Rovi Corp - FORM 10-Q - August 2, 2016

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EX-32.02 - EXHIBIT 32.02 - Rovi Corpexhibit320263016.htm
EX-32.01 - EXHIBIT 32.01 - Rovi Corpexhibit320163016.htm
EX-31.02 - EXHIBIT 31.02 - Rovi Corpexhibit310263016.htm
EX-31.01 - EXHIBIT 31.01 - Rovi Corpexhibit310163016.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________ 
FORM 10-Q
(Mark One)
  x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
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.)
Two Circle Star Way, San Carlos, CA
 
94070
(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  þ    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  þ
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Outstanding as of
Class
July 20, 2016
Common Stock
83,367,843




ROVI CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
 
 
 
ITEM 1.
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
 



1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

June 30, 2016
 
December 31, 2015
ASSETS
(Unaudited)


Current assets:



Cash and cash equivalents
$
151,274


$
101,675

Short-term marketable securities
122,619


107,879

Accounts receivable, net
88,013


87,128

Prepaid expenses and other current assets
25,481


14,191

Total current assets
387,387

 
310,873

Long-term marketable securities
80,172


114,715

Property and equipment, net
35,211


34,984

Intangible assets, net
351,340


386,742

Goodwill
1,344,425


1,343,652

Other long-term assets
7,371


8,330

Total assets
$
2,205,906

 
$
2,199,296





LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Accounts payable and accrued expenses
$
64,081


$
74,113

Deferred revenue
14,997


12,106

Current portion of long-term debt
7,000


7,000

Total current liabilities
86,078

 
93,219

Taxes payable, less current portion
5,217


5,332

Deferred revenue, less current portion
6,467


9,414

Long-term debt, less current portion
963,829


960,156

Deferred tax liabilities, net
66,899


66,116

Other long-term liabilities
49,325


34,494

Total liabilities
1,177,815

 
1,168,731

Commitments and contingencies (Note 8)





Stockholders' equity:



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


—

Common stock, $0.001 par value, 250,000 shares authorized; 131,888 shares issued and 83,302 shares outstanding as of June 30, 2016; and 131,052 shares issued and 82,647 shares outstanding as of December 31, 2015
132


131

Treasury stock, 48,586 shares and 48,405 shares as of June 30, 2016 and December 31, 2015, respectively, at cost
(1,167,575
)

(1,163,533
)
Additional paid-in capital
2,445,589


2,419,921

Accumulated other comprehensive loss
(3,544
)

(6,503
)
Accumulated deficit
(246,511
)

(219,451
)
Total stockholders’ equity
1,028,091

 
1,030,565

Total liabilities and stockholders’ equity
$
2,205,906

 
$
2,199,296


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

2

ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016

2015
 
2016
 
2015
Revenues
$
125,245


$
127,820

 
$
243,629

 
$
261,845

Costs and expenses:



 
 
 
 
Cost of revenues, excluding amortization of intangible assets
24,965


25,669

 
47,502

 
53,799

Research and development
24,184


25,733

 
46,853

 
52,270

Selling, general and administrative
42,563


40,778

 
78,645

 
80,726

Depreciation
4,325


4,448

 
8,559

 
8,818

Amortization of intangible assets
19,030


19,236

 
38,162

 
38,600

Restructuring and asset impairment charges (benefits)
—


(178
)
 
2,333

 
1,539

Total costs and expenses
115,067

 
115,686

 
222,054

 
235,752

Operating income
10,178


12,134

 
21,575

 
26,093

Interest expense
(10,859
)

(11,715
)
 
(21,390
)
 
(24,073
)
Interest income and other, net
(14
)

(183
)
 
(31
)
 
503

(Loss) income on interest rate swaps
(5,507
)

4,399

 
(18,594
)
 
(5,319
)
Loss on debt extinguishment
—


(20
)
 
—

 
(120
)
(Loss) income before income taxes
(6,202
)
 
4,615

 
(18,440
)
 
(2,916
)
Income tax expense
3,206


1,277

 
8,620

 
9,216

Net (loss) income
$
(9,408
)
 
$
3,338

 
$
(27,060
)
 
$
(12,132
)
 
 
 
 
 
 
 
 
Basic (loss) earnings per share:
$
(0.11
)
 
$
0.04

 
$
(0.33
)
 
$
(0.14
)
Weighted average shares used in computing basic (loss) earnings per share
82,110

 
85,248

 
81,742

 
86,767

 
 
 
 
 
 
 
 
Diluted (loss) earnings per share:
$
(0.11
)
 
$
0.04

 
$
(0.33
)
 
$
(0.14
)
Weighted average shares used in computing diluted (loss) earnings per share
82,110

 
85,487

 
81,742

 
86,767


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

3

ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net (loss) income
$
(9,408
)
 
$
3,338

 
$
(27,060
)
 
$
(12,132
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
1,211

 
(666
)
 
2,184

 
(518
)
Unrealized gains (losses) on marketable securities
248

 
(190
)
 
775

 
(46
)
Other comprehensive income (loss), net of tax
1,459

 
(856
)
 
2,959

 
(564
)
Comprehensive (loss) income
$
(7,949
)
 
$
2,482

 
$
(24,101
)
 
$
(12,696
)

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


4

ROVI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Six Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net loss
$
(27,060
)
 
$
(12,132
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation
8,559

 
8,818

Amortization of intangible assets
38,162

 
38,600

Amortization of convertible note discount and note issuance costs
6,935

 
6,986

Asset impairment charge
452

 
—

Change in fair value of interest rate swaps
13,969

 
3,461

Equity-based compensation
18,355

 
22,716

Deferred income taxes
777

 
3,747

Other operating, net
2,958

 
3,001

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(843
)
 
(747
)
Prepaid expenses and other current assets and other long-term assets
(10,377
)
 
(1,544
)
Accounts payable and accrued expenses and other long-term liabilities
(2,928
)
 
(7,334
)
Accrued income taxes
(2,919
)
 
(380
)
Deferred revenue
(56
)
 
556

Net cash provided by operating activities of continuing operations
45,984

 
65,748

Net cash used in operating activities of discontinued operations
—

 
(194
)
Net cash provided by operating activities
45,984

 
65,554

Cash flows provided by investing activities:
 
 
 
Payments for purchase of short- and long-term marketable securities
(59,857
)
 
(134,396
)
Proceeds from sales or maturities of short- and long-term marketable securities
79,507

 
182,376

Payments for purchase of property and equipment
(13,795
)
 
(5,536
)
Payments for purchase of patents
(2,500
)
 
—

Other investing, net
(46
)
 
(53
)
Net cash provided by investing activities
3,309

 
42,391

Cash flows used in financing activities:
 
 
 
Proceeds from revolving credit facility
—

 
100,000

Payments on revolving credit facility
—

 
(100,000
)
Proceeds from issuance of long-term debt, net of issuance costs
—

 
335,616

Principal payments on long-term debt
(3,500
)
 
(344,490
)
Proceeds from sale of warrants
—

 
31,326

Payments for purchase of call options
—

 
(64,825
)
Payments for deferred holdback and contingent consideration
(750
)
 
(5,140
)
Payments for purchase of treasury stock
—

 
(104,519
)
Payments for withholding taxes related to net settlement of restricted stock units
(4,042
)
 
—

Proceeds from exercise of options and employee stock purchase plan
7,329

 
5,866

Net cash used in financing activities
(963
)
 
(146,166
)
Effect of exchange rate changes on cash and cash equivalents
1,269

 
(407
)
Net increase (decrease) in cash and cash equivalents
49,599

 
(38,628
)
Cash and cash equivalents at beginning of period
101,675

 
154,568

Cash and cash equivalents at end of period
$
151,274

 
$
115,940


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

5

ROVI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation and Summary of Significant Accounting Policies

Description of Business

Rovi Corporation (the “Company” or "Rovi"), a Delaware corporation, is focused on powering entertainment discovery and personalization through product technology and intellectual property and using data and analytics to monetize interactions across multiple entertainment platforms. The Company provides a broad set of content discovery solutions that are embedded in our customers' products and services to connect consumers with entertainment, including device embedded and cloud-based interactive program guides (“IPGs”), natural language conversational voice and text search and recommendation services and our extensive database of "Metadata" (i.e., descriptive information, promotional images or other content that describes or relates to television shows, videos, movies, music, books, games or other entertainment content). The Company also offers advertising and a portfolio of data and analytics products including advertising and programming promotion optimization that enable audience targeting in traditional pay TV advertising along with subscriber and operator analytic and insight products that service providers can use to unlock the usage patterns and behaviors of pay TV subscribers. The Company's solutions are deployed globally in the cable, satellite, consumer electronics, entertainment, media and online distribution markets.

Basis of Presentation and Principles of Consolidation

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

The information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto and other disclosures contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2016, for any future year, or for any other future interim period.

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

Certain prior year amounts have been reclassified to conform to the current year presentation.

Use of Estimates

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


6

Concentrations of Risk

The percent of revenue derived from customers, and concentrations of customers, representing more than 10% of revenue were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
AT&T Inc. ("AT&T")
13
%
 
13
%
 
13
%
 
13
%
Charter Communications Inc. ("Charter")
14
%
 
(1)

 
12
%
 
(1)

 
 
 
 
 
 
 
 
Aggregate of AT&T, Charter and Comcast Corporation ("Comcast")
29
%
 
28
%
 
30
%
 
27
%

(1) Customer represented less than 10% of revenue.

Substantially all of the Company's revenue from AT&T and a significant portion of the Company's revenue from Charter is reported in the Intellectual Property Licensing segment. The Company's Intellectual Property Licensing contract with Comcast expired on March 31, 2016. The Company's Product relationship with Comcast, primarily a metadata license, remains in effect.

Customers representing more than 10% of Accounts receivable, net were as follows.
 
June 30, 2016
 
December 31, 2015
AT&T
17
%
 
22
%
Charter
13
%
 
(1
)

(1) Customer represented less than 10% of Accounts receivable, net

Revenue Recognition

During 2016, the Company expanded its business strategy of monetizing its intellectual property to include the sale of select patent assets. As patent sales executed under this strategy represent a component of the Company's ongoing major or central operations and activities of monetizing intellectual property, the related proceeds from patent sales are now recognized as revenue. Revenue from patent sales is recognized when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred and collectibility is reasonably assured. These requirements are generally fulfilled on closing of the patent sale transaction. Revenue for the three and six months ended June 30, 2016 includes $0.5 million related to a patent sale.

Recent Accounting Pronouncements

Standards Recently Adopted

In April 2015, the Financial Accounting Standards Board ("FASB") issued guidance to help entities evaluate whether fees paid in a cloud computing arrangement include a software license. Pursuant to this guidance, when a cloud computing arrangement includes a software license, the customer accounts for the software license element of the arrangement consistent with the acquisition of other software licenses. When a cloud computing arrangement does not include a software license element, the customer accounts for the arrangement as a service contract. The prospective application of this guidance on January 1, 2016 did not have a material effect on the Condensed Consolidated Financial Statements.

Standards Pending Adoption

In June 2016, the FASB issued updated guidance that requires entities to use a current expected credit loss model to measure credit-related impairments for financial instruments held at amortized cost. The current expected credit loss model is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect collectibility. Current expected credit losses, and subsequent adjustments, represent an estimate of lifetime expected credit losses that are recorded as an allowance deducted from the amortized cost basis of the financial instrument. The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt

7

securities by requiring the recognition of impairments for credit-related losses through an allowance and eliminating the length of time a security has been in an unrealized loss position as a consideration in the determination of whether a credit loss exists. The guidance is effective for the Company in the first quarter of 2020, and is effective using a modified retrospective approach for application of the current expected credit loss model to financial instruments and a prospective approach for credit losses on available-for-sale debt securities. Early application is permitted. The Company is evaluating the effect of application on its Condensed Consolidated Financial Statements.

In March 2016, the FASB simplified certain areas of accounting for stock-based compensation, including accounting for the income tax consequences of stock-based compensation, determining the classification of awards as either equity or liabilities, classifying certain items within the statement of cash flows and introducing an accounting policy election to account for forfeitures of nonvested awards as they occur. The simplified guidance is effective for the Company in the first quarter of 2017. Depending on the area simplified, the guidance is effective either prospectively, retrospectively or using a modified retrospective approach. Early application is permitted. The Company is evaluating the effect of application on its Condensed Consolidated Financial Statements.
    
In March 2016, the FASB clarified the requirements for assessing whether contingent options that can accelerate the payment of principal on debt instruments require bifurcation as an embedded derivative. The amendments require a contingent option embedded in a debt instrument to be evaluated for possible separate accounting as a derivative instrument without regard to the nature of the exercise contingency. The clarified guidance is effective for the Company in the first quarter of 2017 using a modified retrospective approach with early application permitted. The Company is evaluating the effect of application on its Condensed Consolidated Financial Statements.

In February 2016, the FASB issued a new accounting standard for leases. The new standard generally requires the recognition of financing and operating lease liabilities and corresponding right-of-use assets on the balance sheet. For financing leases, a lessee recognizes amortization of the right-of-use asset as an operating expense over the lease term separately from interest on the lease liability. For operating leases, a lessee recognizes its total lease expense as an operating expense over the lease term. The amendments are effective for the Company in the first quarter of 2019 using a modified retrospective approach with early application permitted. The Company is evaluating the effect of application on its Condensed Consolidated Financial Statements and expects that its existing operating lease commitments will be recognized as operating lease liabilities and right-of-use assets.

