accounted for the issuance of Term Loan B-2 and subsequent repayment of Term Loan B-1 as a partial debt modification, as a significant number of Term Loan B-1 investors reinvested in Term Loan B-2, and the change in the present value of future cash flows between Term Loan B-1 and Term Loan B-2 was less than 10%. Under debt modification accounting, $3.5 million in unamortized debt issuance costs related to Term Loan B-1 investors who reinvested in Term Loan B-2, are being amortized to Term Loan B-2 interest expense using the effective interest method. In addition, $1.0 million in Term Loan B-2 debt issuance costs, related to new investors in Term Loan B-2, are being amortized to Term Loan B-2 interest expense using the effective interest method. Debt issuance costs of $4.5 million relating to the issuance of Term Loan B-2 to Term Loan B-1 investors, have been recorded as debt modification expenses on the Company's Condensed Consolidated Statement of Operations for the three months ended March 31, 2012. In addition, during the three months ended March 31, 2012, the Company realized a loss on debt redemption of $1.8 million related to writing off the unamortized Term Loan B-1 debt discount and the unamortized debt issuance costs related to investors who did not reinvest in Term Loan B-2.
Debt Repurchase Program
In connection with the issuance of Term Loan A-2 and Term Loan B-2, the Company's Board of Directors authorized the repurchase of the $297.8 million remaining balance of Term Loan B-1. This repurchase authorization was in addition to the May 2011 authorization to repurchase up to $300.0 million of debt outstanding. During the three months ended March 31, 2013, the Company did not repurchase any debt under the May 2011 authorization. As of March 31, 2013, the Company had $210.1 million remaining under its existing debt repurchase authorization.
The following is a summary of the carrying value and par value of the Company's debt (in thousands) as of March 31, 2013:
|
| | | | | | | |
| Carrying Value | | Par Value |
Term Loan A-1 | $ | 375,203 |
| | $ | 376,696 |
|
Term Loan A-2 | 199,194 |
| | 199,974 |
|
Term Loan B-2 | 537,519 |
| | 540,035 |
|
2040 Convertible Notes | 265,384 |
| | 290,990 |
|
| $ | 1,377,300 |
| | $ | 1,407,695 |
|
NOTE 6 – INVESTMENTS
The following is a summary of available-for-sale and other investment securities (in thousands) as of March 31, 2013:
|
| | | | | | | | | | | | | | | |
| Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Cash | $ | 54,206 |
| | $ | — |
| | $ | — |
| | $ | 54,206 |
|
Cash equivalents - Money markets | 220,174 |
| | — |
| | — |
| | 220,174 |
|
Cash equivalents - Corporate debt securities | 6,000 |
| | — |
| | — |
| | 6,000 |
|
Total cash and cash equivalents | $ | 280,380 |
| | $ | — |
| | $ | — |
| | $ | 280,380 |
|
Available-for-sale investments: | | | | | | | |
Auction rate securities | $ | 15,700 |
| | $ | — |
| | $ | (1,177 | ) | | $ | 14,523 |
|
Corporate debt securities | 210,097 |
| | 175 |
| | (70 | ) | | 210,202 |
|
Foreign government obligations | 13,362 |
| | — |
| | (12 | ) | | 13,350 |
|
U.S. Treasury/Agencies | 339,057 |
| | 51 |
| | (32 | ) | | 339,076 |
|
Total available-for-sale investments | $ | 578,216 |
| | $ | 226 |
| | $ | (1,291 | ) | | $ | 577,151 |
|
Total cash, cash equivalents and investments | | | | | | | $ | 857,531 |
|
The following is a summary of available-for-sale and other investment securities (in thousands) as of December 31, 2012:
|
| | | | | | | | | | | | | | | |
| Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Cash | $ | 51,629 |
| | $ | — |
| | $ | — |
| | $ | 51,629 |
|
Cash equivalents - Money markets | 212,123 |
| | — |
| | — |
| | 212,123 |
|
Cash equivalents - Corporate debt securities | 21,600 |
| | — |
| | — |
| | 21,600 |
|
Total cash and cash equivalents | $ | 285,352 |
| | $ | — |
| | $ | — |
| | $ | 285,352 |
|
Available-for-sale investments: | | | | | | | |
Auction rate securities | $ | 15,700 |
| | $ | — |
| | $ | (1,413 | ) | | $ | 14,287 |
|
Corporate debt securities | 365,268 |
| | 196 |
| | (100 | ) | | 365,364 |
|
Foreign government obligations | 20,745 |
| | 19 |
| | (1 | ) | | 20,763 |
|
U.S. Treasury/Agencies | 282,412 |
| | 75 |
| | (20 | ) | | 282,467 |
|
Total available-for-sale investments | $ | 684,125 |
| | $ | 290 |
| | $ | (1,534 | ) | | $ | 682,881 |
|
Total cash, cash equivalents and investments | | | | | | | $ | 968,233 |
|
As of March 31, 2013, the fair value of available-for-sale debt investments, by contractual maturity, was as follows (in thousands):
|
| | | |
Due in 1 year or less | $ | 463,387 |
|
Due in 1-2 years | 105,241 |
|
Due in 2-3 years | — |
|
Due in greater than 3 years | 14,523 |
|
Total | $ | 583,151 |
|
Market values were determined for each individual security in the investment portfolio. The Company attributes the unrealized losses in its auction rate securities portfolio to liquidity issues rather than credit issues. The Company’s available-for-sale auction rate securities portfolio at March 31, 2013 is comprised solely of AAA rated investments in federally insured student loans and municipal and educational authority bonds. The Company continues to earn interest on all of its auction rate security instruments and has the ability and intent to hold these securities until they recover.
NOTE 7 – INTEREST RATE SWAPS AND CAPS
In March 2010, in connection with the issuance of the 2040 Convertible Notes, the Company entered into interest rate swaps with a notional amount of $460.0 million under which it pays a weighted average floating rate of 6 month USD – LIBOR minus 0.342%, set in arrears, and receives a fixed rate of 2.625%. These swaps expire in February 2015. In November 2010, after future interest rate expectations decreased, the Company entered into additional swaps with a notional amount of $460.0 million under which it pays a fixed rate which gradually increases from 0.203% for the six-month settlement period ended in February 2011, to 2.619% for the six-month settlement period ending in February 2015 and receives a floating rate of 6 month USD – LIBOR minus 0.342%, set in arrears. These swaps expire in February 2015. The combination of these swaps has the effect of fixing the interest rate the Company pays on its 2040 Convertible Notes at a fixed rate which gradually increases from 0.203% for the six-month settlement period ended in February 2011, to 2.619% for the six-month settlement period ending in February 2015.
