Attached files
file | filename |
---|---|
EX-10.6 - Rovi Corp | ex10-6.htm |
EX-31.1 - Rovi Corp | ex31-1q3.htm |
EX-31.2 - Rovi Corp | ex31-2q3.htm |
EX-32.1 - Rovi Corp | ex32-1q3.htm |
EX-32.2 - Rovi Corp | ex32-2q3.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2009
or
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ________ to ________
Commission
file number: 000-53413
Rovi
Corporation
(Exact
name of registrant as specified in its charter)
Delaware
|
26-1739297
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
2830 De La Cruz Boulevard, Santa Clara, CA | 95050 |
(Address of principal executive offices) | (Zip Code) |
(408) 562-8400 | |
(Registrant’s
telephone number, including area code)
|
|
|
|
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X 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 ____ No
____
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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 (check
one):
Large
accelerated filer X Accelerated
filer____ Non-accelerated filer____ Smaller reporting
company___
(Do
not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). Yes ____ No X
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class | Outstanding as of November 1, 2009 |
Common stock, $0.001 par value | 103,047,283 |
ROVI
CORPORATION
FORM
10-Q
INDEX
PART
I - FINANCIAL INFORMATION
Page | ||
Item 1. |
Unaudited
Financial Statements
|
|
Condensed
Consolidated Balance Sheets as of September
30, 2009, and December 31,
2008
|
1
|
|
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008 | 2 | |
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 | 3 | |
Notes to Condensed Consolidated Financial Statements | 4 | |
Item 2. |
Management’s
Discussion and Analysis of Financial Condition
and Results of Operations
|
22 |
Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 31 |
Item 4. | Controls and Procedures | 32 |
PART II - OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 33 |
Item 1A. | Risk Factors | 34 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 34 |
Item 3. |
Defaults
Upon Senior Securities
|
34 |
Item 4. | Submission of Matters to a Vote of Security Holders | 35 |
Item 5. | Other Information | 35 |
Item 6. |
Exhibits
|
36 |
Signatures | 37 |
PART I. FINANCIAL INFORMATION
Item
1. Financial Statements
ROVI
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands)
(Unaudited)
ASSETS
September
30,
|
December
31,
|
||
2009
|
2008
|
||
Current
assets:
|
|||
Cash and cash equivalents
|
$ 138,603
|
$ 199,188
|
|
Short-term investments
|
107,340
|
77,914
|
|
Restricted
cash
|
36,830
|
-
|
|
Trade accounts receivable, net
|
79,661
|
84,020
|
|
Taxes receivable
|
2,195
|
-
|
|
Deferred tax assets, net
|
26,187
|
29,537
|
|
Prepaid expenses and other current assets
|
13,388
|
12,053
|
|
Assets held for sale
|
-
|
329,522
|
|
Total current assets
|
404,204
|
732,234
|
|
Long-term
marketable securities
|
27,942
|
84,955
|
|
Property
and equipment, net
|
41,571
|
45,352
|
|
Finite-lived
intangible assets, net
|
799,837
|
895,071
|
|
Deferred
tax assets, net
|
4,632
|
-
|
|
Other
assets
|
34,157
|
50,387
|
|
Goodwill
|
854,210
|
828,185
|
|
$ 2,166,553
|
$ 2,636,184
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
Current
liabilities:
|
|||
Accounts payable and accrued expenses
|
$ 70,139
|
$ 85,686
|
|
Deferred revenue
|
19,692
|
14,376
|
|
Taxes payable
|
-
|
8,996
|
|
Current portion of debt and capital lease obligations
|
-
|
5,842
|
|
Liabilities held for sale
|
-
|
56,021
|
|
Total current liabilities
|
89,831
|
170,921
|
|
Taxes
payable, less current portion
|
75,951
|
73,009
|
|
Deferred
tax liability, net
|
-
|
9,914
|
|
Long-term
debt and capital lease obligations, less current portion
|
477,629
|
855,160
|
|
Deferred
revenue, less current portion
|
3,253
|
4,909
|
|
Other
non current liabilities
|
16,121
|
7,076
|
|
662,785
|
1,120,989
|
||
Stockholders’
equity:
|
|||
Common stock
|
105
|
103
|
|
Treasury stock
|
(25,068)
|
(25,068)
|
|
Additional paid-in capital
|
1,644,056
|
1,602,667
|
|
Accumulated other comprehensive loss
|
(2,119)
|
(4,879)
|
|
Accumulated deficit
|
(113,206)
|
(57,628)
|
|
Total stockholders’ equity
|
1,503,768
|
1,515,195
|
|
$ 2,166,553
|
$ 2,636,184
|
||
See the
accompanying notes to the unaudited Condensed Consolidated Financial
Statements.
- 1 -
ROVI
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues
|
$ | 115,273 | $ | 108,526 | $ | 345,909 | $ | 211,875 | ||||||||
Costs
and expenses:
|
||||||||||||||||
Cost of revenues
|
14,941 | 14,817 | 45,405 | 31,335 | ||||||||||||
Research and development
|
23,687 | 20,748 | 69,720 | 42,773 | ||||||||||||
Selling, general and administrative
|
34,128 | 34,790 | 98,507 | 80,030 | ||||||||||||
Depreciation
|
4,573 | 4,365 | 13,604 | 8,822 | ||||||||||||
Amortization
|
20,635 | 20,624 | 61,297 | 38,722 | ||||||||||||
Restructuring and asset impairment charges
|
- | - | 53,619 | - | ||||||||||||
Total costs and expenses
|
97,964 | 95,344 | 342,152 | 201,682 | ||||||||||||
Operating
income from continuing operations
|
17,309 | 13,182 | 3,757 | 10,193 | ||||||||||||
Interest expense
|
(10,266 | ) | (18,256 | ) | (41,433 | ) | (35,698 | ) | ||||||||
Interest income and other, net
|
873 | 2,397 | 3,698 | 10,496 | ||||||||||||
Loss on debt redemption
|
(8,687 | ) | - | (8,687 | ) | - | ||||||||||
Gain on sale of strategic investments
|
- | - | - | 5,238 | ||||||||||||
Loss
from continuing operations before income taxes
|
(771 | ) | (2,677 | ) | (42,665 | ) | (9,771 | ) | ||||||||
Income
tax expense (benefit)
|
11,150 | (13,889 | ) | (23,428 | ) | (17,600 | ) | |||||||||
(Loss)
income from continuing operations, net of tax
|
(11,921 | ) | 11,212 | (19,237 | ) | 7,829 | ||||||||||
Discontinued
operations, net of tax
|
- | (3,734 | ) | (36,341 | ) | 89,332 | ||||||||||
Net
(loss) income
|
$ | (11,921 | ) | $ | 7,478 | $ | (55,578 | ) | $ | 97,161 | ||||||
Basic
and diluted:
|
||||||||||||||||
(Loss) income per common share from continuing operations
|
$ | (0.12 | ) | $ | 0.11 | $ | (0.19 | ) | $ | 0.10 | ||||||
(Loss) income per common share from discontinued
operations
|
$ | - | $ | (0.04 | ) | $ | (0.36 | ) | $ | 1.10 | ||||||
Net
(loss) income per common share
|
$ | (0.12 | ) | $ | 0.07 | $ | (0.55 | ) | $ | 1.20 | ||||||
Shares
used in computing basic net (loss) income per common share
|
101,084 | 102,036 | 100,511 | 80,076 | ||||||||||||
Shares
used in computing diluted net (loss) income per common
share
|
101,084 | 102,062 | 100,511 | 80,105 | ||||||||||||
See the accompanying notes to the unaudited Condensed Consolidated Financial Statements.
- 2 -
ROVI
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
Nine Months Ended | ||||||||
September
30,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
(loss) income
|
$ | (55,578 | ) | $ | 97,161 | |||
Adjustments
to reconcile net (loss) income to net cash provided by
operations:
|
||||||||
(Income) loss from discontinued operations, net of tax
|
(583 | ) | 13,596 | |||||
Loss (gain) on disposition of discontinued operations
|
3,661 | (151,284 | ) | |||||
Depreciation and amortization
|
74,901 | 47,544 | ||||||
Amortization of note issuance costs and convertible
note discount
|
15,386 | 9,613 | ||||||
Equity-based compensation
|
15,929 | 9,366 | ||||||
Restructuring and asset impairment charge
|
48,872 | - | ||||||
Deferred taxes
|
(8,393 | ) | 13,701 | |||||
Write-off of note issuance costs
|
5,633 | - | ||||||
Gain on sale of strategic investment
|
- | (5,238 | ) | |||||
Changes
in operating assets and liabilities, net of assets and liabilities
acquired:
|
||||||||
Accounts receivable, net
|
4,468 | 3,417 | ||||||
Deferred revenue
|
3,153 | 12,156 | ||||||
Prepaid expenses, other current assets and other assets
|
(3,595 | ) | 15,776 | |||||
Income taxes
|
(8,249 | ) | (8,096 | ) | ||||
Accounts payable, accrued expenses, and other long-term
liabilities
|
(13,015 | ) | (38,937 | ) | ||||
Net
cash provided by operating activities of continuing
operations
|
82,590 | 18,775 | ||||||
Net
cash provided by operating activities of discontinued
operations
|
1,184 | 19,252 | ||||||
Net
cash provided by operating activities
|
83,774 | 38,027 | ||||||
Cash
flows from investing activities:
|
||||||||
Proceeds
from disposition of businesses, net of costs to sell
|
266,205 | 195,091 | ||||||
Reclass
portion of sales proceeds from disposition of business to restricted
cash
|
(36,782 | ) | - | |||||
Purchases
of long and short-term marketable investments
|
(59,330 | ) | (185,758 | ) | ||||
Sales
or maturities of long and short term marketable
investments
|
87,667 | 385,659 | ||||||
Acquisition
of Gemstar, net of cash acquired
|
- | (910,742 | ) | |||||
Purchases
of property and equipment
|
(13,421 | ) | (4,767 | ) | ||||
Other
acquisitions, net of cash acquired and other investing
|
(23,993 | ) | (828 | ) | ||||
Net
cash provided by (used in) investing activities of continuing
operations
|
220,346 | (521,345 | ) | |||||
Net
cash used in investing activities of discontinued
operations
|
- | (1,101 | ) | |||||
Net
cash provided by (used in) investing activities
|
220,346 | (522,446 | ) | |||||
Cash
flows from financing activities:
|
||||||||
Principal
payments under capital lease and debt obligations
|
(390,344 | ) | (2,959 | ) | ||||
Proceeds
from issuance of debt, net of issuance costs
|
- | 615,469 | ||||||
Proceeds
from exercise of options and other financing activities
|
25,462 | 7,985 | ||||||
Net
cash (used in) provided by financing activities of continuing
operations
|
(364,882 | ) | 620,495 | |||||
Net
cash used in financing activities of discontinued
operations
|
(114 | ) | (274 | ) | ||||
Net
cash (used in) provided by financing activities
|
(364,996 | ) | 620,221 | |||||
Effect
of exchange rate changes on cash
|
291 | (1,138 | ) | |||||
Net
(decrease) increase in cash and cash equivalents
|
(60,585 | ) | 134,664 | |||||
Cash
and cash equivalents at beginning of period
|
199,188 | 134,070 | ||||||
Cash
and cash equivalents at end of period
|
$ | 138,603 | $ | 268,734 | ||||
See the
accompanying notes to the unaudited Condensed Consolidated Financial
Statements.