In January 2016, the FASB amended certain aspects of the recognition and measurement guidance for financial assets and liabilities. The amendments are effective for the Company in the first quarter of 2018 with the effect of adoption recognized as a cumulative-effect adjustment to beginning retained earnings in 2018. Early application is not permitted. The Company is evaluating the effect of application on its Condensed Consolidated Financial Statements.

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

(2) Pending Acquisition

On April 28, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, TiVo Inc. (“TiVo”), a global leader in next-generation video technology and innovative cloud-based software-as-a-service solutions, Titan Technologies Corporation, a Delaware corporation and wholly owned subsidiary of Rovi (“Parent”), Nova Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Rovi Merger Sub”) and Titan Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“TiVo Merger Sub”), providing for the merger of Rovi Merger Sub with and into Rovi (the “Rovi Merger”), with Rovi as the surviving entity in the Rovi Merger and becoming a wholly owned subsidiary of Parent, the merger of TiVo Merger Sub with and into TiVo (the “TiVo Merger,” and, collectively with the Rovi Merger and the other transactions contemplated by the Merger Agreement, the “Transactions”), with TiVo as the surviving entity in the TiVo Merger and becoming a wholly owned subsidiary of Parent, subject to the terms and conditions set forth therein.


8

Under the terms of the Merger Agreement, while the average Rovi stock price (based on the volume-weighted average trading price of Rovi's common stock on the NASDAQ over the fifteen day period ending on (and including) the third trading day prior to closing) is between $16.00 and $25.00, each share of TiVo common stock will be converted into the right to receive $10.70 per share, which is comprised of $2.75 per share in cash and $7.95 per share of the common stock of Parent. Between a Rovi stock price of $18.71 (an exchange ratio of 0.4250 per share) and $16.00 (an exchange ratio of 0.4969 per share), Rovi has the option to pay incremental cash instead of issuing additional shares, with the cash component being no less than $2.75 and no more than $3.90 per share of TiVo common stock. Assuming Rovi does not make a cash top up election as provided for in the Merger Agreement, if the volume-weighted average trading price of Rovi's common stock is in excess of $25.00, then each share of TiVo common stock will be exchanged for $2.75 per share in cash and 0.3180 shares of the common stock of Parent. If the volume-weighted average trading price of Rovi's common stock is less than $16.00, then each share of TiVo common stock will be exchanged for $2.75 per share in cash and 0.4969 shares of the common stock of Parent. If Rovi's stock price is below $16.00, Rovi has the option to select an exchange ratio between 0.4250 and 0.4969 and the cash consideration would be calculated based on the exchange ratio selected, but in no event will the cash consideration be more than $3.90 per share. The Merger Agreement contains additional adjustment provisions. As of July 22, 2016, the aggregate purchase price was approximately $1,048.4 million using Rovi's closing share price of $18.52. The cash portion of the aggregate purchase price will be funded from the combined company's cash and investments.

Rovi stockholders will continue to own one share of common stock in Parent for each share of Rovi common stock owned as of the closing. Both companies' boards of directors have approved the Transactions. The Transactions are subject to approval by Rovi and TiVo stockholders and other customary closing conditions, and are expected to close in the third calendar quarter of 2016. Rovi and TiVo may each terminate the Merger Agreement under certain circumstances, and in connection with the termination of the Merger Agreement under specified circumstances, Rovi or TiVo may be required to pay the other party a termination fee of up to $36.6 million.

The description of the Merger Agreement herein does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is attached as Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on May 4, 2016.

(3) Investments

The amortized cost and fair value of cash, cash equivalents and marketable securities by significant investment category were as follows (in thousands):
 
June 30, 2016
 
Amortized Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
43,117

 
$
—

 
$
—

 
$
43,117

Cash equivalents - Money market funds
108,157

 
—

 
—

 
108,157

Cash and cash equivalents
$
151,274

 
$
—

 
$
—

 
$
151,274

 
 
 
 
 
 
 
 
Auction rate securities
$
10,800

 
$
—

 
$
(540
)
 
$
10,260

Corporate debt securities
100,085

 
141

 
(19
)
 
100,207

Foreign government obligations
7,720

 
1

 
(3
)
 
7,718

U.S. Treasuries / Agencies
84,559

 
85

 
(38
)
 
84,606

Marketable securities
$
203,164

 
$
227

 
$
(600
)
 
$
202,791

Total cash, cash equivalents and marketable securities
 
 
 
 
 
 
$
354,065



9

 
December 31, 2015
 
Amortized Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
56,745

 
$
—

 
$
—

 
$
56,745

Cash equivalents - Money market funds
44,930

 
—

 
—

 
44,930

Cash and cash equivalents
$
101,675

 
$
—

 
$
—

 
$
101,675

 
 
 
 
 
 
 
 
Auction rate securities
$
10,800

 
$
—

 
$
(540
)
 
$
10,260

Corporate debt securities
98,997

 
—

 
(327
)
 
98,670

Foreign government obligations
11,878

 
—

 
(56
)
 
11,822

U.S. Treasuries / Agencies
102,120

 
5

 
(283
)
 
101,842

Marketable securities
$
223,795

 
$
5

 
$
(1,206
)
 
$
222,594

Total cash, cash equivalents and marketable securities
 
 
 
 
 
 
$
324,269


The Company attributes unrealized losses on its auction rate securities to liquidity issues rather than credit issues. The Company’s auction rate securities are comprised solely of AAA-rated federally insured student loans. The Company continues to earn interest on its auction rate securities and has the ability and intent to hold these securities until they recover their amortized cost.

As of June 30, 2016, the amortized cost and fair value of marketable securities, by contractual maturity, were as follows (in thousands): 
 
Amortized Cost
 
Fair Value
Due in less than 1 year
$
122,597

 
$
122,619

Due in 1-2 years
69,768

 
69,912

Due in more than 2 years
10,800

 
10,260

Total
$
203,165

 
$
202,791


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

10

Assets and liabilities reported at fair value on a recurring basis in the Condensed Consolidated Balance Sheets were classified in the fair value hierarchy as follows (in thousands):
 
June 30, 2016
 
Total
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Money market funds
$
108,157

 
$
108,157

 
$
—

 
$
—

Short-term marketable securities
 
 
 
 
 
 
 
Corporate debt securities
61,818

 
—

 
61,818

 
—

Foreign government obligations
7,718

 
—

 
7,718

 
—

U.S. Treasuries / Agencies
53,083

 
—

 
53,083

 
—

Long-term marketable securities
 
 
 
 
 
 
 
Auction rate securities
10,260

 
—

 
—

 
10,260

Corporate debt securities
38,389

 
—

 
38,389

 
—

U.S. Treasuries / Agencies
31,523

 
—

 
31,523

 
—

Total Assets
$
310,948

 
$
108,157

 
$
192,531

 
$
10,260

Liabilities
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
 
 
 
 
 
 
Interest rate swaps
$
(2,365
)
 
$
—

 
$
(2,365
)
 
$
—

Other long-term liabilities
 
 
 
 
 
 
 
Interest rate swaps
(37,356
)
 
—

 
(37,356
)
 
—

Total Liabilities
$
(39,721
)
 
$
—

 
$
(39,721
)
 
$
—

 
 
December 31, 2015
 
Total
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Money market funds
$
44,930

 
$
44,930

 
$
—

 
$
—

Short-term marketable securities
 
 
 
 
 
 
 
Corporate debt securities
43,876

 
—

 
43,876

 
—

Foreign government obligations
7,827

 
—

 
7,827

 
—

U.S. Treasuries / Agencies
56,176

 
—

 
56,176

 
—

Long-term marketable securities
 
 

 

 

Auction rate securities
10,260

 
—

 
—

 
10,260

Corporate debt securities
54,794

 
—

 
54,794

 
—

Foreign government obligations
3,995

 
—

 
3,995

 
—

U.S. Treasuries / Agencies
45,666

 
—

 
45,666

 
—

Total Assets
$
267,524

 
$
44,930

 
$
212,334

 
$
10,260

Liabilities
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
 
 
 
 
 
 
Interest rate swaps
$
(195
)
 
$
—

 
$
(195
)
 
$
—

Other long-term liabilities
 
 
 
 
 
 
 
Interest rate swaps
(25,557
)
 
—

 
(25,557
)
 
—

Total Liabilities
$
(25,752
)
 
$
—

 
$
(25,752
)
 
$
—



11

The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting period. For the three and six months ended June 30, 2016 and 2015, there were no transfers between levels of the fair value hierarchy.

Changes in the fair value of assets and liabilities classified in Level 3 of the fair value hierarchy were as follows (in thousands): 
 
Three Months Ended June 30,
 
2016
 
2015
 
Auction Rate Securities
 
Auction Rate Securities
 
Veveo Contingent Consideration
Balance at beginning of period
$
10,152

 
$
10,638

 
$
(3,000
)
Settlements
—

 
—

 
2,140

Unrealized gains (losses) included in other comprehensive (loss) income
108

 
(54
)
 
—

Balance at end of period
$
10,260

 
$
10,584

 
$
(860
)
 
Six Months Ended June 30,
 
2016
 
2015
 
Auction Rate Securities
 
Auction Rate Securities
 
IntegralReach Contingent Consideration
 
Veveo Contingent Consideration
Balance at beginning of period
$
10,260

 
$
10,638

 
$
(3,000
)
 
$
(3,000
)
Settlements
—

 
—

 
3,000

 
2,140

Unrealized gains (losses) included in other comprehensive (loss) income
—

 
(54
)
 
—

 
—

Balance at end of period
$
10,260

 
$
10,584

 
$
—

 
$
(860
)

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

12

Other Fair Value Disclosures
The carrying amount and fair value of debt issued by the Company were as follows (in thousands): 
 
June 30, 2016
 
December 31, 2015
 
Carrying Amount
 
Fair Value (1)
 
Carrying Amount
 
Fair Value (1)
2020 Convertible Notes
$
290,856

 
$
326,784

 
$
284,241

 
$
298,494

Term Loan Facility B
679,973

 
673,995

 
682,915

 
656,688

Total
$
970,829

 
$
1,000,779

 
$
967,156

 
$
955,182


(1)
The fair value of debt issued by the Company is estimated using quoted prices for the identical instrument in a market that is not active and considers interest rates currently available to companies of similar credit standing for similar terms and remaining maturities, and considers the nonperformance risk of the Company. If reported at fair value in the Condensed Consolidated Balance Sheets, debt issued by the Company would be classified in Level 2 of the fair value hierarchy.

(5) Goodwill and Intangible Assets, Net

Goodwill

Goodwill allocated to the reportable segments and changes in the carrying amount of goodwill by reportable segment were as follows (in thousands):
 
Intellectual Property Licensing
 
Product
 
Total
December 31, 2015
$
1,184,500

 
$
159,152

 
$
1,343,652

Foreign currency translation
—

 
773

 
773

June 30, 2016
$
1,184,500

 
$
159,925

 
$
1,344,425


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

Intangible Assets, Net

In January 2016, the Company purchased a portfolio of patents for $2.5 million in cash. The Company accounted for the patent portfolio purchase as an asset acquisition and is amortizing the purchase price over a weighted average period of 5.3 years.

Intangible assets, net consisted of the following (in thousands): 
 
June 30, 2016
 
Gross
 
Accumulated
Amortization
 
Net
Developed technology and patents
$
877,688

 
$
(546,098
)
 
$
331,590

Existing contracts and customer relationships
47,524

 
(39,386
)
 
8,138

Content databases and other
59,539

 
(47,927
)
 
11,612

Trademarks / Tradenames
8,300

 
(8,300
)
 
—

Total
$
993,051

 
$
(641,711
)
 
$
351,340


13

 
December 31, 2015
 
Gross
 
Accumulated
Amortization
 
Net
Developed technology and patents
$
875,188

 
$
(512,060
)
 
$
363,128

Existing contracts and customer relationships
47,524

 
(36,933
)
 
10,591

Content databases and other
59,014

 
(45,991
)
 
13,023

Trademarks / Tradenames
8,300

 
(8,300
)
 
—

Total
$
990,026

 
$
(603,284
)
 
$
386,742


As of June 30, 2016, future estimated amortization expense for finite-lived intangible assets was as follows (in thousands): 
Remainder of 2016
$
37,873

2017
73,918

2018
70,507

2019
68,052

2020
67,288

Thereafter
33,702

Total
$
351,340


(6) Restructuring and Asset Impairment Charges

In the three months ended March 31, 2016, the Company initiated certain facility rationalization activities, including relocating its corporate headquarters from Santa Clara, California to San Carlos, California and consolidating its Silicon Valley operations into the new corporate headquarters, and eliminated a number of positions associated with a reorganization of the sales force structure, downsizing the global services workforce and eliminating certain general and administrative positions. As a result of these actions, Restructuring and asset impairment charges of $2.3 million were recognized in the three months ended March 31, 2016. No Restructuring and asset impairment charges were recognized in the three months ended June 30, 2016.

In conjunction with the disposition of the Rovi Entertainment Store, DivX and MainConcept businesses and the Company's narrowed business focus on discovery, in 2014 the Company conducted a review of its remaining product development, sales, data operations and general and administrative functions to identify potential cost efficiencies. As a result of this analysis, the Company took cost reduction actions that resulted in Restructuring and asset impairment (benefits) charges. Amounts recognized in three and six months ended June 30, 2015 represent adjustments to the amounts originally recorded in connection with the 2014 restructuring actions.
 