In October 2011, the Company entered into swaps with a notional amount of $300.0 million. These swaps have an effective date of June 2013, and under these swaps the Company pays a fixed interest rate which gradually increases from 0.81% for the three month settlement period ending September 2013, to 2.65% for the final settlement period ending in January 2016 and receives a floating rate of three month USD-LIBOR-BBA. These swaps expire in January 2016. In May 2012, the Company entered into swaps with a notional amount of $197.0 million. These swaps have an effective date of January 2014, and under these swaps the Company pays a fixed interest rate which gradually increases from 0.58% for the three month settlement period ending June 2014, to 1.65% for the final settlement period ending in January 2016 and receives a floating rate of one month USD-LIBOR-BBA. These swaps expire in January 2016. In May 2012, the Company entered into additional swaps with a notional amount of $215.0 million. These swaps have an effective date of April 2014, and under these swaps the Company pays a fixed interest rate which gradually increases from 0.65% for the three month settlement period ending June 2014, to 2.11% for the final settlement period ending in March 2017 and receives a floating rate of one month USD-LIBOR-BBA. These swaps expire in March 2017. The Company entered into these swaps to effectively fix the future interest rate during the applicable periods on a portion of its senior secured term loan.
In June 2012, the Company entered into several zero cost foreign currency collars to reduce its risk from future Euro appreciation. Under these collars, the Company purchased an option to buy 0.5 million Euros for $0.65 million (a strike price of 1.30 USD / EUR) each month from July 2012 to June 2013. The Company also sold puts which could require it to buy 0.5 million Euros for $0.61 million (a strike price of 1.23 USD / EUR) each month from July 2012 to June 2013.
The Company has not designated any of its interest rate swaps, caps or foreign currency collars as hedges. The Company records these interest rate swaps, caps and foreign currency collars on its balance sheet at fair market value with the changes in fair value recorded as gain (loss) on interest rate swaps and caps, net, in its Condensed Consolidated Statements of Operations. During the three months ended March 31, 2013 and 2012, the Company recorded a loss of $1.0 million and $0.1 million, respectively, for the change in the fair value of its interest rate swaps, caps and foreign currency collars and the related settlements. For information on the fair value of the Company’s interest rate swaps, caps and foreign currency collars, see Note 8.
NOTE 8 – FAIR VALUE MEASUREMENTS
In accordance with ASC 820, the Company uses three levels of inputs to measure fair value:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or valuations in which all significant inputs are observable or can be obtained from observable market data.
Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities.
The Company values its interest rate swaps using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its interest rate swaps for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings.
The Company’s auction rate securities are valued using a discounted cash flow analysis or other type of valuation model. These analyses 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 similar characteristics to the securities held by the Company.
The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting period. Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following types of instruments at March 31, 2013 (in thousands):
|
| | | | | | | | | | | | | | | |
| Total | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Current Assets | | | | | | | |
Money market funds (1) | $ | 220,174 |
| | $ | 220,174 |
| | $ | — |
| | $ | — |
|
Corporate debt securities (2) | 162,548 |
| | — |
| | 162,548 |
| | — |
|
Foreign government obligations (3) | 5,004 |
| | — |
| | 5,004 |
| | — |
|
U.S. Treasuries / Agencies (3) | 295,835 |
| | — |
| | 295,835 |
| | — |
|
Non-Current Assets | | | | | | | |
Auction rate securities (4) | 14,523 |
| | — |
| | — |
| | 14,523 |
|
Corporate debt securities (4) | 53,654 |
| | — |
| | 53,654 |
| | — |
|
Foreign government obligations (4) | 8,346 |
| | — |
| | 8,346 |
| | — |
|
U.S. Treasuries / Agencies (4) | 43,241 |
| | — |
| | 43,241 |
| | — |
|
Total | $ | 803,325 |
| | $ | 220,174 |
| | $ | 568,628 |
| | $ | 14,523 |
|
Non-Current Liabilities | | | | | | | |
Interest rate swaps and caps (5) | $ | (8,718 | ) | | $ | — |
| | $ | (8,718 | ) | | $ | — |
|
| |
(1) | Included in cash and cash equivalents on the Condensed Consolidated Balance Sheet. |
| |
(2) | Includes $6.0 million included in cash and cash equivalents and $156.5 million included in short-term investments on the Condensed Consolidated Balance Sheet and classified as available-for-sale securities. |
| |
(3) | Included in short-term investments on the Condensed Consolidated Balance Sheet and classified as available-for-sale securities. |
| |
(4) | Included in long-term marketable investment securities on the Condensed Consolidated Balance Sheet and classified as available-for-sale securities. |
| |
(5) | Included in other non current liabilities on the Condensed Consolidated Balance Sheet. As of March 31, 2013, the fair value of the Company's interest rate swaps and caps in an asset position was $21.7 million and the fair value in a liability position was $30.4 million. These amounts have been recorded on a net basis on the Company's balance sheet. |
As of December 31, 2012, assets and liabilities measured and recorded at fair value on a recurring basis, were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Total | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Current Assets | | | | | | | |
Money market funds (1) | $ | 212,123 |
| | $ | 212,123 |
| | $ | — |
| | $ | — |
|
Corporate debt securities (2) | 345,044 |
| | — |
| | 345,044 |
| | — |
|
Foreign government obligations (3) | 17,601 |
| | — |
| | 17,601 |
| | — |
|
U.S. Treasuries / Agencies (3) | 236,943 |
| | — |
| | 236,943 |
| | — |
|
Non-Current Assets | | |
| |
| |
|
Auction rate securities (4) | 14,287 |
| | — |
| | — |
| | 14,287 |
|
Corporate debt securities (4) | 41,920 |
| | — |
| | 41,920 |
| | — |
|
Foreign government obligations (4) | 3,162 |
| | — |
| | 3,162 |
| | — |
|
U.S. Treasuries / Agencies (4) | 45,524 |
| | — |
| | 45,524 |
| | — |
|
Total | $ | 916,604 |
| | $ | 212,123 |
| | $ | 690,194 |
| | $ | 14,287 |
|
Non-Current Liabilities | | | | | | | |
Interest rate swaps and caps (5) | $ | (3,769 | ) | | $ | — |
| | $ | (3,769 | ) | | $ | — |
|
| |
(1) | Included in cash and cash equivalents on the Condensed Consolidated Balance Sheet. |
| |
(2) | Includes $21.6 million included in cash and cash equivalents and $323.4 million included in short-term investments on the Condensed Consolidated Balance Sheet and classified as available-for-sale securities. |
| |
(3) | Included in short-term investments on the Condensed Consolidated Balance Sheet and classified as available-for-sale securities. |
| |
(4) | Included in long-term marketable investment securities on the Condensed Consolidated Balance Sheet and classified as available-for-sale securities. |
| |
(5) | Included in other non current liabilities on the Condensed Consolidated Balance Sheet. As of December 31, 2012, the fair value of the Company's interest rate swaps and caps in an asset position was $27.4 million and the fair value in a liability position was $31.2 million. These amounts have been recorded on a net basis on the Company's balance sheet. |
The following table provides a summary of changes in the Company’s Level 3 auction rate securities ("ARS") as of March 31, 2013 and 2012 (in thousands):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2013 | | 2012 |
Balance at beginning of period | $ | 14,287 |
| | $ | 14,314 |
|
Unrealized gain (loss) included in accumulated other comprehensive income | 236 |
| | (260 | ) |
Balance at end of period | $ | 14,523 |
| | $ | 14,054 |
|
The fair value of the Company’s outstanding debt at March 31, 2013 is as follows (in thousands):
|
| | | | | | | |
| Carrying Value | | Significant Other Observable Inputs (Level 2) |
Term Loan A-1 | $ | 375,203 |
| | $ | 376,696 |
|
Term Loan A-2 | 199,194 |
| | 199,234 |
|
Term Loan B-2 | 537,519 |
| | 540,035 |
|
2040 Convertible Notes (1) | 265,384 |
| | 297,013 |
|
| $ | 1,377,300 |
| | |
| |
(1) | The par value of the 2040 Convertible Notes is $291.0 million. See Note 5 for additional details. |
NOTE 9 – EQUITY-BASED COMPENSATION
Stock Options Plans
The Company currently grants equity awards from the 2008 Equity Incentive Plan (the “2008 Plan”), the 2000 Equity Incentive Plan (the “2000 Plan”) and, effective February 17, 2011, the 2004 Sonic Plan.
