Nuance Communications Annual Report 2012

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549_______________________________Form 10-K(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2012ORooTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-27038NUANCE COMMUNICATIONS, INC.(Exact name of Registrant as Specified in its Charter)Delaware 94-3156479(State or Other Jurisdiction of (I.R.S. EmployerIncorporation or Organization) Identification No.) 1 Wayside RoadBurlington, Massachusetts 01803(Address of Principal Executive Offices) (Zip Code)Registrant’s telephone number, including area code:(781) 565-5000SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:Title of Each Class Name of Each Exchange on Which RegisteredCommon stock, $0.001 par value NASDAQ Stock Market LLCSECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:NoneIndicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No oIndicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No 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 thepreceding 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 past90 days. Yes  No oIndicate 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 submittedand posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required tosubmit and post such files). Yes  No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best ofRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer Accelerated filer oNon-accelerated filer oSmaller 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 The aggregate market value of the outstanding common equity held by non-affiliates of the Registrant as of the last business day of the Registrant’s most recently completedsecond fiscal quarter was approximately $5.3 billion based upon the last reported sales price on the Nasdaq National Market for such date. For purposes of this disclosure, sharesof Common Stock held by officers and directors of the Registrant and by persons who hold more than 5% of the outstanding Common Stock have been excluded because suchpersons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive.The number of shares of the Registrant’s Common Stock, outstanding as of October 31, 2012, was 312,423,563.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s definitive Proxy Statement to be delivered to stockholders in connection with the Registrant’s 2013 Annual Meeting of Stockholders areincorporated by reference into Part III of this Form 10-K. NUANCE COMMUNICATIONS, INC.TABLE OF CONTENTS PagePART IItem 1.Business1Item 1A.Risk Factors5Item 1B.Unresolved Staff Comments14Item 2.Properties15Item 3.Legal Proceedings15Item 4.Mine Safety Disclosures15 PART IIItem 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities16Item 6.Selected Financial Data17Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations17Item 7A.Quantitative and Qualitative Disclosures about Market Risk45Item 8.Financial Statements and Supplementary Data46Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure100Item 9A.Controls and Procedures100Item 9B.Other Information100 PART IIIItem 10.Directors, Executive Officers and Corporate Governance101Item 11.Executive Compensation101Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters101Item 13.Certain Relationships and Related Transactions, and Director Independence101Item 14.Principal Accountant Fees and Services101 PART IVItem 15.Exhibits and Financial Statement Schedules102 Table of ContentsPART IThis Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 thatinvolve risks, uncertainties and assumptions that, if they never materialize or if they prove incorrect, could cause our consolidated results to differ materiallyfrom those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemedforward-looking, including statements pertaining to: our future revenue, cost of revenue, research and development expense, selling, general and administrativeexpenses, amortization of intangible assets and gross margin, earnings, cash flows and liquidity; our strategy relating to our segments; the potential of futureproduct releases; our product development plans and investments in research and development; future acquisitions and anticipated benefits from acquisitions;international operations and localized versions of our products; our contractual commitments; our fiscal 2013 revenue and expense expectations and legalproceedings and litigation matters. You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “should,”“expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue” or the negative of such terms, or other comparableterminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Our actual results could differmaterially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Item 1A of this Annual Reportunder the heading “Risk Factors.” All forward-looking statements included in this document are based on information available to us on the date hereof. Wewill not undertake and specifically decline any obligation to update any forward-looking statements.Item 1.BusinessOverviewWe are a leading provider of voice and language solutions for businesses and consumers around the world. Our solutions are used in healthcare, mobile,consumer, enterprise customer service, and imaging markets. We offer market-leading accuracy, natural language understanding capability, domainknowledge and implementation capabilities, built on our significant, long-term investments in research and development. Our solutions are based on ourproprietary voice and language platform and are used every day by millions of people and thousands of businesses for tasks and services such as requestinginformation from a phone-based self-service solution, dictating medical records, searching the mobile Web by voice, entering a destination into a navigationsystem, or working with PDF documents. We offer our solutions to our customers in a variety of ways, including through products, hosting, professionalservices and maintenance and support. Our product revenues include embedded original equipment manufacturers ("OEM") royalties, traditional enterpriselicensing, term-based enterprise licensing and consumer-based sales. Our hosting revenues are primarily generated through on-demand service models,comprised of hosted transaction-based pricing arrangements that typically have multi-year terms. Hosting and maintenance and support revenues are recurringin nature as our customers need to use our products on a repeat basis to handle their needs in medical transcription, enterprise customer service and mobileconnected services.We leverage our global professional services organization and our extensive network of partners to design, develop and deploy innovative solutions forbusinesses and organizations around the globe. We market and sell our products directly through a dedicated sales force, through our e-commerce website andalso through a global network of resellers, including system integrators, independent software vendors, value-added resellers, hardware vendors,telecommunications carriers and distributors.We have built a world-class portfolio of intellectual property, technologies, applications and solutions through both internal development andacquisitions. We expect to continue to pursue opportunities to expand our assets, geographic presence, distribution network and customer base throughacquisitions of other businesses and technologies.We are organized in four segments: Healthcare, Mobile and Consumer, Enterprise, and Imaging. We leverage our voice and language platform to delivercustom, domain-specific solutions across these four segments. In fiscal 2012, segment revenue as a percentage of total segment revenue for Healthcare, Mobileand Consumer, Enterprise and Imaging was 39%, 29%, 19% and 13%, respectively. In fiscal 2011, segment revenue as a percentage of total segment revenuefor Healthcare, Mobile and Consumer, Enterprise and Imaging was 38%, 28%, 21% and 13%, respectively. See Note 22 to the consolidated financialstatements for additional information about our reportable segments.HealthcareThe healthcare industry is under significant pressure to streamline operations, reduce costs and improve patient care. In recent years, healthcareorganizations such as hospitals, clinics, medical groups, physicians’ offices and insurance providers have increasingly turned to improving their clinicaldocumentation process from capturing the physician voice to creating documentation through the use of the information to improve the delivery of care, qualitymeasures, coding accuracy and appropriate reimbursement.1Table of ContentsWe provide comprehensive dictation and transcription solutions and services that capture the patient encounters with their physician. These hosted andon-premise solutions provide platforms to generate and distribute clinical documentation through the use of advanced dictation and transcription features, andallow us to deliver scalable, highly productive medical transcription solutions. Additionally, we offer solutions that leverage the captured information and,with state-of-the-art coding, compliance and record management, which streamlines Healthcare Information Management ("HIM") processes to drivecompliance and reimbursement. Through Clinical Documentation Improvement ("CDI") programs, we assist in bridging the gap between physicians andcoders.We are uniquely positioned to accelerate future innovation to transform the entire process of clinical documentation, as we are deeply entrenched in thephysician base with our voice capture solutions and have the ability to leverage our Clinical Language Understanding technology to power clinical, coder andCDI specialist solutions that intelligently bridge documentation, CDI, coding and compliance. As many physicians adopt mobile devices, we migrate to mobileand cloud based solutions, supporting our transcription solutions as well as solutions that could be easily integrated by independent software vendors in totheir mobile electronic health record clients. These solutions will significantly streamline speed and completeness of documentation so that providers canshorten the time between the patient visit and the payment for that visit.We utilize a focused, enterprise sales team and professional services organization to address the market and implementation requirements of thehealthcare industry. Direct distribution is supplemented by distributors and partnerships with electronic medical records application and other healthcare ITproviders including, but not limited to Allscripts, Cerner, Epic, GE, IBM, McKesson and the University of Pittsburgh Medical Center ("UPMC"). In somecases, our healthcare solutions are priced under a traditional software perpetual licensing model. However, certain of our healthcare solutions, in particular ourtranscription solution, are also offered on an on-demand model and priced by volume of usage (such as number of lines transcribed). We continue toexperience an increased preference for on-demand pricing model. Representative customers include Advocate, Banner Health, Cleveland Clinic, Department ofVeterans Affairs, HCA, Leahy Clinic, Kaiser Permanente, Mayo Clinic, NHS, Providence Health & Services, Sharp, Steward Sutter Health, Tenet, UPMC,U.S. Army and Wellspan.Mobile and ConsumerWe help consumers use the powerful capabilities of their phones, cars, tablets, desktop and portable computers, personal navigation devices and otherconsumer electronics by enabling the use of voice commands, text-to-speech and enhanced text input solutions to control and interact with these devices moreeasily and naturally, and to access the array of content and services available on the Internet. Our suite of Dragon general purpose desktop and portablecomputer dictation applications increases productivity by using speech to create documents, streamline repetitive and complex tasks, input data, completeforms and automate manual transcription processes. Today, an increasing number of people worldwide rely on mobile devices to stay connected, informed andproductive. Our suite of mobile solutions and services provides a platform to build, implement and deploy custom solutions on a variety of mobile devicesand other consumer electronics. We have focused in recent quarters on integrating our Dragon technology and brand initiatives across mobile and consumermarkets.Our portfolio of mobile and consumer solutions and services includes an integrated suite of voice control and text-to-speech solutions, dictationapplications, predictive text technologies, mobile messaging services and emerging services such as dictation, Web search and voicemail-to-text. We utilize afocused, enterprise sales team and professional services organization to address market and implementation requirements. We utilize direct distribution,supplemented by partnerships with electronics suppliers and integrators such as Clarion, Harman Kardon and Rovi. Our solutions are used by mobile phone,automotive, personal navigation device, computer, television and other consumer electronic manufacturers and their suppliers, including Amazon, Apple,Audi, BMW, Ford, Garmin, GM, HTC, Intel, LG Electronics, Mercedes Benz, Nintendo, Nokia, Panasonic, Samsung, Sharp, T-Mobile, TomTom andToyota. Telecommunications carriers, web search companies and content providers are increasingly using our mobile search and communication solutions tooffer value-added services to their subscribers and customers. Our embedded mobile solutions are sold to automobile and device manufacturers, generally on aroyalty model priced per device sold, as well as on a volume of usage model and sometimes on a license model. Our connected mobile services are sold throughtelecommunications carriers, voicemail system providers, smartphone application developers or directly to consumers, and generally priced on a volume ofusage model (such as per subscriber or per use). At the end of fiscal 2012, our mobile cloud services powered handsets, cars, televisions and other mobiledevices in 34 languages. Representative connected services customers and partners include Cisco, Comcast, Esnatech, Mitel, Rogers, Siemens, Telefonica,Telstra, Time Warner Cable, TISA, T-Mobile and Vodafone. In addition, various smartphone application stores include hundreds of applications that utilizeour technology, such as our Dragon Mobile Assistant, DragonDictation, DragonGo! and FlexT9, as well as third party applications including Amazon PriceCheck, Ask, Bon’ App, Coupons.com, E*Trade, Grainger, Kraft, Merriam-Webster, On-Star, PlaySay, Recipe.com, Snapguide, Target, Vocre and YellowPages.2Table of ContentsDuring the fourth quarter of fiscal 2012, we shipped new versions of Dragon NaturallySpeaking for Windows and Dragon Dictate for Mac, which arecurrently available in eight languages. Our desktop and portable computer dictation solutions are generally sold under a traditional perpetual software licensemodel. We utilize a combination of our global reseller network and direct sales to distribute our desktop and portable computer dictation products. Resellersinclude retailers such as Amazon, Best Buy and WalMart. Enterprise customers include organizations such as law firms, insurance agencies and governmentagencies. Representative customers include ATF, Exxon, FBI, IBM, Texas Department of Family Protective Services and Zurich.EnterpriseTo remain competitive, organizations must improve the quality of customer care while reducing costs and ensuring a positive customer experience.Technological innovation, competitive pressures and rapid commoditization have made it increasingly important for organizations to achieve enduring marketdifferentiation and secure customer loyalty. In this environment, organizations need to satisfy the expectations of increasingly savvy and mobile consumerswho demand high levels of customer service.We deliver a portfolio of customer service business intelligence and authentication solutions that are designed to help companies better support,understand and communicate with their customers. Our solutions include the use of technologies such as speech recognition, natural language understanding,text-to-speech, biometric voice identification and analytics to automate caller identification and authorization, virtual assistants, call