Components of Restructuring and asset impairment charges (benefits) were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Future minimum lease payments, net
$
—

 
$
—

 
$
214

 
$
1,499

Severance costs
—

 
(178
)
 
388

 
40

Contract termination costs
—

 
—

 
1,279

 
—

Asset impairment
—

 
—

 
452

 
—

Restructuring and asset impairment charges (benefits)
$
—

 
$
(178
)
 
$
2,333

 
$
1,539


Accrued restructuring costs were as follows (in thousands):
 
June 30, 2016
 
December 31, 2015
Future minimum lease payments, net
$
819

 
$
2,015

Severance costs
227

 
250

Contract termination costs
120

 
—

Accrued restructuring costs
$
1,166

 
$
2,265



14

(7) Debt and Interest Rate Swaps

A summary of the Company's financing arrangements were as follows (dollars in thousands):
 
 
 
 
June 30, 2016
 
December 31, 2015
 
Interest Rate
Issue Date
Maturity Date
Outstanding Principal
Carrying Amount
 
Outstanding Principal
Carrying Amount
2020 Convertible Notes
0.500%
March 4, 2015
March 1, 2020
$
345,000

$
290,856

 
$
345,000

$
284,241

Term Loan Facility B
Variable
July 2, 2014
July 2, 2021
686,000

679,973

 
689,500

682,915

Total Long-term debt
 
 
 
$
1,031,000

970,829

 
$
1,034,500

967,156

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

 
 
7,000

Long-term debt, less current portion
 
 
 
 
$
963,829

 
 
$
960,156


2020 Convertible Notes

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

The 2020 Convertible Notes are convertible at an initial conversion rate of 34.5968 shares of common stock per $1,000 of principal of notes, which is equivalent to an initial conversion price of $28.9044 per share of common stock. Holders may convert the 2020 Convertible Notes, prior to the close of business on the business day immediately preceding December 1, 2019, in multiples of $1,000 of principal under the following circumstances:
•
during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•
during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 of principal of 2020 Convertible Notes for each trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or
•
on the occurrence of specified corporate events.
    
On or after December 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert the 2020 Convertible Notes, in multiples of $1,000 of principal, at any time.

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

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

The 2020 Convertible Notes are not redeemable prior to maturity by the Company and no sinking fund is provided. The 2020 Convertible Notes are unsecured and do not contain financial covenants or restrictions on the payment of dividends, the incurrence of indebtedness or the repurchase of other securities by the Company. The 2015 Indenture includes customary terms and covenants, including certain events of default after which the 2020 Convertible Notes may be due and payable immediately.


15

The Company has separately accounted for the liability and equity components of the 2020 Convertible Notes. The initial carrying amount of the liability component was calculated by estimating the value of the 2020 Convertible Notes using the Company’s estimated non-convertible borrowing rate of 4.75% at the time the instrument was issued. The carrying amount of the equity component, representing the value of the conversion option, was determined by deducting the liability component from the principal amount of the 2020 Convertible Notes. The difference between the principal amount of the 2020 Convertible Notes and the liability component is considered a debt discount which is being amortized to interest expense using the effective interest method over the expected term of the 2020 Convertible Notes. The equity component of the 2020 Convertible Notes was recorded as a component of Additional paid-in capital in the Condensed Consolidated Balance Sheets and will not be remeasured as long as it continues to meet the conditions for equity classification. Related to the 2020 Convertible Notes, the Condensed Consolidated Balance Sheets included the following (in thousands):
 
June 30, 2016
 
December 31, 2015
Liability component
 
 
 
Principal outstanding
$
345,000

 
$
345,000

Less: Unamortized debt discount
(48,250
)
 
(54,215
)
Less: Unamortized debt issuance costs
(5,894
)
 
(6,544
)
Carrying amount
$
290,856

 
$
284,241

 
 
 
 
Equity component
$
63,854

 
$
63,854


Components of interest expense related to the 2020 Convertible Notes were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Stated interest
$
431

 
$
431

 
$
863

 
$
575

Amortization of debt discount
3,000

 
2,864

 
5,965

 
3,811

Amortization of debt issuance costs
329

 
348

 
650

 
463

Total interest expense
$
3,760

 
$
3,643

 
$
7,478

 
$
4,849


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

Purchased Call Options and Sold Warrants

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

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

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

16


Senior Secured Credit Facility

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

In June 2015 and September 2015, the Company made voluntary principal prepayments of $50.0 million and $75.0 million, respectively, on Term Loan Facility A. The September 2015 voluntary principal prepayment extinguished Term Loan Facility A.

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

The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, and dividends and other distributions. The Credit Agreement is secured by substantially all of the Company's assets. The Company may be required to make an additional payment on the Term Loan Facility each February. This payment is calculated as a percentage of the prior year's Excess Cash Flow as defined in the Credit Agreement. No additional payment was required in February 2016.

Convertible Senior Notes Due 2040

The Company issued $460.0 million in aggregate principal of 2.625% Convertible Senior Notes due in 2040 at par (the “2040 Convertible Notes”) pursuant to an Indenture dated March 17, 2010 (the "2010 Indenture"). On February 20, 2015, holders of $287.4 million of outstanding principal exercised their right to require the Company to repurchase their 2040 Convertible Notes for cash. On June 30, 2015, the Company redeemed the remaining $3.6 million of outstanding 2040 Convertible Notes. In connection with these transactions, $0.1 million was recorded as Loss on debt extinguishment in the Condensed Consolidated Statements of Operations for the six months ended June 30, 2015.

Components of interest expense related to the 2040 Convertible Notes were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Stated interest
$
—

 
$
25

 
$
—

 
$
1,114

Amortization of debt discount
—

 
—

 
—

 
1,865

Amortization of debt issue costs
—

 
—

 
—

 
241

Total interest expense
$
—

 
$
25

 
$
—

 
$
3,220


17


Debt Maturities

As of June 30, 2016, aggregate future principal payments on long-term debt, including the current portion of long-term debt, were as follows (in thousands):
Remainder of 2016
$
3,500

2017
7,000

2018
7,000

2019 (1)
352,000

2020
7,000

Thereafter
654,500

Total
$
1,031,000


(1)
While the 2020 Convertible Notes are scheduled to mature on March 1, 2020, future principal payments are presented based on the date the 2020 Convertible Notes can be freely converted by holders, which is December 1, 2019. However, the 2020 Convertible Notes may be converted by holders prior to December 1, 2019 in certain circumstances.

Interest Rate Swaps

The Company issues long-term debt denominated in U.S. dollars based on market conditions at the time of financing and may enter into interest rate swaps to achieve a primarily fixed interest rate. Alternatively, the Company may choose not to enter into interest rate swaps or may terminate a previously executed swap if it believes a larger proportion of floating-rate debt would be beneficial. The Company has not designated any of its interest rate swaps as hedges for accounting purposes. The Company records interest rate swaps in the Condensed Consolidated Balance Sheets at fair value with changes in fair value recorded as (Loss) income on interest rate swaps in the Condensed Consolidated Statements of Operations. During the three months ended June 30, 2016 and 2015, the Company recorded a loss of $5.5 million and a gain of $4.4 million, respectively, on its interest rate swaps. During the six months ended June 30, 2016 and 2015, the Company recorded losses of $18.6 million and $5.3 million, respectively, on its interest rate swaps.

Details of the Company's interest rate swaps as of June 30, 2016 and December 31, 2015 were as follows (dollars in thousands):
 
 
 
Notional
 
 
Contract Inception
Contract Effective Date
Contract Maturity
June 30, 2016
December 31, 2015
Interest Rate Paid
Interest Rate Received
Senior Secured Credit Facility
 
 
 
 
May 2012
January 2014
January 2016
$
—

$
197,000

(1)
One month USD-LIBOR
May 2012
April 2014
March 2017
$
215,000

$
215,000

(2)
One month USD-LIBOR
June 2013
January 2016
March 2019
$
250,000

$
250,000

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

$
125,000

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

$
200,000

2.93%
One month USD-LIBOR

(1)
The Company paid a fixed interest rate which gradually increased from 0.58% for the three-month settlement period ended in June 2014 to 1.65% for the settlement period ended in January 2016.
(2)
The Company pays a fixed interest rate which gradually increases from 0.65% for the three-month settlement period ended in June 2014 to 2.11% for the settlement period ending in March 2017.

(8) Commitments and Contingencies

Indemnifications

In the normal course of business, the Company provides indemnifications of varying scopes and amounts to certain of its licensees against claims made by third parties arising out of the use and / or incorporation of the Company's products, intellectual property, services and / or technologies into the licensees' products and services. In some cases, the Company may receive tenders of defense and indemnity arising out of products, intellectual property services and / or technologies that are no

18

longer provided by the Company due to having divested certain assets, but which were previously licensed or provided by the Company. The Company's indemnification obligations are typically limited to the cumulative amount paid to the Company by the licensee under the license agreement; however, some license agreements, including those with the Company's largest multiple system operators and digital broadcast satellite providers, have larger limits or do not specify a limit on amounts that may be payable under the indemnity arrangements. The Company cannot estimate the possible range of losses that may affect its Condensed Consolidated Financial Statements in a given period or the maximum potential impact of these indemnification provisions on its Condensed Consolidated Financial Statements.

Legal Proceedings

The Company is party to various legal actions, claims and proceedings as well as other actions, claims and proceedings incidental to its business. The Company accrues a liability for matters in which losses are considered probable and the amount of loss can be reasonably estimated. Some of the matters pending against the Company involve potential compensatory, punitive or treble damage claims or sanctions, that, if granted, could require the Company to pay damages or make other expenditures in amounts that could have a material adverse effect on its financial position, results of operations or cash flows.

On May 10, 2016, the Company received a letter from Dolby Laboratories, Inc. (“Dolby”) demanding unpaid royalties in the amount of $11.5 million related to (i) software licensed by the Company’s Sonic Solutions subsidiary and (ii) certain support and maintenance agreements that Sonic had with certain larger customers during the period from 2009 to 2012. Dolby further claimed that it was entitled to interest on the allegedly unpaid royalties in the amount of $11.8 million. The alleged unpaid royalties cover products that have subsequently been divested by the Company. On July 20, 2016, the Company received another letter from Dolby, proposing to forego the interest it claims it is owed relating to certain portions of the dispute if a settlement is reached promptly. However, Dolby added an additional demand for unpaid royalties in the amount of $9.5 million related to software distributions allegedly made by the Company’s MainConcept subsidiary (which has also been subsequently divested by the Company), for a total demand of $20.9 million. The Company does not agree with Dolby’s assertions and intends to vigorously defend itself in this matter. The Company has offered to settle this matter with Dolby for $0.5 million and has recorded a $0.5 million liability as of June 30, 2016 in its Condensed Consolidated Balance Sheets.

As of June 30, 2016, the Company does not believe any legal matters, individually or in the aggregate, will have a material adverse effect on its Condensed Consolidated Financial Statements.

(9) Stockholders' Equity

(Loss) Earnings Per Share

Basic earnings per share ("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 shares and dilutive common share equivalents outstanding during the period, except for periods of a loss from continuing operations. In periods of a loss from continuing operations, no common share equivalents are included in Diluted EPS because their effect would be anti-dilutive.

The number of shares used to calculate Basic EPS and Diluted EPS were as follows (in thousands):
    
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Weighted average shares used to calculate Basic EPS
82,110

 
85,248

 
81,742

 
86,767

Dilutive effect of equity-based compensation awards
—

 
239

 
—

 
—

Weighted average shares used to calculate Diluted EPS
82,110

 
85,487

 
81,742

 
86,767


19


Weighted average potential shares excluded from the calculation of Diluted EPS as their effect would have been anti-dilutive were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Stock options
3,501

 
4,070

 
3,579

 
4,291

Restricted awards
2,246

 
2,007

 
2,523

 
2,914

2020 Convertible Notes (1)
11,936

 
11,936

 
11,936

 
7,781

2040 Convertible Notes (1)
—

 
76

 
—

 
1,752

Warrants
11,936

 
11,936

 
11,936

 
7,781

Weighted average potential shares excluded from the calculation of Diluted EPS
29,619

 
30,025

 
29,974

 
24,519

 
(1)
See Note 7 for additional details.

For the three months ended June 30, 2016 and 2015, 0.9 million and 0.9 million weighted average performance-based restricted awards, respectively, were excluded from the calculation of Diluted EPS as the performance metric had yet to be achieved or their inclusion would have been anti-dilutive. For the six months ended June 30, 2016 and 2015, 0.8 million and 0.9 million weighted average performance-based restricted awards, respectively, were excluded from the calculation of Diluted EPS as the performance metric had yet to be achieved or their inclusion would have been anti-dilutive.

Effect of the 2020 Convertible Notes and related transactions on Diluted EPS

In periods when the Company reports income from continuing operations, the potential dilutive effect of additional shares that may be issued on conversion of the 2020 Convertible Notes are included in the calculation of Diluted EPS under the treasury stock method if the price of the Company’s common stock exceeds the conversion price. The 2020 Convertible Notes have no impact on Diluted EPS until the price of the Company's common stock exceeds the conversion price of $28.9044 per share because the principal of the 2020 Convertible Notes is required to be settled in cash. Based on the closing price of the Company's common stock of $15.64 per share on June 30, 2016, the if-converted value of the 2020 Convertible Notes was less than the outstanding principal.

Under the treasury stock method, the 2020 Convertible Notes would be dilutive if the Company’s common stock closes at or above $28.9044 per share. However, on conversion, no economic dilution is expected from the 2020 Convertible Notes as the exercise of call options purchased by the Company with respect to its common stock described in Note 7 is expected to eliminate any potential dilution from the 2020 Convertible Notes that would have otherwise occurred. The call options are always excluded from the calculation of Diluted EPS as they are anti-dilutive under the treasury stock method.