As of March 31, 2013, the Company had a total of 31.8 million shares reserved and 4.8 million shares available for issuance under the 2008 Plan, 2000 Plan and 2004 Sonic Plan.
These equity plans provide for the grant of stock options, restricted stock awards, restricted stock units, performance shares and similar types of equity awards by the Company to employees, officers, directors and consultants of the Company. For options granted during the period ended March 31, 2013, the vesting period was generally four years where one quarter of the grant vests at the end of the first year, and the remainder vests monthly. Options granted during the period ended March 31, 2013 have a contractual term of seven years.
Restricted stock award and restricted stock unit grants generally vest annually over four years. Restricted stock awards are considered outstanding at the time of the grant, as the stockholders are entitled to voting rights. As of March 31, 2013, the number of restricted stock awards outstanding and unvested was 3.7 million. As of March 31, 2013, the number of restricted stock units outstanding and unvested was 0.4 million.
The Company also grants performance shares which entitle the recipient to receive a prescribed number of shares of the Company’s common stock, upon the achievement of performance goals and objectives as determined by the compensation committee based upon criteria set forth in the 2008 Plan. As of March 31, 2013, the number of performance shares outstanding and unvested was 0.8 million.
Employee Stock Purchase Plan
The Company’s 2008 Employee Stock Purchase Plan (“ESPP”) allows eligible employee participants to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP consists of a twenty-four month offering period with four six-month purchase periods in each offering period. Employees purchase shares in each purchase period at 85% of the market value of the Company’s common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower.
As of March 31, 2013, the Company had reserved, and available for future issuance, 4.1 million shares of common stock under the ESPP.
Valuation and Assumptions
The Company uses the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The fair value of equity-based payment awards on the date of grant is determined by an option-pricing model using a number of complex and subjective variables. These variables include expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. The Company determines the fair value of its restricted stock grants as the difference between the market value on the date of grant less the exercise price.
Estimated volatility of the Company’s common stock for new grants is determined by using a combination of historical volatility and implied volatility in market traded options. When historical data is available and relevant, the expected term of options granted is determined by calculating the average term from historical stock option exercise experience. When there is insufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term due to changes in the terms of option grants, the Company uses the “simplified method” as permitted under Staff Accounting Bulletin No. 110. For options granted after July 15, 2008, the Company changed its standard vesting terms from three to four years and its contractual term from five to seven years. For the period from July 15, 2008 to June 30, 2012, the Company did not have sufficient data for options with four year vesting terms and seven year contractual life and used the simplified method to calculate the expected term. The risk-free interest rate used in the option valuation model is from U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option pricing model. In accordance with ASC Topic 718, Compensation – Stock Compensation, the Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records equity-based compensation expense only for those awards that are expected to vest. The assumptions used to value equity-based payments are as follows:
|
| | | | | |
| Three months ended March 31, |
| 2013 | | 2012 |
Option Plans: | | | |
Dividends | 0 | % | | 0 | % |
Expected term | 4.0 years |
| | 4.6 years |
|
Risk free interest rate | 0.5 | % | | 0.8 | % |
Volatility rate | 46 | % | | 45 | % |
ESPP Plan: | | | |
Dividends | 0 | % | | 0 | % |
Expected term | 1.3 years |
| | 1.3 years |
|
Risk free interest rate | 0.2 | % | | 0.3 | % |
Volatility rate | 49 | % | | 50 | % |
|
| | | | | | | |
The weighted average per share fair value of equity-based awards are as follows: | | | |
| Three months ended March 31, |
| 2013 | | 2012 |
Weighted average fair value: | | | |
Option grants | $ | 6.09 |
| | $ | 11.75 |
|
Employee purchase share rights | $ | 6.17 |
| | $ | 6.03 |
|
Restricted stock award grants | $ | 17.82 |
| | $ | 33.99 |
|
As of March 31, 2013, there was $125.4 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested equity-based payments granted to employees. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted average period of 2.8 years.
The total intrinsic value of options exercised during the three months ended March 31, 2013 and 2012 was $0.6 million and $2.2 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares.
NOTE 10 – GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the Company’s goodwill activity associated with its continuing operations (in thousands):
|
| | | |
Goodwill, net at December 31, 2012 | $ | 1,341,035 |
|
Acquisitions | 8,149 |
|
Changes due to foreign currency exchange rates and other | (543 | ) |
Goodwill, net at March 31, 2013 | $ | 1,348,641 |
|
The Company assesses its goodwill for impairment annually as of October 1, or more frequently if circumstances indicate impairment may have occurred. To accomplish this, the Company determines the fair value of its reporting units using a discounted cash flow approach and / or a market approach and compares it to the carrying amount of the reporting units at the date of the impairment analysis. The Company’s publicly traded equity is a key input in determining the fair value of its reporting units. An other than temporary decline in the value of the Company’s publicly traded equity and / or a significant decrease in the Company’s future business prospects could require the Company to record a goodwill and / or intangible asset impairment charge in the future. The Company did not record any goodwill impairment charges to its continuing operations for any of the periods presented.
The following tables summarize the Company’s intangible assets for its continuing operations subject to amortization as of March 31, 2013 and December 31, 2012 (in thousands):
|
| | | | | | | | | | | |
| March 31, 2013 |
| Gross Costs | | Accumulated Amortization | | Net |
Finite-lived intangibles: | | | | | |
Developed technology and patents | $ | 895,570 |
| | $ | (358,507 | ) | | $ | 537,063 |
|
Existing contracts and customer relationships | 146,524 |
| | (58,516 | ) | | 88,008 |
|
Content databases and other | 60,006 |
| | (31,179 | ) | | 28,827 |
|
Trademarks / Tradenames | 25,300 |
| | (11,878 | ) | | 13,422 |
|
| $ | 1,127,400 |
| | $ | (460,080 | ) | | $ | 667,320 |
|
| December 31, 2012 |
| Gross Costs | | Accumulated Amortization | | Net |
Finite-lived intangibles: | | | | | |
Developed technology and patents | $ | 895,571 |
| | $ | (339,966 | ) | | $ | 555,605 |
|
Existing contracts and customer relationships | 146,524 |
| | (54,512 | ) | | 92,012 |
|
Content databases and other | 57,234 |
| | (29,204 | ) | | 28,030 |
|
Trademarks / Tradenames | 25,300 |
| | (11,453 | ) | | 13,847 |
|
| $ | 1,124,629 |
| | $ | (435,135 | ) | | $ | 689,494 |
|
As of March 31, 2013, the Company estimates its amortization expense in future periods to be as follows (in thousands):
|
| | | |
| Amortization Expense |
Remainder of 2013 | $ | 74,998 |
|
2014 | 93,944 |
|
2015 | 86,497 |
|
2016 | 83,469 |
|
2017 | 82,047 |
|
Thereafter | 246,365 |
|
Total amortization expense | $ | 667,320 |
|
NOTE 11 – RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
Q1 2013 Restructuring Action
During the first quarter of 2013, the Company continued the review of its operations that began in the third quarter of 2012 (see below). As a result of this analysis, the Company has taken additional cost reduction actions, which have resulted in a restructuring charge of $0.6 million related to employee severance. As of March 31, 2013, $0.4 million of these charges remain unpaid.