- 3
-
ROVI
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – BASIS OF PRESENTATION
On July
15, 2009, Macrovision Solutions Corporation changed its name to Rovi Corporation
(the “Company”).
In May
2008, the Company acquired Gemstar-TV Guide International, Inc. (“Gemstar”) and
in April 2009 the Company acquired substantially all of the operations of Muze,
Inc. (“Muze”). The Company’s results of operations include the
operations of Gemstar and Muze from those dates forward (See Note
2).
In April
2008, the Company sold its software and games businesses (referred to as
“Software” and “Games”, respectively). In November 2008, the Company
sold its RightCommerce (also known as “eMeta”) business. In December
2008, the Company sold its TV Guide Magazine business. In January
2009, the Company sold its TVG Network business and, in February 2009, the
Company sold its TV Guide Network and TV Guide Online
businesses. Together TV Guide Magazine, TVG Network, TV Guide Network
and TV Guide Online are collectively referred to as the “Media
Properties”. The results of operations and cash flows of Software,
Games, eMeta and the Media Properties have been classified as discontinued
operations for all periods presented (See Note 3).
The
accompanying unaudited Condensed Consolidated Financial Statements have been
prepared by the Company and its subsidiaries 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, including those items
disclosed under the caption “Risk Factors” contained in the Company’s 2008
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, 2009, 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.
- 4 -
NOTE
2 – ACQUISITIONS
Gemstar
Acquisition
On May 2,
2008, the Company acquired Gemstar in a cash and stock transaction for $2.65
billion. Gemstar was a technology, media and entertainment company
that developed, licensed, marketed and distributed products and services
targeted at the video guidance and entertainment needs of consumers
worldwide.
The
Company, using estimated fair values as of May 2, 2008, allocated the
purchase price to the net tangible and intangible assets acquired as follows (in
thousands):
Cash
and cash equivalents
|
$ | 663,618 | |||
Trade
accounts receivable
|
74,848 | ||||
Property
and equipment
|
72,546 | ||||
Goodwill
|
932,755 | ||||
Identifiable
intangible assets
|
1,118,570 | ||||
Other
assets
|
56,667 | ||||
Accounts
payable and other liabilities
|
(144,708 | ) | |||
Restructuring
charge (See note 9)
|
(21,162 | ) | |||
Deferred
tax liabilities, net
|
(3,815 | ) | |||
Deferred
revenue
|
(85,461 | ) | |||
Capital
lease obligations
|
(11,898 | ) | |||
Total
purchase price
|
$ | 2,651,960 |
Other
Acquisitions
On April 30, 2009, the Company acquired
substantially all of the assets of Muze for approximately $17.0 million in
cash. Muze provides metadata on video, music, games and books to
retailers, Internet destinations, software producers, consumer electronics
manufacturers and mobile service providers in the United States and
Europe. The Company acquired Muze to expand its worldwide
entertainment metadata portfolio and enhance its technology platform for
delivering metadata.
The
Company also paid approximately $8.3 million for a music metadata distribution
business in the Asia Pacific region. This transaction closed on July 1,
2009.
Pro
Forma Financial Information
The pro forma financial information
presented below (in millions, except per share amounts) assumes the acquisition
of Gemstar had occurred on January 1, 2007. The pro forma financial
information does not include the results of Software, Games, eMeta and the Media
Properties as these businesses have been classified as discontinued
operations. The pro forma financial information assumes $275 million
of net proceeds from the sale of the Media Properties reduced the amount of debt
issued in conjunction with acquiring Gemstar. The pro forma
information presented is for illustrative purposes only and is not necessarily
indicative of the results of operations that would have been realized if the
acquisition had been completed on the date indicated, nor is it indicative of
future operating results. The pro forma financial information does not include
any adjustments for operating efficiencies or cost savings.
- 5 -
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
||
2008
|
2008
|
||
Net
revenue
|
$ 108.5
|
$ 313.9
|
|
Operating
income (1)
|
$ 13.2
|
$ 51.5
|
|
Income
from continuing operations (1)
|
$ 14.8
|
$ 34.6
|
|
Basic
and diluted income per common share from continuing
operations
|
$ 0.14
|
$ 0.34
|
(1)
|
The
nine months ended September 30, 2008, includes a $32.5 million pre-tax
benefit from a Gemstar insurance
settlement.
|
NOTE
3 – DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
On
February 28, 2009, the Company sold its TV Guide Network and TV Guide Online
business units for approximately $242 million in cash, of which $36.8 million
was deposited in a 15 month escrow account as a source of recovery in the event
the buyer has an indemnifiable claim. The Company has recorded this
$36.8 million as restricted cash on its Condensed Consolidated Balance
Sheet.
The
assets and liabilities attributable to the Company’s TV Guide Network and TV
Guide Online business units classified in the Condensed Consolidated Balance
Sheet as held for sale at December 31, 2008, consist of the following (in
thousands):
Trade accounts receivable, net | $ | 17,320 | ||
Property and equipment, net | 22,914 | |||
Other
assets
|
4,893 | |||
Goodwill
and intangible assets
|
223,595 | |||
Accounts
payable and other liabilities
|
(11,749 | ) | ||
Capital
lease
|
(11,456 | ) | ||
Deferred
revenue
|
(8,574 | ) | ||
Total
net assets held for sale
|
$ | 236,943 |
On
January 27, 2009, the Company sold its TVG Network business unit for
approximately $50.7 million. Included in the net assets sold was
$11.9 million of cash.
The
assets and liabilities attributable to the Company’s TVG Network business unit
classified in the Condensed Consolidated Balance Sheet as held for sale at
December 31, 2008, consist of the following (in thousands):
- 6 -
Trade
accounts receivable, net
|
$ | 5,255 | ||
Property
and equipment, net
|
3,927 | |||
Other
assets
|
1,499 | |||
Goodwill
and intangible assets
|
50,119 | |||
Accounts
payable and other liabilities
|
(24,242 | ) | ||
Total
net assets held for sale
|
$ | 36,558 |
On
December 1, 2008, the Company sold its TV Guide Magazine business unit in
exchange for the assumption of its net liabilities. During the nine
months ended September 30, 2009, the Company made a $2.6 million payment to the
buyer of TV Guide Magazine to settle the final working capital
adjustment. This payment is recorded in proceeds from disposition of
businesses, net of costs to sell on the Consolidated Statement of Cash
Flows.
On
November 17, 2008, the Company sold its eMeta business unit for $0.8 million in
cash.
On April
1, 2008, the Company sold its Software business unit for $191 million and its
Games business unit for $4 million in cash.
The
results of operations of the Company’s discontinued businesses consist of the
following (in thousands):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
revenue:
|
||||||||||||||||
Software
|
$ | - | $ | - | $ | - | $ | 27,503 | ||||||||
Games
|
- | - | - | 1,633 | ||||||||||||
eMeta
|
- | 1,712 | - | 5,624 | ||||||||||||
TV
Guide Magazine
|
- | 30,859 | - | 50,636 | ||||||||||||
TV
Guide Network / TV Guide Online
|
- | 33,061 | 18,363 | 54,724 | ||||||||||||
TVG
Network
|
- | 15,584 | 4,562 | 24,418 | ||||||||||||
Pre-tax
(loss) income:
|
||||||||||||||||
Software
|
$ | - | $ | (322 | ) | $ | - | $ | (7,187 | ) | ||||||
Games
|
- | - | - | (2,551 | ) | |||||||||||
eMeta
|
- | (7,487 | ) | - | (11,032 | ) | ||||||||||
TV
Guide Magazine
|
- | (4,851 | ) | - | (6,522 | ) | ||||||||||
TV
Guide Network/TV Guide Online
|
- | 3,074 | 1,825 | 5,292 | ||||||||||||
TVG
Network
|
- | 1,062 | (694 | ) | (11 | ) | ||||||||||
Pre-tax
(loss) gain on disposal of business units
|
- | - | (3,661 | ) | 151,284 | |||||||||||
Income
tax benefit (expense) (1)
|
- | 4,790 | (33,811 | ) | (39,941 | ) | ||||||||||
(Loss) income from discontinued operations, net of tax
|
$ | - | $ | (3,734 | ) | $ | (36,341 | ) | $ | 89,332 | ||||||
|
(1)
|
The
income tax expense for the nine months ended September 30, 2009, is
primarily due to the sales of TVG Network and TV Guide Network / TV Guide
Online including goodwill for which the Company had no basis for tax
purposes.
|
NOTE
4 – DEBT
Convertible
Senior Notes
In
August 2006, the Company issued $240.0 million in 2.625% convertible
senior notes (the “Convertible Notes”) due 2011 at par. The Convertible Notes
may be converted, under certain
- 7
-
On
January 1, 2009, the Company adopted an update to Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) topic 470 related to
accounting for convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) (formerly FASB Staff
Position APB 14-1). These updates specify that issuers of such
instruments should separately account for the liability and equity components in
a manner that will reflect the entity’s nonconvertible debt borrowing rate on
the instrument’s issuance date when interest cost is recognized. The
Company applied the provisions retrospectively to all periods presented
resulting in an increase to interest expense of $2.1 million and $6.3 million, a
decrease to net income of $1.3 million and $3.9 million and a decrease in
diluted net income per share of $0.01 and $0.05 for the three and nine months
ended September 30, 2008, respectively. Additionally, stockholders’
equity at December 31, 2008, was increased by $15.9 million and long-term debt
was decreased by $26.6 million to a carrying amount of $213.4
million.
As of
September 30, 2009, and December 31, 2008, the principal amount of the Company’s
Convertible Notes was $240.0 million. As of September 30, 2009, the
unamortized discount on the Convertible Notes due to applying these provisions
was $19.6 million, resulting in a carrying amount of $220.4
million. During the three and nine months ended September 30,
2009, the Company recorded $2.4 million and $7.0 million of interest expense for
the Convertible Notes related to the amortization of the discount.
Senior
Secured Term Loan
In
connection with the Gemstar acquisition, the Company entered into and fully
drew-down a $550 million five year senior secured term loan credit facility
(“Term Loan”). As required under the Term Loan, during the three
months ended March 31, 2009, the Company used $240.0 million of the proceeds
from the Media Properties sale to make a payment on the Term Loan. On
May 6, 2009, the Company made a $50 million voluntary payment on the Term Loan
reducing the outstanding balance to $257.2 million as of September 30,
2009. In addition, these repayments accelerated the
amortization of note issuance costs resulting in $3.2 million of additional
interest expense for the nine months ended September 30,
2009. Unamortized note issuance costs related to the Term Loan as of
September 30, 2009, were $17.8 million and are included in other long-term
assets on the Condensed Consolidated Balance Sheet.
11%
Senior Notes
In
connection with the Gemstar acquisition, the Company issued $100 million of 11%
senior notes (“11% Senior Notes”) due 2013. On August 5, 2009, the
Company redeemed the $100 million 11% Senior Notes at par plus accrued interest
and a $2.8 million make-whole payment representing the discounted value of
interest which the note holders would have received through November 15, 2009,
the first date the 11% Senior Notes could be retired without a premium. In
addition, the Company paid $0.6 million to the Term Loan holders to obtain their
consent to redeem the 11% Senior Notes. In connection with the
redemption of the 11% Senior Notes, the Company has recorded an $8.7 million
loss on debt redemption on its Consolidated Statement of Operations for the
three and nine months ended September 30, 2009. This loss is
comprised of the $2.8 million make-whole payment discussed above, the write-off
of $5.6 million in note issuance costs and $0.3 million in fees associated with
the note redemption.