The warrants sold by the Company with respect to its common stock described in Note 7 have an effect on Diluted EPS when the Company’s share price exceeds the warrant’s strike price of $40.1450 per share. As the price of the Company’s common stock increases above the warrant strike price, additional dilution would occur.

Share Repurchase Program

No shares were repurchased pursuant to the Company's Board authorized repurchase plan during the three and six months ended June 30, 2016. During the three and six months ended June 30, 2015, the Company repurchased 1.7 million and 5.0 million shares of its common stock pursuant to its Board authorized repurchase plan for $30.2 million and $100.2 million, respectively.

On April 29, 2015, the Board of Directors authorized the repurchase of up to $125.0 million of the Company's common stock. The April 2015 authorization included amounts which were outstanding under previously authorized share repurchase programs. As of June 30, 2016, the Company had $50.5 million of stock repurchase authorization remaining.
    
The Company issues restricted stock units as part of the equity incentive plans described in Note 10. For the majority of restricted stock units, beginning in the fourth quarter of 2015, shares are withheld to satisfy required withholding taxes at the vesting date. Shares withheld to satisfy required withholding taxes in connection with the vesting of restricted stock units are treated as common stock repurchases in the Condensed Consolidated Financial Statements because they reduce the number of

20

shares that would have been issued on vesting. However, these withheld shares are not considered common stock repurchases under the Company's authorized share repurchase plan. During the three and six months ended June 30, 2016, the Company withheld 16.8 thousand and 0.2 million shares of common stock to satisfy $0.3 million and $4.0 million of required withholding taxes, respectively.

Section 382 Rights Plan

On April 28, 2016 (the “Rights Dividend Declaration Date”), the Board of Directors (the “Board of Directors”) of the Company adopted a Section 382 rights plan (the “Section 382 Rights Plan”) and declared a dividend distribution of one right for each outstanding share of Rovi’s common stock to stockholders of record at the close of business on May 19, 2016 (the "Rights Dividend Declaration Date"). The Board of Directors adopted the Section 382 Rights Plan in an effort to protect stockholder value by attempting to protect against a possible limitation on Rovi’s ability to use its net operating loss carryforwards (“NOLs”). If Rovi experiences an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), Rovi’s ability to fully utilize the NOLs on an annual basis will be substantially limited, and the timing of the usage of the NOLs could be substantially delayed, which could therefore significantly impair the value of those benefits. The Section 382 Rights Plan is intended to act as a deterrent to any person (an “Acquiring Person”) acquiring (together with all affiliates and associates of such person) beneficial ownership of 4.91% or more of Rovi’s outstanding common stock within the meaning of Section 382 of the Code, without the approval of the Board of Directors. Stockholders who beneficially own 4.91% or more of Rovi’s outstanding common stock as of the Rights Dividend Declaration Date will not be deemed to be an Acquiring Person, but such person will be deemed an Acquiring Person if such person (together with all affiliates and associates of such person) becomes the beneficial owner of securities representing a percentage of Rovi’s common stock that exceeds by 0.5% or more the lowest percentage of beneficial ownership of Rovi’s common stock that such person had at any time since the Rights Dividend Declaration Date. The description and terms of the rights, including expiration of the Section 382 Rights Plan, are set forth in a Section 382 Rights Agreement, dated as of April 28, 2016 (the “Section 382 Rights Agreement”), by and between the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent.

(10) Equity-based Compensation

Stock Options

The Company grants equity-based compensation awards from its 2008 Equity Incentive Plan (the “2008 Plan”). As of June 30, 2016, the Company had 29.5 million shares reserved and 12.7 million shares available for issuance under the 2008 Plan. The 2008 Plan permits the grant of stock options, restricted stock, restricted stock units and similar types of equity awards to employees, officers, directors and consultants of the Company. Stock options generally have vesting periods of four years with one quarter of the grant vesting on the first anniversary of the grant, followed by monthly vesting thereafter. Stock options generally have a contractual term of seven years. Restricted stock is considered outstanding at the time of the grant as holders are entitled to voting rights. Awards of restricted stock and restricted stock units (collectively, "restricted awards") are generally subject to a four year graded vesting period. 

The Company grants performance-based restricted stock units to certain of its senior officers for three year performance periods. Vesting in the awards is subject to either performance conditions or a market condition as well as a three year service period. Depending on the level of achievement, the maximum number of shares that could be issued on vesting could be up to 200% of the target number of performance-based restricted stock units granted.

For awards subject to performance conditions, the fair value per award is fixed at the grant date; however, the amount of compensation expense is adjusted throughout the performance period based on the probability of achievement of a target revenue compound annual growth rate and an Adjusted EBITDA (defined in Note 12) margin, with compensation expense based on the number of shares ultimately issued. For awards subject to a market condition, the fair value per award is fixed at the grant date and the amount of compensation expense is not adjusted during the performance period based on changes in the level of achievement of the relative Total Shareholder Return metric.

Employee Stock Purchase Plan

The Company’s 2008 Employee Stock Purchase Plan (“ESPP”) allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP consists of four six-month purchase periods within a twenty-four month offering period. Employees purchase shares each purchase period at the lower of 85% of the market value of the Company’s common stock at either the beginning of the offering period or the end of the purchase period.


21

As of June 30, 2016, the Company had 1.4 million shares of common stock reserved and available for issuance under the ESPP.

Valuation Techniques and Assumptions

The Company uses the Black-Scholes-Merton option pricing formula to estimate the fair value of stock options and ESPP shares. The fair value of stock options and ESPP shares is estimated on the grant date using complex and subjective inputs, such as the expected volatility of the Company's common stock over the expected term of the award and projected employee exercise behavior. The Company estimates the fair value of restricted awards subject to service or performance conditions as the market value of the Company's common stock on the date of grant and uses a Monte Carlo simulation to estimate the fair value of restricted stock units subject to market conditions.

Assumptions used to estimate the fair value of equity-based compensation awards were as follows: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Stock options:
 
 
 
 
 
 
 
Expected volatility
N/A
 
N/A
 
55.7
%
 
45.0
%
Expected term
N/A
 
N/A
 
4.1 years

 
4.0 years

Risk-free interest rate
N/A
 
N/A
 
1.2
%
 
1.3
%
Expected dividend yield
N/A
 
N/A
 
0.0
%
 
0.0
%
ESPP shares:
 
 
 
 
 
 
 
Expected volatility
N/A
 
N/A
 
60.9
%
 
35.0
%
Expected term
N/A
 
N/A
 
1.3 years

 
1.3 years

Risk-free interest rate
N/A
 
N/A
 
0.6
%
 
0.4
%
Expected dividend yield
N/A
 
N/A
 
0.0
%
 
0.0
%
Restricted stock units subject to market conditions:
 
 
 
 
 
 
Expected volatility
N/A
 
N/A
 
55.9
%
 
41.0
%
Expected term
N/A
 
N/A
 
3.0 years

 
3.0 years

Risk-free interest rate
N/A
 
N/A
 
1.0
%
 
1.0
%
Expected dividend yield
N/A
 
N/A
 
0.0
%
 
0.0
%

Expected volatility is estimated using a combination of historical volatility and implied volatility derived from publicly-traded options on the Company's common stock. When historical data is available and relevant, the expected term of the award is estimated by calculating the average term from historical experience. When there is insufficient historical data to provide a reasonable basis on which to estimate the expected term, the Company uses an average of the vesting period and the contractual term of the award to estimate the expected term of the award. The risk-free interest rate is the yield on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the award at the grant date. The Company does not anticipate paying cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero. The number of awards expected to be forfeited during the requisite service period is estimated at the time of grant using historical data and equity-based compensation is only recognized for awards for which the requisite service is expected to be rendered. Forfeiture estimates are revised during the requisite service period and the effect of changes in the number of awards expected to be forfeited during the requisite service period is recorded as a cumulative adjustment in the period estimates are revised.

The weighted-average grant date fair value of equity-based awards (per award) and pre-tax equity-based compensation expense (in thousands) was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Stock options
N/A

 
N/A

 
$
10.30

 
$
9.05

ESPP shares
N/A

 
N/A

 
$
7.62

 
$
6.94

Restricted awards
$
17.41

 
$
17.62

 
$
23.73

 
$
23.96

 
 
 
 
 
 
 
 
Pre-tax equity-based compensation
$
9,917

 
$
10,653

 
$
18,355

 
$
22,716

 

22

As of June 30, 2016, there was $56.4 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested equity-based awards which is expected to be recognized over a remaining weighted average period of 2.5 years.

The aggregate intrinsic value of stock options exercised during the three months ended June 30, 2016 and 2015 was immaterial. The aggregate intrinsic value of stock options exercised during the six months ended June 30, 2016 and 2015 was $0.6 million and $0.3 million, respectively. Intrinsic value is calculated as the difference between the market price of the shares at the time of exercise and the exercise price of the stock option.

As of June 30, 2016, 1.2 million shares of restricted stock were unvested, which includes 0.4 million shares of performance-based restricted stock. As of June 30, 2016, 2.5 million restricted stock units were unvested, which includes 0.4 million performance-based restricted stock units. The aggregate fair value of restricted awards vested during the three months ended June 30, 2016 and 2015 was $1.2 million and $0.6 million, respectively. The aggregate fair value of restricted awards vested during the six months ended June 30, 2016 and 2015 was $21.4 million and $23.1 million, respectively.

(11) Income Taxes

Due to the fact that the Company has significant net operating loss carryforwards and has recorded a valuation allowance against a significant portion of its deferred tax assets, foreign withholding taxes are the primary driver of Income tax expense. Components of Income tax expense were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Foreign withholding tax
$
2,737

 
$
3,525

 
$
6,444

 
$
6,657

State income tax (benefit) expense
(271
)
 
(3,195
)
 
122

 
(2,182
)
Foreign income tax
192

 
472

 
837

 
1,126

Change in net deferred tax liabilities
461

 
260

 
921

 
3,633

Change in unrecognized tax benefits
87

 
215

 
296

 
(18
)
Income tax expense
$
3,206

 
$
1,277

 
$
8,620

 
$
9,216

            
As of December 31, 2015, the Company had recorded deferred tax assets for net operating loss carryforwards as
follows (in thousands):
 
Carryforward Amount
 
Years of Expiration
Federal (1)
$
1,155,486

 
2020 - 2033
State (2)
$
821,952

 
2017 - 2033

(1) Includes $180.0 million related to stock option deductions that are not included in deferred tax assets.
(2) Includes $27.4 million related to stock option deductions that are not included in deferred tax assets.

As of December 31, 2015, the Company's deferred tax asset related to U.S. federal net operating loss carryforwards from continuing operations was $292.7 million. A full valuation allowance has been applied against U.S. federal net operating loss carryforwards. As of December 31, 2015, the Company's deferred tax asset related to state net operating loss carryforwards from continuing operations was $46.0 million. A valuation allowance of $39.9 million has been applied against state net operating loss carryforwards as of December 31, 2015.
    
The Company believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits that could result from federal, state and foreign tax audits. The Company regularly assesses potential outcomes of these audits in order to determine the appropriateness of its tax provision. Adjustments to liabilities for unrecognized tax benefits are made to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular income tax audit. However, income tax audits are inherently unpredictable and there can be no assurance that the Company will accurately predict the outcome of these audits. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously recognized, and therefore the resolution of one or more of these uncertainties in any particular period could have a material adverse impact on the Condensed Consolidated Financial Statements.    
    

23

(12) Segment Information

Reportable segments are identified based on the Company's organizational structure and information reviewed by the Company’s chief operating decision maker ("CODM") to evaluate performance and allocate resources. The Company's operations are organized into two reportable segments for financial reporting purposes: Intellectual Property Licensing and Product. The Intellectual Property Licensing segment consists primarily of IPG patent licensing to third party guide developers such as multi-channel video service providers (e.g., cable, satellite and internet-protocol television), consumer electronics (“CE”) manufacturers, set-top box manufacturers and interactive television software and program guide providers in the online, over-the-top video and mobile phone businesses. The Product segment consists primarily of the licensing of Company-developed IPG products and services provided for multi-channel video service providers and CE manufacturers, in-guide advertising revenue, analytics revenue and revenue from licensing Metadata. The Product segment also includes sales of legacy Analog Content Protection, VCR Plus+, connected platform and media recognition products.

Segment results are derived from the Company's internal management reporting system. The accounting policies used to derive segment results are substantially the same as those used by the consolidated company. Intersegment revenues and expenses have been eliminated from segment financial information as transactions between reportable segments are excluded from the measure of segment profitability reviewed by the CODM. In addition, certain costs are not allocated to the segments as they are considered Corporate costs. Corporate costs primarily include general and administrative costs such as corporate management, finance, legal and human resources. The CODM uses an Adjusted EBITDA (as defined below) measure to evaluate the performance of, and allocate resources to, the segments. Segment balance sheets are not used by the CODM to allocate resources or assess performance.