Q3 2012 Restructuring Action
During the third quarter of 2012, the Company reviewed its costs in order to reduce and more efficiently manage its operating expenses. As a result of this analysis, the Company has taken cost reduction actions, which have resulted in a restructuring charge of $4.5 million being recorded during the three months ended September 30, 2012. Of this restructuring charge $3.2 million relate to our continuing operations and $1.3 million relate to our discontinued operations. As of March 31, 2013, $0.6 million of severance costs and $0.2 million in future lease payments for abandoned office space remain unpaid.
Q1 2012 Restructuring Action
In connection with a review of the Company's operations, the Company reorganized certain parts of its sales and product development groups. These actions resulted in severance charges of $0.8 million in the first quarter of 2012, all of which have been paid as of March 31, 2013.
Sonic Acquisition Restructuring Plan
In conjunction with the Sonic acquisition, management acted upon a plan to restructure certain Sonic operations to create cost efficiencies for the combined company. During the first quarter of 2012, the Company recorded an additional $0.6 million in restructuring charges to its continuing operations, which included $0.3 million for employee severance and contract termination costs and $0.3 million to accrue for the present value of lease payments for abandoned office space. As of March 31, 2013, all of the Sonic acquisition restructuring costs have been paid.
NOTE 12 – EARNINGS PER SHARE (EPS)
Basic net EPS is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period, except for periods of operating loss for which no common share equivalents are included because their effect would be anti-dilutive.
The following weighted average potential common shares were excluded from the computation of diluted net earnings per share as their effect would have been anti-dilutive (in thousands):
|
| | | | | |
| Three months ended March 31, |
| 2013 | | 2012 |
Stock options | 4,102 |
| | 4,163 |
|
Restricted stock | 1,997 |
| | 2,001 |
|
Convertible notes (1) | 6,144 |
| | 6,144 |
|
Total weighted average potential common shares excluded from diluted net earnings per share | 12,243 |
| | 12,308 |
|
| |
(1) | See Note 5 for additional details. |
NOTE 13 – INCOME TAXES
The Company recorded income tax benefit from continuing operations for the three months ended March 31, 2013, of $0.6 million which was primarily due to the reduction in its deferred tax asset valuation allowance resulting from the Company's acquisition of IntegralReach. The acquisition resulted in a net deferred tax liability recorded for the acquired amortizable intangible assets. These net deferred tax liabilities are a source of future taxable income which allowed the Company to reduce its pre-acquisition valuation allowance. The change in the Company's pre-acquisition valuation allowance which resulted from the acquired net deferred tax liabilities is not regarded as a component of the acquisition accounting and has been credited to income tax expense.
The Company recorded an income tax expense from continuing operations for the three months ended March 31, 2012, of $4.5 million. Income tax expense is based on an annual effective tax rate forecast, including estimates and assumptions that could change during the year.
During the three months ended March 31, 2010, the Company entered into a closing agreement with the Internal Revenue Service through its Pre-Filing Agreement (PFA) program confirming that the Company recognized an ordinary tax loss of approximately $2.4 billion from the 2008 sale of its TV Guide Magazine business. In connection with the PFA closing agreement the Company established a valuation allowance against its deferred tax assets as a result of determining that it is more likely than not that its deferred tax assets would not be realized. At March 31, 2013, the Company reviewed the determination made at March 31, 2010, that it is more likely than not that its deferred tax assets will not be realized. While the Company believes that its fundamental business model is robust, there has not been a change from the March 31, 2010, determination that it is more likely than not that its deferred tax assets will not be realized and as such has maintained a valuation allowance against deferred tax assets at March 31, 2013.
The Company conducts business globally and, as a result, files U.S. federal, state and foreign income tax returns in various jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. With few exceptions, the Company is no longer subject to income tax examinations for years before 2008.
NOTE 14 – STOCK REPURCHASE PROGRAM
In November 2011, the Company’s Board of Directors authorized the repurchase of up to $400.0 million of the Company’s common stock. During the three months ended March 31, 2013, the Company repurchased 2.2 million shares of its common stock for $42.1 million. As of March 31, 2013, the Company had $180.8 million remaining under its existing stock
repurchase program. As of March 31, 2013, treasury stock consisted of 23.7 million shares of common stock that had been repurchased, with a cost basis of approximately $676.7 million.
NOTE 15 – COMMITMENTS AND CONTINGENCIES
Indemnifications
In the normal course of business, the Company provides indemnification 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, provided the licensee is not in violation of the terms and conditions of the agreement and / or additional performance or other requirements for such indemnification. In some cases, the Company may receive tenders of defense and indemnity arising out of products that are no longer provided by the Company due to having divested certain assets, but which were previously licensed 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 the Company's results of operations or cash flows in a given period or the maximum potential impact of these indemnification provisions on its future results of operations.
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 has established loss provisions only for matters in which losses are probable and 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 or results of operations. At this time, management has not reached a determination that any litigation matters, individually or in the aggregate, are expected to result in liabilities that will have a material adverse effect on the Company's financial position or results of operations or cash flows.
NOTE 16 – SUBSEQUENT EVENTS
On April 9, 2013, the Company entered into a Refinancing Amendment and Joinder Agreement (the “Refinancing Amendment”) to the Amended and Restated Credit Agreement, dated as of February 7, 2011, as amended and restated as of March 29, 2012, as further amended pursuant to that certain Amendment No. 1 dated as of February 13, 2013.
The Refinancing Amendment provides for a new tranche of term loans ("Term Loan B-3") in the aggregate principal amount of $540.0 million. Term Loan B-3 matures on March 29, 2019. The Company used the proceeds from Term Loan B-3 to refinance in full all outstanding Term Loan B-2 amounts.
Term Loan B-3 bears interest, at the Company's option, at a rate equal to either the LIBOR rate, plus an applicable margin equal to 2.75% per annum (subject to a 0.75% LIBOR floor) or the prime lending rate, plus an applicable margin equal to 1.75% per annum. Except as described above, the terms and conditions of Term Loan B-3 are substantially identical to Term Loan B-2.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the U.S. Securities and Exchange Commission (collectively, the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company's management as well as estimates and assumptions made by Company's management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company's management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
The following commentary should be read in conjunction with the financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission.