- 8
-
NOTE
5 – INVESTMENTS AND FAIR VALUE MEASUREMENTS
The
following is a summary of available-for-sale and other investment securities (in
thousands) as of September 30, 2009:
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
||||||||||||||
Cash
|
$ | 32,610 | $ | - | $ | - | $ | 32,610 | |||||||||
Cash
equivalents - money markets
|
105,993 | - | - | 105,993 | |||||||||||||
Total
cash and cash equivalents
|
$ | 138,603 | $ | - | $ | - | $ | 138,603 | |||||||||
Restricted
cash
|
$ | 36,830 | $ | - | $ | - | $ | 36,830 | |||||||||
Available-for-sale
investments:
|
|||||||||||||||||
Auction
rate securities
|
$ | 17,100 | $ | - | $ | (1,722 | ) | $ | 15,378 | ||||||||
Corporate
debt securities
|
39,815 | 265 | (39 | ) | 40,041 | ||||||||||||
Treasury/Agencies
|
21,831 | 7 | - | 21,838 | |||||||||||||
Total
available-for-sale investments
|
$ | 78,746 | $ | 272 | $ | (1,761 | ) | $ | 77,257 | ||||||||
Auction
rate securities classified as trading
|
$ | 52,211 | |||||||||||||||
ARS
Put Option
|
$ | 5,814 | |||||||||||||||
Total
cash, cash equivalents, restricted cash and investments
|
$ | 310,715 |
The
following is a summary of available-for-sale and other investment securities (in
thousands) as of December 31, 2008:
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
||||||||||||||
Cash
|
$ | 37,271 | $ | - | $ | - | $ | 37,271 | |||||||||
Cash
equivalents - money markets
|
154,842 | - | - | 154,842 | |||||||||||||
Cash
equivalents – 0-90 day investments
|
7,072 | 4 | (1 | ) | 7,075 | ||||||||||||
Total
cash and cash equivalents
|
$ | 199,185 | $ | 4 | $ | (1 | ) | $ | 199,188 | ||||||||
Available-for-sale
investments:
|
|||||||||||||||||
Auction
rate securities
|
$ | 17,100 | $ | - | $ | (2,758 | ) | $ | 14,342 | ||||||||
Commercial
paper
|
22,066 | 24 | (21 | ) | 22,069 | ||||||||||||
Corporate
debt securities
|
24,184 | 188 | (37 | ) | 24,335 | ||||||||||||
Treasury/Agencies
|
32,329 | 43 | (25 | ) | 32,347 | ||||||||||||
US
and municipal securities
|
7,381 | 20 | - | 7,401 | |||||||||||||
Total
available-for-sale investments
|
$ | 103,060 | $ | 275 | $ | (2,841 | ) | $ | 100,494 | ||||||||
Auction
rate securities classified as trading
|
$ | 52,005 | |||||||||||||||
ARS
Put Option
|
$ | 10,370 | |||||||||||||||
Total
cash, cash equivalents and investments
|
$ | 362,057 |
- 9
-
The
following inputs, as defined under FASB ASC 820, were used to determine the
fair value of the Company’s investment securities at September 30, 2009 (in
thousands):
Total
|
Quoted
Prices
in
Active
Markets (Level 1) |
Significant
Other
Observable
Inputs (Level 2) |
Significant
Unobservable
Inputs (Level 3) |
|||||||||||||
Money
market funds
|
$ | 105,993 | $ | 105,993 | $ | - | $ | - | ||||||||
Money
market funds (restricted cash)
|
36,830 | 36,830 | - | - | ||||||||||||
Fixed
income available-for-sale securities
|
61,879 | - | 61,879 | - | ||||||||||||
Auction
rate securities (Available-for-sale)
|
15,378 | - | - | 15,378 | ||||||||||||
Auction
rate securities (Trading)
|
52,211 | - | - | 52,211 | ||||||||||||
ARS
Put Option
|
5,814 | - | - | 5,814 | ||||||||||||
Total
|
$ | 278,105 | $ | 142,823 | $ | 61,879 | $ | 73,403 |
The
interest rate reset auction events for the Company’s auction rate securities
have failed since early 2008. Therefore, the fair values of these securities are
estimated taking into account such factors as 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’s auction rate securities portfolio at September
30, 2009, includes solely AAA rated investments, comprised of federally insured
student loans and municipal and educational authority bonds. The Company
continues to earn interest on all of its auction rate security
instruments. In addition, in December 2008 the Company entered into
an agreement with UBS AG which provides (i) the Company the right (“ARS Put
Option”) to sell auction rate securities with a par value of $62.4 million back
to UBS AG at par, at the Company’s sole discretion, anytime during the period
from June 30, 2010, through July 2, 2012, and (ii) UBS AG the
right to purchase these auction rate securities or sell them on the Company’s
behalf at par anytime through July 2, 2012. During the three months ended
September 30, 2009, UBS AG repurchased $4.3 million of these auction rate
securities at par. The Company elected to measure the ARS Put Option
under the fair value option of FASB ASC 825. The applicable auction
rate securities are classified as trading and are recorded in short-term
investments at September 30, 2009, and long-term marketable securities at
December 31, 2008.
The
following table provides a summary of changes in the Company’s Level 3 auction
rate securities and ARS Put Option as of September 30, 2009 (in
thousands):
Balance
at December 31, 2008
|
$ | 76,717 | ||
Gain
on ARS classified as trading and recorded in other income
|
4,556 | |||
Unrealized
gain included in accumulated other comprehensive income
|
1,036 | |||
ARS
Put Option loss recorded in other income
|
(4,556 | ) | ||
Settlements
|
(4,350 | ) | ||
Balance
at September 30, 2009
|
$ | 73,403 |
On April
1, 2009, the Company adopted updates to FASB ASC topic 825 related to interim
disclosures about the fair value of financial instruments (formerly FSP SFAS
107-1 and APB 28-1). These updates require additional disclosures
about the Company’s financial instruments, such as the Company’s
- 10
-
Quoted
Prices
in
Active
Markets
|
Significant
Other
Observable
Inputs
|
||||
Carrying
Value
|
(Level 1)
|
(Level 2)
|
|||
Term
Loan
|
$ 257,248
|
$ -
|
$ 257,248
|
||
Convertible
Notes (1)
|
220,381
|
$ 306,538
|
$ -
|
||
$ 477,629
|
|||||
(1)
The principal amount of the Convertible Notes is $240 million (see Note
4).
|
On
January 1, 2009, the Company adopted an update to FASB ASC topic 820 (formerly
FSP SFAS 157-2). This update deferred the effective date of changes to fair
value measurements as it relates to non-financial assets and liabilities
including items such as reporting units measured at fair value in a goodwill
impairment test and non-financial assets acquired and liabilities assumed in a
business combination, to allow the FASB and constituents additional time to
consider the effect of various implementation issues that have
arisen. The adoption of these changes did not have a material impact
on the Company’s financial position or operating results.
NOTE
6 – EQUITY-BASED COMPENSATION
Stock
Option Plans
During
the quarter ended September 30, 2009, the Company granted stock options and
restricted stock awards from the 2008 Equity Incentive Plan (the “2008 Plan”)
and the 2000 Equity Incentive Plan (the “2000 Plan”).
As
of September 30, 2009, the Company had a total of 29.6 million shares
reserved and 13.5 million shares available for issuance under the 2000 and
2008 Plans. The 2000 and 2008 Plans provide for the grant of stock options,
restricted stock awards and similar types of equity awards by the Company to
employees, officers, directors and consultants of the Company. For
options granted during the periods ended September 30, 2009, 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. Option grants have
contractual terms ranging from five to ten years.
Restricted
stock awards issued during the quarter ended September 30, 2009, generally vest
annually over four years. As of September 30, 2009, the number of
shares awarded but unvested was 0.5 million under the 2000 Plan and 0.7 million
under the 2008 Plan.
Employee
Stock Purchase Plan
The
Company’s 2008 Employee Stock Purchase Plan (the “2008 ESPP”) allows eligible
employee participants to purchase shares of the Company’s common stock at a
discount through payroll deductions. The 2008 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
- 11
-
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 September 30, 2009, the Company had reserved 7.5 million shares of common
stock under the 2008 ESPP and had 7.0 million shares available for future
issuance.
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 awards as the difference between the market value of the
awards on the date of grant less the exercise price of the awards
granted.
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 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. Since the Company did not have sufficient data for options
with four year vesting terms and seven year contractual life, the simplified
method was used to calculate 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 valuation model. 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 record 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
September
30,
|
Nine
months ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Option
Plans:
|
||||||||||||||||
Dividends
|
None
|
None
|
None
|
None
|
||||||||||||
Expected
term
|
4.4
years
|
4.6
years
|
4.5
years
|
3.5
years
|
||||||||||||
Risk
free interest rate
|
2.1% | 2.9% | 2.0% | 2.8% | ||||||||||||
Volatility
rate
|
42% | 44% | 44% | 43% | ||||||||||||
ESPP
Plan:
|
||||||||||||||||
Dividends
|
None
|
None
|
None
|
None
|
||||||||||||
Expected
term
|
1.3
years
|
1.2
years
|
1.3
years
|
1.2
years
|
||||||||||||
Risk
free interest rate
|
0.7% | 2.3% | 0.7% | 2.2% | ||||||||||||
Volatility
rate
|
45% | 45% | 49% | 45% |
- 12
-
As of
September 30, 2009, there was $45.2 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 2.6 years.
The
weighted average fair value of equity-based awards are as follows:
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Weighted
average fair value:
|
||||||||||||||||
Option
grants
|
$ | 10.35 | $ | 6.16 | $ | 8.43 | $ | 4.92 | ||||||||
Employee
purchase share rights
|
$ | 8.84 | $ | 3.68 | $ | 6.82 | $ | 3.98 | ||||||||
Restricted
stock award grants
|
$ | 30.00 | $ | 15.52 | $ | 26.95 | $ | 15.50 |
The
total intrinsic value of options exercised during the three and nine months
ended September 30, 2009, was $8.1 million and $9.5 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 7 – 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, 2008
|
$ 828,185
|
Changes
due to foreign currency exchange rates and other
|
3,769
|
2009
acquisitions
|
16,450
|
Gemstar
purchase accounting adjustments
|
5,806
|
Goodwill,
net at September 30, 2009
|
$ 854,210
|
During
the second quarter of 2009, the Company completed extensive consumer research
regarding its brands. This consumer research indicated that the
brands acquired by the Company did not represent the future vision of the
Company and did not carry a positive connotation in the market. The
Company determined these results to be an indicator of potential impairment of
its trademark intangible assets. The Company determined the fair
value of its trademark intangible assets using the relief-from-royalty
method. The relief-from-royalty method uses Level 3 inputs to
estimate the after-tax saving enjoyed by owning the assets as opposed to paying
a third party for its use. The Company determined the fair value of
its trademark and intangible assets to be $8.3 million and recorded a $43.1
million impairment charge during the second quarter of 2009. This
impairment charge is included in restructuring and asset impairment charges on
the Condensed Consolidated Statements of Operations for the nine months ended
September 30, 2009.