24

Segment results were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Intellectual Property Licensing
 
 
 
 
 
 
 
Service Provider
$
53,371


$
51,301

 
$
96,107

 
$
98,454

Consumer Electronics
14,348


18,431

 
27,872

 
36,297

Revenues
67,719

 
69,732

 
123,979

 
134,751

Adjusted Operating Expenses (1)
17,697

 
15,405

 
31,854

 
32,020

Adjusted EBITDA (2)
50,022

 
54,327

 
92,125

 
102,731

Product
 
 
 
 
 
 
 
Service Provider
51,985


50,298

 
103,091

 
101,323

Consumer Electronics
4,092


5,368

 
8,857

 
10,761

Other
1,449


2,422

 
7,702

 
15,010

Revenues
57,526

 
58,088

 
119,650

 
127,094

Adjusted Operating Expenses (1)
44,503

 
48,161

 
91,150

 
100,297

Adjusted EBITDA (2)
13,023

 
9,927

 
28,500

 
26,797

Corporate:
 
 
 
 
 
 
 
Adjusted Operating Expenses (1)
12,209

 
14,020

 
24,255

 
27,416

Adjusted EBITDA (2)
(12,209
)
 
(14,020
)
 
(24,255
)
 
(27,416
)
Consolidated:
 
 
 
 
 
 
 
Revenues
125,245

 
127,820

 
243,629

 
261,845

Adjusted Operating Expenses (1)
74,409

 
77,586

 
147,259

 
159,733

Adjusted EBITDA (2)
50,836

 
50,234

 
96,370

 
102,112

Depreciation
4,325

 
4,448

 
8,559

 
8,818

Amortization of intangible assets
19,030

 
19,236

 
38,162

 
38,600

Restructuring and asset impairment charges (benefits)
—

 
(178
)
 
2,333

 
1,539

Equity-based compensation
9,917

 
10,653

 
18,355

 
22,716

Transaction and integration costs
6,043

 
—

 
6,043

 
—

Earnout settlement
1,189

 
—

 
1,189

 
—

Contested proxy election costs
—

 
3,941

 
—

 
4,346

Change in franchise tax reserve
154

 
—

 
154

 
—

Operating income
10,178

 
12,134

 
21,575

 
26,093

Interest expense
(10,859
)
 
(11,715
)
 
(21,390
)
 
(24,073
)
Interest income and other, net
(14
)
 
(183
)
 
(31
)
 
503

(Loss) income on interest rate swaps
(5,507
)
 
4,399

 
(18,594
)
 
(5,319
)
Loss on debt extinguishment
—

 
(20
)
 
—

 
(120
)
(Loss) income before income taxes
$
(6,202
)
 
$
4,615

 
$
(18,440
)
 
$
(2,916
)

(1)
Adjusted Operating Expenses is defined as operating expenses excluding depreciation, amortization of intangible assets, restructuring and asset impairment charges, equity-based compensation, transaction, transition and integration expenses, changes in contingent consideration and earnout settlements, contested proxy election costs and changes in franchise tax reserves.

(2)
Adjusted EBITDA is defined as operating income excluding depreciation, amortization of intangible assets, restructuring and asset impairment charges, equity-based compensation, transaction, transition and integration expenses, changes in contingent consideration and earnout settlements, contested proxy election costs and changes in franchise tax reserves.

25


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Discussions of some of the matters contained in this Quarterly Report on Form 10-Q for Rovi Corporation (the “Company,” “we” or “us”) may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, and as such, may involve risks and uncertainties, including the discussion contained in Item 2., "Management’s Discussion and Analysis of Financial Condition and Results of Operations". We have based these forward-looking statements on our current expectations and projections about future events or future financial performance, which include implementing our business strategy, completing our pending acquisition of TiVo, developing and introducing new technologies, obtaining, maintaining and expanding market acceptance of the technologies we offer, successfully renewing intellectual property licenses with the major North American service providers and competition in our markets.

In some cases, these forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “predict,” “potential,” “intend,” or “continue,” and similar expressions. These statements are based on the beliefs and assumptions of our management and on information currently available to our management. Our actual results, performance and achievements may differ materially from the results, performance and achievements expressed or implied in such forward-looking statements. For a discussion of some of the factors that might cause such a difference, see Part I, Item 1A., "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2015, as supplemented by the "Risk Factors" contained in Part II, Item 1A. of this Quarterly Report on Form 10-Q. Except as required by law, we specifically disclaim any obligation to update such forward-looking statements.

The following commentary should be read in conjunction with the Consolidated Financial Statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2015 and the Condensed Consolidated Financial Statements and related notes contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.


Executive Overview of Results

Revenue for the three months ended June 30, 2016 decreased by 2% compared to the prior year as a result of a 3% decline in revenue in our Intellectual Property Licensing segment and a 1% decline in revenue in our Product segment. For the three months ended June 30, 2016, 29% of revenue was from our contracts with AT&T Inc. ("AT&T"), Charter Communications, Inc. ("Charter") and Comcast Corporation ("Comcast"). Our Intellectual Property Licensing contract with Comcast expired on March 31, 2016. Our Product relationship with Comcast, primarily a metadata license, remains in effect.

The expiration of our licenses with Comcast and EchoStar Corporation ("EchoStar") / DISH Network Corporation (collectively, "Dish"), as well as the litigation initiated against Comcast and potential litigation against Dish, whose license expired on April 5, 2016, may result in a reduction of revenue and an increase in litigation costs. While the Company anticipates that Comcast and Dish will eventually execute new licenses, the length of time that Comcast and Dish are out of license prior to executing a license is uncertain. When new licenses are executed, the amount of revenue that will be recognized in that period is uncertain and will depend on a variety of factors including license terms such as duration, pricing, licensed products and fields of use, and the duration of the out-of-license period. In addition, while litigation costs may increase, whether the litigation initiated will cause total expenses to increase or decrease longer-term will be a function of several factors, including the length of time Comcast is out of license and whether litigation is necessary with Dish.

For the three months ended June 30, 2016, our net loss was $9.4 million, or $0.11 per diluted share, compared to net income of $3.3 million, or $0.04 per diluted share, in the prior year. The increased loss was primarily the result of changes in the fair value of our interest rate swap portfolio and transaction costs incurred in 2016 associated with the pending TiVo acquisition. These factors were partially offset by costs incurred in 2015 related to a contested proxy election and lower compensation, consulting and infrastructure costs as a result of prior cost saving initiatives.


26

Pending Acquisition of TiVo

On April 28, 2016, we entered into a definitive agreement (“Merger Agreement”) to acquire TiVo Inc. (“TiVo”), a global leader in next-generation video technology and innovative cloud-based software-as-a-service solutions, for $10.70 per share, which is comprised of $2.75 per share in cash and $7.95 per share of the common stock of a newly formed holding company that will own Rovi and TiVo. As of July 22, 2016, the aggregate purchase price was approximately $1,048.4 million using Rovi's closing share price of $18.52. The consideration payable in stock is subject to a two-way collar between Rovi stock prices of $16.00 and $25.00. Both companies' boards of directors have approved the transaction. The transaction is subject to approval by Rovi and TiVo stockholders and other customary closing conditions, and is expected to close in the third calendar quarter of 2016. For further details, refer to Note 2 of the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

27


Comparison of Three and Six Months Ended June 30, 2016 and 2015

The condensed consolidated results of operations for the three and six months ended June 30, 2016 compared to the prior year were as follows (dollars in thousands):
 
Three Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Revenues
$
125,245

 
$
127,820

 
$
(2,575
)
 
(2
)%
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues, excluding amortization of intangible assets
24,965

 
25,669

 
(704
)
 
(3
)%
Research and development
24,184

 
25,733

 
(1,549
)
 
(6
)%
Selling, general and administrative
42,563

 
40,778

 
1,785

 
4
 %
Depreciation
4,325

 
4,448

 
(123
)
 
(3
)%
Amortization of intangible assets
19,030

 
19,236

 
(206
)
 
(1
)%
Restructuring and asset impairment charges (benefits)
—

 
(178
)
 
178

 
(100
)%
Total costs and expenses
115,067

 
115,686

 
(619
)
 
(1
)%
Operating income
10,178

 
12,134

 
(1,956
)
 
(16
)%
Interest expense
(10,859
)
 
(11,715
)
 
856

 
(7
)%
Interest income and other, net
(14
)
 
(183
)
 
169

 
(92
)%
(Loss) income on interest rate swaps
(5,507
)
 
4,399

 
(9,906
)
 
(225
)%
Loss on debt extinguishment
—

 
(20
)
 
20

 
(100
)%
(Loss) income before income taxes
(6,202
)
 
4,615

 
(10,817
)
 
(234
)%
Income tax expense
3,206

 
1,277

 
1,929

 
151
 %
Net (loss) income
$
(9,408
)
 
$
3,338

 
$
(12,746
)
 
(382
)%
 
Six Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Revenues
$
243,629

 
$
261,845

 
$
(18,216
)
 
(7
)%
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues, excluding amortization of intangible assets
47,502

 
53,799

 
(6,297
)
 
(12
)%
Research and development
46,853

 
52,270

 
(5,417
)
 
(10
)%
Selling, general and administrative
78,645

 
80,726

 
(2,081
)
 
(3
)%
Depreciation
8,559

 
8,818

 
(259
)
 
(3
)%
Amortization of intangible assets
38,162

 
38,600

 
(438
)
 
(1
)%
Restructuring and asset impairment charges
2,333

 
1,539

 
794

 
52
 %
Total costs and expenses
222,054

 
235,752

 
(13,698
)
 
(6
)%
Operating income
21,575

 
26,093

 
(4,518
)
 
(17
)%
Interest expense
(21,390
)
 
(24,073
)
 
2,683

 
(11
)%
Interest income and other, net
(31
)
 
503

 
(534
)
 
(106
)%
Loss on interest rate swaps
(18,594
)
 
(5,319
)
 
(13,275
)
 
250
 %
Loss on debt extinguishment
—

 
(120
)
 
120

 
(100
)%
Loss before income taxes
(18,440
)
 
(2,916
)
 
(15,524
)
 
532
 %
Income tax expense
8,620

 
9,216

 
(596
)
 
(6
)%
Net loss
$
(27,060
)
 
$
(12,132
)
 
$
(14,928
)
 
123
 %


28

Revenues

For the three months ended June 30, 2016, revenue decreased 2% compared to the prior year as a result of a $2.0 million decrease in revenue in our Intellectual Property Licensing segment and a $0.6 million decrease in revenue in our Product segment. Intellectual Property Licensing generated 54.1% of total revenue for the three months ended June 30, 2016 compared to 54.6% in the prior year.

For the six months ended June 30, 2016, revenue decreased 7% compared to the prior year as a result of a $10.8 million decrease in revenue in our Intellectual Property Licensing segment and a $7.4 million decrease in revenue in our Product segment. Intellectual Property Licensing generated 50.9% of total revenue for the six months ended June 30, 2016 compared to 51.5% in the prior year.

For additional details on the changes in revenue, see the discussion of our segment results below.

Cost of revenues, excluding amortization of intangible assets
  
Cost of revenues, excluding amortization of intangible assets, consist primarily of service costs, employee-related costs, patent prosecution, maintenance and litigation costs and an allocation of overhead and facilities costs. For the three months ended June 30, 2016, Cost of revenues, excluding amortization of intangible assets, decreased 3% from the prior year primarily due to a $1.3 million decrease in compensation costs, cost saving initiatives resulting in a $0.6 million decrease in consulting costs and a $0.6 million decrease in infrastructure costs as well as a $0.4 million decrease in legal costs, which were partially offset by a $2.5 million increase in patent prosecution and defense costs.

For the six months ended June 30, 2016, Cost of revenues, excluding amortization of intangible assets, decreased 12% from the prior year primarily due to a $3.2 million decrease in compensation costs and cost saving initiatives resulting in a $1.3 million decrease in consulting costs and a $1.0 million decrease in infrastructure costs.

Research and development

Research and development expenses are comprised primarily of employee-related costs, consulting costs and an allocation of overhead and facilities costs. For the three months ended June 30, 2016, Research and development expenses decreased 6% compared to the prior year primarily due to $0.6 million reduction in consulting costs related to our metadata operations and legacy guide products due to cost saving initiatives.

For the six months ended June 30, 2016, Research and development expenses decreased 10% compared to the prior year primarily due to a reduction of $3.4 million in compensation costs and a reduction of $1.8 million in consulting costs related to our metadata operations and legacy guide products due to prior cost saving initiatives.

Selling, general and administrative

Selling expenses are comprised primarily of employee-related costs, including travel costs, advertising costs and an allocation of overhead and facilities costs. General and administrative expenses are comprised primarily of employee-related costs, including travel costs, corporate accounting, consulting, legal and tax fees and an allocation of overhead and facilities costs.

The 4% increase in Selling, general and administrative expenses during the three months ended June 30, 2016 was primarily due to $6.0 million of transaction costs incurred in 2016 associated with the pending TiVo acquisition and a $1.2 million final Veveo earn-out settlement. These cost increases were partially offset by the prior year including $3.9 million of expenses related to a contested proxy election, a $1.0 million decrease in marketing spend and the benefit of prior cost saving initiatives.

The 3% decrease in Selling, general and administrative expenses during the six months ended June 30, 2016 was primarily due to the prior year including $4.3 million of expenses related to a contested proxy election and consulting costs related to planning for license renewals with Charter, AT&T, Comcast and EchoStar. These cost reductions were partially offset by $6.0 million of transaction costs incurred in 2016 associated with the pending TiVo acquisition and a $1.2 million final Veveo earn-out settlement.


29

We anticipate incurring material transaction, transition and integration-related costs, primarily consisting of information systems investments, employee-related costs, and investment banking, accounting, consulting and legal fees, in connection with closing the acquisition of TiVo and integrating TiVo's operations with the operations of Rovi.

Amortization of intangible assets

For the three and six months ended June 30, 2016, Amortization of intangible assets decreased from the prior year primarily due to certain intangible assets related to past acquisitions becoming fully amortized during the period which was partially offset by additional amortization related to the acquisition of a patent portfolio in January 2016.
    