steering, completion oftasks such as updates, purchases and information retrieval, and automated outbound notifications. Our solutions improve the customer experience, increasethe use of self-service and enable new revenue opportunities. We complement our solutions and products with a global professional services organization thatsupports customers and partners with business and systems consulting project management, user-interface design, voice science, application development andbusiness performance optimization, allowing us to deliver end-to-end speech solutions and system integration for voice-enabled customer care. In addition, weoffer solutions that can meet customer care needs through web sites and direct interaction with applications on cell phones, enabling customers to very quicklyretrieve relevant information. Use of our voice and language processing-enabled web sites and mobile customer care solutions can dramatically decreasecustomer care costs, in comparison to calls handled by operators.Our solutions are used by a wide variety of enterprises in customer-service intensive sectors, including telecommunications, financial services, traveland entertainment, and government. Our speech solutions are designed to serve our global partners and customers and are available in approximately80 languages and dialects worldwide. In addition to our own sales and professional services teams, we often work closely with industry partners, includingAvaya, Cisco and Genesys, that integrate our solutions into their hardware and software platforms. Our enterprise solutions offerings include both atraditional software perpetual licensing model and an on-demand model and are priced by volume of usage (such as number of minutes callers use the systemor number of calls completed in the system). Representative customers include Bank of America, Barclays, Cigna, Citibank, Comcast, Deutsche Bank,Disney, FedEx, OnStar, PG&E, U.K.HM Revenue & Customs, USAA, US Airways, Telecom Italia, Telefonica, T-Mobile, Wells Fargo and Verizon.ImagingThe evolution of the Internet, email and other networks has greatly simplified the ability to share electronic documents, resulting in an ever-growingvolume of documents to be used and stored. In addition, the proliferation of network and Internet connected multifunction printers has increased the need toefficiently manage printers and enforce printing policies. Our document imaging, print management and PDF solutions reduce the costs associated with paperdocuments through easy to use scanning, document management and electronic document routing solutions. We offer versions of our products tomultifunction printer manufacturers, home offices, small businesses and enterprise customers.Our imaging solutions offer optical character recognition technology to deliver highly accurate document scanning and storage. We provide networkedprint management and comprehensive PDF applications designed specifically for business users. In addition, we offer applications that combine networkscanning, network print management and PDF creation to quickly enable distribution of documents to users’ desktops or to enterprise applications. Our hostof services includes software development toolkits for independent software vendors. Our imaging solutions are generally sold under a traditional perpetualsoftware license model, and some solutions are also offered as a hosted solution. We utilize a combination of our global reseller network and direct sales todistribute our imaging products. We license our software to multifunction printer manufacturers such as Brother, Canon, Dell, HP and Xerox, which bundleour solutions with multi-function devices, digital copiers, printers and scanners, on a royalty model, priced per unit sold. Representative customers includeAflac, Airbus, Amazon, Barclays, Blue Shield, Citibank, EMC, Ernst & Young, Eurostar, Franklin Templeton, Intuit, Johnson & Johnson, JP MorganChase, Nationwide, Norwegian Tax Authorities, Office Depot, Phillips, PricewaterhouseCoopers, UPS and US Department of Justice.3Table of ContentsResearch and Development/Intellectual PropertyIn recent years, we have developed and acquired extensive technology assets, intellectual property and industry expertise in voice, language and imagingthat provide us with a competitive advantage in our markets. Our technologies are based on complex algorithms which require extensive amounts of linguisticand image data, acoustic models and recognition techniques. A significant investment in capital and time would be necessary to replicate our currentcapabilities.We continue to invest in technologies to maintain our market-leading position and to develop new applications. Our technologies are covered byapproximately 2,800 patents and 1,100 patent applications. Our intellectual property, whether purchased or developed internally, is critical to our success andcompetitive position and, ultimately, to our market value. We rely on a portfolio of patents, copyrights, trademarks, services marks, trade secrets,confidentiality provisions and licensing arrangements to establish and protect our intellectual property and proprietary rights. We incurred research anddevelopment expenses of $225.4 million, $179.4 million, and $152.1 million in fiscal 2012, 2011 and 2010, respectively.International OperationsWe have principal offices in a number of international locations including: Australia, Belgium, Canada, Germany, Hungary, India, Ireland, Italy,Japan, and the United Kingdom. The responsibilities of our international operations include research and development, healthcare transcription and editing,customer support, sales and marketing and administration. Additionally, we maintain smaller sales, services and support offices throughout the world tosupport our international customers and to expand international revenue opportunities.Geographic revenue classification is based on the geographic areas in which our customers are located. For fiscal 2012, 2011 and 2010, 71%, 73% and72% of revenue was generated in the United States and 29%, 27% and 28% of revenue was generated by our international operations, respectively.CompetitionThe individual markets in which we compete are highly competitive and are subject to rapid technology changes. There are a number of companies thatdevelop or may develop products that compete in our target markets; however, currently there is no one company that competes with us in all of our productareas. While we expect competition to continue to increase both from existing competitors and new market entrants, we believe that we will compete effectivelybased on many factors, including:•Specialized Professional Services. Our superior technology, when coupled with the high quality and domain knowledge of our professionalservices organization, allows our customers and partners to place a high degree of confidence and trust in our ability to deliver results. We supportour customers in designing and building powerful innovative applications that specifically address their needs and requirements.•International Appeal. The international reach of our products is due to the broad language coverage of our offerings, including our voice andlanguage technology, which provides recognition for approximately 80 languages and dialects and natural-sounding synthesized speech in65 languages, and supports a broad range of hardware platforms and operating systems. Our imaging technology supports more than 100languages for Optical Character Recognition and document handling, with up to 20 screen language choices, including Asian languages.•Technological Superiority. Our voice, language and imaging technologies, applications and solutions are often recognized as the most innovativeand proficient products in their respective categories. Our voice and language technology has industry-leading recognition accuracy and provides anatural, voice-enabled interaction with systems, devices and applications. Our imaging technology is viewed as the most accurate in the industry.Technology publications, analyst research and independent benchmarks have consistently indicated that our products rank at or aboveperformance levels of alternative solutions.•Broad Distribution Channels. Our ability to address the needs of specific markets, such as financial, legal, healthcare and government, and tointroduce new products and solutions quickly and effectively is enhanced through our dedicated direct sales force; our extensive global network ofresellers, comprising system integrators, independent software vendors, value-added resellers, hardware vendors, telecommunications carriers anddistributors; and our e-commerce website (www.nuance.com).In our segments, we compete with companies such as Adobe, M*Modal, Microsoft and Google. In addition, a number of smaller companies in bothspeech and imaging offer services, technologies or products that are competitive with our solutions in some markets. In certain markets, some of our partnerssuch as Avaya, Cisco, Intervoice and Genesys develop and market products4Table of Contentsand services that might be considered substitutes for our solutions. Current and potential competitors have established, or may establish, cooperativerelationships among themselves or with third parties to increase the ability of their technologies to address the needs of our prospective customers.Some of our competitors or potential competitors, such as Adobe, Microsoft and Google, have significantly greater financial, technical and marketingresources than we do. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customerrequirements. They may also devote greater resources to the development, promotion and sale of their products than we do.EmployeesAs of September 30, 2012, we had approximately 12,000 full-time employees in total, including approximately 1,000 in sales and marketing,approximately 2,000 in professional services, approximately 1,500 in research and development, approximately 800 in general and administrative andapproximately 6,700 that provide transcription and editing services. Approximately 37 percent of our employees are based outside of the United States, themajority of whom provide transcription and editing services and are based in India. Our employees are not represented by any labor union and are notorganized under a collective bargaining agreement, and we have never experienced a work stoppage. We believe that our relationships with our employees aregenerally good.Company InformationWe were incorporated in 1992 as Visioneer, Inc. under the laws of the state of Delaware. In 1999, we changed our name to ScanSoft, Inc. and alsochanged our ticker symbol to SSFT. In October 2005, we changed our name to Nuance Communications, Inc. and in November 2005 we changed our tickersymbol to NUAN.Our website is located at www.nuance.com. This Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and all amendments to these reports, as well as proxy statements and other information we file with or furnish to the Securities and Exchange Commission,or the SEC, are accessible free of charge on our website. We make these documents available as soon as reasonably practicable after we file them with, orfurnish them to, the SEC. Our SEC filings are also available on the SEC’s website at http://www.sec.gov. Alternatively, you may access any document wehave filed by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public ReferenceRoom can be obtained by calling the SEC at 1-800-SEC-0330. Except as otherwise stated in these documents, the information contained on our website oravailable by hyperlink from our website is not incorporated by reference into this report or any other documents we file with or furnish to the SEC.Item 1A.Risk FactorsYou should carefully consider the risks described below when evaluating our company and when deciding whether to invest in our company. The risksand uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we do not currentlybelieve are important to an investor may also harm our business operations. If any of the events, contingencies, circumstances or conditions described in thefollowing risks actually occurs, our business, financial condition or our results of operations could be seriously harmed. If that happens, the trading price ofour common stock could decline and you may lose part or all of the value of any of our shares held by you.Risks Related to Our BusinessOur operating results may fluctuate significantly from period to period, and this may cause our stock price to decline.Our revenue and operating results have fluctuated in the past and are expected to continue to fluctuate in the future. Given this fluctuation, we believe thatquarter to quarter comparisons of revenue and operating results are not necessarily meaningful or an accurate indicator of our future performance. As a result,our results of operations may not meet the expectations of securities analysts or investors in the future. If this occurs, the price of our stock would likelydecline. Factors that contribute to fluctuations in operating results include the following:•slowing sales by our distribution and fulfillment partners to their customers, which may place pressure on these partners to reducepurchases of our products;•volume, timing and fulfillment of customer orders;•our ability to generate additional revenue from our intellectual property portfolio;5Table of Contents•customers delaying their purchasing decisions in anticipation of new versions of our products;•customers delaying, canceling or limiting their purchases as a result of the threat or results of terrorism;•introduction of new products by us or our competitors;•seasonality in purchasing patterns of our customers;•reduction in the prices of our products in response to competition, market conditions or contractual obligations;•returns and allowance charges in excess of accrued amounts;•timing of significant marketing and sales promotions;•impairment charges against goodwill and intangible assets;•delayed realization of synergies resulting from our acquisitions;•write-offs of excess or obsolete inventory and accounts receivable that are not collectible;•increased expenditures incurred pursuing new product or market opportunities;•general economic trends as they affect retail and corporate sales; and•higher than anticipated costs related to fixed-price contracts with our customers.Due to the foregoing factors, among others, our revenue and operating results are difficult to forecast. Our expense levels are based in significant part onour expectations of future revenue and we may not be able to reduce our expenses quickly to respond to a shortfall in projected revenue. Therefore, our failureto meet revenue expectations would seriously harm our operating results, financial condition and cash flows.We have grown, and may continue to grow, through acquisitions, which could dilute our existing stockholders.As part of our business strategy, we have in the past acquired, and expect to continue to acquire, other businesses and technologies. In connection withpast acquisitions, we issued a substantial number of shares of our common stock as transaction consideration and also incurred significant debt to financethe cash consideration used for our acquisitions. We may continue to issue equity securities for future acquisitions, which would dilute existing stockholders,perhaps significantly depending on the terms of such acquisitions. We may also incur additional debt in connection with future acquisitions, which, ifavailable at all, may place additional restrictions on our ability to operate our business. Our ability to realize the anticipated benefits of our acquisitions will depend on successfully integrating the acquired businesses.Our prior acquisitions required, and our recently completed acquisitions continue to require, substantial integration and management efforts and we expectfuture acquisitions to require similar efforts. Acquisitions of this nature involve a number of risks, including:•difficulty in transitioning and integrating the operations and personnel of the acquired businesses;•potential disruption of our ongoing business and distraction of management;•potential difficulty in successfully implementing, upgrading and deploying in a timely and effective manner new operationalinformation systems and upgrades of our finance, accounting and product distribution systems;•difficulty in incorporating acquired technology and rights into our products and technology;•potential difficulties in completing projects associated with in-process research and development;•unanticipated expenses and delays in completing acquired development projects and technology integration;•management of geographically remote business units both in the United States and internationally;•impairment of relationships with partners and customers;•assumption of unknown material liabilities of acquired companies;•accurate projection of revenue plans of the acquired entity in the due diligence process;•customers delaying purchases of our products pending resolution of product integration between our existing and our newlyacquired products;6Table of Contents•entering markets or types of businesses in which we have limited experience; and•potential loss of key employees of the acquired business.As a result of these and other risks, if we are unable to successfully integrate acquired businesses, we may not realize the anticipated benefits from ouracquisitions. Any failure to achieve these benefits or failure to successfully integrate acquired businesses and technologies could seriously harm our business.Charges to earnings as a result of our acquisitions may adversely affect our operating results in the foreseeable future, which could have amaterial and adverse effect on the market value of our common stock.Under accounting principles generally accepted in the United States of America, we record the market value of our common stock or other form ofconsideration issued in connection with an acquisition as the cost of acquiring the company or business. We have allocated that cost to the individual assetsacquired and liabilities assumed, including various identifiable intangible assets such as acquired technology, acquired trade names and acquired customerrelationships based on their respective fair values. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherentlyuncertain. After we complete an acquisition, the following factors could result in material charges and adversely affect our operating results and may adverselyaffect our cash flows:•costs incurred to combine the operations of businesses we acquire, such as transitional employee expenses and employee retention,redeployment or relocation expenses;•impairment of goodwill or intangible assets;•amortization of intangible assets acquired;•a reduction in the useful lives of intangible asset acquired;•identification of or changes to assumed contingent liabilities, both income tax and non-income tax related after our finaldetermination of the amounts for these contingencies or the conclusion of the measurement period (generally up to one year from theacquisition date), whichever comes first;•charges to our operating results to eliminate certain duplicative pre-merger activities, to restructure our operations or to reduce ourcost structure;•charges to our operating results resulting from expenses incurred to effect the acquisition; and•charges to our operating results due to the expensing of certain stock awards assumed in an acquisition.Intangible assets are generally amortized over a five to fifteen year period. Goodwill and certain intangible assets with indefinite lives, are not subject toamortization but are subject to an impairment analysis, at least annually, which may result in an impairment charge if the carrying value exceeds its impliedfair value. As of September 30, 2012, we had identified intangible assets of approximately $906.5 million, net of accumulated amortization, and goodwill ofapproximately $3.0 billion. In addition, purchase accounting limits our ability to recognize certain revenue that otherwise would have been recognized by theacquired company as an independent business. As a result, the combined company may delay revenue recognition or recognize less revenue than we and theacquired company would have recognized as independent companies.7Table of ContentsOur significant debt could adversely affect our financial health and prevent us from fulfilling our obligations under our credit facility and ourconvertible debentures.We have a significant amount of debt. As of September 30, 2012, we had a total of $2,270.7 million of gross debt outstanding, including $143.5 millionin term loans due in March 2013, $487.1 million in term loans due in March 2016 under an amended and restated agreement signed in July 2011, $700.0million of senior notes due in 2020 and $940.0 million in convertible debentures. In October, 2012, we issued $350.0 million of senior notes due in 2020 andused $143.5 million of the proceeds to prepay the term loans due in March 2013. Investors may require us to redeem the 2027 Debentures totaling $250.0million in aggregate principal amount in August 2014, or sooner if the closing sale price of our common stock is more than 120% of the then currentconversion price for certain specified periods. If a holder elects to convert, we will be required to pay the principal amount in cash and any amounts payable inexcess of the principal amount will be paid in cash or shares of our common stock, at our election. Investors may require us to redeem the 2031 Debentures,totaling $690.0 million in aggregate principal amount in November 2017, or sooner if the closing sale price of our common stock is more than 130% of thethen current conversion price for certain specified periods. If a holder elects to convert, we will be required to pay the principal amount in cash and anyamounts payable in excess of the principal amount will be paid in cash or shares of our common stock, at our election. We also have a $75.0 millionrevolving credit line available to us through March 2015. As of September 30, 2012, there were $17.9 million of letters of credit issued, but there were no otheroutstanding borrowings under the revolving credit line. Our debt level could have important consequences, for example it could:•require us to use a large portion of our cash flow to pay principal and interest on debt, including the convertible debentures and thecredit facility, which will reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions,research and development expenditures and other business activities;•restrict us from making strategic acquisitions or exploiting business opportunities;•place us at a competitive disadvantage compared to our competitors that have less debt; and•limit, along with the financial and other restrictive covenants related to our debt, our ability to borrow additional funds, dispose ofassets or pay cash dividends.Our ability to meet our payment and other obligations under our debt instruments depends on our ability to generate significant cash flow in the future.This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond ourcontrol. We cannot assure you that our business will generate cash flow from operations, or that additional capital will be available to us, in an amountsufficient to enable us to meet our payment obligations under the convertible debentures and our other debt and to fund other liquidity needs. If we are not ableto generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, including the convertible debentures, sellassets, reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may not beable to meet our payment obligations under the convertible debentures and our other debt.In addition, approximately $630.6 million of our debt outstanding as of September 30, 2012 bears interest at variable rates. If market interest ratesincrease, our debt service requirements will increase, which would adversely affect our results of operations and cash flows.Our debt agreements contain covenant restrictions that may limit our ability to operate our business.The agreement governing our senior credit facility contains, and any of our other future debt agreements may contain, covenant restrictions that limit ourability to operate our business, including restrictions on our ability to:•incur additional debt or issue guarantees;•create liens;•make certain investments;•enter into transactions with our affiliates;•sell certain assets;•redeem capital stock or make other restricted payments;•declare or pay dividends or make other distributions to stockholders; and•merge or consolidate with any entity.Our ability to comply with these covenants is dependent on our future performance, which will be subject to many factors, some of which are beyond ourcontrol, including prevailing economic conditions. As a result of these covenants, our ability to respond to changes in business and economic conditions andto obtain additional financing, if needed, may be significantly8Table of Contentsrestricted, and we may be prevented from engaging in transactions that might otherwise be beneficial to us. In addition, our failure to comply with thesecovenants could result in a default under our debt agreements, which could permit the holders to accelerate our obligation to repay the debt. If any of our debt isaccelerated, we may not have sufficient funds available to repay the accelerated debt. We have a history of operating losses, and may incur losses in the future, which may require us to raise additional capital on unfavorable terms.We reported net income of $207.1 million and $38.2 million in fiscal 2012 and 2011, respectively, net losses of $19.1 million for the fiscal year 2010and have a total accumulated deficit of $161.2 million as of September 30, 2012. If we are unable to maintain profitability, the market price for our stock maydecline, perhaps substantially. We cannot assure you that our revenue will grow or that we will maintain profitability in the future. If we do not achieve andmaintain profitability, we may be required to raise additional capital to maintain or grow our operations. Additional capital, if available at all, may be highlydilutive to existing investors or contain other unfavorable terms, such as a high interest rate and restrictive covenants.Voice and language technologies may not continue to garner widespread acceptance, which could limit our ability to grow our voice andlanguage business.We have invested and expect to continue to invest heavily in the acquisition, development and marketing of voice and language technologies. The marketfor voice and language technologies is relatively new and rapidly evolving. Our ability to increase revenue in the future depends in large measure on thecontinuing acceptance of these technologies in general and our products in particular. The continued development of the market for our current and future voiceand language solutions in general, and our solutions in particular, will also depend on:•consumer and business demand for speech-enabled applications;•development by third-party vendors of applications using voice and language technologies; and•continuous improvement in voice and language technology.Sales of our voice and language products would be harmed if the market for these technologies does not continue to increase or increases slower than weexpect, or if we fail to develop new technology faster than our competitors, and consequently, our business could be harmed and we may not achieve a level ofprofitability necessary to successfully operate our business.The markets in which we operate are highly competitive and rapidly changing and we may be unable to compete successfully.There are a number of companies that develop or may develop products that compete in our targeted markets. The individual markets in which wecompete are highly competitive, and are rapidly changing. Within voice and language, we compete with AT&T, Google, Microsoft, and other smallerproviders. Within healthcare, we compete with M*Modal and other smaller providers. Within imaging, we compete with ABBYY, Adobe, I.R.I.S. andNewSoft. In voice and language, some of our partners such as Avaya, Cisco, Intervoice and Genesys develop and market products that can be consideredsubstitutes for our solutions. In addition, a number of smaller companies in voice, language and imaging produce technologies or products that are in somemarkets competitive with our solutions. Current and potential competitors have established, or may establish, cooperative relationships among themselves orwith third parties to increase the ability of their technologies to address the needs of our prospective customers.The competition in these markets could adversely affect our operating results by reducing the volume of the products we license or the prices we cancharge. Some of our current or potential competitors, such as Adobe, Google and Microsoft, have significantly greater financial, technical and marketingresources than we do. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customerrequirements. They may also devote greater resources to the development, promotion and sale of their products than we do.Some of our customers, such as Google and Microsoft, have developed or acquired products or technologies that compete with our products andtechnologies. These customers may give higher priority to the sale of these competitive products or technologies. To the extent they do so, market acceptanceand penetration of our products, and therefore our revenue, may be adversely affected. Our success will depend substantially upon our ability to enhance ourproducts and technologies and to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customerrequirements and incorporate technological enhancements. If we are unable to develop new products and enhance functionalities or technologies to adapt to thesechanges, or if we are unable to realize synergies among our acquired products and technologies, our business will suffer.9Table of ContentsThe failure to successfully maintain the adequacy of our system of internal control over financial reporting could have a material adverseimpact on our ability to report our financial results in an accurate and timely manner.The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report of management oninternal control over financial reporting in their annual reports on Form 10-K that contains an assessment by management of the effectiveness of our internalcontrol over financial reporting. In addition, our independent registered public accounting firm must attest to and report on the effectiveness of our internalcontrol over financial reporting. Any failure in the effectiveness of our system of internal control over financial reporting could have a material adverse impacton our ability to report our financial statements in an accurate and timely manner, could subject us to regulatory actions, civil or criminal penalties,shareholder litigation, or loss of customer confidence, which could result in an adverse reaction in the financial marketplace due to a loss of investorconfidence in the reliability of our financial statements, which ultimately could negatively impact our stock price.A significant portion of our revenue is derived, and a significant portion of our research and development activities are based, outside theUnited States. Our results could be harmed by economic, political, regulatory and other risks associated with these international regions.Because we operate worldwide, our business is subject to risks associated with doing business internationally. We anticipate that revenue frominternational operations could increase in the future. Most of our international revenue is generated by sales in Europe and Asia. In addition, some of ourproducts are developed and manufactured outside the United States and we have a large number of employees in India that provide transcription services. Wealso have a large number of employees in Canada, Germany and United Kingdom that provide professional services. A significant portion of the developmentof our voice and language products is conducted in Canada and Germany, and a significant portion of our imaging research and development is conducted inHungary. We also have significant research and development resources in Austria, Belgium, Italy, and United Kingdom. Accordingly, our future results couldbe harmed