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ROVI CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following commentary should be read in conjunction with the Consolidated Financial Statements and related notes contained elsewhere in this Form 10-K.

February 12, 2014

Overview

We are focused on powering the discovery and personalization of digital entertainment. We provide a broad set of integrated solutions that are embedded in our customers' products and services, connecting consumers with entertainment. Content discovery solutions include interactive program guides ("IPGs"), search and recommendations, cloud data services and our extensive database of Metadata. We also offer advertising and analytics services. Our advertising services are primarily sold in guides we provide or where a service provider allows us to sell advertising. Our analytics services utilize our proprietary data and data we acquire to offer service providers and advertisers the opportunity to optimize their television advertising and promotional efforts. In addition to offering IPGs developed by us, our customers may also license our patents and deploy their own IPG or a third party IPG. We have patented many aspects of content discovery, DVR and VOD functionality, multi-screen functionality, as well as interactive applications and advertising. We have historically licensed this portfolio for use with linear television broadcast. However, there is an emerging industry transition to Internet platform technologies which is enabling new video services for television in homes as well as on multiple screens such as tablets and smartphones. We believe this transition presents new opportunities to license our intellectual property portfolio for different use cases and to different customers, as well as to develop, market and sell products and services which enable such functionality. Building upon this, we are establishing broad industry relationships with the companies leading the next generation of digital entertainment. Our strategy includes developing products and services that complement our intellectual property and address the opportunity presented by this industry transformation. Our solutions are deployed globally in the cable, satellite, consumer electronics, entertainment, media and online distribution markets. We group our revenue into the following categories - (i) service providers, (ii) consumer electronics ("CE"), and (iii) Other. We include in service provider revenues any revenue related to an IPG deployed by a service provider in a subscriber household whether the ultimate payment for that IPG comes from the service provider or from a manufacturer of a set-top box. Revenue related to an IPG deployed in a set-top box sold at retail is included in CE manufacturers. We also include in service provider revenues advertising revenue generated from our service provider IPGs, analytics revenue and revenue from licensing our Metadata. CE includes license revenue received from consumer electronics companies for our IPG products, IPG patents, Metadata and advertising revenue from our CE IPGs or the Rovi Ad Service. Other revenue consists primarily of revenue generated from our legacy ACP, VCR Plus+, connected platform and media recognition products. Costs and Expenses Cost of revenues consists primarily of service costs, royalty expense, patent prosecution, patent maintenance and patent litigation costs and an allocation of overhead and facilities. Research and development expenses are comprised primarily of employee compensation and benefits, consulting costs and an allocation of overhead and facilities costs. Selling and marketing expenses are comprised primarily of employee compensation and benefits, travel, advertising and an allocation of overhead and facilities costs. General and administrative expenses are comprised primarily of employee compensation and benefits, travel, accounting, tax and corporate legal fees and an allocation of overhead and facilities costs. 37



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Comparison of Years Ended December 31, 2013 and 2012 The following tables present our 2012 results from operations compared to the prior year (in thousands): Year Ended December 31, 2013 2012 Change $ Change % Revenues: Service provider $ 380,059$ 344,736 35,323 10 % CE 128,155 132,693 (4,538 ) (3 )% Other 29,853 48,665 (18,812 ) (39 )% Total revenues 538,067 526,094 11,973 2 % Costs and expenses: Cost of revenues 92,729 101,597 (8,868 ) (9 )% Research and development 112,760 118,030



(5,270 ) (4 )% Selling, general and administrative 151,325 143,457 7,868

5 % Depreciation 16,871 19,988 (3,117 ) (16 )% Amortization of intangible assets 74,413 74,337 76 - % Restructuring and asset impairment charges 7,638 4,737 2,901 61 % Total operating expenses 455,736 462,146 (6,410 ) (1 )% Operating income from continuing operations 82,331 63,948 18,383 29 % Interest expense (62,019 ) (61,742 ) (277 ) - % Interest income and other, net 2,799 3,203 (404 ) (13 )% Debt modification expense (1,351 ) (4,496 ) 3,145 (70 )% Gain (loss) on interest rate swaps and caps, net 2,898 (10,624 ) 13,522 (127 )% Loss on debt redemption (2,761 ) (1,758 ) (1,003 ) 57 % Income (loss) from continuing operations before taxes 21,897 (11,469 ) 33,366 (291 )% Income tax expense 1,540 9,158 (7,618 ) (83 )% Income (loss) from continuing operations, net of tax 20,357 (20,627 ) 40,984 (199 )% Loss from discontinued operations, net of tax (192,447 ) (13,717 ) (178,730 ) 1,303 % Net loss $ (172,090 )$ (34,344 ) (137,746 ) 401 % Net Revenue Service Providers Revenue For the year ended December 31, 2013, revenue from service providers increased by 10% compared to the prior year. This increase was primarily due to an increase in IPG patent and product revenues which benefited from new IPG patent license agreements that included catch-up payments to make us whole for the pre-license period of use and growth in IPG patent and IPG product subscribers. We expect our service provider revenue to continue to grow in the future due to growth in product revenues driven by recent product deals and growth in xD and analytics revenue. We expect this increase to be partially offset by a decline in revenue from patent license agreements that included catch-up payments to make us whole for the pre-license period of use. CE Revenue For the year ended December 31, 2013, revenue from CE manufacturers decreased by 3% compared to the prior year. This decrease was primarily due to a decline in CE device shipments that included our IPG technology, primarily due to a weaker European market. We expect our CE revenue to increase slightly in 2014 as increases in CE data revenue are offset by a decline in revenue from patent license agreements that included catch-up payments to make us whole for the pre-license period of use. 38