Restructuring and asset impairment charges (benefits)

In the three months ended March 31, 2016, we initiated certain facility rationalization activities, including relocating our corporate headquarters from Santa Clara, California to San Carlos, California and consolidating our Silicon Valley operations into the new corporate headquarters, and eliminating a number of positions associated with a reorganization of the sales force structure, downsizing the global services workforce and eliminating certain general and administrative positions. As a result of these actions, Restructuring and asset impairment charges of $2.3 million were recognized in the three months ended March 31, 2016. No Restructuring and asset impairment charges were recognized in the three months ended June 30, 2016.

In conjunction with the disposition of the Rovi Entertainment Store, DivX and MainConcept businesses and the Company's narrowed business focus on discovery, in 2014 we conducted a review of our remaining product development, sales, data operations and general and administrative functions to identify potential cost efficiencies. As a result of this analysis, we took cost reduction actions that resulted in Restructuring and asset impairment benefits of $0.2 million and Restructuring and asset impairment costs of $1.5 million in the three and six months ended June 30, 2015, respectively. Amounts recognized in three and six months ended June 30, 2015 represent adjustments to the amounts originally recorded in connection with the 2014 restructuring actions.

Interest expense

For the three months ended June 30, 2016, Interest expense decreased compared to the prior year primarily due to a decrease in average debt outstanding.

For the six months ended June 30, 2016, Interest expense decreased compared to the prior year primarily due to a lower effective interest rate on the 2020 Convertible Notes compared to the 2040 Convertible Notes, as well as a decrease in average debt outstanding.

Interest income and other, net

For the six months ended June 30, 2016, the decrease in Interest income and other, net was primarily due to an increased foreign currency remeasurement loss of $0.7 million.

(Loss) income on interest rate swaps

We have not designated any of our interest rate swaps as hedges for accounting purposes and therefore changes in the fair value of our interest rate swaps are not offset by changes in the fair value of the related hedged item in our Condensed Consolidated Statements of Operations (see Note 7 to the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference). We generally utilize interest rate swaps to convert the interest rate on a portion of our floating interest rate loans to a fixed interest rate. Under the terms of our interest rate swaps, we generally receive a floating rate of interest and pay a fixed rate of interest. When there is an increase in expected future London Interbank Offering Rate ("LIBOR"), we generally will have a gain when adjusting our interest rate swaps to fair value. When there is a decrease in expected future LIBOR, we generally will have a loss when adjusting our interest rate swaps to fair value.

Loss on debt extinguishment

During the six months ended June 30, 2015, we redeemed $291.0 million in principal of our 2040 Convertible Notes for cash, resulting in a Loss on debt extinguishment of $0.1 million.


30

Income tax expense

Due to our significant net operating loss carryforwards and a valuation allowance applied against a significant portion of our deferred tax assets, foreign withholding taxes are the primary driver of our Income tax expense.

We recorded Income tax expense for the three months ended June 30, 2016 of $3.2 million, which primarily consists of $2.7 million of foreign withholding taxes, a $0.5 million increase in net deferred tax liabilities and $0.2 million of foreign income taxes, which were partially offset by a benefit from state income taxes of $0.3 million. We recorded Income tax expense for the three months ended June 30, 2015 of $1.3 million, which primarily consists of $3.5 million of foreign withholding taxes, $0.5 million of foreign income taxes and a $0.3 million increase in net deferred tax liabilities, partially offset by a $3.2 million benefit from state income taxes, which reflected the settlement of our 2008 California tax return. The year-over-year decrease in foreign withholding taxes was due to a larger portion of license fees the Company received in 2015 coming from licensees in countries that are subject to foreign withholding taxes.

We recorded Income tax expense for the six months ended June 30, 2016 of $8.6 million, which primarily consists of $6.4 million of foreign withholding taxes, a $0.9 million increase in net deferred tax liabilities and $0.8 million of foreign income taxes. We recorded Income tax expense for the six months ended June 30, 2015 of $9.2 million, which primarily consists of $6.7 million of foreign withholding taxes, a $3.6 million increase in net deferred tax liabilities and $1.1 million of foreign income taxes, partially offset by a $2.2 million benefit from state income taxes, which reflected the settlement of our 2008 California tax return. The year-over-year decrease in foreign withholding taxes was due to a larger portion of license fees the Company received in 2015 coming from licensees in countries that are subject to foreign withholding taxes.

Segment Results

We report segment information in the same way management internally organizes the business for assessing performance and making decisions regarding the allocation of resources to the business units. The terms Adjusted Operating Expenses and Adjusted EBITDA in the following discussion use the definitions provided in Note 12 of the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Intellectual Property Licensing Segment

The Intellectual Property Licensing segment's results of operations for the three and six months ended June 30, 2016 compared to the prior year were as follows (dollars in thousands):
 
Three Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Service Provider
$
53,371

 
$
51,301

 
$
2,070

 
4
 %
Consumer Electronics
14,348

 
18,431

 
(4,083
)
 
(22
)%
Intellectual Property Licensing Revenues
67,719

 
69,732

 
(2,013
)
 
(3
)%
Adjusted Operating Expenses
17,697

 
15,405

 
2,292

 
15
 %
Adjusted EBITDA
$
50,022

 
$
54,327

 
$
(4,305
)
 
(8
)%
Adjusted EBITDA Margin
73.9
%
 
77.9
%
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Service Provider
$
96,107

 
$
98,454

 
$
(2,347
)
 
(2
)%
Consumer Electronics
27,872

 
36,297

 
(8,425
)
 
(23
)%
Intellectual Property Licensing Revenues
123,979

 
134,751

 
(10,772
)
 
(8
)%
Adjusted Operating Expenses
31,854

 
32,020

 
(166
)
 
(1
)%
Adjusted EBITDA
$
92,125

 
$
102,731

 
$
(10,606
)
 
(10
)%
Adjusted EBITDA Margin
74.3
%
 
76.2
%
 
 
 
 

For the three months ended June 30, 2016, Intellectual Property Licensing revenue decreased 3% compared to the prior year as a 4% increase in Service Provider revenue was more than offset by a 22% decrease in revenue from CE manufacturers. Service Provider revenue increased primarily due to the current quarter including agreements which included catch-up payments to make us whole for the pre-license period of use, the benefit of certain multiple system operator

31

households being acquired by licensees paying a higher effective rate and $0.5 million in revenue from patent sales, partially offset by the prior period benefiting from a third party IPG provider for set-top boxes executing a bulk purchase of IPG licenses and Comcast being out of license during the current period.

For the six months ended June 30, 2016, Intellectual Property Licensing revenue decreased 8% compared to the prior year due to a 2% decrease in Service Provider revenue and a 23% decrease in revenue from CE manufacturers. Service Provider revenue decreased primarily due to the prior period benefiting from a third party IPG provider of set-top boxes executing a bulk purchase of IPG licenses and Comcast being out of license in the current period. These decreases more than offset the benefit from the current period including catch-up payments to make us whole for the pre-license period of use, the benefit of certain multiple system operator households being acquired by licensees paying a higher effective rate and $0.5 million in revenue from patent sales.

During 2016, we expanded our business strategy of monetizing our intellectual property to include the sale of select patent assets. As patent sales executed under this strategy represent a component of our ongoing major or central operations and activities of monetizing intellectual property, we now record the related proceeds from patent sales as revenue. Service Provider Intellectual Property Licensing revenue for the three and six months ended June 30, 2016 includes $0.5 million related to a patent sale. We expect additional patent sales in the future.

The decrease in revenue from Consumer Electronics ("CE") manufacturers for the three and six months ended June 30, 2016 was primarily due to a decrease in our licensees' market share, combined with continuing pressures on their business models, which has caused our revenue from CE manufacturers to decline. Such declines could continue unless we are able to successfully license new entrants to this market.  

Intellectual Property Licensing Adjusted Operating Expenses increased 15% during the three months ended June 30, 2016 primarily due to a $2.5 million increase in patent prosecution and defense costs. Intellectual Property Licensing Adjusted Operating Expenses decreased 1% during the six months ended June 30, 2016 primarily due to cost saving initiatives resulting in a decrease in consulting costs, which was partially offset by higher compensation costs.

Product Segment

The Product segment's results of operations for the three and six months ended June 30, 2016 compared to the prior year were as follows (dollars in thousands):
 
Three Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Service Provider
$
51,985

 
$
50,298

 
$
1,687

 
3
 %
Consumer Electronics
4,092

 
5,368

 
(1,276
)
 
(24
)%
Other
1,449

 
2,422

 
(973
)
 
(40
)%
Product Revenues
57,526

 
58,088

 
(562
)
 
(1
)%
Adjusted Operating Expenses
44,503

 
48,161

 
(3,658
)
 
(8
)%
Adjusted EBITDA
$
13,023

 
$
9,927

 
$
3,096

 
31
 %
Adjusted EBITDA Margin
22.6
%
 
17.1
%
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Service Provider
$
103,091

 
$
101,323

 
$
1,768

 
2
 %
Consumer Electronics
8,857

 
10,761

 
(1,904
)
 
(18
)%
Other
7,702

 
15,010

 
(7,308
)
 
(49
)%
Product Revenues
119,650

 
127,094

 
(7,444
)
 
(6
)%
Adjusted Operating Expenses
91,150

 
100,297

 
(9,147
)
 
(9
)%
Adjusted EBITDA
$
28,500

 
$
26,797

 
$
1,703

 
6
 %
Adjusted EBITDA Margin
23.8
%
 
21.1
%
 
 
 
 

For the three months ended June 30, 2016, Product revenue decreased 1% compared to the prior year as a 3% increase in Service Provider revenue was more than offset by declines in CE revenue and Other revenue. Service Provider revenue increased primarily due to growth in metadata and a catch up payment from a cash basis international customer, which were

32

partially offset by a decrease in advertising revenue as a result of the expiration of the Comcast license during the period which provided for a share of the in-guide advertising revenue. The decrease in CE revenue was primarily due to a decrease in the number of units shipped that incorporate our products. The decrease in Other revenue was the result of the continuing decline in Analog Content Protection revenue. Analog Content Protection revenue is expected to continue to decline in the future.

For the six months ended June 30, 2016, Product revenue decreased 6% compared to the prior year as as a 2% increase in Service Provider revenue was more than offset by declines in CE revenue and Other revenue. Service Provider revenue increased primarily due to growth in metadata and analytics and a catch up payment from a cash basis international customer, which were partially offset by a decrease in advertising revenue as a result of the expiration of the Comcast license during the period which provided for a share of the in-guide advertising revenue. The decrease in CE revenue was primarily due to a decrease in the number of units shipped that incorporate our products. The decrease in Other revenue was the result of the continuing decline in Analog Content Protection revenue, as well as the six months ended June 30, 2015 including a significant perpetual license fee from a manufacturer of set-top boxes. Analog Content Protection revenue is expected to continue to decline in the future.

Product Adjusted Operating Expenses decreased 8% and 9% for the three and six months ended June 30, 2016, respectively, compared to the prior year primarily as a result of a decrease in spending on our metadata operations and legacy guide products due to cost saving initiatives as well as a reduction in compensation and consulting costs.

Corporate

Corporate costs for the three and six months ended June 30, 2016 compared to the prior year were as follows (dollars in thousands):    
 
Three Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Adjusted Operating Expenses
$
12,209

 
$
14,020

 
$
(1,811
)
 
(13
)%
 
Six Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Adjusted Operating Expenses
$
24,255

 
$
27,416

 
$
(3,161
)
 
(12
)%

For the three and six months ended June 30, 2016, Corporate Adjusted Operating Expenses decreased primarily due to a decrease in compensation, consulting and marketing costs.

Liquidity and Capital Resources

We finance our operations primarily from cash generated by our operations. We believe our cash position remains strong and our cash, cash equivalents and marketable securities and anticipated cash flow provided by operations, supplemented with access to capital markets as necessary, are generally sufficient to support our operating businesses, capital expenditures, restructuring activities, maturing debt, interest payments and income tax payments in addition to investments in future growth opportunities and share repurchases for at least the next twelve months. Our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and economic conditions; however, our use of a variety of funding sources to meet our liquidity needs is designed to facilitate continued access to sufficient capital resources under such conditions.

As of June 30, 2016, we had $151.3 million in Cash and cash equivalents, $122.6 million in Short-term marketable securities and $80.2 million in Long-term marketable securities. Our cash, cash equivalents and marketable securities are held in numerous locations around the world, with $214.9 million held by our foreign subsidiaries as of June 30, 2016. Due to our net operating loss carryforwards, we could repatriate amounts to the U.S. with minimal income tax impacts.


33

Sources and Uses of Cash

Cash flows for the six months ended June 30, 2016 compared to the prior year were as follows (in thousands):
 
Six Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Net cash provided by operating activities of continuing operations
$
45,984

 
$
65,748

 
$
(19,764
)
 
(30
)%
Net cash provided by investing activities
3,309

 
42,391

 
(39,082
)
 
(92
)%
Net cash used in financing activities
(963
)
 
(146,166
)
 
145,203

 
(99
)%
Net cash used in discontinued operations
—

 
(194
)
 
194

 
(100
)%
Effect of exchange rate changes on cash and cash equivalents
1,269

 
(407
)
 
1,676

 
(412
)%
Net increase (decrease) in cash and cash equivalents
$
49,599

 
$
(38,628
)
 
$
88,227

 
(228
)%

Net cash provided by operating activities of continuing operations for the six months ended June 30, 2016 decreased $19.8 million primarily due to prepaying a third party for an intellectual property license in 2016 and a decrease in net income. The availability of cash generated by our operations in the future could be affected by business risks including, but not limited to, the Risk Factors described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 and in Part II, Item 1A of this Quarterly Report on Form 10-Q, which are incorporated herein by reference.