Overview
We are focused on powering the discovery, delivery, display and monetization of digital entertainment. We provide a broad set of integrated solutions that are embedded in our customers' products and services, connecting consumers with entertainment. Our offerings enable discovery, advertising and video display and delivery. Content discovery solutions include interactive program guides (“IPGs”), search and recommendations, cloud data services and our extensive database of descriptive information about television, movies, music, books, and game content (“metadata”). In addition to offering IPGs developed by us, our customers may also license our patents and deploy their own IPG or a third party IPG. Advertising solutions include the Rovi Advertising Network and the Rovi Advertising Service, delivering advertising to IPGs, devices connected to the Internet, interactive applications and advertising on consumer websites operated by us. Video display and delivery solutions include video compression-decompression technology (“codecs”) and content protection technologies and services. Rovi's solutions are deployed globally in the cable, satellite, consumer electronics, entertainment and online distribution markets.
We group our revenue into the following categories - (i) service providers, (ii) CE discovery and advertising, (iii) CE video delivery and display, and (iv) Other. We include in service provider revenues any revenue related to an IPG deployed by a service provider in a subscriber household whether the ultimate payment for that IPG comes from the service provider or from a manufacturer of a set-top box. Revenue related to an IPG deployed in a set-top box sold at retail is included in CE manufacturers. We also include in service provider revenues advertising revenue generated from our service provider IPGs and consumer websites such as AllRovi.com and SideReel.com. CE discovery and advertising includes license revenue received from consumer electronics companies for our IPG products as well as license revenue for our IPG patents, Rovi Cloud Services and advertising revenue from our CE IPGs or the Rovi Ad Network. CE video delivery and display includes revenue from consumer electronics companies for our DivX, ACP, VCR Plus+, connected platform and media recognition technologies. Other revenue consists primarily of licensing of our underlying media content/metadata, MainConcept codecs and licensing of our content protection technologies to entertainment companies.
Costs and Expenses
Cost of revenues consists primarily of service costs, royalty expenses, patent prosecution, patent maintenance and patent litigation costs and an allocation of overhead and facilities costs. Research and development expenses are comprised primarily of employee compensation and benefits, consulting costs and an allocation of overhead and facilities costs. Selling and marketing expenses are comprised primarily of employee compensation and benefits, travel, advertising and an allocation of overhead and facilities costs. General and administrative expenses are comprised primarily of employee compensation and benefits, travel, accounting, tax and corporate legal fees and an allocation of overhead and facilities costs.
Results of Operations
The following tables present our condensed consolidated statements of operations for our continuing operations compared to the prior year (in thousands).
|
| | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2013 | | 2012 | | Change $ | | Change % |
Revenues: | | | | | | | |
Service providers | $ | 79,774 |
| | $ | 79,354 |
| | 420 |
| | 1 | % |
CE discovery and advertising | 38,466 |
| | 38,199 |
| | 267 |
| | 1 | % |
CE video delivery and display | 21,020 |
| | 37,470 |
| | (16,450 | ) | | (44 | )% |
Other | 15,470 |
| | 16,704 |
| | (1,234 | ) | | (7 | )% |
Total revenues | 154,730 |
| | 171,727 |
| | (16,997 | ) | | (10 | )% |
Costs and expenses: | | | | | | | |
Cost of revenues | 30,748 |
| | 25,152 |
| | 5,596 |
| | 22 | % |
Research and development | 35,824 |
| | 40,165 |
| | (4,341 | ) | | (11 | )% |
Selling, general and administrative | 41,756 |
| | 40,476 |
| | 1,280 |
| | 3 | % |
Depreciation | 4,464 |
| | 5,000 |
| | (536 | ) | | (11 | )% |
Amortization of intangible assets | 25,035 |
| | 25,635 |
| | (600 | ) | | (2 | )% |
Restructuring and asset impairment charges | 637 |
| | 1,372 |
| | (735 | ) | | (54 | )% |
Total costs and expenses | 138,464 |
| | 137,800 |
| | 664 |
| | — | % |
Operating income from continuing operations | 16,266 |
| | 33,927 |
| | (17,661 | ) | | (52 | )% |
Interest expense | (16,161 | ) | | (12,148 | ) | | (4,013 | ) | | 33 | % |
Interest income and other, net | 629 |
| | 1,610 |
| | (981 | ) | | (61 | )% |
Debt modification expense | (304 | ) | | (4,464 | ) | | 4,160 |
| | (93 | )% |
Loss on interest rate swaps and caps, net | (1,044 | ) | | (104 | ) | | (940 | ) | | 904 | % |
Loss on debt redemption | — |
| | (1,758 | ) | | 1,758 |
| | (100 | )% |
(Loss) income from continuing operations before taxes | (614 | ) | | 17,063 |
| | (17,677 | ) | | (104 | )% |
Income tax (benefit) expense | (616 | ) | | 4,543 |
| | (5,159 | ) | | (114 | )% |
Income from continuing operations, net of tax | 2 |
| | 12,520 |
| | (12,518 | ) | | (100 | )% |
Loss from discontinued operations, net of tax | (25,735 | ) | | (17,129 | ) | | (8,606 | ) | | 50 | % |
Net loss | $ | (25,733 | ) | | $ | (4,609 | ) | | (21,124 | ) | | 458 | % |
Service Providers Revenue
For the three months ended March 31, 2013, revenue from service providers increased by 1%, compared to the same period in the prior year. This increase was primarily due to an increase in IPG product revenues which benefited from continued digital subscriber growth. We expect revenue from licensing our IPG products and patents to continue to grow in the future from licensing additional solutions, from increased international licensing, from increased licensing to our existing customers to broaden their licenses into the Online and Mobile fields of use, from continued digital subscriber growth and from increased advertising revenue.
CE Discovery and Advertising Revenue
For the three months ended March 31, 2013, revenue from CE discovery and advertising increased by 1% compared to the same period in the prior year. The increase was primarily due to an increase in CE IPG patent revenue driven by an increase in revenue from license agreements that included catch-up payments to make us whole for the pre-license period of use, entered into this quarter versus one year ago. We expect revenue from licensing our IPG patents to increase in the future as we enter into renewals with existing customers and get previously licensed CE manufacturers back under license.
CE Video Delivery and Display Revenue
For the three months ended March 31, 2013, revenue decreased by 44% compared to the same period in the prior year. This decrease was primarily due to a significant decrease in DivX product revenue due to the three months ended March 31, 2012, including revenue from license agreements which allow certain of our licensees to incorporate certain legacy DivX profiles in specified legacy device types in perpetuity. In 2013, we believe CE video delivery and display revenue will decrease
by 35% to 45%, as compared to 2012, due to declines in DivX product sales, the anticipated continuing decline in ACP sales and discontinuing sales of our connected platform product. Several significant DivX customer contracts will come up for renewal in 2013. DivX revenue in 2013 and beyond will be impacted by the terms under which customers agree to renew such contracts.