- 13
-
The Company’s
finite-lived intangible assets associated with its continuing operations are as
follows (in thousands):
September
30, 2009
|
||||||||||||
Gross
Costs
|
Accumulated
Amortization
|
Net
|
||||||||||
Finite-lived intangibles:
|
||||||||||||
Developed technology and
patents
|
$ | 827,835 | $ | (113,927 | ) | $ | 713,908 | |||||
Existing contracts
and customer relationships
|
46,576 | (10,233 | ) | 36,343 | ||||||||
Content
databases and other
|
50,812 | (8,664 | ) | 42,148 | ||||||||
Trademarks /
Tradenames
|
8,300 | (862 | ) | 7,438 | ||||||||
$ | 933,523 | $ | (133,686 | ) | $ | 799,837 |
December
31, 2008
|
|||||
Gross
Costs
|
Accumulated
Amortization
|
Net
|
|||
Finite-lived intangibles:
|
|||||
Developed technology and
patents
|
$ 826,968
|
$ (61,438)
|
$ 765,530
|
||
Existing contracts and
customer relationships
|
43,635
|
(6,800)
|
36,835
|
||
Content
database and other
|
44,652
|
(4,690)
|
39,962
|
||
Trademarks /
Tradenames
|
55,047
|
(2,303)
|
52,744
|
||
$ 970,302
|
$ (75,231)
|
$ 895,071
|
As of
September 30, 2009, the Company estimates its amortization expense in future
periods to be as follows (in thousands):
Amortization
Expense
|
||
Remainder
of 2009
|
$ 20,601
|
|
2010
|
79,852
|
|
2011
|
76,770
|
|
2012
|
72,863
|
|
2013
|
70,812
|
|
Thereafter
|
478,939
|
|
Total
amortization expense
|
$ 799,837
|
NOTE
8 – SALE OF STRATEGIC INVESTMENT
During
the first quarter of 2008, the Company recognized a gain of $5.2 million on the
sale of its investment in Digimarc Corporation.
- 14
-
NOTE
9 – RESTRUCTURING CHARGES
Muze
Restructuring Plan
In
connection with the acquisition of the assets of Muze (see Note 2), management
implemented a plan to restructure Muze’s operations resulting in a charge of
$0.9 million during the second quarter of 2009. This was done to
eliminate redundancies with the Company’s entertainment metadata
business. This charge included $0.7 million for employee severance
and a $0.2 million liability for the fair value of future lease payments on
abandoned office space. As of September 30, 2009, the liability for
future lease payments related to the abandoned office space was $0.1
million.
Q1
2009 Restructuring Plan
In
conjunction with the disposition of the Media Properties, the Company’s
management approved several actions resulting in a restructuring and asset
impairment charge of $8.4 million. This was done to create cost
efficiencies for the Company now that it no longer supports the Media
Properties. These charges included $1.3 million in severance, a $2.9
million liability for the fair value of future lease payments on abandoned
office space and $4.2 million in non–cash asset impairment charges related to
the abandoned office space. As of September 30, 2009, the liability
for future lease payments related to the abandoned office space was $2.5
million.
Gemstar
Acquisition Restructuring Plan
In
conjunction with the Gemstar acquisition, management acted upon a
pre-acquisition plan to restructure certain Gemstar operations resulting in
severance of $21.2 million. This was done in order to create cost efficiencies
for the combined Company. The severance liability was recognized as an assumed
liability in the Gemstar acquisition and, accordingly, resulted in an increase
to goodwill. As of December 31, 2008, the Company had paid $19.1 million of
these costs and had a remaining liability of $2.1 million. During the
nine months ended September 30, 2009, the Company paid $1.8 million of these
costs resulting in a remaining liability of $0.3 million.
Fiscal
2007 Restructuring Plans
In 2007
the Company’s Board of Directors approved several restructuring actions and an
organizational realignment program. In addition, the Company discontinued its
Hawkeye anti-piracy service. As of December 31, 2008, the Company had
$0.4 million in accrued liabilities relating to these restructuring
actions. During the first quarter of 2009, the Company reversed the
remaining $0.4 million in liabilities. This reversal was recorded in
restructuring and asset impairment charges in the Condensed Consolidated
Statement of Operations.
NOTE
10 – EARNINGS PER SHARE (“EPS”)
On January 1, 2009, the Company
adopted an update to FASB ASC topic 260 related to determining whether
instruments granted in share-based payment transactions are participating
securities (formerly FSP EITF 03-6-1). This update defines unvested share-based
payment awards that contain nonforfeitable rights to dividends as participating
securities that should be included in computing EPS using the two-class
method. The Company’s non-vested restricted stock awards
granted prior to June 30, 2009, qualify as participating securities. As
required, all prior-period EPS data has been adjusted. The adoption
did not have a material impact on the Company’s financial condition or results
of operations.
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.
- 15
-
The
calculation of earnings per common share and diluted earnings per common share
is presented below.
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Basic
(loss) income per common share
|
||||||||||||||||
(Loss)
income from continuing operations
|
$ | (11,921 | ) | $ | 11,212 | $ | (19,237 | ) | $ | 7,829 | ||||||
Income
allocated to participating securities
|
- | (96 | ) | - | (99 | ) | ||||||||||
(Loss)
income allocated to common shareholders from continuing
operations
|
$ | (11,921 | ) | $ | 11,116 | $ | (19,237 | ) | $ | 7,730 | ||||||
Discontinued
Operations
|
$ | - | $ | (3,734 | ) | $ | (36,341 | ) | $ | 89,332 | ||||||
Loss
(income) allocated to participating securities
|
- | 32 | - | (1,131 | ) | |||||||||||
Discontinued
operations allocated to common shareholders
|
$ | - | $ | (3,702 | ) | $ | (36,341 | ) | $ | 88,201 | ||||||
Net
(loss) income
|
$ | (11,921 | ) | $ | 7,478 | $ | (55,578 | ) | $ | 97,161 | ||||||
Income
allocated to participating securities
|
- | (64 | ) | - | (1,230 | ) | ||||||||||
Net
(loss) income allocated to common shareholders
|
$ | (11,921 | ) | $ | 7,414 | $ | (55,578 | ) | $ | 95,931 | ||||||
Weighted
average basic common shares outstanding
|
101,084 | 102,036 | 100,511 | 80,076 | ||||||||||||
(Loss)
income per common share from continuing operations
|
$ | (0.12 | ) | $ | 0.11 | $ | (0.19 | ) | $ | 0.10 | ||||||
(Loss)
income per common share from discontinued operations
|
- | (0.04 | ) | (0.36 | ) | 1.10 | ||||||||||
Net (loss) income per common share
|
$ | (0.12 | ) | $ | 0.07 | $ | (0.55 | ) | $ | 1.20 | ||||||
Diluted
(loss) income per common share
|
||||||||||||||||
(Loss)
income from continuing operations
|
$ | (11,921 | ) | $ | 11,212 | $ | (19,237 | ) | $ | 7,829 | ||||||
Income
allocated to participating securities
|
- | (96 | ) | - | (99 | ) | ||||||||||
(Loss)
income allocated to common shareholders from continuing
operations
|
$ | (11,921 | ) | $ | 11,116 | $ | (19,237 | ) | $ | 7,730 | ||||||
Discontinued
Operations
|
$ | - | $ | (3,734 | ) | $ | (36,341 | ) | $ | 89,332 | ||||||
Loss
(income) allocated to participating securities
|
- | 32 | - | (1,131 | ) | |||||||||||
Discontinued
operations allocated to common shareholders
|
$ | - | $ | (3,702 | ) | $ | (36,341 | ) | $ | 88,201 | ||||||
Net
(loss) income
|
$ | (11,921 | ) | $ | 7,478 | $ | (55,578 | ) | $ | 97,161 | ||||||
Income
allocated to participating securities
|
- | (64 | ) | - | (1,230 | ) | ||||||||||
Net
(loss) income allocated to common shareholders
|
$ | (11,921 | ) | $ | 7,414 | $ | (55,578 | ) | $ | 95,931 | ||||||
Weighted
average diluted common shares outstanding
|
101,084 | 102,036 | 100,511 | 80,076 | ||||||||||||
Dilutive
potential common shares
|
- | 26 | - | 29 | ||||||||||||
Weighted
average diluted common shares outstanding
|
101,084 | 102,062 | 100,511 | 80,105 | ||||||||||||
(Loss)
income per common share from continuing operations
|
$ | (0.12 | ) | $ | 0.11 | $ | (0.19 | ) | $ | 0.10 | ||||||
(Loss)
income per common share from discontinued operations
|
- | (0.04 | ) | (0.36 | ) | 1.10 | ||||||||||
Net (loss) income per common share
|
$ | (0.12 | ) | $ | 0.07 | $ | (0.55 | ) | $ | 1.20 |
- 16 -
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
September
30,
|
Nine
months ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Stock
options
|
7,951 | 7,251 | 7,956 | 5,695 | ||||||||||||
Restricted
stock
|
970 | - | 883 | - | ||||||||||||
Warrants
(1)
|
7,955 | 7,955 | 7,955 | 7,955 | ||||||||||||
Convertible
Notes
|
8,486 | 8,486 | 8,486 | 8,486 | ||||||||||||
Total
weighted average potential common shares
excluded from diluted net earnings per
share
|
25,362 | 23,692 | 25,280 | 22,136 |
(1) In August 2006, in conjunction with the issuance of the Convertible Notes, the Company sold warrants to purchase up to 7.96 million shares of its common stock at a price of $32.9248 per share. The warrants expire on various dates from August 16, 2011, through the 104th scheduled trading day following August 16, 2011, and must be settled in net shares. The Company also entered into a convertible bond call option whereby the Company has options to purchase up to 7.96 million shares of the Company’s common stock at a price of $28.2829 per share. These options expire on August 15, 2011, and must be settled in net shares.
NOTE
11 – COMPREHENSIVE (LOSS) INCOME
The
components of comprehensive (loss) income, net of taxes, are as follows (in
thousands):
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
(loss) income
|
$ | (11,921 | ) | $ | 7,478 | $ | (55,578 | ) | $ | 97,161 | ||||||
Other
comprehensive (loss) income:
|
||||||||||||||||
Unrealized (losses) gains on investments, net (1)
|
23 | (3,188 | ) | 1,080 | (7,515 | ) | ||||||||||
Foreign currency translation adjustments, net (2)
|
818 | (2,389 | ) | 1,680 | (10,372 | ) | ||||||||||
Comprehensive
(loss) income
|
$ | (11,080 | ) | $ | 1,901 | $ | (52,818 | ) | $ | 79,274 |
(1)
|
Changes in unrealized (losses) gains on investments during the nine months ended September 30, 2008, include the reduction of $3.2 million, net of taxes, of unrealized gains which became realized gains when the Company sold its investment in Digimarc Corporation during the first quarter of 2008 (see Note 8). |
(2)
|
Foreign currency translation adjustments for the three and nine months ended September 30, 2008, include a reduction of $5.0 million arising from the sale of the Software business (see Note 3). |
NOTE
12 – RECENT ACCOUNTING PRONOUNCEMENTS
In
August 2009, the FASB issued ASU 2009-05, Fair Value Measurements (Topic 820) –
Measuring Liabilities at Fair Value. ASU 2009-5 amends ASC topic 820
by providing additional guidance clarifying the measurement of liabilities at
fair value. When a quoted price in an active market for the identical
liability is not available, the amendments require that the fair value of a
liability be measured using
- 17
-
one or
more of the listed valuation techniques that should maximize the use of relevant
observable inputs and minimize the use of unobservable inputs. The
Company will adopt ASU 2009-05 on October 1, 2009. The adoption is
not anticipated to have a material impact on the Company’s financial position or
results from operations.