by a variety of factors associated with international sales and operations, including:•changes in a specific country's or region's economic conditions;•geopolitical turmoil, including terrorism and war;•trade protection measures and import or export licensing requirements imposed by the United States or by other countries;•compliance with foreign and domestic laws and regulations;•negative consequences from changes in applicable tax laws;•difficulties in staffing and managing operations in multiple locations in many countries;•difficulties in collecting trade accounts receivable in other countries; and•less effective protection of intellectual property than in the United States.We are exposed to fluctuations in foreign currency exchange rates.Because we have international subsidiaries and distributors that operate and sell our products outside the United States, we are exposed to the risk ofchanges in foreign currency exchange rates. In certain circumstances, we have entered into forward exchange contracts to hedge against foreign currencyfluctuations. We use these contracts to reduce our risk associated with exchange rate movements, as the gains or losses on these contracts are intended to offsetany exchange rate losses or gains on the hedged transaction. We do not engage in foreign currency speculation. With our increased international presence in anumber of geographic locations and with international revenue and costs projected to increase, we are exposed to changes in foreign currencies including theeuro, British pound, Canadian dollar, Japanese yen, Indian rupee, Australian dollar, Israeli shekel, Swiss franc and the Hungarian forint. Changes in thevalue of foreign currencies relative to the value of the U.S. dollar could adversely affect future revenue and operating results.Impairment of our intangible assets could result in significant charges that would adversely impact our future operating results.We have significant intangible assets, including goodwill and intangibles with indefinite lives, which are susceptible to valuation adjustments as a resultof changes in various factors or conditions. The most significant intangible assets are patents and core technology, completed technology, customerrelationships and trademarks. Customer relationships are amortized on an accelerated basis based upon the pattern in which the economic benefits of customerrelationships are being utilized. Other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives. We assess thepotential impairment of intangible assets on an annual basis, as well as whenever events or changes in circumstances indicate that the carrying value may notbe recoverable. Factors that could trigger an impairment of such assets include the following:•significant underperformance relative to historical or projected future operating results;10Table of Contents•significant changes in the manner of or use of the acquired assets or the strategy for our overall business;•significant negative industry or economic trends;•significant decline in our stock price for a sustained period;•changes in our organization or management reporting structure that could result in additional reporting units, which may requirealternative methods of estimating fair values or greater disaggregation or aggregation in our analysis by reporting unit; and•a decline in our market capitalization below net book value.Future adverse changes in these or other unforeseeable factors could result in an impairment charge that would impact our results of operations andfinancial position in the reporting period identified. Our sales to government clients subject us to risks, including early termination, audits, investigations, sanctions and penalties.We derive a portion of our revenues from contracts with the United States government, as well as various state and local governments, and their respectiveagencies. Government contracts are generally subject to audits and investigations which could identify violations of these agreements. Government contractviolations could result in a range of consequences including, but not limited to, contract price adjustments, civil and criminal penalties, contract termination,forfeiture of profit and/or suspension of payment, and suspension or debarment from future government contracts. We could also suffer serious harm to ourreputation if we were found to have violated the terms of our government contracts.We conducted an analysis of our compliance with the terms and conditions of certain contracts with the U.S. General Services Administration (“GSA”).Based upon our analysis, we voluntarily notified GSA of non-compliance with the terms of two contracts. The final resolution of this matter may adverselyimpact our financial position.If we are unable to attract and retain key personnel, our business could be harmed.If any of our key employees were to leave, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivitywhile any successor obtains the necessary training and experience. Our employment relationships are generally at-will and we have had key employees leave inthe past. We cannot assure you that one or more key employees will not leave in the future. We intend to continue to hire additional highly qualified personnel,including software engineers and operational personnel, but may not be able to attract, assimilate or retain qualified personnel in the future. Any failure toattract, integrate, motivate and retain these employees could harm our business.Our medical transcription services may be subject to legal claims for failure to comply with laws governing the confidentiality of medical records.Healthcare professionals who use our medical transcription services deliver to us health information about their patients including information thatconstitutes a record under applicable law that we may store on our computer systems. Numerous federal and state laws and regulations, the common law andcontractual obligations govern collection, dissemination, use and confidentiality of patient-identifiable health information, including:•state and federal privacy and confidentiality laws;•our contracts with customers and partners;•state laws regulating healthcare professionals;•Medicaid laws; and•the Health Insurance Portability and Accountability Act of 1996 and related rules proposed by the Health Care FinancingAdministration.The Health Insurance Portability and Accountability Act of 1996 establishes elements including, but not limited to, federal privacy and securitystandards for the use and protection of protected health information. Any failure by us or by our personnel or partners to comply with applicable requirementsmay result in a material liability. Although we have systems and policies in place for safeguarding protected health information from unauthorized disclosure,these systems and policies may not preclude claims against us for alleged violations of applicable requirements. There can be no assurance that we will not besubject to liability claims that could have a material adverse affect on our business, results of operations and financial condition.11Table of ContentsAdverse changes in general economic or political conditions in any of the major countries in which we do business could adversely affect ouroperating results.Adverse changes in domestic and global economic and political conditions, as well as uncertainty in the global financial markets may negatively affectour financial results. These macroeconomic developments could negatively affect our business, operating results or financial condition in a number of wayswhich, in turn, could adversely affect our stock price. A prolonged period of economic decline could have a material adverse effect on our results of operationsand financial condition and exacerbate some of the other risk factors described herein. Our customers may defer purchases of our products, licenses, andservices in response to tighter credit and negative financial news or reduce their demand for them. Our customers may also not be able to obtain adequateaccess to credit, which could affect their ability to make timely payments to us or ultimately cause the customer to file for protection from creditors underapplicable insolvency or bankruptcy laws. If our customers are not able to make timely payments to us, our accounts receivable could increase. Politicalinstability in any of the major countries in which we do business would also likely harm our business, results of operations and financial condition. Current uncertainty in the global financial markets and the global economy may negatively affect our financial results.Our investment portfolio, which primarily includes investments in money market funds, is generally subject to credit, liquidity, counterparty, marketand interest rate risks that may be exacerbated by the recent global financial crisis. If the banking system or the fixed income, credit or equity marketsdeteriorate or remain volatile, our investment portfolio may be impacted and the values and liquidity of our investments could be adversely affected.In addition, our operating results and financial condition could be negatively affected if, as a result of economic conditions, either:•the demand for, and prices of, our products, licenses, or services are reduced as a result of actions by our competitors orotherwise; or•our financial counterparties or other contractual counterparties are unable to, or do not, meet their contractual commitments to us.Security and privacy breaches in our systems may damage client relations and inhibit our growth.The uninterrupted operation of our hosted solutions and the confidentiality and security of third-party information is critical to our business. Any failuresin our security and privacy measures could have a material adverse effect on our financial position and results of operations. If we are unable to protect, or ourclients perceive that we are unable to protect, the security and privacy of our electronic information, our growth could be materially adversely affected. Asecurity or privacy breach may:•cause our clients to lose confidence in our solutions;•harm our reputation;•expose us to liability; and•increase our expenses from potential remediation costs.While we believe we use proven applications designed for data security and integrity to process electronic transactions, there can be no assurance that ouruse of these applications will be sufficient to address changing market conditions or the security and privacy concerns of existing and potential clients.Interruptions or delays in service from data center hosting facilities could impair the delivery of our service and harm our business.We currently serve our customers from data center hosting facilities. Any damage to, or failure of, our systems generally could result in interruptions inour service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their on-demandservices and adversely affect our renewal rates and our ability to attract new customers.Risks Related to Our Intellectual Property and TechnologyUnauthorized use of our proprietary technology and intellectual property could adversely affect our business and results of operations.Our success and competitive position depend in large part on our ability to obtain and maintain intellectual property rights protecting our products andservices. We rely on a combination of patents, copyrights, trademarks, service marks, trade secrets, confidentiality provisions and licensing arrangements toestablish and protect our intellectual property and proprietary rights. Unauthorized parties may attempt to copy aspects of our products or to obtain, license,sell or otherwise use information that we12Table of Contentsregard as proprietary. Policing unauthorized use of our products is difficult and we may not be able to protect our technology from unauthorized use.Additionally, our competitors may independently develop technologies that are substantially the same or superior to our technologies and that do not infringeour rights. In these cases, we would be unable to prevent our competitors from selling or licensing these similar or superior technologies. In addition, the lawsof some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. Although the source code for our proprietarysoftware is protected both as a trade secret and as a copyrighted work, litigation may be necessary to enforce our intellectual property rights, to protect ourtrade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Litigation,regardless of the outcome, can be very expensive and can divert management efforts.Third parties have claimed and may claim in the future that we are infringing their intellectual property, and we could be exposed to significantlitigation or licensing expenses or be prevented from selling our products if such claims are successful.From time to time, we are subject to claims that we or our customers may be infringing or contributing to the infringement of the intellectual propertyrights of others. We may be unaware of intellectual property rights of others that may cover some of our technologies and products. If it appears necessary ordesirable, we may seek licenses for these intellectual property rights. However, we may not be able to obtain licenses from some or all claimants, the terms ofany offered licenses may not be acceptable to us, and we may not be able to resolve disputes without litigation. Any litigation regarding intellectual propertycould be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. In the event of a claimof intellectual property infringement, we may be required to enter into costly royalty or license agreements. Third parties claiming intellectual propertyinfringement may be able to obtain injunctive or other equitable relief that could effectively block our ability to develop and sell our products.We may incur substantial costs enforcing or acquiring intellectual property rights and defending against third-party claims as a result oflitigation or other proceedings.In connection with the enforcement of our own intellectual property rights, the acquisition of third-party intellectual property rights, or disputes relating tothe validity or alleged infringement of third-party intellectual property rights, including patent rights, we have been, are currently, and may in the future be,subject to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation are typically very costly and can be disruptive toour business operations by diverting the attention and energy of management and key technical personnel. Although we have successfully defended or resolvedpast litigation and disputes, we may not prevail in any ongoing or future litigation and disputes. In addition, we may incur significant costs in acquiring thenecessary third party intellectual property rights for use in our products. Third party intellectual property disputes could subject us to significant liabilities,require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from manufacturing or licensing certain of our products, causesevere disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments with our customers includingcontractual provisions under various license arrangements. Any of these could seriously harm our business.Our software products may have bugs, which could result in delayed or lost revenue, expensive correction, liability to our customers and claimsagainst us.Complex software products such as ours may contain errors, defects or bugs. Defects in the solutions or products that we develop and sell to ourcustomers could require expensive corrections and result in delayed or lost revenue, adverse customer reaction and negative publicity about us or our productsand services. Customers who are not satisfied with any of our products may also bring claims against us for damages, which, even if unsuccessful, wouldlikely be time-consuming to defend, and could result in costly litigation and payment of damages. Such claims could harm our reputation, financial resultsand competitive position.Risks Related to our Corporate Structure, Organization and Common StockThe holdings of our largest stockholder may enable it to influence matters requiring stockholder approval.As of September 30, 2012, Warburg Pincus, a global private equity firm, beneficially owned approximately 17.9% of our outstanding common stock,including 3,562,238 shares of our outstanding Series B Preferred Stock, each of which is convertible into one share of our common stock. Because of itslarge holdings of our capital stock relative to other stockholders, this stockholder has a strong influence over matters requiring approval by our stockholders.The market price of our common stock has been and may continue to be subject to wide fluctuations, and this may make it difficult for you toresell the common stock when you want or at prices you find attractive.Our stock price historically has been, and may continue to be, volatile. Various factors contribute to the volatility of our stock price, including, forexample, quarterly variations in our financial results, new product introductions by us or our competitors13Table of Contentsand general economic and market conditions. Sales of a substantial number of shares of our common stock by our largest stockholders, or the perception thatsuch sales could occur, could also contribute to the volatility or our stock price. While we cannot predict the individual effect that these factors may have onthe market price of our common stock, these factors, either individually or in the aggregate, could result in significant volatility in our stock price during anygiven period of time. Moreover, companies that have experienced volatility in the market price of their stock often are subject to securities class action litigation.If we were the subject of such litigation, it could result in substantial costs and divert management's attention and resources.Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, new regulations promulgated by the Securities and Exchange Commission and the rules of theNasdaq Marketplace, are resulting in increased general and administrative expenses for companies such as ours. These new or changed laws, regulations andstandards are subject to varying interpretations in many cases, and as a result, their application in practice may evolve over time as new guidance is providedby regulatory and governing bodies, which could result in higher costs necessitated by ongoing revisions to disclosure and governance practices. We arecommitted to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest resources to comply with evolvinglaws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time andattention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ fromthe activities intended by regulatory or governing bodies, our business may be harmed. Future sales of our common stock in the public market could adversely affect the trading price of our common stock and our ability to raisefunds in new stock offerings.Future sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could adversely affectprevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of equity or equity-related securities. Inconnection with past acquisitions, we issued a substantial number of shares of our common stock as transaction consideration. We may continue to issueequity securities for future acquisitions, which would dilute existing stockholders, perhaps significantly depending on the terms of such acquisitions. Noprediction can be made as to the effect, if any, that future sales of shares of common stock, or the availability of shares of common stock for future sale, willhave on the trading price of our common stock.We have implemented anti-takeover provisions, which could discourage or prevent a takeover, even if an acquisition would be beneficial to ourstockholders.Provisions of our certificate of incorporation, bylaws and Delaware law, as well as other organizational documents could make it more difficult for a thirdparty to acquire us, even if doing so would be beneficial to our stockholders. These provisions include:•authorized “blank check” preferred stock;•prohibiting cumulative voting in the election of directors;•limiting the ability of stockholders to call special meetings of stockholders;•requiring all stockholder actions to be taken at meetings of our stockholders; and•establishing advance notice requirements for nominations of directors and for stockholder proposals.Item 1B.Unresolved Staff CommentsNone.14Table of ContentsItem 2.PropertiesOur corporate headquarters and administrative, sales, marketing, research and development and customer support functions occupy approximately234,000 square feet of space that we lease in Burlington, Massachusetts. We also lease additional properties in the United States and a number of foreigncountries. The following table summarizes our significant properties as of September 30, 2012:Location Sq. Ft. Lease Term Primary Use (approx.) Burlington, Massachusetts 234,000 March, 2018 Corporate headquarters and administrative, sales, marketing,research and development and customer support functions.Melbourne, Florida 130,000 Owned Administrative, customer support and professional servicesfunctions.Montreal, Quebec 98,000 December, 2016 Research and development, professional services, customersupport functions.Sunnyvale, California 71,000 September, 2013 Administrative, research and development, professional servicesand customer support functions.Bangalore, India 50,000 April, 2015 Transcription and editing servicesIn addition to the properties referenced above, we also lease a number of small sales and marketing offices in the United States and internationally. As ofSeptember 30, 2012, we were productively utilizing substantially all of the space in our facilities, except for space that has been subleased to third parties.Item 3.Legal ProceedingsLike many companies in the software industry, we have from time to time been notified of claims that we may be infringing certain intellectual propertyrights of others. These claims have been referred to counsel, and they are in various stages of evaluation and negotiation. If it appears necessary or desirable,we may seek licenses for these intellectual property rights. There is no assurance that licenses will be offered by all claimants, that the terms of any offeredlicenses will be acceptable to us or that in all cases the dispute will be resolved without litigation, which may be time consuming and expensive, and mayresult in injunctive relief or the payment of damages by us. We do not consider the matters to be material either individually or in the aggregate at this time. Ourview of the matters may change in the future as events related thereto unfold.Item 4.Mine Safety DisclosuresNot applicable.15Table of ContentsPART IIItem 5.Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket InformationOur common stock is traded on the NASDAQ Global Select Market under the symbol “NUAN”. The following table sets forth, for our fiscal quartersindicated, the high and low sales prices of our common stock, in each case as reported on the NASDAQ Global Select Market. Low HighFiscal 2011: First quarter$14.79 $19.19Second quarter16.79 20.97Third quarter18.85 22.93Fourth quarter15.56 22.40Fiscal 2012: First quarter$19.28 $26.97Second quarter24.37 31.15Third quarter19.33 26.85Fourth quarter19.58 25.89HoldersAs of October 31, 2012, there were 765 stockholders of record of our common stock.Dividend PolicyWe have never declared or paid any cash dividends on our common stock. We currently expect to retain future earnings, if any, to finance the growthand development of our business and do not anticipate paying any cash dividends in the foreseeable future. Furthermore, the terms of our credit facility placerestrictions on our ability to pay dividends, except for stock dividends.Issuer Purchases of Equity SecuritiesWe have not announced any currently effective authorization to repurchase shares of our common stock.Unregistered Sales of Equity Securities and Use of ProceedsOn August 14, 2012, we issued 795,848 shares of our common stock to International Business Machines Corporation as consideration for acollaboration agreement. The shares were issued in reliance upon an exemption from the registration requirements of the Securities Act of 1933, as amended,provided by Section 4(2) thereof because the issuance did not involve a public offering.16Table of ContentsItem 6.Selected Consolidated Financial DataThe following selected consolidated financial data is not necessarily indicative of the results of future operations and should be read in conjunction with“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notesincluded elsewhere in this Annual Report on Form 10-K (as adjusted for the retrospective application of FASB ASC 470-20 in 2009 and 2008). Fiscal Year Ended September 30, 2012 2011 2010 2009 2008Operations: Total revenues$1,651.5 $1,318.7 $1,118.9 $950.4 $868.5Gross profit1,046.6 818.9 709.6 590.8 552.8Income from operations126.2 52.6 32.9 57.6 32.6(Benefit) provision for income taxes(141.8) (8.2) 18.0 40.4 14.6Net income (loss)$207.1 $38.2 $(19.1) $(19.4) $(37.0)Net Income(Loss) Per Share Data: Basic$0.67 $0.13 $(0.07) $(0.08) $(0.18)Diluted$0.65 $0.12 $(0.07) $(0.08) $(0.18)Weighted average common sharesoutstanding: Basic306.4 302.3 287.4 253.6 209.8Diluted320.8 316.0 287.4 253.6 209.8Financial Position: Cash and cash equivalents and marketablesecurities$1,129.8 $478.5 $550.0 $527.0 $261.6Total assets5,799.0 4,095.3 3,769.7 3,499.5 2,846.0Long-term debt, net of current portion1,735.8 853.0 851.0 848.9 847.3Total stockholders’ equity2,728.3 2,493.4 2,297.2 2,043.0 1,471.7Selected Data and Ratios: Working capital$736.5 $379.9 $459.2 $376.6 $133.5Depreciation of property and equipment31.7 27.6 21.6 18.7 16.4Amortization of intangible assets155.5 143.3 135.6 115.4 82.6Gross margin percentage63.4% 62.1% 63.4% 62.2% 63.7%Item 7.Management's Discussion and Analysis of Financial Condition and Results of OperationsThe following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of ourbusiness. Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our consolidated financialstatements and the accompanying notes to the consolidated financial statements.Forward-Looking StatementsThis Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 thatinvolve risks, uncertainties and assumptions that, if they never materialize or if they prove incorrect, could cause our consolidated results to differ materiallyfrom those expressed or implied by such forward-looking statements. These forward-looking statements include predictions regarding:•our future revenue, cost of revenue, research and development expenses, selling, general and administrative expenses, amortization of intangibleassets and gross margin;•our strategy relating to our segments;17Table of Contents•the potential of future product releases;•our product development plans and investments in research and development;•future acquisitions, and anticipated benefits from acquisitions;•international operations and localized versions of our products; and•legal proceedings and litigation matters.You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,”“believes,” “estimates,” “predicts,” “intends,” “potential,” “continue” or the negative of such terms, or other comparable terminology. Forward-lookingstatements also include the assumptions underlying or relating to any of the foregoing statements. Our actual results could differ materially from thoseanticipated in these forward-looking statements for many reasons, including the risks described in Item 1A — “Risk Factors” and elsewhere in this AnnualReport on Form 10-K.You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. Weundertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.OverviewWe are a leading provider of voice and language solutions for businesses and consumers around the world. Our solutions are used in healthcare, mobile,consumer, enterprise customer service, and imaging markets. We offer market-leading accuracy, natural language understanding capability, domainknowledge and implementation capabilities, built on our significant, long-term investments in research and development. Our solutions are based on ourproprietary voice and language platform and are used every day by millions of people and thousands of businesses for tasks and services such as requestinginformation from a phone-based self-service solution, dictating medical records, searching the mobile Web by voice, entering a destination into a navigationsystem, or working with PDF documents. We offer our solutions to our customers in a variety of ways, including through products, hosting, professionalservices and maintenance and support. Our product revenues include embedded OEM royalties, traditional enterprise licensing, term-based enterprise licensingand consumer-based sales. Our hosting revenues are primarily generated through on-demand service models, comprised of hosted transaction-based pricingarrangements that typically have multi-year terms. Our hosting and maintenance and support revenues are recurring in nature as our customers need to use ourproducts on a repeat basis to handle their needs in medical transcription, enterprise customer service and mobile connected services. Our professional servicesalso offer a visible revenue stream, as we have a backlog of assignments that take time to complete.We are organized in four segments; Healthcare, Mobile and Consumer, Enterprise, and Imaging. Our solutions and services address our four segments:•Healthcare. We provide a comprehensive set of solutions and services that support the clinical documentation process from capturing the patientencounter with their physician, to improved clinical documentation, coding, compliance and reimbursement. Our hosted and on-premise solutionsprovide platforms to generate and distribute clinical documentation through the use of advanced dictation and transcription features, and allow us todeliver scalable, highly productive medical transcription solutions. We offer solutions that leverage the captured information and with state-of-the-artcoding, compliance and record management which streamlines health information management ("HIM") processes to drive compliance andreimbursement. Through Clinical Documentation Improvement programs, we bridge the gap between physicians and coders. These solutions willsignificantly streamline speed and completeness of documentation so that providers can shorten the time between the patient visit and the paymentfor that visit. Our solutions also enable us to accelerate future innovation to transform the way healthcare providers document patient care, throughimproved interface with electronic medical records and extraction of clinical information to support the billing and insurance reimbursementprocesses. We also offer speech recognition solutions for radiology, cardiology, pathology and related specialties, that help healthcare providersdictate, edit and sign reports without manual transcription. Trends in our healthcare business include a growing customer preference for hostedsolutions, increasing interest in the use of mobile devices to access healthcare systems and records, and increasing international interest. Wecontinue to see strong demand for transactions which involve the sale and delivery of both software and non-software related services or products.Over the last several quarters, we have signed several new contracts for our hosted solutions, and the volume of lines processed in these services hassteadily increased. We are investing to expand our product set to address these opportunities, expand our international capabilities, and reduce ourtime from contract signing to initiation of billable services.