Other Revenue
For the three months ended March 31, 2013, other revenue decreased from the same period in the prior year primarily due to a decline in analog content protection revenue from entertainment companies partially offset by an increase in data revenue.
Cost of Revenues
For the three months ended March 31, 2013, cost of revenues increased from the same period in the prior year primarily due to an increase in patent litigation expenses.
Research and Development
For the three months ended March 31, 2013, research and development expenses decreased from the same period in the prior year primarily due to a decrease in employee related costs due to the 2012 restructuring actions the Company
undertook to more efficiently manage its operating expenses (see Note 11 to the Condensed Consolidated Financial Statements).
Selling, General and Administrative
For the three months ended March 31, 2013, selling, general and administrative expenses increased from the same period in the prior year primarily due to an increase in consulting costs and corporate legal expenses.
Amortization of Intangible Assets
For the three months ended March 31, 2013, amortization of intangible assets decreased from the same period in the prior year primarily due to a decrease in amortization related to the customer relationship intangible assets acquired in the Sonic acquisition. The acquired Sonic customer relationship intangible assets are being amortized based on the proportion of the expected future cash flow generated by the assets in each year to the total future cash flow expected to be generated by the asset. As the expected cash flows decline over time, the amortization is also decreasing.
Restructuring and Asset Impairment Charges
During the first quarter of 2013, we continued the review of our operations that began in the third quarter of 2012 (see Note 11 to the Condensed Consolidated Financial Statements). As a result of this analysis, we have taken additional cost reduction actions, which have resulted in a restructuring charge of $0.6 million, related to employee severance.
During the first quarter of 2012, in connection with a review of our operations, we reorganized certain parts of our sales and product development groups. These actions resulted in severance charges of $0.8 million in the first quarter of 2012.
In conjunction with the Sonic acquisition, management acted upon a plan to restructure certain Sonic operations to create cost efficiencies for the combined company. During the first quarter of 2012, we recorded $0.6 million in restructuring charges to our continuing operations related to the Sonic acquisition.
Interest Expense
For the three months ended March 31, 2013, interest expense increased 33% compared to the same period in the prior year. The increase in interest expense was primarily due to an increase in the average debt outstanding.
Interest Income and Other, Net
For the three months ended March 31, 2013, interest income and other, net decreased as compared to the same period in the prior year primarily due the current year including foreign exchange losses while the prior year included foreign exchange gains.
Loss on Debt Redemption and Debt Modification Expense
On February 13, 2013, the Company amended the Amended and Restated Credit Agreement to expand the permitted investments under the Amended and Restated Credit Agreement. In connection with this amendment, the Company recorded $0.3 million in debt modification expenses during the three months ended March 31, 2013.
On March 29, 2012, we borrowed $800 million consisting of (i) a 5-year $215 million term loan (“Term Loan A-2”), and (ii) a 7-year $585 million term loan (“Term Loan B-2”) (see Note 5 to the Condensed Consolidated Financial Statements). The proceeds of the two new tranches of term loans were partially used to pay off the remaining $297.8 million balance of Term Loan B-1. We accounted for the issuance of Term Loan B-2 and subsequent repayment of Term Loan B-1 as a partial debt modification, as a significant number of Term Loan B-1 investors reinvested in Term Loan B-2, and the change in the present value of future cash flows was less than 10%. Under debt modification accounting, $3.5 million in unamortized debt issuance costs related to Term Loan B-1 investors who reinvested in Term Loan B-2, are being amortized to Term Loan B-2 interest expense using the effective interest method. In addition, $1.0 million in Term Loan B-2 debt issuance costs, related to new investors in Term Loan B-2, are being amortized to Term Loan B-2 interest expense using the effective interest method. Debt issuance costs of $4.5 million relating to the issuance of Term Loan B-2 to Term Loan B-1 investors have been recorded as debt modification expenses for the three months ended March 31, 2012. In addition, during the first quarter of 2012, we realized a loss on debt redemption of $1.8 million related to writing off the unamortized Term Loan B-1 debt issuance costs and unamortized discount related to investors who did not reinvest in Term Loan B-2.
Loss on Interest Rate Swaps and Caps, Net
We have not designated any of our interest rate swaps, caps or foreign currency collars as hedges and therefore record the changes in fair value of these instruments in our Condensed Consolidated Statements of Operations (see Note 7 to the Condensed Consolidated Financial Statements). Loss on interest rate swaps and caps, net for the three months ended March 31, 2013, is primarily due to a decrease in the fair value of our swaps under which we have agreed to pay a fixed rate and receive a floating rate, as there has been a decline in future expected LIBOR rates.
Income Taxes
We recorded income tax benefit from continuing operations for the three months ended March 31, 2013, of $0.6 million, which was primarily due to the reduction in our deferred tax asset valuation allowance resulting from our acquisition of IntegralReach. The acquisition resulted in a net deferred tax liability recorded for the acquired amortizable intangible assets. These net deferred tax liabilities are a source of future taxable income which allowed us to reduce our pre-acquisition valuation allowance. The change in our pre-acquisition valuation allowance which resulted from the acquired net deferred tax liabilities is not regarded as a component of the acquisition accounting and has been credited to income tax expense.
We recorded income tax expense from continuing operations for the three months ended March 31, 2012, of $4.5 million. Income tax expense is based on an annual effective tax rate forecast, including estimates and assumptions that could change during the year.
Discontinued Operations
Discontinued operations for the three months ended March 31, 2013, includes the Rovi Entertainment Store business and expenses we recorded for indemnification claims related to the Company’s previous software business which included the FLEXnet, InstallShield and AdminStudio software tools which were disposed of in 2008 (see Note 4 to the Condensed Consolidated Financial Statements). The loss from discontinued operations for the three months ended March 31, 2013, is primarily due to recording a $16.0 million impairment charge to the goodwill of the Rovi Entertainment Store business in connection with recording the net assets of the business at fair value less cost to sell (see Note 4 to the Condensed Consolidated Financial Statements).
Discontinued operations for the three months ended March 31, 2012, includes the Rovi Entertainment Store business, the Roxio Consumer Software business and expenses we recorded for indemnification claims related to the Company’s previous software business which were disposed of in 2008 (see Note 4 to the Condensed Consolidated Financial Statements).
Critical Accounting Policies and Use of Estimates
The discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements. These Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, equity-based compensation, goodwill and intangible
assets, impairment of long lived assets and income taxes. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
There have been no significant changes in our critical accounting policies during the three months ended March 31, 2013, as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.
Liquidity and Capital Resources
We finance our operations primarily from cash generated by operations. Net cash provided by our continuing operating activities increased to $51.8 million for the three months ended March 31, 2013, from $33.4 million in the same period in the prior year. This increase was primarily due to a smaller increase in working capital in the current year vs the same period in the prior year. The availability of cash generated by our operations in the future could be affected by other business risks including, but not limited to, those factors referenced under the caption “Risk Factors” contained in our 2012 Annual Report on Form 10-K.