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Other Revenue For the year ended December 31, 2013, Other revenue decreased compared to the prior year primarily due to the continued decline in content protection revenue and a decline in connected platform revenue. We expect this decline to continue in the future as our customers continue to decrease their use of analog copy protection. Cost of Revenues For the year ended December 31, 2013, cost of revenues decreased from the prior year primarily due to a decrease in patent litigation costs and a decrease in employee related costs due to the restructuring actions we undertook to more efficiently manage our operating expenses (See Note 11 to the Consolidated Financial Statements). We expect patent related costs in 2014 to be consistent with 2013 levels. Research and Development For the year ended December 31, 2013, research and development expenses decreased from the prior year primarily due to a decrease in employee related costs due to the restructuring actions we undertook to more efficiently manage our operating expenses (See Note 11 to the Consolidated Financial Statements). Selling, General and Administrative For the year ended December 31, 2013, selling, general and administrative expenses increased from the prior year primarily due to an increase in consulting costs and corporate legal expenses. Depreciation For the year ended December 31, 2013, depreciation decreased from the prior year primarily due a decline in average property and equipment balances. Restructuring and Asset Impairment Charges During 2013, we continued the review of our operations that began in the third quarter of 2012 (see Note 11 to the Consolidated Financial Statements). As a result of this analysis, we have taken additional cost reduction actions, which have resulted in a restructuring charge of $7.6 million related to our continuing operations. During the third quarter of 2012, we reviewed our costs in order to reduce and more efficiently manage our operating expenses. As a result of this analysis, we took cost reduction actions, which resulted in a restructuring charge of $3.5 million related to our continuing operations. In addition, in connection with a review of our operations in the first quarter of 2012, we reorganized certain parts of our sales and product development groups. These actions resulted in severance charges of $0.8 million in the first quarter of 2012 (see Note 11 to the Consolidated Financial Statements). In conjunction with the Sonic acquisition, management acted upon a plan to restructure certain Sonic operations to create cost efficiencies for the combined company. During the first quarter of 2012, we recorded $0.4 million in restructuring charges to our continuing operations related to the Sonic acquisition. Interest Expense For the year ended December 31, 2013, interest expense increased slightly compared to the same period in the prior year primarily due to an increase in debt discount amortization related to our convertible notes. As our convertible notes may be settled in cash upon conversion, we have separately accounted for the liability and equity components of the convertible notes to reflect our non-convertible debt borrowing rate of 7.75%, at the time the instrument was issued, when interest cost is recognized. The debt discount is being amortized through February 2015, which represents the first date the convertible notes can be called by us or put to us by the note holders (see Note 7 to the Consolidated Financial Statements). Interest Income and Other, Net Interest income and other, net decreased compared to the same period in the prior year primarily due to the current year including a loss on foreign currency translation while the prior year had a gain. Gain (Loss) on Interest Rate Swaps and Caps, Net We have not designated any of our interest rate swaps or caps as hedges and therefore record the changes in fair value of these instruments in our Consolidated Statements of Operations (see Note 9 to the Consolidated Financial Statements). We 39