In the second
quarter of 2009, the Company adopted an update to FASB ASC topic 855 (formerly
SFAS No. 165) related to subsequent events. This update defines
subsequent events as either recognized (previously referred to in practice as
Type I) or non-recognized (previously referred to in practice as Type
II). The adoption did not have a material impact on the Company’s
financial position or results from operations.
On April
1, 2009, the Company adopted an update to FASB ASC topic 320 (formerly FSP SFAS
115-2 and FAS 124-2) related to the recognition and presentation of
other-than-temporary impairments. This update replaces the existing
requirement that management assert it has both the intent and ability to hold an
impaired security until recovery with the requirement that management assert:
(i) it does not have the intent to sell the security; and (ii) it is more likely
than not it will not have to sell the security before recovery of its cost
basis. The update also incorporates examples of factors from existing
literature that should be considered in determining whether a debt security is
other-than-temporarily impaired. The adoption did not have a material
impact on the Company’s financial position or results from
operations.
On April
1, 2009, the Company adopted an update to FASB ASC topic 820 (formerly FSP SFAS
157-4) related to determining fair value when the volume and level of activity
for the asset or liability have significantly decreased and identifying
transactions that are not orderly. This update affirms that the
objective of fair value, when the market for an asset is not active, is the
price that would be received to sell the asset in an orderly transaction and
clarifies and includes additional factors for determining whether potentially
comparative transactions are orderly transactions or transactions that are not
orderly (that is, distressed or forced). The adoption did not have a
material impact on the Company’s financial position or results from
operations.
On
January 1, 2009, the Company adopted an update to FASB ASC topic 805 (formerly
SFAS No. 141 (R)) related to business combinations. New requirements include:
(i) the fair value of stock provided as consideration be measured as of the
acquisition date instead of the announcement date; (ii) acquisition-related
costs be recognized separately from the acquisition, generally as an expense,
instead of treated as a part of the cost of the acquisition that was allocated
to the assets acquired and the liabilities assumed; (iii) restructuring costs
that the acquirer expected, but was not obligated to incur, be recognized
separately from the acquisition instead of recognized as if they were a
liability assumed at the acquisition date; (iv) contingent consideration be
recognized at the acquisition date, measured at its fair value at that date,
instead of recognized when the contingency was resolved and consideration was
issued or became issuable; (v) recognizing a gain when the fair value of the
identifiable net assets acquired exceeds the fair value of the consideration
transferred instead of allocating the “negative goodwill” amount as a pro rata
reduction of the amounts that otherwise would have been assigned to particular
assets acquired; (vi) research and development assets acquired in a business
combination will be recognized at their acquisition-date fair values as assets
acquired in a business combination instead of being measured at their
acquisition-date fair values and then immediately charged to expense; and (vii)
changes in the amount of deferred tax benefits created in a business
combination, outside of the valuation period, will be recognized either in
income from continuing operations or directly in contributed capital, depending
on the circumstances, instead of recognized through a corresponding reduction to
goodwill or certain noncurrent assets or an increase in so-called negative
goodwill. The adoption did not have a material impact on the
Company’s financial position or results from operations.
On
January 1, 2009, the Company adopted an update to FASB ASC topic 350 (formerly
FSP SFAS 142-3) related to the determination of the
useful life of intangible assets. This update amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset in order to improve the consistency
between the useful life of a recognized
- 18
-
intangible
asset under FASB ASC topic 350 (formerly SFAS 142) and the period of expected
cash flows used to measure the fair value of the asset under FASB ASC topic 805,
(formerly SFAS No. 141(R)). The adoption did not have a material
impact on the Company’s financial position or results from
operations.
NOTE
13 – INCOME TAXES
The
Company recorded income tax expense of $11.2 million and income tax benefit of
$13.9 million from its continuing operations for three months ended
September 30, 2009 and 2008, respectively. The Company recorded income tax
benefit of $23.4 million and $17.6 million from its continuing operations for
nine months ended September 30, 2009 and 2008, respectively. Income
tax expense is based upon an annual effective tax rate forecast, including
estimates and assumptions that could change during the year, including the
amount of foreign reinvested earnings. During the three months ended September
30, 2009, the Company revised its estimate of 2009 foreign reinvested
earnings. As the Company’s projected pre-tax GAAP loss is relatively
small, permanent book-to-tax differences, such as the foreign rate differential,
have a significant impact on the Company’s annual effective tax rate. The
result of these revisions was an income tax expense for the three months ended
September 30, 2009, which included the amount required to reflect the
appropriate income tax benefit for the nine months ended September 30, 2009,
based upon the revised full-year forecast. The tax expense for the three months
ended September 30, 2009, also includes a discrete tax benefit of $3.0 million
resulting from the pre-tax loss on debt redemption of $8.7 million recorded in
the same reporting period. The income tax benefit for the nine months
ended September 30, 2009, also includes a discrete tax benefit of $1.9 million
resulting from the enactment of a California tax law change during the first
quarter which reduced the balance of deferred tax liabilities expected to be
paid in 2011 and years thereafter.
In
assessing the realizability of deferred tax assets, the Company considered
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible, as well as tax planning
strategies.
Based on
projections of future taxable income over the periods in which the deferred tax
assets are deductible and the history of the Company’s profitability, the
Company believes that it is more likely than not that the benefits of these
deductible differences, net of valuation allowances, as of September 30, 2009,
will be realized.
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 2004.
NOTE
14 – 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 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. 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 our 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.
- 19
-
Comcast Cable Communications Corp.,
LLC v. Finisar Corporation, in the United States District Court for the
Northern District of California. In support of a potential claim for
indemnification, Comcast Cable Communications Corp., LLC (“Comcast”) put the
Company on notice that it had received communications from Finisar
asserting infringement of U.S. Patent 5,404,505 (the “‘505 patent”). On
July 7, 2006, Comcast filed a declaratory judgment action in the Northern
District of California asking the Court to rule, among other things, that it
does not infringe the ‘505 patent and/or that the patent is invalid. On
May 15, 2008, Finisar entered into a covenant and stipulation with Comcast,
filed with the California Court, that it would not assert any claim of the ‘505
patent against Comcast or certain related entities, other than claim
25. On July 11, 2008, the Court ruled on Comcast’s summary
judgment motion, finding that claim 25 is invalid, and therefore finding that
Comcast’s non-infringement motion is moot. Comcast has not taken any
further action insofar as its potential indemnity claim against the Company is
concerned.
Legal
Proceedings
Thomson, Inc. v. Gemstar-TV Guide
International, Inc., in the Superior Court of the State of Indiana for
the County of Hamilton. On May 23, 2008, Thomson, Inc. (“Thomson”)
initiated this action, seeking, among other things, indemnification from the
Company in connection with its settlement of the patent claims against it in
SuperGuide Corporation v.
DirecTV Enterprises, Inc., et al., in the United States District Court
for the Western District of North Carolina. Thomson alleges that it entered
into multiple agreements with the Company between 1996 and 2003 that would
require the Company to indemnify Thomson in the SuperGuide
litigation. Specifically, Thomson asserts causes of action for
fraud/fraudulent inducement, breach of contract, breach of implied in fact
indemnity and warranty of title against infringement, and unjust
enrichment. Thomson seeks a declaration from the Court that the Company
owes Thomson defense and indemnity for SuperGuide’s claims, compensatory
damages, including fees and expenses paid by Thomson in that case, the return of
royalties paid by Thomson to the Company under the aforementioned agreements,
pre and post-judgment interest, punitive damages, attorney fees, and costs of
suit. The case is set for trial at a date to be determined in
2010.
DIRECTV, Inc. v. Gemstar-TV Guide
Interactive, Inc., American Arbitration Association - Los
Angeles. On March 20, 2009, DirecTV filed this arbitration demand
seeking indemnity for payments made in settlement of two patent infringement
lawsuits, including the SuperGuide Corporation v. DirecTV
Enterprises, Inc., et al. matter. DirecTV seeks
indemnity under the November 21, 2003, License and Distribution Agreement and
Patent License Agreement between the parties and claims damages plus interest
and its arbitration-related attorneys’ fees. The Company has filed a
Response and Counterclaim for breach of contract. A hearing
date has been set for December 7, 2009.
John Burke v. TV Guide Magazine
Group, Inc., Open Gate Capital, Rovi Corp., Gemstar-TV Guide International,
Inc. On August 11, 2009, plaintiff filed a purported class
action lawsuit claiming that the
- 20
-
Company’s
former subsidiary, TV Guide Magazine, breached agreements with its subscribers
and violated consumer protection laws with its practice of counting double
issues toward the number of issues in a subscription. On September
10, 2009, the Company filed an answer to the complaint along with a petition to
remove the case to federal court.
In
addition to the items listed above, 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 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 the matters listed above or any other litigation,
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.
NOTE
15 – SUBSEQUENT EVENTS
In October 2009, the Company made $50
million in voluntary payments on its Term Loan.
Subsequent
events have been evaluated up to and including November 5, 2009, which is the
date these financial statements were issued.
-
21-
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
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, 2008, as filed with the SEC.
Overview
On July
15, 2009, Macrovision Solutions Corporation changed its name to Rovi Corporation
(the “Company”). Our management and our board of
directors believe that the corporate name change better reflects our
strategy to power the discovery and enjoyment of digital
entertainment. In executing this strategy, we made several
acquisitions and divestitures. Many of these transactions involved
established company or product brands that each carried some market awareness
and an association with a specific capability or product. We
believed, and research validated, that none of these acquired brands, nor the
Macrovision brand itself, represented the vision and strategy for what the
Company has now become. Based upon consumer, customer and overall
market research, Rovi Corporation was selected as our new name. The
name elicited positive connotations on a global basis and generally associated
us with exploration and discovery (i.e., “roving”), both of which are broad,
forward-looking concepts that are desired by our target markets. The
new visual identity and shorter name better aids us in reaching consumers, which
we believe is a critical element in demonstrating the value of our solutions to
our target customers in the consumer electronics (“CE”) and service provider
(cable, satellite, telecommunications, mobile and internet service providers
among others) markets.
We are
focused on powering the discovery and enjoyment of digital entertainment by
providing a broad set of integrated solutions that are embedded in our
customers’ products and services and used by end consumers to simplify and guide
their interaction with digital entertainment. Our offerings include
interactive program guides (“IPGs”), embedded licensing technologies (such as
recommendations and search capability), media recognition technologies and
licensing of our extensive database of descriptive information about television,
movie, music, books, and game content and content protection technologies and
services. In addition to offering Company developed IPGs, our
customers may also license our patents and deploy their own IPG or a third party
IPG. We group our revenue into the following categories - (i) CE
manufacturers, (ii) service providers, and (iii) 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. IPG revenues for IPGs included in a set-top box deployed by a
service provider where payment was made by the set-top box manufacturer were
previously classified in CE manufacturers. Revenue related to an IPG
deployed in a set-top box sold at retail is included in CE manufacturers. Our
management feels this classification is preferable as it allows a better
association between service provider revenue and digital households deploying a
Company-provided IPG or an IPG deployed under a patent license with the
Company. CE manufacturers deploy such Company products and services
as Connected Platform, TV Guide On Screen, Guide Plus+, G-GUIDE, VCR Plus+, web
services, LASSO and Tapestry. Service providers deploy such Company products and
services as Passport Echo, Passport DCT, Passport, i-Guide and web services.
Other includes our business of licensing our extensive database of descriptive
information about television, movie, music and game content and our
entertainment company content protection products and services such as ACP,
RipGuard, CopyBlock and BD+.