Net cash provided by investing activities for the six months ended June 30, 2016 decreased $39.1 million due to a decrease in net proceeds from net sales and maturities of marketable securities of $28.3 million and higher spending on capital expenditures associated with relocating our corporate headquarters to San Carlos, California. The six months ended June 30, 2016 includes a payment of $2.5 million for the purchase of a patent portfolio. We anticipate capital expenditures to grow our business and strengthen our operations infrastructure of between $25 million and $30 million for the full year 2016.

Net cash provided by financing activities for the six months ended June 30, 2016 included the receipt of $7.3 million from the exercise of employee stock options and sales of stock through our employee stock purchase plan, $4.0 million in tax withholding payments from the net share settlement of restricted stock units and $3.5 million in principal payments on our Term Loan Facility B. Net cash used in financing activities for the six months ended June 30, 2015 included $287.4 million in principal payments on our 2040 Convertible Notes and the issuance of $345.0 million in principal of our 2020 Convertible Notes. Using proceeds from the 2020 Convertible Notes, we repaid $100.0 million which had been borrowed against our Revolving Facility in February 2015, in part, to extinguish a portion of the 2040 Convertible Notes. In connection with issuing the 2020 Convertible Notes, we purchased a call option to manage the potential dilution to earnings per share from conversion of the 2020 Convertible Notes and sold a warrant for a net cash payment of $33.5 million. The six months ended June 30, 2015 also includes the payment of $5.1 million in contingent consideration related to previous acquisitions. In addition, during the six months ended June 30, 2015 we used $104.5 million to repurchase shares of our common stock and received $5.9 million from the exercise of employee stock options and sales of stock through our employee stock purchase plan.

On April 29, 2015, our Board of Directors authorized the repurchase of up to $125.0 million of our common stock.  The April 2015 authorization includes any amounts which were outstanding under previously authorized stock repurchase programs. As of June 30, 2016, our remaining stock repurchase authorization was $50.5 million.

Pending Acquisition of TiVo

On April 28, 2016, we entered into a Merger Agreement to acquire TiVo Inc. (“TiVo”) for $10.70 per share comprised of $2.75 per share in cash and $7.95 per share of the common stock of a newly formed holding company that will own Rovi and TiVo. As of July 22, 2016, the aggregate purchase price was approximately $1,048.4 million using Rovi's closing share price of $18.52. The consideration payable in stock is subject to a two-way collar between Rovi stock prices of $16.00 and $25.00, with the Rovi stock price based on the average volume weighted average Rovi stock price over the fifteen trading days ending three trading days prior to the transaction closing. If our share price increases between the date of the Merger Agreement and the transaction closing date, TiVo stockholders will receive fewer shares (a lower exchange ratio) until our share price reaches $25.00, at which point ownership and exchange ratio will be fixed at 0.3180 per share. Conversely, if our share price decreases between the date of the Merger Agreement and the transaction closing date, TiVo stockholders will receive more shares until our stock price reaches $18.71. Between a share price of $18.71 (an exchange ratio of 0.4250 per share) and $16.00 (an exchange ratio of 0.4969 per share), we have the option to pay incremental cash instead of issuing more shares. Depending on what we elect to do if our stock price is between $16.00 and $18.71, the cash consideration could range

34

from approximately $265 million to $376 million. If our stock price is below $16.00, we have the option to select an exchange ratio between 0.4250 and 0.4969 and the cash consideration would be calculated based on the exchange ratio selected, but in no event will the cash consideration be more than $3.90 per share.

The closing of the transaction will also trigger a fundamental change under the indenture governing TiVo’s $230 million 2% convertible senior notes due 2021, which will require TiVo to offer to repurchase the notes at par plus accrued and unpaid interest. We anticipate most, if not all, of the TiVo noteholders will require TiVo to repurchase their notes. The transaction’s cash consideration and the repurchase of the TiVo 2% convertible senior notes will be funded from the cash and marketable securities on hand at the combined company.

Capital Resources

The outstanding principal and carrying amount of debt we issued were as follows (in thousands):
 
June 30, 2016
 
December 31, 2015
 
Outstanding Principal
 
Carrying Amount
 
Outstanding Principal
 
Carrying Amount
2020 Convertible Notes
$
345,000

 
$
290,856

 
$
345,000

 
$
284,241

Term Loan Facility B
686,000

 
679,973

 
689,500

 
682,915

Total
$
1,031,000

 
$
970,829

 
$
1,034,500

 
$
967,156


During the next twelve months, $7.0 million of outstanding principal is scheduled to mature. For more information on our borrowings, see Note 7 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

2020 Convertible Notes

We issued $345.0 million in aggregate principal of 0.500% Convertible Notes that matures on March 1, 2020 at par pursuant to an Indenture dated March 4, 2015 (the "2015 Indenture"). The 2020 Convertible Notes may be converted, under certain circumstances, based on an initial conversion rate of 34.5968 shares of common stock per $1,000 of principal of notes (which represents an initial conversion price of approximately $28.9044 per share). Holders may convert the 2020 Convertible Notes prior to the close of business on the business day immediately preceding December 1, 2019, in multiples of $1,000 of principal under the following circumstances:
•
during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•
during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 of principal of 2020 Convertible Notes for each trading day was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or
•
on the occurrence of specified corporate events.
    
On or after December 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert the 2020 Convertible Notes, in multiples of $1,000 of principal, at any time.

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

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


35

The 2020 Convertible Notes are not redeemable prior to maturity by us and no sinking fund is provided. The 2020 Convertible Notes are unsecured and do not contain financial covenants or restrictions on the payment of dividends, the incurrence of indebtedness or the repurchase of other securities by us. The 2015 Indenture includes customary terms and covenants, including certain events of default after which the 2020 Convertible Notes may be due and payable immediately.
    
Senior Secured Credit Facility

On July 2, 2014, we, as parent guarantor, and two of our wholly-owned subsidiaries, Rovi Solutions Corporation and Rovi Guides, Inc., as borrowers, and certain of our other subsidiaries, as subsidiary guarantors, entered into a Credit Agreement (the “Credit Agreement”). The Credit Agreement provided for a (i) five-year $125.0 million term loan A facility (the “Term Loan Facility A”), (ii) seven-year $700.0 million term loan B facility (the “Term Loan Facility B” and together with Term Loan Facility A, the “Term Loan Facility”) and (iii) five-year $175.0 million revolving credit facility (including a letter of credit sub-facility) (the "Revolving Facility” and together with the Term Loan Facility, the “Senior Secured Credit Facility”).

As a result of voluntary principal prepayments in June 2015 and September 2015, Term Loan Facility A was extinguished. In September 2015, the Revolving Facility was terminated at our election.

Term Loan Facility B amortizes in equal quarterly installments in an aggregate annual amount equal to 1% of the original principal amount thereof, with any remaining balance payable on the final maturity date of Term Loan Facility B. Loans under Term Loan Facility B bear interest, at our option, at a rate equal to either LIBOR, plus an applicable margin equal to 3.00% per annum (subject to a 0.75% LIBOR floor) or the prime lending rate, plus an applicable margin equal to 2.00% per annum.

The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to us and our subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, dividends and other distributions. The Credit Agreement is secured by substantially all of the Company's assets. We may be required to make an additional payment on Term Loan Facility B each February. This payment is calculated as a percentage of the prior year's Excess Cash Flow as defined in the Credit Agreement. No payment was required in February 2016.

Critical Accounting Policies and Estimates

The preparation of our Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Our estimates, assumptions and judgments are based on historical experience and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources. Making estimates, assumptions and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Management believes the estimates, assumptions and judgments employed and resulting balances reported in the Condensed Consolidated Financial Statements are reasonable; however, actual results could differ materially.

There have been no significant changes to the critical accounting policies and estimates as compared to those disclosed in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015, which is incorporated herein by reference.

Contractual Obligations

For information about our contractual obligations, see "Contractual Obligations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015, which is incorporated herein by reference. Our contractual obligations have not changed materially since December 31, 2015.

Off-Balance Sheet Arrangements
    
For information about our off-balance sheet arrangements, see "Off-Balance Sheet Arrangements" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015, which is incorporated herein by reference. Since December 31, 2015, we have not engaged in any material off-balance sheet arrangements, including the use of structured finance vehicles, special purpose entities or variable interest entities.

36


Recent Accounting Pronouncements

For a summary of applicable recent accounting pronouncements, see Note 1 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, we are exposed to market risks, including those related to changes in interest rates, foreign currency exchange rates and security prices that could impact our financial position, results of operations or cash flows. For quantitative and qualitative disclosures about market risk, see Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2015, which is incorporated herein by reference. Our exposure to market risk has not changed materially since December 31, 2015.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). In evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
 
Changes in Internal Control Over Financial Reporting

We believe there have been no changes to our internal controls over financial reporting during the quarter ended June 30, 2016, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.


37

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
    
The information contained in Note 8 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated by reference herein.

ITEM 1A. RISK FACTORS

On April 28, 2016, the Company entered into a definitive agreement to acquire TiVo Inc. (“TiVo”), a global leader in next-generation video technology and innovative cloud-based software-as-a-service solutions, for $10.70 per share, which is comprised of $2.75 per share in cash and $7.95 per share of the common stock of a newly formed holding company (“HoldCo”) that will own Rovi and TiVo following two mergers. In light of that announcement, the Company has modified the Risk Factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015, which is incorporated herein by reference, to add the following risk factors:

Rovi cannot be sure of the market value of the shares of HoldCo common stock to be issued upon completion of the mergers.

The market values of Rovi common stock at the time of the mergers may vary significantly from its prices on the date the merger agreement was executed, and the date on which Rovi stockholders vote on the mergers. The market value of the HoldCo common stock issued in the mergers and the Rovi common stock surrendered in the mergers may be higher or lower than the values of these shares on earlier dates. 100% of the Rovi merger consideration to be received by Rovi stockholders will be HoldCo common stock. The purchase price for the TiVo common stock is designed to be valued at $10.70 per share at average Rovi stock prices from $16.00 to $25.00, comprised partially of cash and partially of shares of HoldCo common stock in an amount based on an exchange ratio, subject to a two-way collar adjustment, and with the HoldCo common stock component of the purchase price valued based on the average Rovi stock price. Under the merger agreement, the exchange ratio is subject to a two-way collar adjustment depending on the average Rovi stock price, and if the average Rovi stock price is less than $18.71, Rovi's exchange ratio election, and that adjustment could result in more or less shares of HoldCo common stock being issued to TiVo stockholders, and more or less cash being payable to TiVo stockholders.

Changes in the market prices of Rovi common stock may result from a variety of factors that are beyond the control of Rovi, including changes in its businesses, operations and prospects, regulatory considerations, governmental actions, and legal proceedings and developments. Market assessments of the benefits of the mergers, the likelihood that the mergers will be completed, and general and industry-specific market and economic conditions may also have an effect on the market price of Rovi common stock. Changes in market prices of Rovi common stock may also be caused by fluctuations and developments affecting domestic and global securities markets. Neither Rovi nor TiVo is permitted to terminate the merger agreement solely because of changes in the market price of either party’s respective common stock.  

In addition, it is possible that the mergers may not be completed until a significant period of time has passed after the special meetings. As a result, the market values of Rovi common stock may vary significantly from the date of the special meetings to the date of the completion of the mergers. There is no assurance that the mergers will be completed, that there will not be a delay in the completion of the mergers or that all or any of the anticipated benefits of the mergers will be obtained.
    
Obtaining required regulatory approvals may prevent or delay completion of the mergers or reduce the anticipated benefits of the mergers or may require changes to the structure or terms of the mergers.

Consummation of the mergers is conditioned upon, among other things, the expiration or termination of the waiting period (and any extensions thereof) applicable to the mergers under the Hart-Scott-Rodino ("HSR") Act. The HSR waiting period was terminated on July 8, 2016, but at any time before or after the mergers are consummated, the Department of Justice, the Federal Trade Commission, or U.S. state attorneys general or foreign governmental authorities could take action under the antitrust laws against the mergers, including seeking to enjoin completion of the mergers, condition completion of the mergers upon the divestiture of assets of Rovi, TiVo or their subsidiaries or impose restrictions on HoldCo’s post-merger operations. These could negatively affect the results of operations and financial condition of the combined company following completion of the mergers. Any such requirements or restrictions may prevent or delay completion of the mergers or may reduce the anticipated benefits of the mergers, which could also have a material adverse effect on the combined company’s business and cash flows, financial condition and results of operations.


38

Failure to successfully combine the businesses of Rovi and TiVo, or to achieve integration in the expected time frame may adversely affect HoldCo’s future results.

The success of the mergers will depend, in part, on HoldCo’s ability to realize the anticipated benefits from combining the businesses of Rovi and TiVo. To realize these anticipated benefits, including the cost synergies being forecast,
the businesses of Rovi and TiVo must be successfully combined. Historically, Rovi and TiVo have been independent companies, and they will continue to be operated as such until the completion of the mergers. The management of HoldCo may face significant challenges in consolidating the functions of TiVo and Rovi, integrating the technologies, organizations, procedures, policies and operations, as well as addressing the different business cultures at the two companies, and retaining key personnel. For example, the management of HoldCo may delay taking certain actions to consolidate functions because doing so might trigger costs under TiVo’s employee change of control benefits, or management of HoldCo may take such actions and incur incremental costs. If the combined company is not successfully integrated or such integration is delayed, the anticipated benefits of the mergers may not be realized fully or at all or may take longer to realize than expected. The integration may also be complex and time consuming, and require substantial resources and effort. The integration process and other disruptions resulting from the mergers may also disrupt each company’s ongoing businesses and/or adversely affect our relationships with employees, customers, regulators and others with whom we have business or other dealings.