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generally utilize interest rate swaps to convert the interest rate on a portion of our floating rate term loans to a fixed rate. As under the terms of these interest rate swaps we receive a floating rate and pay a fixed rate, when there is an increase in expected future LIBOR rates we will have a gain when marking our interest rate swaps to market. When there is a decrease in expected future LIBOR rates we will have a loss when marking our interest rate swaps to market. Loss on Debt Redemption and Debt Modification Expense On April 9, 2013, we entered into a Refinancing Amendment and Joinder Agreement (the "Refinancing Amendment") to the Amended and Restated Credit Agreement. The Refinancing Amendment provides for a new tranche of term loans ("Term Loan B-3") in the aggregate principal amount of $540.0 million. We used the proceeds from Term Loan B-3 to refinance in full all outstanding Term Loan B-2 amounts. We accounted for the issuance of Term Loan B-3 and subsequent repayment of Term Loan B-2 as a partial debt modification, as a significant number of Term Loan B-2 investors reinvested in Term Loan B-3, and the change in the present value of future cash flows between Term Loan B-2 and Term Loan B-3 was less than 10%. Under debt modification accounting, $3.6 million in unamortized debt issuance costs related to Term Loan B-2 investors who reinvested in Term Loan B-3, are being amortized to Term Loan B-3 interest expense using the effective interest method. In addition, $0.1 million in Term Loan B-3 debt issuance costs, related to new investors in Term Loan B-3, are being amortized to Term Loan B-3 interest expense using the effective interest method. Debt issuance costs of $1.0 million relating to the issuance of Term Loan B-3 to Term Loan B-2 investors, have been recorded as debt modification expenses. In addition, we realized a $2.8 million loss on debt redemption related to writing off the unamortized Term Loan B-2 debt issuance costs related to investors who did not reinvest in Term Loan B-3 and the unamortized debt discount on Term Loan B-2. On March 29, 2012, we borrowed $800 million consisting of (i) a 5-year $215 million term loan ("Term Loan A-2"), and (ii) a 7-year $585 million term loan ("Term Loan B-2") (see Note 7 to the Consolidated Financial Statements). The proceeds of the two new tranches of term loans were partially used to pay off the remaining $297.8 million balance of Term Loan B-1. We accounted for the issuance of Term Loan B-2 and subsequent repayment of Term Loan B-1 as a partial debt modification, as a significant number of Term Loan B-1 investors reinvested in Term Loan B-2, and the change in the present value of future cash flows was less than 10%. Under debt modification accounting, $3.5 million in unamortized debt issuance costs related to Term Loan B-1 investors who reinvested in Term Loan B-2, are being amortized to Term Loan B-2 interest expense using the effective interest method. In addition, $1.0 million in Term Loan B-2 debt issuance costs, related to new investors in Term Loan B-2, are being amortized to Term Loan B-2 interest expense using the effective interest method. Debt issuance costs of $4.5 million relating to the issuance of Term Loan B-2 to Term Loan B-1 investors have been recorded as debt modification expenses for the year ended December 31, 2012. In addition, we realized a loss on debt redemption of $1.8 million related to writing off the unamortized Term Loan B-1 debt issuance costs related to investors who did not reinvest in Term Loan B-2 and the unamortized debt discount on Term Loan B-1. Income Taxes We recorded income tax expense from continuing operations for the year ended December 31, 2013, of $1.5 million, which primarily consists of foreign withholding taxes, foreign income taxes, state income taxes, and the net change in our deferred tax asset valuation allowance, partially offset by a $13.0 million benefit from releasing certain tax contingency reserves. Due to the fact that we have a significant net operating loss carryforward and we have recorded a valuation allowance against our deferred tax assets, foreign withholding taxes are the primary driver of our income tax expense. We recorded an income tax expense from continuing operations for the year ended December 31, 2012, of $9.2 million, which primarily consists of foreign withholding taxes, foreign income taxes, state income taxes, and the net change in our deferred tax asset valuation allowance. During the three months ended March 31, 2010, we entered into a closing agreement with the Internal Revenue Service through its Pre-Filing Agreement (PFA) program confirming that we recognized an ordinary tax loss of approximately $2.4 billion from the 2008 sale of our TV Guide Magazine business. In connection with the PFA closing agreement we established a valuation allowance against our deferred tax assets as a result of determining that it is more likely than not that our deferred tax assets would not be realized. At December 31, 2013, we have reviewed the determination made at March 31, 2010, that it is more likely than not that our deferred tax assets will not be realized. While we believe that our fundamental business model is robust, there has not been a change from the March 31, 2010, determination that it is more likely than not that our deferred tax assets will not be realized and as such we have maintained a valuation allowance against our deferred tax assets at December 31, 2013. Discontinued Operations 40



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Discontinued operations for the years ended December 31, 2013, includes the DivX and MainConcept business, the Rovi Entertainment Store business, the Consumer Web business, expenses related to settling a patent claim against the Roxio Consumer Software business for the period prior to the business being sold and expenses we recorded for indemnification claims related to another former Software business which was disposed of in 2008 (see Note 5 to Consolidated Financial Statements). The loss in discontinued operations for the year ended December 31, 2013, is primarily due to recording a $64.9 million impairment charge to write-down the net assets of the DivX and MainConcept business to fair value less cost to sell, a $73.1 million impairment charge to the assets of the Rovi Entertainment Store business and recording a $6.8 million impairment charge to the goodwill and intangible assets of the Consumer Web business as well the loss on disposal of the Rovi Entertainment Store (see Note 5 to the Consolidated Financial Statements). Discontinued operations in 2012 includes the DivX and MainConcept business, the Rovi Entertainment Store business, the Consumer Web business, the Roxio Consumer Software business and expenses we recorded for indemnification claims related to the Company's previous software business which was disposed of in 2008 (see Note 5 to the Consolidated Financial Statements).