In May
2008, we acquired Gemstar-TV Guide International, Inc. (“Gemstar”) and, in April
2009, we acquired substantially all of the operations of Muze, Inc.
(“Muze”). Our results of operations include the operations of Gemstar
and Muze from those dates forward (see Note 2 to the Condensed Consolidated
Financial Statements).
In April
2008, we sold our software and games businesses (referred to as “Software” and
“Games”, respectively). In November 2008, we sold our RightCommerce
(also known as “eMeta”) business. In December 2008, we sold our TV
Guide Magazine business. In January 2009, we sold our TVG
Network
- 22
-
business
and, in February 2009, we sold our TV Guide Network and TV Guide Online
businesses. Together TV Guide Magazine, TVG Network, TV Guide Network
and TV Guide Online are collectively referred to as the “Media
Properties”. The results of operations and cash flows of Software,
Games, eMeta and the Media Properties have been classified as discontinued
operations for all periods presented (see Note 3 to the Condensed Consolidated
Financial Statements).
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 | ||||||||||||||||
September
30,
|
Change
|
|||||||||||||||
2009
|
2008
|
$ | % | |||||||||||||
Revenues:
|
||||||||||||||||
Service providers
|
$ | 57,256 | $ | 48,481 | 8,775 | 18 | % | |||||||||
CE manufacturers
|
44,234 | 47,699 | (3,465 | ) | -7 | % | ||||||||||
Other
|
13,783 | 12,346 | 1,437 | 12 | % | |||||||||||
Total revenues
|
115,273 | 108,526 | 6,747 | 6 | % | |||||||||||
Costs
and expenses:
|
||||||||||||||||
Cost of revenues
|
14,941 | 14,817 | 124 | 1 | % | |||||||||||
Research
and development
|
23,687 | 20,748 | 2,939 | 14 | % | |||||||||||
Selling, general and administrative
|
34,128 | 34,790 | (662 | ) | -2 | % | ||||||||||
Depreciation
|
4,573 | 4,365 | 208 | 5 | % | |||||||||||
Amortization
|
20,635 | 20,624 | 11 | 0 | % | |||||||||||
Total operating expenses
|
97,964 | 95,344 | 2,620 | 3 | % | |||||||||||
Operating
income from continuing operations
|
17,309 | 13,182 | 4,127 | 31 | % | |||||||||||
Interest
expense
|
(10,266 | ) | (18,256 | ) | 7,990 | -44 | % | |||||||||
Interest
income and other, net
|
873 | 2,397 | (1,524 | ) | -64 | % | ||||||||||
Loss
on debt redemption
|
(8,687 | ) | - | (8,687 | ) |
NA
|
||||||||||
Loss
from continuing operations before taxes
|
(771 | ) | (2,677 | ) | 1,906 | -71 | % | |||||||||
Income
tax expense (benefit)
|
11,150 | (13,889 | ) | 25,039 | -180 | % | ||||||||||
(Loss)
income from continuing operations, net of tax
|
(11,921 | ) | 11,212 | (23,133 | ) | -206 | % | |||||||||
Loss
from discontinued operations, net of tax
|
- | (3,734 | ) | 3,734 | -100 | % | ||||||||||
Net
(loss) income
|
$ | (11,921 | ) | $ | 7,478 | (19,399 | ) | -259 | % |
-
23 -
Nine
Months Ended
|
||||||||||||||||
September
30,
|
Change
|
|||||||||||||||
2009
|
2008
|
$ | % | |||||||||||||
Revenues:
|
||||||||||||||||
Service providers
|
$ | 168,276 | $ | 80,873 | 87,403 | 108 | % | |||||||||
CE manufacturers
|
138,658 | 95,467 | 43,191 | 45 | % | |||||||||||
Other
|
38,975 | 35,535 | 3,440 | 10 | % | |||||||||||
Total revenues
|
345,909 | 211,875 | 134,034 | 63 | % | |||||||||||
Costs
and expenses:
|
||||||||||||||||
Cost of revenues
|
45,405 | 31,335 | 14,070 | 45 | % | |||||||||||
Research and development
|
69,720 | 42,773 | 26,947 | 63 | % | |||||||||||
Selling, general and administrative
|
98,507 | 80,030 | 18,477 | 23 | % | |||||||||||
Depreciation
|
13,604 | 8,822 | 4,782 | 54 | % | |||||||||||
Amortization
|
61,297 | 38,722 | 22,575 | 58 | % | |||||||||||
Restructuring and asset impairment charges
|
53,619 | - | 53,619 |
NA
|
||||||||||||
Total operating expenses
|
342,152 | 201,682 | 140,470 | 70 | % | |||||||||||
Operating
income from continuing operations
|
3,757 | 10,193 | (6,436 | ) | -63 | % | ||||||||||
Interest
expense
|
(41,433 | ) | (35,698 | ) | (5,735 | ) | 16 | % | ||||||||
Interest
income and other, net
|
3,698 | 10,496 | (6,798 | ) | -65 | % | ||||||||||
Loss
on debt redemption
|
(8,687 | ) | - | (8,687 | ) |
NA
|
||||||||||
Gain
on sale of strategic investments
|
- | 5,238 | (5,238 | ) | -100 | % | ||||||||||
Loss
from continuing operations before taxes
|
(42,665 | ) | (9,771 | ) | (32,894 | ) | 337 | % | ||||||||
Income
tax benefit
|
(23,428 | ) | (17,600 | ) | (5,828 | ) | 33 | % | ||||||||
(Loss)
income from continuing operations, net of tax
|
(19,237 | ) | 7,829 | (27,066 | ) | -346 | % | |||||||||
(Loss)
income from discontinued operations, net of tax
|
(36,341 | ) | 89,332 | (125,673 | ) | -141 | % | |||||||||
Net
(loss) income
|
$ | (55,578 | ) | $ | 97,161 | (152,739 | ) | -157 | % |
Service Providers Revenue
For the
three months ended September 30, 2009, revenue from the sale of our products to
service providers increased 18% compared to the same period in the prior
year. This increase was primarily due to new IPG patent licensees in
Europe as well as from digital subscriber growth domestically. We
expect revenue from licensing our IPG products and patents to continue to grow
in the future from increased international licensing and from continued domestic
digital subscriber growth. For the nine months ended September 30,
2009, revenue from the sale of our products to service providers increased
significantly compared to the same period in the prior year. This was
largely due to including revenue from products and patents we obtained in the
Gemstar acquisition.
CE
Manufacturers Revenue
For the
three months ended September 30, 2009, revenue from the sale of our products and
licensing of our patents to CE manufacturers decreased by 7% compared to the
same period in the prior year. This decrease was primarily due to a decline in
VCR Plus+ and ACP revenues, partially offset by an increase in IPG patent
revenue. We expect VCR Plus+ revenues will continue to decline and in
the long-term we anticipate ACP revenues will also decline. We
believe, in the future, these declines will be offset by growth in our IPG and
other businesses. For the nine months ended September 30, 2009,
revenue from the sale of our products to CE manufacturers increased
significantly compared to the same period in the prior year. This was
largely due to including revenue from products and patents we obtained in the
Gemstar acquisition.
- 24
-
Other
revenue consists primarily of licensing of our underlying media content/metadata
and licensing of our content protection technologies to entertainment
companies. For the three and nine months ended September 30, 2009,
Other revenue increased compared to the same periods in the prior year primarily
due to increased revenue from our data business, primarily driven by the Muze
acquisition. This increase was partially offset by a decline in our
content protection revenues from entertainment studios.
Cost of Revenues
For the
three months ended September 30, 2009, cost of revenues was consistent with the
same period in the prior year. For the nine months ended September
30, 2009, cost of revenues increased from the same period in the prior year,
primarily due to additional costs associated with products and services acquired
in the Gemstar acquisition.
Research
and Development
For the
three months ended September 30, 2009, research and development expenses
increased from the same period in the prior year primarily due to increased
headcount and an increase in stock based compensation expense. For
the nine months ended September 30, 2009, research and development expense
increased from the same period in the prior year, primarily due to additional
research and development activities related to the Gemstar
operations.
Selling,
General and Administrative
For the
three months ended September 30, 2009, selling, general and administrative
expenses decreased from the same period in the prior year primarily due to
realizing synergies from the Gemstar acquisition, partially offset by an
increase in stock based compensation expense. For the nine months ended
September 30, 2009, selling, general and administrative expense increased from
the same period in the prior year, primarily due to additional costs associated
with the Gemstar operations.
Depreciation
and amortization
For the
nine months ended September 30, 2009, depreciation and amortization increased
from the same period in the prior year primarily due to the depreciation of
fixed assets and amortization of intangible assets from the Gemstar
acquisition.
Restructuring
and asset impairment charges
During
the second quarter of 2009, we completed extensive consumer research regarding
our brands. This consumer research indicated that the brands acquired
by us did not represent the future vision of the Company and did not carry a
positive connotation in the market. We determined these results to be
an indicator of potential impairment of our trademark intangible
assets. We determined the fair value of our trademark and intangible
assets to be $8.3 million and recorded a $43.1 million impairment charge during
the second quarter of 2009 (see Note 7 to the Condensed Consolidated Financial
Statements). In addition, during the second quarter of 2009, we
recorded $0.9 million in restructuring charges related to the Muze acquisition
and $1.6 million in other asset impairment charges.
In
conjunction with the disposition of the Media Properties in the first quarter of
2009, our management approved several actions resulting in a restructuring and
asset impairment charge of $8.4 million. Additionally, during the
first quarter of 2009, we reversed the remaining $0.4 million in liabilities
- 25 -
Interest Expense
In August
of 2009, we redeemed our $100 million (“11% Senior Notes”) and, during the first
nine months of 2009, we made $290 million in principal payments on our Term
Loan. As a result, interest expense for the three months ended
September 30, 2009, decreased by 44% compared to the same period in the prior
year. Interest expense for the nine months ended September 30, 2009,
increased when compared to the same period in the prior year primarily due to
the debt issued to finance the Gemstar acquisition. Interest expense
for the nine months ended September 30, 2009, also included $3.2 million in
accelerated amortization of note issuance costs related to the pay down of
principal related to the Term Loan in the first nine months of 2009 (see Note 4
to the Condensed Consolidated Financial Statements).
Interest Income and Other,
Net
Interest
income and other, net decreased from the same periods in the prior year due to
lower prevailing interest rates and lower average cash and investment
balances.
Loss
on Debt Redemption
In
connection with the redemption of the 11% Senior Notes, we recorded an $8.7
million loss on debt redemption for the three and nine months ended September
30, 2009. This loss is comprised of a $2.8 million make-whole payment
representing the discounted value of interest which the note holders would have
received through November 15, 2009, the first date the 11% Senior Notes could be
retired without a premium, the write-off of $5.6 million in note issuance costs
and $0.3 million in fees associated with the note redemption (see Note 4 to the
Condensed Consolidated Financial Statements).
Gain on Sale of Strategic
Investments
During
the first quarter of 2008 we recognized a gain of $5.2 million on the sale of
our investment in Digimarc Corporation.