•Mobile and Consumer. Our portfolio of mobile and consumer solutions and services includes an integrated suite of18Table of Contentsvoice control and text-to-speech solutions, dictation applications, predictive text technologies, mobile messaging services and emerging services suchas dictation, Web search and voicemail-to-text. Our suite of Dragon general purpose desktop and portable computer dictation applications increasesproductivity by using speech to create documents, streamline repetitive and complex tasks, input data, complete forms and automate manualtranscription processes. In particular, we have focused in recent quarters on integrating our Dragon technology and brand initiatives across mobileand consumer markets. Trends in our mobile-consumer segment include device manufacturers requiring custom applications to deliver unique anddifferentiated products, broadening keyboard technologies to take advantage of touch screens, increasing hands-free capabilities on cell phones andautomobiles to address the growing concern of distracted driving, and the adoption of our technology on a broadening scope of devices, such astelevisions, set-top boxes, e-book readers and tablet computers. We continue to see strong demand for transactions which involve the sale anddelivery of both software and non-software related services or products. We are investing to increase our capabilities and capacity to help devicemanufacturers build custom applications, to increase the capacity of our data centers, to increase the number, kinds and capacity of networkservices, to enable developers to access our technology, and to expand both awareness and channels for our direct-to-consumer products.•Enterprise. We deliver a portfolio of customer service business intelligence and authentication solutions that are designed to help companies bettersupport, understand and communicate with their customers. Our solutions include the use of technologies such as speech recognition, naturallanguage understanding, text-to-speech, biometric voice recognition and analytics to automate caller identification and authorization, call steering,completion of tasks such as updates, purchases and information retrieval, and automated outbound notifications. Our solutions improve thecustomer experience, increase the use of self-service and enable new revenue opportunities. In addition, we offer solutions that can meet customercare needs through direct interaction with thin-client applications on cell phones, enabling customers to very quickly retrieve relevant information.Trends in our enterprise business include increasing interest in the use of mobile applications to access customer care systems and records,increasing interest in coordinating actions and data across customer care channels, and the ability of a broader set of hardware providers andsystems integrators to serve the market. We are investing to expand our product set to address these opportunities, to increase efficiency of ourhosted applications, expand our capabilities and capacity to help customers build custom applications, and broaden our relationships with newhardware and systems integrator partners serving the market.•Imaging. Our imaging solutions offer optical character recognition technology to deliver highly accurate document scanning and storage. Weprovide networked print management and comprehensive PDF applications designed specifically for business users. In addition, we offerapplications that combine network scanning, network print management and PDF creation to quickly enable distribution of documents to users’desktops or to enterprise applications. Our host of services includes software development toolkits for independent software vendors. The imagingmarket is evolving to include more networked solutions, mobile access to networked solutions, and multi-function devices. We are investing toimprove mobile access to our networked products, expand our distribution channels and embedding relationships, and expand our languagecoverage.We leverage our global professional services organization and our extensive network of partners to design and deploy innovative solutions for businessesand organizations around the globe. We market and sell our products directly through a dedicated sales force and through our e-commerce website and alsothrough a global network of resellers, including system integrators, independent software vendors, value-added resellers, hardware vendors,telecommunications carriers and distributors.We have built a world-class portfolio of intellectual property, technologies, applications and solutions through both internal development andacquisitions. We expect to continue to pursue opportunities to broaden these assets and expand our customer base through acquisitions.Confronted by dramatic increases in electronic information, consumers, business personnel and healthcare professionals must use a variety of resourcesto retrieve information, transcribe patient records, conduct transactions and perform other job-related functions. We believe that the power of our solutions cantransform the way people use the Internet, telecommunications systems, electronic medical records, wireless and mobile networks and related corporateinfrastructure to conduct business.StrategyIn fiscal 2013, we will continue to focus on growth by providing market-leading, value-added solutions for our customers and partners through a broadset of technologies, service offerings and channel capabilities. We will also continue to focus on operating efficiencies, expense discipline and acquisitionsynergies to improve gross margins and operating margins. We intend to pursue growth through the following key elements of our strategy:•Extend Technology Leadership. Our solutions are recognized as among the best in their respective categories. We intend19Table of Contentsto leverage our global research and development organization and broad portfolio of technologies, applications and intellectual property to fostertechnological innovation and maintain customer preference for our solutions. We also intend to invest in our engineering resources and seek newtechnological advancements that further expand the addressable markets for our solutions.•Broaden Expertise in Vertical Markets. Businesses are increasingly turning to Nuance for comprehensive solutions rather than for a singletechnology product. We intend to broaden our expertise and capabilities to deliver targeted solutions for a range of industries including mobile devicemanufacturers, healthcare, telecommunications, financial services and government administration. We also intend to expand our global sales andprofessional services capabilities to help our customers and partners design, integrate and deploy innovative solutions.•Increase Subscription and Transaction Based Recurring Revenue. We intend to increase our subscription and transaction based offerings in oursegments. The expansion of our subscription or transaction based solutions will enable us to deliver applications that our customers use on a repeatbasis, and pay for on a per use basis, providing us with the opportunity to enjoy the benefits of recurring revenue streams.•Expand Global Presence. We intend to further expand our international resources to better serve our global customers and partners and to leverageopportunities in emerging markets such as Asia and Latin America. We continue to add regional executives and sales employees in differentgeographic regions to better address demand for voice and language based solutions and services.•Pursue Strategic Acquisitions and Partnerships. We have selectively pursued strategic acquisitions to expand our technology, solutions andresources to complement our organic growth. We have also formed key partnerships with other important companies in our markets of interest, andintend to continue to do so in the future where it will enhance the value of our business. We have proven experience in integrating businesses andtechnologies and in delivering enhanced value to our customers, partners, employees and shareholders. We intend to continue to pursue acquisitionsthat enhance our solutions, serve specific vertical markets and strengthen our technology portfolio.Key MetricsIn evaluating the financial condition and operating performance of our business, management focuses on revenue, net income, gross margins, operatingmargins and cash flow from operations. A summary of these key financial metrics for the fiscal year ended September 30, 2012, as compared to the fiscalyear ended September 30, 2011, is as follows:•Total revenue increased by $332.8 million to $1,651.5 million;•Net income improved by $168.9 million to $207.1 million;•Gross margins increased by 1.3 percentage points to 63.4%;•Operating margins increased by 3.6 percentage point to 7.6%; and•Cash provided by operating activities for the fiscal year ended September 30, 2012 was $473.0 million, an increase of $115.6 million from theprior fiscal year.In addition to the above key financial metrics, we also focus on certain non-financial performance indicators. A summary of these key non-financialperformance indicators as of and for the period ended September 30, 2012, as compared to September 30, 2011, is as follows:•Annualized line run-rate in our on-demand healthcare solutions increased 21% to approximately 4.8 billion lines per year. The annualized line run-rate is determined using billed equivalent line counts in a given quarter, multiplied by four; and•Estimated 3-year value of on-demand contracts increased 43% to approximately $1.9 billion. We determine this value by using our best estimate ofall anticipated future revenue streams under signed on-demand contracts currently in place, whether or not they are guaranteed through a minimumcommitment clause. Our best estimate is based on assumptions about launch dates, volumes and renewal rates within the three year period. Most ofthese contracts are priced by volume of usage and typically have no or low minimum commitments. Actual revenue could vary from our estimatesdue to factors such as cancellations, non-renewals or volume fluctuations.20Table of ContentsRESULTS OF OPERATIONSTotal RevenuesThe following tables show total revenues by product type and revenue by geographic location, based on the location of our customers, in dollars andpercentage change (dollars in millions): Fiscal 2012 Fiscal 2011 Fiscal 2010 % Change 2012 vs.2011 % Change 2011 vs.2010Product and licensing$740.7 $607.4 $473.5 21.9% 28.3%Professional services and hosting674.0 509.1 463.5 32.4% 9.8%Maintenance and support236.8 202.2 181.9 17.1% 11.2%Total Revenues$1,651.5 $1,318.7 $1,118.9 25.2% 17.9%United States$1,175.2 $963.7 $802.0 21.9% 20.2%International476.3 355.0 316.9 34.2% 12.0%Total Revenues$1,651.5 $1,318.7 $1,118.9 25.2% 17.9%Fiscal 2012 Compared to Fiscal 2011The geographic split for fiscal 2012 was 71% of total revenue in the United States and 29% internationally, as compared to 73% of total revenue in theUnited States and 27% internationally for the same period last year. The increase in the proportion of revenue generated internationally was primarily due tocontributions from our Mobile and Consumer and Imaging segments.Fiscal 2011 Compared to Fiscal 2010The geographic split for fiscal 2011 was 73% of total revenue in the United States and 27% internationally, as compared to 72% of total revenue in theUnited States and 28% internationally for the same period last year. The increase in the proportion of revenue generated domestically was primarily due tocontributions from our Healthcare on-demand solutions, which are sold predominantly in the United States.Product and Licensing RevenueProduct and licensing revenue primarily consists of sales and licenses of our technology. The following table shows product and licensing revenue, indollars and as a percentage of total revenue (dollars in millions): Fiscal 2012 Fiscal 2011 Fiscal 2010 % Change 2012 vs.2011 % Change 2011 vs.2010Product and licensing revenue$740.7 $607.4 $473.5 21.9% 28.3%As a percentage of total revenues44.9% 46.1% 42.3% Fiscal 2012 Compared to Fiscal 2011Product and licensing revenue for fiscal 2012 increased $133.3 million, as compared to fiscal 2011. The increase consisted of a $74.6 million increasein Mobile and Consumer revenue primarily driven by growth in sales of our embedded solutions. Imaging product and licensing revenue increased$36.1 million, primarily driven by sales of our multi-functional peripheral (“MFP”) products, which included revenue associated with our acquisition ofEquitrac in the third quarter of fiscal 2011.Fiscal 2011 Compared to Fiscal 2010Product and licensing revenue for fiscal 2011 increased $133.9 million, as compared to fiscal 2010. The increase consisted of a $50.1 million increasein Mobile and Consumer revenue primarily driven by $31.6 million of growth in sales of our embedded solutions, and additional sales of $18.5 million ofDragon consumer products. Imaging revenue increased by $43.9 million, due to increased revenue from our MFP products. Healthcare revenue increased by$23.0 million resulting in part from continued strength in Dragon Medical solutions, which represented $12.8 million of the increase during the year.Enterprise on-premise license sales increased by $16.9 million resulting from the continued increase in global demand for our core speech solutions.21Table of ContentsProfessional Services and Hosting RevenueProfessional services revenue primarily consists of consulting, implementation and training services for customers. Hosting revenue primarily relates todelivering hosted services, such as medical transcription, automated customer care applications, voice message transcription, and mobile search andtranscription, over a specified term. The following table shows professional services and hosting revenue, in dollars and as a percentage of total revenue(dollars in millions): Fiscal 2012 Fiscal 2011 Fiscal 2010 % Change 2012 vs.2011 % Change 2011 vs.2010Professional services and hosting revenue$674.0 $509.1 $463.5 32.4% 9.8%As a percentage of total revenues40.8% 38.6% 41.4% Fiscal 2012 Compared to Fiscal 2011Professional services and hosting revenue for fiscal 2012 increased $164.9 million, as compared to fiscal 2011. The increase consisted of a$130.6 million increase in Healthcare revenue primarily driven by transactional volume growth in our on-demand solutions, of which $77.4 million was dueto our acquisitions closed during fiscal 2011 and 2012. Mobile and Consumer revenue increased $30.9 million, primarily attributable to a $16.0 millionincrease in professional services to support the implementation of our embedded handset and automotive solutions and a $13.4 million increase driven bytransactional volume growth in our connected mobile services.Fiscal 2011 Compared to Fiscal 2010Professional services and hosting revenue for fiscal 2011 increased $45.6 million, as compared to fiscal 2010. The increase consisted of a $40.1 millionincrease in Healthcare revenue primarily driven by transactional volume growth in our on-demand solutions. Mobile and Consumer revenue increased$29.3 million as a result of growth of $19.2 million in our connected mobile services and growth of $10.1 million in professional services for our embeddedsolutions. Enterprise revenue decreased by $24.4 million, primarily due to the decline of one on-demand customer’s volume.Maintenance and Support RevenueMaintenance and support revenue primarily consists of technical support and maintenance services. The following table shows maintenance andsupport revenue, in dollars and as a percentage of total revenue (dollars in millions): Fiscal 2012 Fiscal 2011 Fiscal 2010 % Change 2012 vs.2011 % Change 2011 vs.2010Maintenance and support revenue$236.8 $202.2 $181.9 17.1% 11.2%As a percentage of total revenues14.3% 15.3% 16.3% Fiscal 2012 Compared to Fiscal 2011Maintenance and support revenue for fiscal 2012 increased $34.6 million, as compared to fiscal 2011. The increase was driven by growth in ourproduct and licensing sales which included a $15.8 million increase in Imaging revenue primarily due to our acquisition of Equitrac, and a $10.2 millionincrease in Healthcare revenue driven by growth in sales of our Dragon Medical solutions.Fiscal 2011 Compared to Fiscal 2010Maintenance and support revenue for fiscal 2011 increased $20.3 million, as compared to fiscal 2010. The increase was driven by growth in ourproduct and licensing sales which included a $7.5 million increase in Healthcare driven by Dragon Medical solutions, a $5.5 million increase in Enterprise,and a $5.3 million increase in Imaging with contributions from our acquisition of Equitrac.22Table of ContentsCOSTS AND EXPENSESCost of Product and Licensing RevenueCost of product and licensing revenue primarily consists of material and fulfillment costs, manufacturing and operations costs and third-party royaltyexpenses. The