Comparison of Years Ended December 31, 2012 and 2011 from operations

The following tables present our 2012 results from operations compared to the prior year (in thousands): Year Ended December 31, 2012 2011 Change $ Change % Revenues: Service providers $ 344,736$ 328,746 15,990 5 % CE 132,693 169,243 (36,550 ) (22 )% Other 48,665 86,135 (37,470 ) (44 )% Total revenues 526,094 584,124 (58,030 ) (10 )% Costs and expenses: Cost of revenues 101,597 87,988 13,609 15 % Research and development 118,030 122,021 (3,991 ) (3 )% Selling, general and administrative 143,457 160,726 (17,269 ) (11 )% Depreciation 19,988 18,759 1,229 7 % Amortization of intangible assets 74,337 77,145 (2,808 ) (4 )% Restructuring and asset impairment charges 4,737 20,462 (15,725 ) (77 )% Total operating expenses 462,146 487,101 (24,955 ) (5 )% Operating income from continuing operations 63,948 97,023 (33,075 ) (34 )% Interest expense (61,742 ) (53,776 ) (7,966 ) 15 % Interest income and other, net 3,203 4,859 (1,656 ) (34 )% Debt modification expense (4,496 ) - (4,496 ) NM Loss on interest rate swaps and caps, net (10,624 ) (4,314 ) (6,310 ) 146 % Loss on debt redemption (1,758 ) (11,514 ) 9,756 (85 )% (Loss) income from continuing operations before taxes (11,469 ) 32,278 (43,747 ) (136 )% Income tax expense 9,158 24,258 (15,100 ) (62 )% (Loss) income from continuing operations, net of tax (20,627 ) 8,020 (28,647 ) (357 )% Loss from discontinued operations, net of tax (13,717 ) (49,306 ) 35,589 (72 )% Net loss $ (34,344 )$ (41,286 ) 6,942 (17 )% Net Revenue Service Providers Revenue For the year ended December 31, 2012, revenue from service providers increased by 5% compared to the prior year. This increase was primarily due to an increase in IPG product and patent revenues which benefited from continued domestic and international digital subscriber growth and rate increases on renewed IPG product agreements. Also contributing to the growth was an increase in advertising revenue. 41



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CE Revenue For the year ended December 31, 2012, CE revenue decreased by 22% compared to the prior year. This decrease was primarily due to fewer significant IPG patent licensing agreements, which included catch-up payments to make us whole for the pre-license period of use, entered into in 2012 as compared to the prior year. Other Revenue For the year ended December 31, 2012, Other revenue decreased compared to the prior year primarily due to the continued decline in content protection revenue. Cost of Revenues For the year ended December 31, 2012, cost of revenues increased from the prior year primarily due to increased patent litigation costs. Research and Development For the year ended December 31, 2012, research and development expenses decreased from the prior year primarily due to the 2012 restructuring actions we undertook to more efficiently manage our operating expenses (See Note 11 to the Consolidated Financial Statements). Selling, General and Administrative For the year ended December 31, 2012, selling, general and administrative expenses decreased from the prior year primarily due the prior year including transaction and integration costs related to the Sonic acquisition. Also contributing to the reduction in 2012 were savings from the 2012 restructuring actions we undertook to more efficiently manage our operating expenses (See Note 11 to the Consolidated Financial Statements). Depreciation For the year ended December 31, 2012, depreciation increased from the prior year primarily due to an increase in fixed asset purchases in the second half of 2011, which lead to an increase in depreciation in 2012. Amortization of Intangible Assets For the year ended December 31, 2012, amortization of intangible assets decreased from the prior year primarily due to certain intangible assets acquired in the Gemstar TV-Guide International acquisition now being fully amortized. Restructuring and Asset Impairment Charges During the third quarter of 2012, we reviewed our costs in order to reduce and more efficiently manage our operating expenses. As a result of this analysis, we took cost reduction actions, which resulted in a restructuring charge of $3.5 million related to our continuing operations. In addition, in connection with a review of our operations in the first quarter of 2012, we reorganized certain parts of our sales and product development groups. These actions resulted in severance charges of $0.8 million in the first quarter of 2012 (see Note 11 to the Consolidated Financial Statements). In conjunction with the Sonic acquisition, we implemented restructuring activities to create cost efficiencies for the combined company. During the first quarter of 2012, we recorded $0.4 million in restructuring charges to our continuing operations related to the Sonic acquisition. During 2011, we recorded $7.0 million in restructuring charges to our continuing operations related to the Sonic acquisition (see Note 11 to the Consolidated Financial Statements). On July 1, 2011, we sold our BD+ technology assets. In connection with the sale, the Company recorded a $13.5 million impairment charge related to the BD+ intangible assets. Interest Expense For the year ended December 31, 2012, interest expense increased compared to the same period in the prior year due to an increase in average debt outstanding. Interest Income and Other, Net The decrease in interest income and other, net, for the year ended December 31, 2012, as compared to the prior year, is primarily due to us recording a $1.2 million impairment charge to a strategic investment in 2012. 42