Income Taxes
We
recorded an income tax expense of $11.2 million and an income tax benefit of
$13.9 million from continuing operations for three months ended
September 30, 2009 and 2008, respectively. We recorded an income tax
benefit of $23.4 million and $17.6 million from continuing operations for nine
months ended September 30, 2009 and 2008, respectively. Income tax
expense is based upon an annual effective tax rate forecast, including estimates
and assumptions that could change during the year, including the amount of
foreign reinvested earnings. During the three months ended September 30, 2009,
we revised our estimate of 2009 foreign reinvested earnings. As our
projected pre-tax GAAP loss is relatively small, permanent book-to-tax
differences, such as the foreign rate differential, have a significant impact on
our annual effective tax rate. The result of these revisions was an income
tax expense for the three months ended September 30, 2009, which included the
amount required to reflect the appropriate income tax benefit for the nine
months ended September 30, 2009, based upon the revised full-year forecast. The
tax expense for the three months ended September 30, 2009, also includes a
discrete tax benefit of $3.0 million resulting from the pre-tax loss on debt
redemption of $8.7 million recorded in the same reporting period. The
income tax benefit for the nine months ended September 30, 2009, also includes a
discrete tax benefit of $1.9 million resulting from the enactment of a
California tax law change during the first quarter which reduced the balance of
deferred tax liabilities expected to be paid in 2011 and years
thereafter.
- 26
-
Discontinued
Operations
Loss from discontinued operations for
the nine months ended September 30, 2009, is primarily due to income tax expense
recorded for the sale of TVG Network, TV Guide Network and TV Guide
Online.
Income from discontinued operations for
the nine months ended September 30, 2008, is primarily due to the gain on sale
recorded when we sold our Software business.
Costs
and Expenses
Cost of
revenues consists primarily of service costs, patent prosecution, patent
maintenance and patent litigation costs. Research and development
expenses are comprised primarily of employee compensation and benefits,
consulting costs, a 49% share of the Guideworks LLC joint venture and an
allocation of overhead and facilities costs. The 49% share of the
Guideworks LLC joint venture is accounted for as an operating expense. 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.
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
nine months ended September 30, 2009, as compared to those disclosed in our
Annual Report on Form 10-K for the year ended December 31, 2008.
Liquidity
and Capital Resources
Operations
are financed primarily from cash generated by operations. Continuing operating
activities provided net cash of $82.6 million and $18.8 million in the nine
months ended September 30, 2009 and 2008, respectively. Cash provided
by operating activities increased from the prior period primarily due to the
Gemstar acquisition. The availability of cash generated by operations
in the future could be affected by other business risks including, but not
limited to, those factors set forth under the caption “Risk Factors” contained
in our Annual Report on Form 10-K.
- 27 -
Net cash
provided by investing activities from continuing operations for the nine months
ended September 30, 2009, was $220.3 million and included $266.2 million in cash
received from the sale of the Media Properties, partially offset by $36.8
million of proceeds being classified as restricted cash (see below), $13.4
million in capital expenditures and $24.0 million used to acquire Muze and a
music metadata distribution business in the Asia Pacific
region. Included in the 2008 investing activities were $910.7 million
in cash used for Gemstar acquisition and $195.1 million in cash received from
the sale of Software and Games. We anticipate that capital expenditures to
support the growth of our business and strengthen our operations infrastructure
will be between $15 million and $20 million for the full year in
2009.
Net cash
used in financing activities from continuing operations was $364.9 million for
the nine months ended September 30, 2009, primarily due to us making $390.0
million in debt payments. Included in the 2008 financing activities
was $615.5 million in proceeds from the issuance of debt, net of issuance costs,
which was used to fund the Gemstar acquisition.
Included
on our balance sheet at September 30, 2009, is $36.8 million in restricted
cash. As part of the sale of TV Guide Network and TV Guide Online, we
deposited this cash in an escrow account in the event the buyer has an
indemnifiable claim. The cash remaining in the escrow account will be
released to us in May 2010.
In
connection with the Gemstar acquisition, we entered into and fully drew-down the
$550 million Term Loan. As of September 30, 2009, $257.2 million was
outstanding. In October 2009, we made $50 million in voluntary
payments on the Term Loan reducing the balance to $207.2 million as of October
31, 2009. The Term Loan is guaranteed by our domestic subsidiaries,
and the assets and shares of our domestic subsidiaries are pledged as collateral
against the Term Loan. We are required to use the proceeds from asset sales of
$75 million or more to pay down the Term Loan; proceeds from assets sales of
less than $75 million may be retained for investment in fixed or capital
assets. Beginning in 2010, the Company is required to make a payment
on the Term Loan each February. This payment is a percentage, as
calculated per the Term Loan agreement, of the prior years Excess Cash Flow, as
defined in the Term Loan agreement.
We may
elect to pay interest on the Term Loan at a rate of (i) Libor plus 3.75%,
with a Libor floor of 3.5% or (ii) the Term Loan administrative agent’s
prime rate plus 2.75%. The Term Loan includes customary covenants, including
total leverage ratio limits, fixed charge coverage minimums and restrictions on
additional debt incurrence and dividend payments among others. As of
September 30, 2009, we were in compliance with the Term Loan debt
covenants.
In the
event (i) our leverage ratio is greater than 2.5 to 1.0, and (ii) more
than $50 million in aggregate principal amount of the 2.625% convertible senior
notes due 2011 (the “Convertible Notes”) is still outstanding, and
(iii) the scheduled maturity of such Convertible Notes is more than 181
days in the future, then our Term Loan will become due on that 182nd day prior
to the maturity date of such Convertible Notes.
In
connection with the Gemstar acquisition we issued $100 million of 11% Senior
Notes due 2013. On August 5, 2009, the Company fully redeemed the 11%
Senior Notes at par plus accrued interest and a $2.8 million make-whole payment
representing the discounted value of interest which the note holders would have
received through November 15, 2009, the first date the 11% Senior Notes could be
retired without a premium.
In
August 2006, we issued $240.0 million in Convertible Notes which may
be converted, under certain circumstances described below, based on an initial
conversion rate of 35.3571 shares of common stock per $1,000 principal amount of
notes (which represents an initial conversion price of approximately $28.28 per
share).
- 28 -
Prior to
June 15, 2011, holders may convert their 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 September 30, 2006, 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 120% of the applicable conversion price in effect on the last
trading day of the immediately preceding fiscal quarter; (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; or
(iii) upon the occurrence of specified corporate transactions, as defined
in the indenture. From June 15, 2011, until the close of business on the
scheduled trading day immediately preceding the maturity date of August 15,
2011, holders may convert their 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.
Upon
conversion, a holder will receive the conversion value of the Convertible Notes
converted equal to the conversion rate multiplied by the volume weighted average
price of our common stock during a specified period following the conversion
date. The conversion value of each Convertible Note will be paid in:
(i) cash equal to the lesser of the principal amount of the Convertible
Note or the conversion value, as defined, and (ii) to the extent the
conversion value exceeds the principal amount of the Convertible Note, a
combination of common stock and cash. In addition, upon a fundamental change at
any time, as defined, the holders may require us to repurchase for cash all or a
portion of their Convertible Notes upon a “designated event” at a price equal to
100% of the principal amount of the Convertible Notes being repurchased plus
accrued and unpaid interest, if any.
In
September 2007, the Board of Directors of Macrovision Corporation authorized a
stock repurchase program, which allows us to purchase up to $60.0 million of our
common stock in the open market from time to time at prevailing market prices or
otherwise, as conditions warrant. On May 5, 2008, our Board of
Directors reconfirmed this stock purchase program. During the fourth quarter of
2008, we repurchased 2.3 million shares of common stock for approximately
$25.1 million. These repurchases were recorded as treasury stock and resulted in
a reduction of stockholders’ equity. As of September 30, 2009, treasury
stock consisted of 2.3 million shares of common stock that had been
repurchased, with a cost basis of approximately $25.1 million.
As of
September 30, 2009, we had $138.6 million in cash and cash equivalents,
$107.3 million in short-term investments, $27.9 million in long-term marketable
securities and $36.8 million in restricted cash.
Included
in short-term investments and long-term marketable securities are auction rate
securities with a fair value of $67.6 million and par value of $75.1 million.
Our auction rate securities portfolio is solely comprised of AAA rated federally
insured student loans and municipal and educational authority bonds. However,
the auction rate securities we hold have failed to trade at recent auctions due
to insufficient bids from buyers. This limits the short-term liquidity of these
instruments and may limit our ability to liquidate and fully recover the
carrying value of our auction rate securities if we needed to convert some or
all to cash in the near term. Included in the above are auction rate securities
acquired through UBS AG with a par value of $62.4 million. In December 2008, we
entered into an agreement with UBS AG which provides (i) us the right to
sell these auction rate securities back to UBS AG at par, at our sole
discretion, anytime during the period from June 30, 2010, through
July 2, 2012, and (ii) UBS AG the right to purchase these auction rate
securities or sell them on our behalf at par anytime through July 2,
2012. During the three months ended September 30, 2009, UBS
repurchased $4.3 million of these auction rate securities at par.
- 29
-
We
believe that based upon our cash and cash equivalent and short-term investment
balances, the current lack of liquidity in the auction rate securities market
will not have a material impact on our liquidity or our ability to fund our
operations.
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.
Discontinued
Operations
The
collective results from all discontinued operations were as follows (in
thousands):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
revenue:
|
||||||||||||||||
Software
|
$ | - | $ | - | $ | - | $ | 27,503 | ||||||||
Games
|
- | - | - | 1,633 | ||||||||||||
eMeta
|
- | 1,712 | - | 5,624 | ||||||||||||
TV
Guide Magazine
|
- | 30,859 | - | 50,636 | ||||||||||||
TV
Guide Network / TV Guide Online
|
- | 33,061 | 18,363 | 54,726 | ||||||||||||
TVG
Network
|
- | 15,584 | 4,562 | 24,418 | ||||||||||||
Pre-tax
(loss) income:
|
||||||||||||||||
Software
|
$ | - | $ | (322 | ) | $ | - | $ | (7,187 | ) | ||||||
Games
|
- | - | - | (2,551 | ) | |||||||||||
eMeta
|
- | (7,487 | ) | - | (11,032 | ) | ||||||||||
TV
Guide Magazine
|
- | (4,851 | ) | - | (6,522 | ) | ||||||||||
TV
Guide Network/TV Guide Online
|
- | 3,074 | 1,825 | 5,292 | ||||||||||||
TVG
Network
|
- | 1,062 | (694 | ) | (11 | ) | ||||||||||
Pre-tax
(loss) gain on disposal of business units
|
- | - | (3,661 | ) | 151,284 | |||||||||||
Income
tax benefit (expense)
|
- | 4,790 | (33,811 | ) | (39,941 | ) | ||||||||||
(Loss) income from discontinued operations, net of tax
|
$ | - | $ | (3,734 | ) | $ | (36,341 | ) | $ | 89,332 |
Our
Software business focused on independent software vendors and enterprise IT
departments with solutions including: the FLEXnet suite of electronic license
management, electronic license delivery and software asset management products;
InstallShield and other installer products; and AdminStudio software packaging
tools. The sale of our Software business closed in April
2008.
Our Games
business focused on providing tools and services needed to facilitate the
digital distribution of providers of digital goods. The sale of our
Games business closed in April 2008.
eMeta
provided software solutions that enable companies to manage and sell digital
goods and services online. The sale of eMeta closed in November
2008.
TV Guide
Magazine’s weekly publication was centered on TV-related news, feature stories,
TV celebrity photos, behind-the-scenes coverage, reviews and recommendations and
national television listings. The sale of TV Guide Magazine closed in December
2008.
- 30
-
TVG
Network generated revenue primarily from wagering and licensing fees. The sale
of TVG Network closed in January 2009.
TV Guide
Network and TV Guide Online generated revenue primarily from advertising and
carriage fees. The sale of our TV Guide Network and TV Guide Online businesses
closed in February 2009.