following table shows cost of product and licensing revenue, in dollars and as a percentage of product and licensing revenue (dollars inmillions): Fiscal 2012 Fiscal 2011 Fiscal 2010 % Change 2012 vs.2011 % Change 2011 vs.2010Cost of product and licensing revenue$74.8 $65.6 $49.6 14.0% 32.3%As a percentage of product and licensingrevenue10.1% 10.8% 10.5% Fiscal 2012 Compared to Fiscal 2011Cost of product and licensing revenue for fiscal 2012 increased $9.2 million, as compared to fiscal 2011. The increase was primarily due to a $5.0million increase in Imaging costs driven by our acquisition of Equitrac. Gross margin increased 0.7 percentage points primarily due to a mix shift toward ourMobile embedded solutions which carry a higher gross margin.Fiscal 2011 Compared to Fiscal 2010Cost of product and licensing revenue for fiscal 2011 increased $16.0 million, as compared to fiscal 2010. The increase was primarily due to anincrease in hardware costs associated with increased revenues from our MFP products in the Imaging segment. Gross margin remained relatively flat duringthe period.Cost of Professional Services and Hosting RevenueCost of professional services and hosting revenue primarily consists of compensation for services personnel, outside consultants and overhead, as wellas the hardware, infrastructure and communications fees that support our hosting solutions. The following table shows cost of professional services andhosting revenue, in dollars and as a percentage of professional services and hosting revenue (dollars in millions): Fiscal 2012 Fiscal 2011 Fiscal 2010 % Change 2012 vs.2011 % Change 2011 vs.2010Cost of professional services and hostingrevenue$424.7 $341.1 $280.7 24.5% 21.5%As a percentage of professional services andhosting revenue63.0% 67.0% 60.6% Fiscal 2012 Compared to Fiscal 2011Cost of professional services and hosting revenue for fiscal 2012 increased $83.6 million, as compared to fiscal 2011. The increase was primarilydriven by a $73.5 million increase in Healthcare costs related to growth in our on-demand solutions, including the impact from our acquisitions closed duringfiscal 2011 and 2012. Gross margin increased 4.0 percentage points primarily due to a mix shift toward our Healthcare on-demand offerings which carry ahigher gross margin and expanded margins due to an increase in automation services relating to our connected mobile solutions in our Mobile and Consumersegment.Fiscal 2011 Compared to Fiscal 2010Cost of professional services and hosting revenue for fiscal 2011 increased $60.4 million, as compared to fiscal 2010. The increase was due to a$29.6 million increase in Healthcare costs primarily related to growth in our on-demand solutions, and a $16.8 million increase in stock-based compensationrelated to our professional services personnel. Gross margin relative to our professional services and hosting revenue decreased 6.4 percentage points primarilydue to increased stock-based compensation expense reducing gross margin by 3.3 percentage points and the remainder is primarily related to volume andrevenue declines from one on-demand Enterprise customer.23Table of ContentsCost of Maintenance and Support RevenueCost of maintenance and support revenue primarily consists of compensation for product support personnel and overhead. The following table showscost of maintenance and support revenue, in dollars and as a percentage of maintenance and support revenue (dollars in millions): Fiscal 2012 Fiscal 2011 Fiscal 2010 % Change 2012 vs.2011 % Change 2011 vs.2010Cost of maintenance and support revenue$45.3 $38.1 $31.3 18.9% 21.7%As a percentage of maintenance and supportrevenue19.1% 18.8% 17.2% Fiscal 2012 Compared to Fiscal 2011Cost of maintenance and support revenue for fiscal 2012 increased $7.2 million, as compared to fiscal 2011. The increase was primarily due to a $6.9million increase in Imaging costs related to the increase revenues from our Imaging MFP products, which included the impact from the Equitrac acquisition infiscal 2011. Gross margin remained relatively flat during the period.Fiscal 2011 Compared to Fiscal 2010Cost of maintenance and support revenue for fiscal 2011 increased $6.8 million, as compared to fiscal 2010. The increase included a $2.5 millionincrease in costs due to higher volumes of Enterprise application maintenance and support, a $2.1 million increase in costs related to increased revenue fromour MFP products in our Imaging business, which included the impact from our acquisition of Equitrac, and a $1.4 million increase in stock-basedcompensation expense. The increase in stock-based compensation expense reduced gross margin by 0.7% during the period. Excluding impact from stock-based compensation, gross margin remained relatively flat during the period.Research and Development ExpenseResearch and development expense primarily consists of salaries, benefits and overhead relating to engineering staff as well as third party engineeringcosts. The following table shows research and development expense, in dollars and as a percentage of total revenue (dollars in millions): Fiscal 2012 Fiscal 2011 Fiscal 2010 % Change 2012 vs.2011 % Change 2011 vs.2010Research and development expense$225.4 $179.4 $152.1 25.6% 17.9%As a percentage of total revenues13.6% 13.6% 13.6% Fiscal 2012 Compared to Fiscal 2011Research and development expense for fiscal 2012 increased $46.0 million, as compared to fiscal 2011. The increase was attributable to a$35.8 million increase in compensation expense, driven by headcount growth including additional headcount from our acquisitions during the period.Fiscal 2011 Compared to Fiscal 2010Research and development expense for fiscal 2011 increased $27.3 million, as compared to fiscal 2010. The increase was attributable to a $28.6 millionincrease in compensation expense, driven by a $14.9 million increase in stock-based compensation expense and headcount growth as well as additionalheadcount from our acquisitions during the period. The increase was offset by reimbursement of $5.9 million under a new collaboration agreement signedduring the period as discussed in Note 2 of our Notes to Consolidated Financial Statements.Sales and Marketing ExpenseSales and marketing expense includes salaries and benefits, commissions, advertising, direct mail, public relations, tradeshow costs and other costs ofmarketing programs, travel expenses associated with our sales organization and overhead. The following24Table of Contentstable shows sales and marketing expense, in dollars and as a percentage of total revenue (dollars in millions): Fiscal 2012 Fiscal 2011 Fiscal 2010 % Change 2012 vs.2011 % Change 2011 vs.2010Sales and marketing expense$369.2 $306.4 $266.2 20.5% 15.1%As a percentage of total revenues22.4% 23.2% 23.8% Fiscal 2012 Compared to Fiscal 2011Sales and marketing expense for fiscal 2012 increased $62.8 million, as compared to fiscal 2011. The increase was primarily attributable to a$35.9 million increase in compensation expense, driven primarily by additional headcount due to operational and acquisition growth and increased stock-based compensation expense. Additionally, marketing and channel program spending increased $18.6 million to drive revenue growth as part of demandgeneration activities.Fiscal 2011 Compared to Fiscal 2010Sales and marketing expense for fiscal 2011 increased $40.2 million, as compared to fiscal 2010. The increase was primarily attributable to a$21.7 million increase in compensation expense, driven primarily by additional headcount to support growth and a $5.1 million increase in stock-basedcompensation expense. Additionally, marketing and channel program spending increased $14.0 million to drive overall revenue growth.General and Administrative ExpenseGeneral and administrative expense primarily consists of personnel costs for administration, finance, human resources, information systems, facilitiesand general management, fees for external professional advisers including accountants and attorneys, insurance, and provisions for doubtful accounts. Thefollowing table shows general and administrative expense, in dollars and as a percentage of total revenue (dollars in millions): Fiscal 2012 Fiscal 2011 Fiscal 2010 % Change 2012 vs.2011 % Change 2011 vs.2010General and administrative expense$163.3 $147.6 $122.1 10.6% 20.9%As a percentage of total revenues9.9% 11.2% 10.9% Fiscal 2012 Compared to Fiscal 2011General and administrative expense for fiscal 2012 increased $15.7 million, as compared to fiscal 2011. The increase was primarily attributable to a$26.8 million increase in compensation expense, driven primarily by additional headcount due to organic and acquisition growth and increased stock-basedcompensation expense, offset by a $11.0 million decrease in legal costs primarily associated with decrease in on-going litigation activities.Fiscal 2011 Compared to Fiscal 2010General and administrative expense for fiscal 2011 increased $25.5 million, as compared to fiscal 2010. The increase was primarily attributable to a$14.5 million increase in compensation expense and a $9.1 million increase in legal costs associated with on-going litigation and intellectual propertymaintenance. The increase in compensation expense was driven primarily by additional headcount due to organic growth and our acquisitions during theperiod and an $8.9 million increase in stock-based compensation expense.25Table of ContentsAmortization of Intangible AssetsAmortization of acquired patents and core and completed technology are included in cost of revenue and the amortization of acquired customer andcontractual relationships, non-compete agreements, acquired trade names and trademarks, and other intangibles are included in operating expenses. Customerrelationships are amortized on an accelerated basis based upon the pattern in which the economic benefits of the customer relationships are being realized.Other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense was recorded as follows (dollarsin millions): Fiscal 2012 Fiscal 2011 Fiscal 2010 % Change 2012 vs.2011 % Change 2011 vs.2010Cost of revenue$60.0 $55.1 $47.8 8.9% 15.3%Operating expense95.4 88.2 87.8 8.2% 0.5%Total amortization expense$155.4 $143.3 $135.6 8.4% 5.7%As a percentage of total revenues9.4% 10.9% 12.1% Fiscal 2012 Compared to Fiscal 2011Amortization of intangible assets expense for fiscal 2012 increased $12.1 million, as compared to fiscal 2011. The increase was primarily attributableto the amortization of acquired customer relationships from our business acquisitions during fiscal 2012 and the second half of fiscal 2011.Fiscal 2011 Compared to Fiscal 2010Amortization of intangible assets expense for fiscal 2011 increased $7.7 million, as compared to fiscal 2010. The increase was primarily attributable tothe amortization of acquired technology and patent intangible assets from our business acquisitions during fiscal 2011 and our acquisitions of patents andtechnology from third-parties during the fiscal 2010.Based on our balance of amortizable intangible assets as of September 30, 2012, and assuming no impairment or change in useful lives, we expectamortization of intangible assets for fiscal 2013 to be $150.6 million.Acquisition-Related Costs, NetAcquisition-related costs include those costs related to business and other acquisitions, including potential acquisitions. These costs consist of (i)transition and integration costs, including retention payments, transitional employee costs and earn-out payments treated as compensation expense, as well asthe costs of integration-related services provided by third-parties; (ii) professional service fees, including third-party costs related to the acquisition, and legaland other professional service fees associated with disputes and regulatory matters related to acquired entities; and (iii) adjustments to acquisition-related itemsthat are required to be marked to fair value each reporting period, such as contingent consideration, and other items related to acquisitions for which themeasurement period has ended. Acquisition-related costs were recorded as follows (dollars in millions):Fiscal 2012 Fiscal 2011 Fiscal 2010% Change 2012 vs.2011% Change 2011 vs.2010Professional service fees$48.4 $18.0 $17.1 168.9 % 5.3 %Transition and integration costs9.9 3.4 13.6 191.2 % (75.0)%Acquisition-related adjustments0.4 0.5 (0.1) (20.0)% (600.0)%Total Acquisition-related costs, net$58.7 $21.9 $30.6 168.0 % (28.4)%As a percentage of total revenue3.6% 1.7% 2.7% Fiscal 2012 Compared to Fiscal 2011Acquisition-related costs, net for fiscal 2012 increased $36.8 million, as compared to fiscal 2011. The increase was primarily driven by an increase inprofessional fees incurred associated with the post-acquisition legal and regulatory costs associated with recently completed acquisitions. For fiscal 2012,transition and integration costs consisted primarily of the costs associated with transitional employees from our acquisition of Swype.26Table of ContentsFiscal 2011 Compared to Fiscal 2010Acquisition-related costs, net for fiscal 2011 decreased $8.7 million, as compared to fiscal 2010. The decrease was primarily driven by the reduction intransition and integration costs. For fiscal 2010, $8.9 million of transition and integration costs was driven by our acquisitions of eCopy and SpinVox.Restructuring and Other Charges, NetThe following table sets forth the activity relating to the restructuring accruals included in Restructuring and Other Charges, net, in fiscal 2012, 2011and 2010 (dollars in millions): PersonnelRelated FacilitiesCosts Other TotalBalance at September 30, 20090.6 0.3 — 0.9Restructuring and other charges, net9.6 0.2 8.9 18.7Non-cash adjustments— — (6.8) (6.8)Cash payments(8.4) (0.2) (2.1) (10.7)Balance at September 30, 20101.8 0.3 — 2.1Restructuring and other charges, net9.1 1.9 12.0 23.0Non-cash adjustments0.2 — (11.9) (11.7)Cash payments(6.0) (1.2) (0.1) (7.3)Balance at September 30, 20115.1 1.0— 6.1Restructuring and other charges, net6.7 0.4 0.4 7.5Cash payments(10.1) (1.3) (0.4) (11.8)Balance at September 30, 2012$1.7 $0.1 $— $1.8For fiscal 2012, we recorded net restructuring and other charges of $7.5 million, which included a $6.7 million severance charge related to theelimination of approximately 160 personnel across multiple functions primarily to eliminate duplicative positions as a result of businesses acquired.For fiscal 2011, we recorded net restructuring and other charges of $23.0 million, which consisted primarily of an $11.7 million impairment chargerelated to our Dictaphone trade name resulting from a recent change in our Healthcare marketing strategy under which we plan to consolidate our brands andwill no longer be using the Dictaphone trade name in our new product offerings. In addition, we recorded a $9.1 million charge related to the elimination ofapproximately 200 personnel across multiple functions primarily to eliminate duplicative positions as a result of businesses acquired during the year and a$1.9 million charge related to the elimination or consolidation of excess facilities.For fiscal 2010, we recorded net restructuring and other charges of $18.7 million, which consisted primarily of $9.6 million related to the elimination ofapproximately 175 personnel across multiple functions within our company, including acquired entities, a $6.8 million write-off of previously capitalizedpatent defense costs as a result of unsuccessful litigation and $2.1 million of contract termination costs.27Table of ContentsOther Income (Expense)Other income (expense) consists of interest income, interest expense, gain (loss) from security price guarantee derivatives, gain (loss) from foreignexchange, and gains (losses) from other non-operating activities. The following table shows other income (expense) in dollars and as a percentage of totalrevenue (dollars in millions): Fiscal 2012 Fiscal 2011 Fiscal 2010 % Change 2012 vs.2011 % Change 2011 vs.2010Interest income$2.2 $3.2 $1.2 (31.3)% 166.7 %Interest expense(85.3) (36.7) (41.0) 132.4 % (10.5)%Other income, net22.2 11.0 5.8 101.8 % 89.7 %Total other expense, net$(60.9) $(22.5) $(34.0) As a percentage of total revenue3.7% 1.7% 3.0% Fiscal 2012 Compared to Fiscal 2011Interest expense for fiscal 2012 increased $48.6 million, as compared to fiscal 2011. The increase in interest expense was due to the issuance of $690million of 2.75% Convertible Debentures due in 2031 in the first quarter of fiscal 2012 and $700 million of 5.375% Senior Notes due in 2020 in the fourthquarter of fiscal 2012. This increased cash interest expense by $22.7 million and non-cash interest by $21.8 million.Other income, net for fiscal 2012 increased $11.2 million, as compared to fiscal 2011. The increase was primarily driven by a $13.7 million gainrecognized on the original non-controlling equity interest in Vlingo upon our acquisition of Vlingo during the third quarter of fiscal 2012.Fiscal 2011 Compared to Fiscal 2010Interest expense for fiscal 2011 decreased $4.3 million, as compared to fiscal 2010. The decrease in interest expense was primarily driven by decreasedinterest costs as a result of lower rates on our outstanding variable rate borrowings. Other income, net increased $5.2 million, as compared to fiscal 2011,driven primarily by a $9.3 million increase in gains on our security price guarantee derivatives. This was offset by a decrease in foreign exchange gains of$4.7 million resulting from our implementation of a hedging program in fiscal 2011 to reduce our exposure to changes in foreign currency exchange rates.