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Loss on Interest Rate Swaps and Caps, Net We have not designated any of our interest rate swaps, caps or foreign currency collars as hedges and therefore record the changes in fair value of these instruments in our Consolidated Statements of Operations (see Note 9 to the Consolidated Financial Statements). Loss on interest rate swaps and caps, for the year ended December 31, 2012, is primarily due to a decrease in the fair value of our swaps under which we have agreed to pay a fixed rate and receive a floating rate, as there has been a decline in forward LIBOR rates. The loss on interest rate swaps and caps, net for the year ended December 31, 2011, was primarily due to a decrease in the fair value of the swaps we entered into in November 2011 with a notional amount of $300 million. The fair value of these swaps declined due to a decrease in the forward LIBOR rate. As we pay fixed and receive floating under these swaps, the fair value of the swaps declined. Loss on Debt Redemption and Debt Modification Expense On March 29, 2012, we borrowed $800 million consisting of (i) a 5-year $215 million term loan ("Term Loan A-2"), and (ii) a 7-year $585 million term loan ("Term Loan B-2") (see Note 7 to the Consolidated Financial Statements). The proceeds of the two new tranches of term loans were partially used to pay off the remaining $297.8 million balance of Term Loan B-1. We accounted for the issuance of Term Loan B-2 and subsequent repayment of Term Loan B-1 as a partial debt modification, as a significant number of Term Loan B-1 investors reinvested in Term Loan B-2, and the change in the present value of future cash flows was less than 10%. Under debt modification accounting, $3.5 million in unamortized debt issuance costs related to Term Loan B-1 investors who reinvested in Term Loan B-2, are being amortized to Term Loan B-2 interest expense using the effective interest method. In addition, $1.0 million in Term Loan B-2 debt issuance costs, related to new investors in Term Loan B-2, are being amortized to Term Loan B-2 interest expense using the effective interest method. Debt issuance costs of $4.5 million relating to the issuance of Term Loan B-2 to Term Loan B-1 investors have been recorded as debt modification expenses for the year ended December 31, 2012. In addition we realized a loss on debt redemption of $1.8 million related to writing off the unamortized Term Loan B-1 unamortized discount related to investors who did not reinvest in Term Loan B-2 and the unamortized debt discount on Term Loan B-1. During the year ended December 31, 2011, we repurchased a total of $106.3 million in par value of the 2.625% convertible senior notes (the "2011 Convertible Notes") due in 2011 for $221.1 million. During the year ended December 31, 2011, we repurchased a total of $169.0 million in par value of the 2.625% convertible senior notes (the "2040 Convertible Notes") due in 2040 for $203.2 million. In connection with the repurchases, we recorded $11.5 million in losses on debt redemption during the year ended December 31, 2011 (see Note 7 to the Consolidated Financial Statements). Income Taxes We recorded income tax expense from continuing operations for the year ended December 31, 2012, of $9.2 million, which primarily consists of foreign withholding taxes, foreign income taxes, state income taxes, and the net change in our deferred tax asset valuation allowance. Due to the fact that we have a significant net operating loss carryforward and we have recorded a valuation allowance against our deferred tax assets, foreign withholding taxes are the primary driver of our income tax expense. We recorded an income tax expense from continuing operations for the year ended December 31, 2011, of $24.3 million, primarily due to foreign withholding taxes and the net change in our deferred tax asset valuation. Discontinued Operations Discontinued operations for the years ended December 31, 2012 and 2011 includes the Rovi Entertainment Store business, DivX and MainConcept business, Consumer Web business, Roxio Consumer Software business and expenses we recorded for indemnification claims related to another former Software business which was disposed of in 2008 (see Note 5 to Consolidated Financial Statements). The loss in discontinued operations for the year ended December 31, 2011, was primarily due to recording a $40.6 million impairment charge to reduce the carrying value of the intangible assets of the Roxio Consumer Software business to fair value less costs to sell and losses from the Rovi Entertainment Store's operations. Critical Accounting Policies and Use of Estimates The discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements. These Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related 43