Rovi will be subject to business uncertainties and contractual restrictions while the mergers are pending.

Uncertainty about the effect of the mergers on employees and customers may have an adverse effect on Rovi and consequently on the combined company. These uncertainties may impair Rovi’s ability to retain and motivate key personnel and could cause customers and others that deal with Rovi to defer entering into contracts with Rovi or making other decisions concerning Rovi or seek to change existing business relationships with Rovi. In addition, if key employees depart because of uncertainty about their future roles and the potential complexities of the mergers, Rovi’s business could be harmed. In addition, the merger agreement restricts Rovi from making certain acquisitions and taking other specified actions until the mergers occur without the consent of the other party. These restrictions may prevent Rovi from pursuing attractive business opportunities that may arise prior to the completion of the mergers. 

The merger agreement limits Rovi’s ability to pursue alternatives to the mergers.

Rovi has agreed that it will not solicit, initiate, knowingly encourage or take any other action designed to facilitate inquiries or the making of any proposals which may reasonably be expected to lead to any takeover proposal, engage in discussions or negotiations regarding takeover proposals, provide any confidential information or data in relation to a takeover proposal, approve or recommend (or propose publicly to do the same) any takeover proposal or any letter of intent, merger agreement or similar agreement related to any takeover proposal, subject to limited exceptions, including that a party may take certain actions in the event it receives an unsolicited takeover proposal that constitutes a superior proposal or is reasonably expected to lead to a superior proposal, and the party’s board of directors determines in good faith, after consultation with its outside legal counsel, that a failure to take action with respect to such takeover proposal would be inconsistent with its fiduciary duties. Rovi has also agreed that its board of directors will not change its recommendation to its stockholders or approve any alternative agreement, subject to limited exceptions, including that, at any time prior to stockholder approval, the board of directors may make a change in recommendation (i) in response to an intervening event (as defined in the merger agreement) and the board concludes in good faith, after consultation with its outside legal counsel, that the failure to take such action would be inconsistent with the exercise of its fiduciary duties to Rovi’s stockholders under applicable laws; or (ii) in response to a superior proposal, if the board of directors concludes that a failure to change its recommendation would be inconsistent with the exercise of its fiduciary duties to Rovi’s stockholders under applicable laws and, if requested by TiVo, Rovi’s representatives shall have negotiated in good faith with TiVo for five business days (and in the case of any material amendment or modification to such superior proposal, for a period expiring upon the later to occur of three business days and the end of such five business day period) regarding any revisions to the terms of the transactions contemplated by the merger agreement proposed by TiVo in response to such superior proposal. The merger agreement also requires Rovi to call, give notice of and hold a meeting of its stockholders for the purposes of obtaining the applicable stockholder approval. This special meeting requirement does apply to Rovi in the event that the merger agreement is terminated in accordance with its terms. In addition, under specified circumstances, Rovi may be required to pay TiVo a termination fee of $36.6 million or $9.15 million (depending on the specific circumstances) if the merger is not consummated. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of Rovi from considering or proposing an acquisition or might result in a potential competing acquirer proposing to pay a lower price per share to acquire Rovi than it might otherwise have been willing to pay.


39

Failure to complete the mergers could negatively impact the stock price, business and financial results of Rovi.

If the mergers are not completed, the ongoing business of Rovi may be adversely affected and Rovi will be subject to several risks and consequences, including the following:
•
Rovi may be required, under certain circumstances, to pay TiVo a termination fee of $36.6 million or $9.15 million (depending on the specific circumstances);
•
Rovi will be required to pay certain costs relating to the mergers, whether or not the mergers are completed, such as significant fees and expenses relating to legal, accounting, financial advisor, regulatory and printing fees;
•
under the merger agreement, Rovi is subject to certain restrictions on the conduct of its business prior to completing the mergers which may adversely affect its ability to execute certain of its business strategies; and
•
matters relating to the mergers may require substantial commitments of time and resources by Rovi management, which could otherwise have been devoted to other opportunities that may have been beneficial to Rovi as an independent company.

In addition, if the mergers are not completed, Rovi may experience negative reactions from the financial markets and from its customers and employees. Rovi also could be subject to litigation related to a failure to complete the mergers or to enforce its obligations under the merger agreement. If the mergers are not consummated, Rovi cannot assure you that the risks described will not materially affect the business, financial results and stock price of Rovi.

Rovi and HoldCo will incur significant transaction and merger-related transition costs in connection with the mergers.

Rovi expects that it and HoldCo will incur significant, non-recurring costs in connection with consummating the mergers and integrating the operations of Rovi and TiVo. Rovi may incur additional costs to maintain employee morale and to retain key employees. Rovi will also incur significant fees and expenses relating to legal, accounting and other transaction fees and other costs associated with the mergers. Some of these costs are payable regardless of whether the mergers are completed. Moreover, under specified circumstances, Rovi may be required to pay a termination fee of $36.6 million or $9.15 million (depending on the specific circumstances) if the merger is not consummated.

Rovi and, subsequently, the combined company must continue to retain, motivate and recruit executives and other key employees, which may be difficult in light of uncertainty regarding the mergers, and failure to do so could negatively affect the combined company.

For the mergers to be successful, during the period before the mergers are completed, Rovi must continue to retain, motivate and recruit executives and other key employees. Moreover, the combined company must be successful at retaining and motivating key employees following the completion of the mergers. Experienced employees in the industries in which Rovi operates are in high demand and competition for their talents can be intense. Employees of both Rovi and TiVo, and potential recruits to the companies, may experience uncertainty about their future role with the combined company until, or even after, strategies with regard to the combined company are announced or executed. The potential distractions of the mergers may adversely affect the ability of Rovi or, following completion of the mergers the combined company, to retain, motivate and recruit executives and other key employees and keep them focused on applicable strategies and goals. A failure by Rovi or, following the completion of the mergers, the combined company, to attract, retain and motivate executives and other key employees during the period prior to or after the completion of the mergers could have a negative impact on the business of Rovi or the combined company.

A lawsuit has been filed against several members of the TiVo board challenging the mergers, and an adverse ruling in such lawsuit, or any similar lawsuit that may be filed, may prevent the mergers from becoming effective or from becoming effective within the expected timeframe.
On July 14, 2016, purported TiVo shareholders filed a putative lawsuit on behalf of a class of TiVo stockholders in the Delaware Chancery Court, captioned Northern California Pipe Trades Trust Fund, et al., v. Peter Aquino, et al., Case No. 12560. The lawsuit names members of the TiVo board as defendants and asserts claims against them for breach of fiduciary duty in connection with the mergers. The lawsuit seeks, among other things, to enjoin the defendants from completing the mergers on the agreed-upon terms.

One of the conditions to the closing of the mergers is that no order (other than any foreign antitrust or competition law related order) has been enforced, enacted or issued or is applicable to the mergers or other transactions contemplated by the merger agreement by any governmental entity which prohibits, restrains or makes illegal the consummation of the mergers or other transactions contemplated by the merger agreement. As such, if the plaintiffs are successful in obtaining an injunction

40

prohibiting the defendants from completing the mergers on the agreed upon terms, then such injunction may prevent the mergers from becoming effective, or from becoming effective within the expected timeframe.

Our ability to use our net operating loss carryforwards (NOLs) may be limited; we have adopted an NOL Rights Plan that may act as an anti-takeover device.
 
As of December 31, 2015, we had U.S. federal NOLs of $1.2 billion. The $1.2 billion in U.S. federal NOLs will begin to expire in various years between 2020 and 2033, if not limited by triggering events prior to such time. Under the provisions of the Internal Revenue Code, changes in our ownership, in certain circumstances, will limit the amount of U.S. federal NOLs that can be utilized annually in the future to offset taxable income. In particular, Section 382 of the Internal Revenue Code imposes limitations on a company’s ability to use NOLs upon certain changes in such ownership. Calculations pursuant to Section 382 of the Internal Revenue Code can be very complicated and no assurance can be given that upon further analysis, our ability to take advantage of our NOLs may be limited to a greater extent than we currently anticipate. If we are limited in our ability to use our NOLs in future years in which we have taxable income, we will pay more taxes than if we were able to utilize our NOLs fully. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership that we cannot predict or control that could result in further limitations being placed on our ability to utilize our federal NOLs.
 
In connection with the approval of the merger agreement with TiVo Inc. (the “Merger Agreement”), our Board of Directors approved a Section 382 rights agreement (the “NOL Rights Plan”). The NOL Rights Plan is designed to protect Rovi’s NOLs from the effect of Internal Revenue Code Section 382 discussed above. The completion of the TiVo deal would move Rovi significantly closer to the 50 percent ownership change outlined in Section 382, and increase the likelihood of a loss of Rovi’s valuable NOLs. The NOL Rights Plan will only be effective until the earlier of the consummation of the mergers contemplated by the Merger Agreement or the termination of the Merger Agreement. Although the NOL Rights Plan is intended to reduce the likelihood of an “ownership change” that could adversely affect utilization of our NOLs, there is no assurance that the NOL Rights Plan will prevent all transfers that could result in such an “ownership change.” Upon completion of the mergers, it is anticipated that the certificate of incorporation for the new holding company formed in connection with such transaction will include transfer restrictions also designed to reduce the likelihood of an “ownership change.” The certificate of incorporation for the new holding company will be one of the components of the transactions to be submitted to the Rovi stockholders for approval.
 
The NOL Rights Plan and the transfer restrictions described above could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, a large block of our common stock. A third party that acquires in excess of 4.91% or more of our common stock could suffer substantial dilution of its ownership interest under the terms of the NOL Rights Plan. This may adversely affect the marketability of our common stock by discouraging existing or potential investors from acquiring our stock or additional shares of our stock. It is also possible that the NOL Rights Plan could delay or frustrate the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us, or impede an attempt to acquire a significant or controlling interest in us, even if such events might be beneficial to us and our stockholders. 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The following table provides information about the Company's purchases of its common stock during the three months ended June 30, 2016 (in thousands, except per share amounts):
Period
Total Number of Shares Purchased (1)
 
Average Price Paid Per Share (1)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
April 2016
—

 
$
—

 
—
 
 
$
50,472.6
 
May 2016
—

 
$
—

 
—
 
 
$
50,472.6
 
June 2016
—

 
$
—

 
—
 
 
$
50,472.6
 
Total
—

 
$
—

 
—
 
 
 

(1)
Excludes shares withheld to satisfy minimum statutory tax withholding requirements in connection with the net share settlement of restricted stock units. During the three months ended June 30, 2016, the Company withheld 16.8 thousand shares of common stock to satisfy $0.3 million of required withholding taxes.

41

(2)
On April 29, 2015, our Board of Directors authorized the repurchase of up to $125.0 million of our common stock, excluding shares withheld to satisfy minimum statutory tax withholding requirements in connection with the net share settlement of restricted stock units. The April 2015 authorization included amounts which were outstanding under our previously authorized stock repurchase programs. 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.


42

ITEM 6. EXHIBITS
 
 
 
 
Incorporated by Reference
 
 
Exhibit Number
 

Exhibit Description
 

Form
 
Filing
Date
 
Exhibit
Number
 
Filed Herewith
2.01
 
Agreement and Plan of Merger dated as of April 28, 2016, by and among Rovi Corporation, TiVo Inc., Titan
Technologies Corporation, Nova Acquisition Sub, Inc. and Titan Acquisition Sub, Inc.
 
8-K
 
5/4/2016
 
2.1
 
 
3.01
 
Certificate of Designation of Series A Junior Participating Preferred Stock of Rovi Corporation filed with the Secretary of the State of Delaware on May 3, 2016
 
8-A
 
5/4/2016
 
3.1
 
 
3.02
 
First Amendment to the Amended and Restated Bylaws of Rovi Corporation
 
8-K
 
5/4/2016
 
3.2
 
 
4.01
 
Section 382 Rights Agreement, dated as of April 28, 2016, by and between Rovi Corporation and American Stock Transfer & Trust Company, LLC
 
8-A
 
5/4/2016
 
4.1
 
 
10.01*
 
Rovi Corporation 2008 Equity Incentive Plan, as amended April 27, 2016
 
S-8
 
5/5/2016
 
99.1
 
 
10.02*
 
Rovi Corporation 2008 Employee Stock Purchase Plan, as amended April 27, 2016
 
S-8
 
5/5/2016
 
99.7
 
 
31.01
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
X
31.02
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
X
32.01
 
Certification of Chief Executive Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
**
32.02
 
Certification of Chief Financial Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
**
101.INS
 
XBRL Instance Document
 
 
 
 
 
 
 
X
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
X
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
 
X
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
X
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
 
X
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
 
X

*
Management contract or compensatory plan or arrangement.

**
Furnished herewith.


43

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ROVI CORPORATION
 
 
Authorized Officer:
 
 
Date:
By:
/s/ Thomas Carson
August 2, 2016
 
Thomas Carson
 
 
President and Chief Executive Officer
 
 
 
Principal Financial Officer:
 
 
Date:
By:
/s/ Peter C. Halt
August 2, 2016
 
Peter C. Halt
 
 
Chief Financial Officer
 
 
 
Principal Accounting Officer:
 
 
Date:
By:
/s/ Wesley Gutierrez
August 2, 2016
 
Wesley Gutierrez
 
 
Chief Accounting Officer and Treasurer

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