Impact
of Recently Issued Accounting Standards
See Notes
4, 5, 10 and 12 to the Consolidated Financial Statements for a full description
of recent accounting pronouncements, including the anticipated dates of adoption
and the effects on our Consolidated Financial Statements.
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 $272.3 million as of September 30, 2009. 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 investment grade municipal bonds, 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 September
30, 2009, the fair value of our auction rate securities portfolio totaled
approximately $67.6 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 over one year due to insufficient bids from buyers. This
limits the short-term liquidity of these securities. Included in the
aforementioned securities are auction rate securities acquired through UBS AG
with a par value of $62.4 million. In December 2008, we entered into an
agreement with UBS AG which provides (i) us the right to sell these auction
rate securities back to UBS AG at par, at our sole discretion, anytime during
the period from June 30, 2010 through July 2, 2012, and (ii) UBS
AG the right to purchase these auction rate securities or sell them on our
behalf at par anytime through July 2, 2012. During the three
months ended September 30, 2009, UBS AG repurchased $4.3 million of these
auction rate securities at par. In addition, the credit ratings of these
investments may deteriorate and as a result the fair value of these auction rate
securities may decline and we may incur impairment charges in connection with
these securities which would adversely impact our earnings and financial
condition.
We do not
use derivative financial instruments in our investment portfolio to manage
interest rate risk. We limit our exposure to interest rate and credit
risk, however, 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 $0.1 million decrease
in the fair value of our fixed income available-for-sale securities as of
September 30, 2009.
- 31
-
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.
Convertible
Notes. On August 23, 2006, Macrovision Corporation issued
$240.0 million of Convertible Notes. Subject to fulfillment of
certain conditions, these notes were initially convertible at a rate of 35.3571
shares of Macrovision Corporation’s common stock per $1,000 principal amount of
notes (equivalent to a conversion price of approximately $28.28 per share of
Macrovision Corporation’s common stock). In connection with the May 2, 2008,
acquisition of Gemstar, the Company assumed ownership of Macrovision
Corporation. The Company, Macrovision Corporation and the Bank of New
York, as Trustee for the convertible note holders, executed a Supplemental
Indenture under which the notes become convertible into a number of shares of
the Company’s common stock to be determined in accordance with the Convertible
Debt Indenture dated August 23, 2006. The conversion rate is subject
to adjustment if certain events occur. These notes bear interest at a rate of
2.625% per year. Interest on the notes have accrued from August 23, 2006.
Interest is payable semiannually in arrears on February 15 and August 15 of each
year.
Term Loan. On May
2, 2008, in connection with its acquisition of Gemstar, the Company and
Macrovision Corporation, as co-obligors, entered into the Term Loan facility and
drew down $550 million. In the event (i) the Company’s leverage ratio is greater
than 2.5 to 1.0, (ii) more than $50 million in aggregate principal amount of the
Convertible Notes due 2011 is still outstanding, and (iii) the scheduled
maturity of the Convertible Notes due 2011 is more than 181 days in the future,
then the Term Loan will become due on that 182nd day prior to the Convertible
Notes maturity date. We may elect to pay interest on the Term Loan at
a rate of (i) Libor plus 3.75%, with a Libor floor of 3.5% or (ii) the
Term Loan administrative agent’s prime rate plus 2.75%. As of
September 30, 2009, $257.2 million was outstanding under the Term
Loan. In October 2009, we made $50 million in voluntary payments on
the Term Loan reducing the balance to $207.2 million as of October 31,
2009.
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 Controls over
Financial Reporting. During the quarter ended
September 30, 2009, there have been no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, these controls.
- 32
-
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
DirecTV, Inc. v. Finisar
Corporation. In April 2005, Gemstar received a notice of a
potential claim for indemnification from DirecTV Group, Inc. (“DirecTV”) as a
result of a lawsuit filed by Finisar Corporation (“Finisar”) against DirecTV in
the United States District Court for the Eastern District of Texas. Finisar
alleged that several aspects of the DirecTV satellite transmission
system, including aspects of its advanced electronic program
guide (“EPG”) and the storage, scheduling, and transmission of data for the
EPG, infringed a Finisar patent. On July 7, 2006, the Court awarded Finisar
approximately $117 million. In addition, the Court ordered DirecTV to pay
approximately $1.60 per activated set top box in licensing fees going
forward in lieu of an injunction until the expiration of Finisar’s patent in
2012. The parties both filed appeals to the Federal Circuit, which
subsequently ruled that the trial court's construction of certain terms of the
patent was too broad, vacated the jury's verdict of infringement, held that one
of the seven patent claims at issue is invalid, and left standing the remaining
six claims for reconsideration by the trial court. The appeals court also
reversed the jury's finding that DirecTV's infringement was
willful. The trial court subsequently ruled in DirecTV’s favor on its
summary judgment motion that the remaining claims of the subject patent were
invalid. The Company has not established a reserve with respect to
this matter in its consolidated financial statements.
Comcast Cable Communications Corp.,
LLC v. Finisar Corporation, in the United States District Court for the
Northern District of California. In support of a potential claim for
indemnification, Comcast Cable Communications Corp., LLC (“Comcast”) put the
Company on notice that it had received communications from Finisar
asserting infringement of U.S. Patent 5,404,505 (the “‘505 patent”). On
July 7, 2006, Comcast filed a declaratory judgment action in the Northern
District of California asking the Court to rule, among other things, that it
does not infringe the ‘505 patent and/or that the patent is invalid. On
May 15, 2008, Finisar entered into a covenant and stipulation with Comcast,
filed with the California Court, that it would not assert any claim of the ‘505
patent against Comcast or certain related entities, other than claim
25. On July 11, 2008, the Court ruled on Comcast’s summary judgment
motion, finding that claim 25 is invalid, and therefore finding that Comcast’s
non-infringement motion is moot. Comcast has not taken any further
action insofar as its potential indemnity claim against the Company is
concerned.
Litigation
Thomson, Inc. v. Gemstar—TV Guide
International, Inc., in the Superior Court of the State of Indiana for
the County of Hamilton. On May 23, 2008, Thomson, Inc. (“Thomson”)
initiated this action, seeking, among other things, indemnification from the
Company in connection with its settlement of the patent claims against it in
SuperGuide Corporation v.
DirecTV Enterprises, Inc., et al., in the United States District Court
for the Western District of North Carolina. Thomson alleges that it entered
into multiple agreements with the Company between 1996 and 2003 that would
require the Company to indemnify Thomson in the SuperGuide
litigation. Specifically, Thomson asserts causes of action for
fraud/fraudulent inducement, breach of contract, breach of implied in fact
indemnity and warranty of title against infringement, and unjust
enrichment. Thomson seeks a declaration from the Court that the Company
owes Thomson defense and indemnity for SuperGuide’s claims, compensatory
damages, including fees and expenses paid by Thomson in that case, the return of
royalties paid by Thomson to the Company under the aforementioned agreements,
pre and post-judgment interest, punitive damages, attorney fees, and costs of
suit. The case is set for trial at a date to be determined in
2010.
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DIRECTV, Inc. v. Gemstar-TV Guide
Interactive, Inc., American Arbitration Association - Los
Angeles. On March 20, 2009, DirecTV filed this arbitration demand
seeking indemnity for payments made in settlement of two patent infringement
lawsuits, including the SuperGuide Corporation v. DirecTV
Enterprises, Inc., et al. matter. DirecTV seeks
indemnity under the November 21, 2003, License and Distribution Agreement and
Patent License Agreement between the parties and claims damages plus interest
and its arbitration-related attorneys’ fees. The Company has filed a
Response and Counterclaim for breach of contract. A hearing
date has been set for December 7, 2009.
John Burke v. TV Guide Magazine
Group, Inc., Open Gate Capital, Rovi Corp., Gemstar-TV Guide International,
Inc. On August 11, 2009, plaintiff filed a purported class
action lawsuit claiming that the Company’s former subsidiary, TV Guide Magazine,
breached agreements with its subscribers and violated consumer protection laws
with its practice of counting double issues toward the number of issues in a
subscription. On September 10, 2009, the Company filed an answer to
the complaint along with a petition to remove the case to federal
court.
In
addition to the items listed above, 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 them to
pay damages or make other expenditures in amounts that could have a material
adverse effect on their financial position or results of operations. At this
time management has not reached a determination that the matters listed above or
any other litigation, 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, 2008, and
is incorporated herein by reference. There have been no material
changes in our risk factors since the filing of our last Annual
Report.
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds
None.
Item 3. Defaults Upon Senior
Securities
None.
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Item 4. Submission of Matters to a Vote of Security
Holders
Rovi Corporation held its Annual
Meeting of Stockholders (the “Annual Meeting”) on July 15, 2009. A
brief description of the matters voted upon at the Annual Meeting and the
results of the voting on such matters is set forth below.
Each of
the seven directors nominated were elected for a term of one year by the vote
set forth below:
Votes
|
|||
For
|
Withheld
|
||
Alfred
J. Amoroso
|
92,543,685
|
788,213
|
|
Andrew
K. Ludwick
|
92,554,871
|
777,027
|
|
Alan
L. Earhart
|
92,492,119
|
839,779
|
|
Robert
J. Majteles
|
84,595,459
|
8,736,439
|
|
James
E. Meyer
|
85,552,229
|
7,779,669
|
|
James
P. O’Shaughnessy
|
85,236,434
|
8,095,464
|
|
Ruthann
Quindlen
|
85,247,358
|
8,084,540
|
The
stockholders approved the amendment of the Company’s certificate of
incorporation to change the corporate name of the company to Rovi Corporation by
the vote set forth below:
Votes
For
|
Votes
Against
|
Abstentions
|
||
92,218,112
|
1,008,806
|
104,979
|
The
stockholders also ratified the Company’s appointment of Ernst & Young, LLP
as the Company’s independent registered public accounting firm for
the fiscal year ending December 31, 2009, by the vote set forth
below:
Votes
For
|
Votes
Against
|
Abstentions
|
||
93,230,829
|
59,234
|
41,834
|
Item 5. Other Information
None.
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Item 6.
Exhibits
Incorporated
by Reference
|
||||||||||
Exhibit
Number
|
Exhibit
Description
|
Form
|
Date
|
Number
|
Filed
Herewith
|
|||||
10.02
|
Amendment
No. 1 dated August 4, 2009, to the Credit Agreement dated as of May 2,
2008, among Macrovision Solutions Corporation, Macrovision Corporation,
the Guarantors party thereto, the Lenders party thereto, J.P. Morgan
Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated
and JPMorgan Chase Bank, N.A.
|
8-K
|
8/6/09
|
10.1
|
||||||
10.6
|
Form
of Notice of Restricted Stock Award/Restricted Stock Award Agreement
(U.S.) pursuant to Rovi Corporation’s 2008 Equity Incentive
Plan
|
X
|
||||||||
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 |
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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.
Rovi
Corporation
Authorized
Officer:
Date:
November 5, 2009
|
By:
|
/s/ Alfred J. Amoroso | |
Alfred J. Amoroso | |||
Chief Executive Officer | |||
Principal
Financial Officer :
|
|
Date:
November 5, 2009
|
By:
|
/s/ James Budge | |
James Budge | |||
Chief Financial Officer | |||
Principal
Accounting Officer:
|
|
Date:
November 5, 2009
|
By:
|
/s/ Peter Halt | |
Peter Halt | |||
Chief Accounting Officer | |||
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