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disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, equity-based compensation, goodwill and intangible assets, impairment of long lived assets and income taxes. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. We have identified the accounting policies below as critical to our continuing business operations and the understanding of our results of operations. Revenue Recognition We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collectability is reasonably assured. However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report. For example, for multiple element arrangements, we must: (1) determine whether and when each element has been delivered and whether the delivered element has stand-alone value to the customer and (2) allocate the total consideration among the various elements based on their relative selling price using vendor specific objective evidence (VSOE) of selling price, if it exists; otherwise selling price is determined based on third-party evidence (TPE) of selling price. If neither VSOE nor TPE exist, management must use its best estimate of selling price (BESP) to allocate the arrangement consideration. We account for cash consideration (such as sales incentives) given to our customers or resellers as a reduction of revenue, rather than as an operating expense unless we receive a benefit that is separate from the customer's purchase and for which we can reasonably estimate the fair value of the benefit. Amounts for fees collected or invoiced and due relating to arrangements where revenue cannot be recognized are reflected on our balance sheet as deferred revenue and recognized when the applicable revenue recognition criteria are satisfied. CE and Service Provider Licensing We license our proprietary IPG technology and ACP technology to CE manufacturers, integrated circuit makers, service providers and others. We generally recognize revenue from licensing technology on a per-unit shipped model with CE manufacturers or a per-subscriber model with service providers. The recognition of revenues from per-unit license fees is based on units reported shipped by the manufacturer. CE manufacturers normally report their unit shipments to us in the quarter immediately following that of actual shipment by the manufacturer. We have established significant experience and relationships with certain ACP technology licensing customers to reasonably estimate current period volume for purposes of making an accurate revenue accrual. Accordingly, revenue from these customers is recognized in the period the customer shipped the units. Revenues from per-subscriber fees are recognized in the period the services are provided by a licensee, as reported to the Company by the licensee. Revenues from annual or other license fees are recognized based on the specific terms of the license arrangement. For instance, some of our large CE IPG licensees have entered into agreements for which they have the right to ship an unlimited number of units over a specified term for a flat fee. We record the fees associated with these arrangements on a straight-line basis over the specified term. At times we enter into IPG patent license agreements in which we provide a licensee a release for past infringement as well as the right to ship an unlimited number of units over a future period for a flat fee. In this type of arrangement, we generally would use BESP to allocate the consideration between the release for past infringement and the go-forward patent license. As the revenue recognition criteria for the past infringement would generally be satisfied upon the execution of the agreement, the amount of consideration allocated to the past infringement would be recognized in the quarter the agreement is executed and the amount allocated to the go-forward license agreement would be recognized ratably over the term. In addition, we have entered into agreements in which the licensee pays us a one-time fee for a perpetual license to our ACP technology. Provided that collectability is reasonably assured, we record revenue related to these agreements when the agreement is executed as we have no continuing obligation and the amounts are fixed and determinable. We also generate advertising revenue through our IPGs. Advertising revenue is recognized when the related advertisement is provided. All advertising revenue is recorded net of agency commissions and revenue shares with service providers and CE manufacturers. Metadata Licensing We license Metadata to service providers, CE manufacturers and online portals among others. We generally receive a monthly or quarterly fee from our licensees for the right to use the Metadata, receive regular updates and integrate it into their 44



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own service. We recognize revenue on a straight-line basis over the period the licensee has the right to receive the Metadata service.

Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts to reserve for potentially uncollectible trade receivables. We specifically analyze accounts receivable and historical bad debt experience, customer creditworthiness, current economic trends, international situations (such as currency devaluation), and changes in our customer payment history when evaluating the adequacy of the allowance for doubtful accounts. We review our trade receivables by aging category to identify significant customers with known disputes or collection issues. For accounts not specifically identified, we provide reserves based on historical bad debt loss experience. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Equity-Based Compensation We determine the fair value of stock options and employee stock purchase plan shares using the Black-Scholes option pricing model which uses a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. We estimate the volatility of our common stock by using a combination of historical volatility and implied volatility in market traded options. The Black-Scholes option pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. Existing valuation models, including the Black-Scholes and lattice binomial models, may not provide reliable measures of the fair values of our equity-based compensation. Consequently, there is a risk that our estimates of the fair values of our equity-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those equity-based payments in the future. Certain equity-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, values may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and reported in our financial statements. Goodwill and Other Intangible Assets Goodwill represents the excess of cost over fair value of the net assets of an acquired business. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives. On October 1, 2011, we adopted Accounting Standards Update 2011-8, Intangibles - Goodwill and Other Topics (Topic 350)("ASU 2011-8"). ASU 2011-8 allows us to first assess qualitative factors to determine whether events or circumstances lead to the determination that the fair value of a reporting unit is less than its carrying value. If, after assessing the totality of events or circumstances, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The adoption of ASU 2011-8 did not have a material impact on our results of operations or financial position. Goodwill and intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the assets might be impaired. In connection with our goodwill impairment analysis performed annually in our fourth quarter, we first assess qualitative factors to determine whether events or circumstances indicate that the fair value of a reporting unit is less than its carrying value. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform the two-step impairment test. The first step of the two-step impairment analysis is to determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. We determine the fair value of each reporting unit using the discounted cash flow approach and a market based approach. To the extent the carrying amount of a reporting unit exceeds its fair value, we would be required to perform the second step of the impairment analysis, as this is an indication that the reporting unit goodwill may be impaired. In this step, we compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit. The residual fair value after this allocation is the implied fair value of the reporting unit's goodwill. To the extent the implied fair value of goodwill of each reporting unit is less than its carrying amount we would be required to recognize an impairment loss. The process of evaluating the potential 45



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impairment of goodwill is subjective and requires judgment at many points during the test including future revenue forecasts and discount rates.