Net cash provided by investing activities from continuing operations was $91.1 million for the three months ended March 31, 2013, as compared to $27.3 million in the same period in the prior year. The three months ended March 31, 2013, included $103.7 million in net marketable securities sales, $2.6 million in capital expenditures and $10.0 million used for the acquisition of IntegralReach. Included in 2012 investing activities was the receipt of $13.5 million from the sale of the Roxio Consumer Software business and $18.2 million in net marketable securities sales, partially offset by $4.3 million in capital expenditures. We anticipate that capital expenditures to support the growth of our business and strengthen our operations infrastructure will be between $17.0 million and $22.0 million for the full year in 2013.
Net cash used in financing activities from continuing operations was $140.1 million for the three months ended March 31, 2013, versus net cash provided by financing activities from continuing operations of $466.5 million in the same period in the prior year. During the three months ended March 31, 2013, we made $106.4 million in mandatory debt principal payments and repurchased $42.1 million of our common stock. In addition, we received $8.5 million from the exercise of employee stock options and sales of stock through our employee stock purchase plan. During the three months ended March 31, 2012, we borrowed an additional $800 million ($788.6 million, net of issuance costs and discounts) under our Amended and Restated Credit Facility described below. In addition, we received $9.9 million from the exercise of employee stock options and sales of stock through our employee stock purchase plan. These receipts were partially offset by using $297.8 million to pay off the preexisting Term Loan B-1 under our Initial Credit Agreement described below, $22.5 million to make a mandatory payment on the preexisting Term Loan A-1 and the repurchase of $12.0 million of our common stock.
As discussed in Note 5 of the Condensed Consolidated Financial Statements, in March 2010, we issued $460.0 million in 2.625% convertible senior notes due in 2040 at par. The 2040 Convertible Notes may be converted, under certain circumstances, based on an initial conversion rate of 21.1149 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $47.36 per share). As of March 31, 2013, $291.0 million par value of the 2040 Convertible Notes remain outstanding.
Prior to November 15, 2039, holders may convert their 2040 Convertible Notes into cash and our common stock, at the applicable conversion rate, under any of the following circumstances: (i) during any fiscal quarter after the calendar quarter ending June 30, 2010, if the last reported sale price of our common stock for at least 20 trading days during the 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 applicable conversion price in effect on each applicable trading day; (ii) during the five business-day period after any ten consecutive trading-day period (the “measurement period”) in which the trading price per note for each day of such measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such day; (iii) upon the occurrence of specified corporate transactions, as described in the indenture, or (iv) if we call any or all of the notes for redemption, at any time prior to the close of business on the third scheduled trading day prior to that redemption date. From November 15, 2039 until the close of business on the scheduled trading day immediately preceding the maturity date of February 15, 2040, holders may convert their 2040 Convertible Notes into cash and shares of our common stock, if any, at the applicable conversion rate, at any time, regardless of the foregoing circumstances. On or after February 20, 2015, we have the right to call for redemption all, or a portion, of the 2040 Convertible Notes at 100% of the principal amount of notes to be redeemed, plus accrued interest to, but excluding, the redemption date. Holders have the right to require us to repurchase the 2040 Convertible Notes on February 20, 2015, 2020, 2025, 2030 and 2035 for cash equal to 100% of the principal amount of the notes to be repurchased, plus accrued interest to, but excluding, the repurchase date.
Upon conversion, a holder will receive the conversion value of the 2040 Convertible Notes, converted based on the conversion rate multiplied by the volume weighted average price of our common stock over a specified observation period following the conversion date. The conversion value of each 2040 Convertible Note will be paid in cash up to the aggregate principal amount of the 2040 Convertible Notes to be converted and shares of common stock to the extent the conversion value
exceeds the principal amount of the converted note. Upon the occurrence of a fundamental change (as defined in the indenture), the holders may require us to repurchase for cash all or a portion of their 2040 Convertible Notes at a price equal to 100% of the principal amount of the 2040 Convertible Notes being repurchased plus accrued interest, if any. In addition, following certain corporate events that occur prior to February 20, 2015, the conversion rate will be increased for holders who elect to convert their notes in connection with such a corporate event in certain circumstances.
On February 7, 2011, the Company and certain subsidiaries, as borrowers or guarantors entered into a credit agreement (the "Initial Credit Agreement"), pursuant to which we jointly borrowed $750 million. The Initial Credit Agreement provided for a 5-year $450 million term loan (“Term Loan A-1”) and a 7-year $300 million term loan (“Term Loan B-1”). The term loans are secured by substantially all of our assets. On March 29, 2012, the Initial Credit Agreement was amended and restated (the "Amended and Restated Credit Agreement") to provide for two new tranches of term loans totaling $800 million: (i) a 5-year $215 million term loan (“Term Loan A-2”), and (ii) a 7-year $585 million term loan (“Term Loan B-2”). The proceeds of the two new tranches of term loans were partially used to pay off the remaining $297.8 million balance of Term Loan B-1. The Term Loan A-1 and Term Loan A-2 require annual amortization payments and mature on February 7, 2016 and March 29, 2017, respectively. Term Loan B-2 requires quarterly amortization payments and matures on March 29, 2019. Term Loan A-1 bears interest, at our election, at either prime rate plus an applicable margin equal to 1.5% per annum or LIBOR plus an applicable margin equal to 2.5% per annum, and was issued at a discount of $2.8 million to par value. Term Loan A-2 bears interest, at our election, at either the prime rate plus an applicable margin equal to 1.25% per annum or LIBOR plus an applicable margin equal to 2.25% per annum, and was issued at a discount of $1.0 million to par value. Term Loan B-2 bears interest, at our election, at either the prime rate plus an applicable margin equal to 2.0% per annum or LIBOR plus an applicable margin equal to 3.0% per annum (subject to a 1.0% LIBOR floor) and was issued at a discount of $2.9 million to par value. On April 9, 2013, we entered into a Refinancing Amendment and Joinder Agreement (the “Refinancing Amendment”) to our Amended and Restated Credit Agreement. The Refinancing Amendment provides for a new tranche of term loans "Term Loan B-3" in the aggregate principal amount of $540.0 million. Term Loan B-3 matures on March 29, 2019. The Company used the proceeds from Term Loan B-3 to refinance in full all outstanding Term Loan B-2 amounts. Term Loan B-3 bears interest, at the Company's option, at a rate equal to either the LIBOR rate, plus an applicable margin equal to 2.75% per annum (subject to a 0.75% LIBOR floor) or the prime lending rate, plus an applicable margin equal to 1.75% per annum.
The Amended and Restated 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. The Amended and Restated Credit Agreement contains financial covenants that require the Company and its subsidiaries to maintain a minimum consolidated interest coverage ratio and a maximum total leverage ratio. The Company may be required to make an additional payment on the Senior Secured Term Loan each February. This payment is a percentage of the prior year's Excess Cash Flow as defined in the Amended and Restated Credit Agreement. In February 2013, the Company made a $83.9 million Excess Cash Flow payment based on its 2012 results. As of March 31, 2013, Term Loan A-1, Term Loan A-2 and Term Loan B-2 carrying values were $375.2 million, $199.2 million and $537.5 million, net of discount, respectively.