Impairment of Long­Lived Assets Long­lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. Income Taxes We account for income taxes using the asset and liability method. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year and for deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. From time to time, we enter into transactions in which the tax consequences may be subject to uncertainty. In determining our tax provision for financial reporting purposes, we establish reserves for uncertain tax positions unless such positions are determined to be "more likely than not" of being sustained upon examination, based on their technical merits. We must make significant assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Our judgments, assumptions and estimates relative to the current provision take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amount provided for income taxes in our consolidated financial statements. Liquidity and Capital Resources We finance our operations primarily from cash generated by operations. Net cash provided by our continuing operating activities increased to $204.2 million for the year ended December 31, 2013, from $157.1 million in the prior year. This increase was primarily due to an increase in revenue and the prior year including a significant increase in working capital which decreased cash provided by the operating activities of our continuing operations. The availability of cash generated by our operations in the future could be affected by other business risks including, but not limited to, those factors referenced under the caption "Risk Factors" contained in this Form 10-K. Net cash provided by investing activities from continuing operations increased to $154.1 million for the year ended December 31, 2013, from net cash used in investing activities from continuing operations of $360.1 million in the prior year. The year ended December 31, 2013, included $190.7 million in net marketable securities sales partially offset by $19.1 million in capital expenditures and the $10.0 million payment for the IntegralReach acquisition. Included in 2012 investing activities was $342.2 million in net marketable securities purchases, $15.0 million in capital expenditures and $20.0 million to acquire Snapstick, partially offset by $17.5 million in proceeds from the sale of Roxio. We anticipate that capital expenditures to support the growth of our business and strengthen our operations infrastructure will be between $18.0 million and $26.0 million for the full year 2014. Net cash used in financing activities from continuing operations was $475.2 million for the year ended December 31, 2013, as compared to net cash provided by financing activities from continuing operations of $328.3 million in the prior year. During the year ended December 31, 2013, we made $849.1 million in debt principal payments and repurchased $182.1 million of our common stock. These uses of cash were partially offset by us issuing $540.0 million in debt ($537.5 million, net of issuance costs and discounts) and receiving $18.6 million from the exercise of employee stock options and sales of stock through our employee stock purchase plan. During the year ended December 31, 2012, we borrowed an additional $800.0 million ($788.5 million, net of issuance costs and discounts) under our Amended and Restated Credit Facility described below. In addition, we received $15.6 million from the exercise of employee stock options and sales of stock through our employee stock purchase plan. These receipts were partially offset by using $297.8 million to pay off the preexisting Term Loan B-1 under our Initial Credit Agreement described below, $26.8 million in mandatory payments on the senior secured term loans and repurchasing $152.1 million of our common stock. 46



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As discussed in Note 7 of the Consolidated Financial Statements, in March 2010, we issued $460.0 million in 2.625% convertible senior notes due in 2040 at par. The 2040 Convertible Notes may be converted, under certain circumstances, based on an initial conversion rate of 21.1149 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $47.36 per share). As of December 31, 2013, $291.0 million par value of the 2040 Convertible Notes remains outstanding. Prior to November 15, 2039, holders may convert their 2040 Convertible Notes into cash and our common stock, at the applicable conversion rate, under any of the following circumstances: (i) during any fiscal quarter after the calendar quarter ending June 30, 2010, if the last reported sale price of our common stock for at least 20 trading days during the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the applicable conversion price in effect on each applicable trading day; (ii) during the five business-day period after any ten consecutive trading-day period (the "measurement period") in which the trading price per note for each day of such measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such day; (iii) upon the occurrence of specified corporate transactions, as described in the indenture, or (iv) if we call any or all of the notes for redemption, at any time prior to the close of business on the third scheduled trading day prior to that redemption date. From November 15, 2039 until the close of business on the scheduled trading day immediately preceding the maturity date of February 15, 2040, holders may convert their 2040 Convertible Notes into cash and shares of our common stock, if any, at the applicable conversion rate, at any time, regardless of the foregoing circumstances. On or after February 20, 2015, we have the right to call for redemption all, or a portion, of the 2040 Convertible Notes at 100% of the principal amount of notes to be redeemed, plus accrued interest to, but excluding, the redemption date. Holders have the right to require us to repurchase the 2040 Convertible Notes on February 20, 2015, 2020, 2025, 2030 and 2035 for cash equal to 100% of the principal amount of the notes to be repurchased, plus accrued interest to, but excluding, the repurchase date. Upon conversion, a holder will receive the conversion value of the 2040 Convertible Notes converted based on the conversion rate multiplied by the volume weighted average price of our common stock over a specified observation period following the conversion date. The conversion value of each 2040 Convertible Note will be paid in cash up to the aggregate principal amount of the 2040 Convertible Notes to be converted and shares of common stock to the extent the conversion value exceeds the principal amount of the converted note. Upon the occurrence of a fundamental change (as defined in the indenture), the holders may require us to repurchase for cash all or a portion of their 2040 Convertible Notes at a price equal to 100% of the principal amount of the 2040 Convertible Notes being repurchased plus accrued interest, if any. In addition, following certain corporate events that occur prior to February 20, 2015, the conversion rate will be increased for holders who elect to convert their notes in connection with such a corporate event in certain circumstances. On February 7, 2011, the Company and certain subsidiaries, as borrowers or guarantors entered into a credit agreement (the "Initial Credit Agreement"), pursuant to which we jointly borrowed $750 million. The Initial Credit Agreement provided for a 5-year $450 million term loan ("Term Loan A-1") and a 7-year $300 million term loan ("Term Loan B-1"). The term loans are secured by substantially all of our assets. On March 29, 2012, the Initial Credit Agreement was amended and restated (the "Amended and Restated Credit Agreement") to provide for two new tranches of term loans totaling $800 million: (i) a 5-year $215 million term loan ("Term Loan A-2"), and (ii) a 7-year $585 million term loan ("Term Loan B-2"). The proceeds of the two new tranches of term loans were partially used to pay off the remaining $297.8 million balance of Term Loan B-1. The Term Loan A-1 and Term Loan A-2 require annual amortization payments and mature on February 7, 2016 and March 29, 2017, respectively. On April 9, 2013, the Company entered into a Refinancing Amendment and Joinder Agreement (the "Refinancing Amendment") to the Amended and Restated Credit Agreement, dated as of February 7, 2011, as amended and restated as of March 29, 2012, as further amended pursuant to that certain Amendment No. 1 dated as of February 13, 2013. The Refinancing Amendment provides for a new tranche of term loans ("Term Loan B-3") in the aggregate principal amount of $540.0 million. Term Loan B-3 matures on March 29, 2019. The Company used the proceeds from Term Loan B-3 to refinance in full at a lower interest rate all outstanding Term Loan B-2 amounts. The Amended and Restated Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, and dividends and other distributions. The Amended and Restated Credit Agreement contains financial covenants that require the Company and its subsidiaries to maintain a minimum consolidated interest coverage ratio and a maximum total leverage ratio. The Company may be required to make an additional payment on the Senior Secured Term Loan each February. This payment is a percentage of the prior year's Excess Cash Flow as defined in the Amended and Restated Credit Agreement. In February 2013, the Company made an Excess Cash Flow payment of $83.9 million based on its 2012 results. Due to the $200.0 million voluntary payment made in November 2013, the Company will not have to make an Excess Cash Flow Payment in February 2014. As of December 31, 2013, Term Loan A-1, Term Loan A-2 and Term Loan B-3 carrying values were $220.9 million, $167.4 million and $523.1 million, net of discount, respectively. 47



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In October 2013 our Board of Directors authorized the repurchase of up to $250.0 million of our debt outstanding. This repurchase authorization includes any amounts which were outstanding under previously authorized debt repurchase programs. During the year ended December 31, 2013, we made a voluntary debt payment of $200.0 million under the October 2013 authorization. As of December 31, 2013, we had $50.0 million remaining under our existing debt repurchase authorization. In October 2013, our Board of Directors authorized the repurchase of up to $250.0 million of our common stock. This authorization includes any amounts which were outstanding under previously authorized stock repurchase programs. During the year ended December 31, 2013, we repurchased 9.1 million shares of our common stock for $182.1 million of which $75.0 million was repurchased under the October 2013 authorization and $107.1 million was repurchased under a prior authorization. As of December 31, 2013, we had $175.0 million remaining under our existing stock repurchase program. As of December 31, 2013, we had $156.5 million in cash and cash equivalents, $366.0 million in short-term investments and $118.7 million in long-term marketable securities. Of these amounts, $248.9 million is held by our foreign subsidiaries. Due to our net operating loss carryforwards, we could repatriate the cash and investments held by our foreign subsidiaries back to the United States with a minimal tax impact. We believe that our current cash, cash equivalents and marketable securities and our annual cash flow from operations will be sufficient to meet our working capital, capital expenditure, debt and operating requirements for at least the next twelve months. Contractual Obligations The following table summarizes our contractual obligations at December 31, 2013 (in thousands): Payments due by period Contractual Obligations Less Than More Than (3) Total 1 year 1-3 years 3-5 years 5 years Long-term debt obligations (1) $ 1,204,995 $ - $ 537,831$ 158,179$ 508,985 Interest payments associated with long-term debt obligations 133,373 36,265 55,428 37,325 4,355 Purchase obligations 28,367 18,479 7,351 2,537 - Operating lease obligations(2) 56,352 20,115 24,660 9,319 2,258 $ 1,423,087$ 74,859$ 625,270$ 207,360$ 515,598 (1) The 2040 Convertible Notes have been included in the above table at the first put / call date which is February 2015. However, the 2040 Convertible Notes may be converted by the note holders prior to their



maturity under certain circumstances. See above for additional details.

(2) Operating leases in the above table have been included on a gross basis.

The Company has agreements to receive approximately $16.6 million under

operating subleases.

(3) We are unable to reliably estimate the timing of future payments related

to uncertain tax positions, therefore, $44.0 million of income taxes payable has been excluded from the table above. Recently Issued Accounting Pronouncements See Note 2 to the Consolidated Financial Statements.


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