In May 2011, our Board of Directors authorized the repurchase of up to $300.0 million of debt outstanding. As of March 31, 2013, we had $210.1 million remaining under our existing debt repurchase authorization.
In November 2011, our Board of Directors authorized the repurchase of up to $400.0 million of our common stock. During the three months ended March 31, 2013, we repurchased 2.2 million shares of our common stock for $42.1 million and as of March 31, 2013, had $180.8 million remaining under our existing stock repurchase program.
As of March 31, 2013, we had $280.4 million in cash and cash equivalents, $457.4 million in short-term investments and $119.8 million in long-term marketable securities. Of these amounts, $275.3 million is held by our foreign subsidiaries. Due to our net operating loss carryforwards, we could repatriate the cash and investments held by our foreign subsidiaries back to the United States with only a minimal tax impact. We believe that our current cash, cash equivalents and marketable securities and our annual cash flow from operations will be sufficient to meet our working capital, capital expenditure and debt requirements for the foreseeable future.
Impact of Recently Issued Accounting Standards
See Note 2 to the Condensed Consolidated Financial Statements.
Off Balance Sheet Arrangements
None.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to financial market risks, including changes in interest rates, foreign currency exchange rates and security investments. Changes in these factors may cause fluctuations in our earnings and cash flows. We evaluate and manage the exposure to these market risks as follows:
Fixed Income Investments: We have an investment portfolio of money market funds and fixed income securities, including those classified as cash equivalents, short-term investments and long-term marketable investment securities of $803.3 million as of March 31, 2013. Most of these securities are subject to interest rate fluctuations. An increase in interest rates could adversely affect the market value of our fixed income securities while a decrease in interest rates could adversely affect the amount of interest income we receive.
Our investment portfolio consists principally of money market mutual funds, U.S. Treasury and agency securities, corporate bonds, commercial paper and auction rate securities. We regularly monitor the credit risk in our investment portfolio and take appropriate measures to manage such risks prudently in accordance with our investment policies.
As a result of adverse conditions in the financial markets, auction rate securities may present risks arising from liquidity and/or credit concerns. At March 31, 2013, the fair value of our auction rate securities portfolio totaled approximately $14.5 million. Our auction rate securities portfolio is comprised solely of AAA rated federally insured student loans, municipal and educational authority bonds. The auction rate securities we hold have failed to trade for several years due to insufficient bids from buyers. This limits the short-term liquidity of these securities.
We limit our exposure to interest rate and credit risk, by establishing and strictly monitoring clear policies and guidelines for our fixed income portfolios. The primary objective of these policies is to preserve principal while at the same time maximizing yields, without significantly increasing risk. A hypothetical 50 basis point increase in interest rates would result in a $1.8 million decrease in the fair value of our fixed income available-for-sale securities as of March 31, 2013.
While we cannot predict future market conditions or market liquidity, we believe that our investment policies provide an appropriate means to manage the risks in our investment portfolio.
Foreign Currency Exchange Rates. Due to our reliance on international and export sales, we are subject to the risks of fluctuations in currency exchange rates. Because a substantial majority of our international and export revenues, as well as expenses, are typically denominated in U.S. dollars, fluctuations in currency exchange rates could cause our products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. Many of our subsidiaries operate in their local currency, which mitigates a portion of the exposure related to the respective currency collected. We have also entered into foreign currency collars to hedge our exposure to increases in the Euro (see Note 7 to the Condensed Consolidated Financial Statements).
Indebtedness. We have convertible notes with a par value of $291.0 million. We also have a senior secured credit facility with an outstanding principal balance of approximately $1.1 billion. Our borrowings under our senior secured credit facility are, and are expected to continue to be, at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same. The terms of these debt instruments are more fully described in Note 5 to the Condensed Consolidated Financial Statements.
Interest Rate Swaps and Caps. We have entered into a number of interest rate swaps. Under these swaps we have generally agreed to pay interest at a fixed rate and receive a floating rate from the counterparties. The terms of these interest rate swaps are more fully described in Note 7 to the Condensed Consolidated Financial Statements.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). In evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting. There has been no change in the Company’s internal controls over financial reporting during the quarter ended March 31, 2013, that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in legal proceedings related to intellectual property rights and other matters. The following legal proceedings include those of the Company and its subsidiaries.
Indemnifications. In the normal course of business, the Company provides indemnification 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 licensee's products and services, provided the licensee is not in violation of the terms and conditions of the agreement and/or additional performance or other requirements for such indemnification. In some cases, the Company may receive tenders of defense and indemnity arising out of products that are no longer provided by the Company due to having divested certain assets, but which were previously licensed 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 the Company's results of operations or cash flows in a given period or the maximum potential impact of these indemnification provisions on its future results of operations.
Litigation. 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 has established loss provisions only for matters in which losses are probable and 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 or results of operations. At this time, management has not reached a determination that any litigation matters, individually or in the aggregate, are expected to result in liabilities that will have a material adverse effect on our financial position or results of operations or cash flows.
Item 1A. Risk Factors
A description of the risk factors associated with our business is included under “Risk Factors” contained in Item 1A of our Annual Report on Form 10-K for the period ended December 31, 2012. There have been no material changes in our risk factors since the filing of our last Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information about Company purchases of its equity securities during the quarter ended March 31, 2013:
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Period | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) (1) |
January 1, 2013 to January 31, 2013 | — |
| | — |
| | — |
| | |
February 1, 2013 to February 28, 2013 | 1,326,708 |
| | $ | 18.05 |
| | 1,326,708 |
| | $ | 199.0 |
|
March 1, 2013 to March 31, 2013 | 917,813 |
| | $ | 19.79 |
| | 917,813 |
| | $ | 180.8 |
|
Total | 2,244,521 |
| | | | 2,244,521 |
| | |
| |
(1) | In November 2011, the Company's Board of Directors authorized the repurchase of up to $400.0 million of the Company's common stock. This authorization does not have an expiration date. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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| | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | Date | | Number | | Filed Herewith |
| | | | | | | | | | |
10.01 | | 2013 Senior Executive Company Incentive Plan | | 8-K | | 2/22/13 | | 10.1 |
| | |
31.01 | | Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | | | X |
| | | | | | | | | | |
31.02 | | Certification of the Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | | | X |
| | | | | | | | | | |
32.01 | | Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | | | | X |
| | | | | | | | | | |
32.02 | | Certification of the Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | | | | X |
| | | | | | | | | | |
101.INS | | XBRL Instance Document | | | | | | | | X |
| | | | | | | | | | |
101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | X |
| | | | | | | | | | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.PRE | | XBRL Taxonomy Extension Presentation Document | | | | | | | | X |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | |
Rovi Corporation | | |
Authorized Officer: | | |
| | | |
Date: | May 1, 2013 | By: | /s/ Thomas Carson |
| | | Thomas Carson |
| | | President and Chief Executive Officer |
| | | |
Principal Financial and Accounting Officer: | | |
| | | |
Date: | May 1, 2013 | By: | /s/ Peter C. Halt |
| | | Peter C. Halt |
| | | Chief Financial Officer |
| | | |