(Benefit) Provision for Income TaxesThe following table shows the (benefit) provision for income taxes and the effective income tax rate (dollars in millions): Fiscal 2012 Fiscal 2011 Fiscal 2010 % Change 2012 vs.2011 % Change 2011 vs.2010(Benefit) provision for income taxes$(141.8) $(8.2) $18.0 1,629.3% (145.6)%Effective income tax rate(217.2)% (27.4)% (1,693.3)% Fiscal 2012 Compared to Fiscal 2011Our effective income tax rate was (217.2)% and (27.4)% for fiscal 2012 and 2011, respectively. Benefit from income taxes increased $133.6 millionfrom $8.2 million in fiscal 2011 to $141.8 million in fiscal 2012. The increase in benefit from income taxes included the release of our valuation allowanceresulting from our acquisitions during fiscal 2012 and the recognition of certain deferred tax assets. During fiscal 2012, we recorded a release of valuationallowance of $75.1 million as a result of tax benefits recorded in connection with our acquisitions during the period for which a net deferred tax liability wasestablished in purchase accounting. In addition, by the end of fiscal 2012 , we made a determination that it is more likely than not that certain of our deferredtax assets, primarily in the U.S., will be realized which resulted in a release of $70.5 million of our valuation allowance (See Note 20 of our Notes toConsolidated Financial Statements).28Table of ContentsFiscal 2011 Compared to Fiscal 2010Our effective income tax rate was (27.4)% and (1,693.3)% for fiscal 2011 and 2010, respectively. Provision for income taxes decreased $26.2 millionfrom a provision of $18.0 million to a benefit of $8.2 million. The decrease in the tax provision was primarily related to a tax benefit recorded in connectionwith the Equitrac acquisition for which a net deferred tax liability was recorded in purchase accounting, resulting in a release of our valuation allowance of$34.7 million and therefore a tax benefit during the year. The decrease in the tax provision was also due to a release of $10.6 million of our valuation allowanceassociated with the change in characterization of a previously acquired intangible asset from an indefinite life asset to a finite life asset during our fourthquarter of fiscal 2011. These deferred tax benefits were offset by a $21.4 million increase in our current income tax provision primarily driven by higher U.S.taxable income.SEGMENT ANALYSISWe operate in, and report financial information for, the following four reportable segments: Healthcare, Mobile and Consumer, Enterprise and Imaging.The Healthcare segment is primarily engaged in voice and language processing for healthcare information management offered both by licensing and on-demand services. The Mobile and Consumer segment is primarily engaged in sales of voice and language solutions that are embedded in a device (such as acell phone, car or tablet computer) or installed on a personal computer. Our Enterprise segment offers voice and language solutions by licensing as well as on-demand solutions hosted by us that are designed to help companies better support, understand and communicate with their customers. The Imaging segmentsells document capture and print management solutions that are embedded in copiers and multi-function printers as well as packaged software for documentmanagement.Segment revenues include certain revenue adjustments related to acquisitions that would otherwise have been recognized but for the purchase accountingtreatment of the business combinations. Segment revenues also include revenue that we would have otherwise recognized had we not acquired intellectualproperty and other assets from the same customer during the same quarter. We include these revenues and the related cost of revenues to allow for morecomplete comparisons to the financial results of historical operations, forward-looking guidance and the financial results of peer companies and in assessingmanagement performance.29Table of ContentsSegment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit reflects the direct controllablecosts of each segment together with an allocation of sales and corporate marketing expenses, and certain research and development project costs that benefitmultiple product offerings. Segment profit represents income from operations excluding stock-based compensation, amortization of intangible assets,acquisition-related costs, net, restructuring and other charges, net, costs associated with intellectual property collaboration agreements, other income (expense),net and certain unallocated corporate expenses. Segment profit includes an adjustment for acquisition-related revenues and cost of revenues which includesrevenue from acquisitions that would have otherwise been recognized but for the purchase accounting treatment of these transactions. We believe that theseadjustments allow for more complete comparisons to the financial results of the historical operations. The following table presents segment results (dollars inmillions):Fiscal 2012 Fiscal 2011 Fiscal 2010 % Change 2012 vs.2011 % Change 2011 vs.2010Segment Revenues Healthcare$669.4 $526.8 $449.2 27.1 % 17.3 %Mobile and Consumer508.3 393.3 309.5 29.2 % 27.1 %Enterprise332.0 296.4 296.2 12.0 % 0.1 %Imaging228.4 177.4 140.7 28.7 % 26.1 %Total segment revenues$1,738.1 $1,393.9 $1,195.6 24.7 % 16.6 %Less: acquisition related revenues(86.6) (75.2) (76.7) 15.2 % (2.0)%Total revenues$1,651.5 $1,318.7 $1,118.9 25.2 % 17.9 %Segment Profit Healthcare$314.9 $269.4 $227.4 16.9 % 18.5 %Mobile and Consumer227.6 170.9 120.0 33.2 % 42.4 %Enterprise90.8 63.3 82.3 43.4 % (23.1)%Imaging91.6 69.1 55.6 32.6 % 24.3 %Total segment profit$724.9 $572.7 $485.3 26.6 % 18.0 %Segment Profit Margin Healthcare47.0% 51.1% 50.6% (4.1) 0.5Mobile and Consumer44.8% 43.5% 38.8% 1.3 4.7Enterprise27.3% 21.4% 27.8% 5.9 (6.4)Imaging40.1% 39.0% 39.5% 1.1 (0.5)Total segment profit margin41.7% 41.1% 40.6% 0.6 0.5Segment RevenueFiscal 2012 Compared to Fiscal 2011•Healthcare segment revenue increased $142.6 million, primarily attributable to revenue growth in on-demand solutions. Professional services andhosting revenue increased $119.7 million due to growth in on-demand transactional volume, of which $77.4 million of the increase was due toadditional volume resulting from our acquisitions during fiscal 2011 and 2012.•Mobile and Consumer segment revenue increased $115.0 million. Our product and licensing revenue grew $83.3 million, mainly driven by growthin our embedded handset, automotive and other consumer electronics. Our professional services and hosting revenue grew $32.8 million primarilydriven by a $17.7 million increase in professional services to support the implementations of our embedded handset and automotive solutions aswell as a $15.0 million increase driven by transactional volume growth in our connected mobile services.•Enterprise segment revenue increased $35.6 million. Our product and licensing revenue grew $25.0 million, driven primarily by contributionsfrom our acquisition of Loquendo. Our maintenance and support revenue grew $8.2 million from the continued strength in renewals.•Imaging segment revenue increased $51.0 million. Our product and licensing revenue grew $32.5 million and our maintenance and support grew$18.2 million, primarily due to growth in sales from our MFP products driven by our acquisition of Equitrac.30Table of ContentsFiscal 2011 Compared to Fiscal 2010•Healthcare segment revenue increased by $77.6 million, primarily attributable to revenue growth in both licenses and on-demand solutions. On-demand revenue increased by $47.2 million due to increased transactional volume. Product and licensing revenue increased by $20.5 million due tovolume and continued strong demand of our Healthcare license offerings resulting in part from continued strength in Dragon Medical solutions.•Mobile and Consumer segment revenue increased by $83.8 million. Our product and licensing revenue grew $57.4 million primarily related togrowth of $39.3 million in our embedded handset and automotive products and $18.1 million in our Dragon products. Our professional servicesand hosting revenue grew $24.5 million related to both the increased volume of transactions in our connected mobile services as well as professionalservices revenue to support the implementation of recent handset and automobile design wins.•Enterprise segment revenue remained flat from fiscal 2010 to fiscal 2011. Our product and licensing revenue grew $18.8 million and maintenanceand support revenue grew $6.4 million resulting from the continued increase in global demand for our core speech solutions. These increases wereoffset by a decline of $25.0 million in our professional services and hosting revenue, primarily attributable to the decline in volume from one on-demand customer.•Imaging segment revenue increased by $36.7 million, primarily attributable to growth in sales from our MFP products, which includes the impactfrom our acquisition of Equitrac.Segment ProfitFiscal 2012 Compared to Fiscal 2011•Healthcare segment profit in fiscal 2012 increased $45.5 million, or 16.9%, over fiscal 2011, driven primarily by segment revenue growth of27.1%, partially offset by increased costs from growth in sales of our on-demand solutions. Segment profit margin decreased 4.1 percentagepoints from 51.1% in fiscal 2011 to 47.0% in fiscal 2012. This decrease was primarily driven by a decrease of 5.1 percentage points in margin dueto a higher proportion of editing services in our on-demand offerings, which included impact of the Transcend acquisition, and a 0.6 percentagepoint improvement due to leveraging of selling expenses.•Mobile and Consumer segment profit in fiscal 2012 increased $56.7 million, or 33.2%, over fiscal 2011, primarily due to segment revenue growthof 29.2%, partially offset by increased investment in research and development and marketing. Segment profit margin in fiscal 2012 improved 1.3percentage points from 43.5% in fiscal 2011 to 44.8% in fiscal 2012. This increase was primarily driven by a 2.2 percentage point improvement inmargin due to a favorable mix shift toward our embedded product revenue and a 2.5 percentage point improvement due to leveraging of sellingexpense. These improvements were offset by a 2.0 percentage point decrease in segment profit margin due to increased investment in research anddevelopment to support new product offerings and a 1.1 percentage point decrease as a result of higher marketing demand creation costs to driveDragon consumer product sales.•Enterprise segment profit in fiscal 2012 increased $27.5 million, or 43.4%, over fiscal 2011, driven primarily by segment revenue growth of12.0%, partially offset by increased investment in sales expense. Segment profit margin in fiscal 2012 increased 5.9 percentage points from 21.4%in fiscal 2011 to 27.3% in fiscal 2012. This increase benefited from a favorable mix of product and licensing revenues which includes the impact ofthe acquisition of Loquendo, contributing to an increase in gross margins of 5.3 percentage points, as well as a 1.2 percentage point improvementdriven by operating expense leverage in research and development.•Imaging segment profit in fiscal 2012 increased $22.5 million, or 32.6%, over fiscal 2011, driven in part from a 28.7% increase in segmentrevenue, offset by increased investment in marketing and selling expenses. Segment profit margin increased 1.1 percentage points from 39.0% infiscal 2011 to 40.1% in fiscal 2012. The change in segment profit margin included a 2.5 percentage point improvement due to leveraging sellingexpense, offset by 1.9 percentage points of segment margin erosion due to increased marketing spend to drive revenue growth.Fiscal 2011 Compared to Fiscal 2010•Healthcare segment profit in fiscal 2011 increased $42.0 million, or 18.5%, over fiscal 2010, driven primarily by segment revenue growth of17.3%. Segment profit increased by 0.5 percentage points as a result of operating expense leverage and a $5.9 million reimbursement under a newcollaboration agreement signed during the period as discussed in Note 2 to the audited consolidated financial statements.31Table of Contents•Mobile and Consumer segment profit in fiscal 2011 increased $50.9 million, or 42.4%, over fiscal 2010, resulting in part from the 27.1% increasein segment revenue. Segment profit margin in fiscal 2011 improved 4.7 percentage points from 38.8% in fiscal 2010 to 43.5% in fiscal 2011. Thesegment profit margin improvements were driven primarily by embedded and mobile services gross margin improvements, and from leverage inresearch and development and selling and marketing expenses.•Enterprise segment profit in fiscal 2011 decreased $19.0 million, or 23.1%, over fiscal 2010, while sales were essentially flat. Segment profitmargin in fiscal 2011 declined 6.4 percentage points from 27.8% in fiscal 2010 to 21.4% in fiscal 2011. This decrease was driven by decreasedvolume and revenue from one on-demand customer resulting in a 3.8 percentage point decrease in segment profit and increased spending in researchand development contributed to a 1.7 percentage point decrease in segment profit.•Imaging segment profit in fiscal 2011 increased $13.5 million, or 24.3%, over fiscal 2010, driven primarily by the 26.1% increase in sales.Segment profit margin in fiscal 2011 remained relatively flat at 39.0% in fiscal 2011 compared to 39.5% in fiscal 2010.LIQUIDITY AND CAPITAL RESOURCESCash and cash equivalents totaled $1,129.8 million as of September 30, 2012, an increase of $682.6 million as compared to $447.2 million as ofSeptember 30, 2011. Our working capital at September 30, 2012 was $736.5 million compared to $379.9 million of working capital at September 30, 2011.Cash and cash equivalents held by our international operations totaled $78.8 million and $61.7 million at September 30, 2012 and 2011, respectively. Basedon our business plan, we expect the cash held overseas will continue to be used for our international operations and therefore do not anticipate repatriating thesefunds. If we were to repatriate these amounts, we do not believe that the resulting withholding taxes payable would have a material impact on our liquidity. Asof September 30, 2012, our total accumulated deficit was $161.2 million. We do not expect our accumulated deficit to impact our future ability to operate thebusiness given our strong cash and operating cash flow positions.On October 22, 2012, we issued $350.0 million aggregate principal amount of our 5.375% Senior Notes due 2020 (the "Notes"). The Notes were issuedpursuant to the indenture agreement dated August 14, 2012 related to our $700.0 million aggregate principal amount of 5.375% Senior Notes due 2020 issuedin the fourth quarter of fiscal 2012. Total proceeds, net of issuance costs, were $353.3 million. On October 31, 2012, we used $143.5 million of the netproceeds to prepay the term loans maturing in March 2013.On October 1, 2012, we acquired J.A. Thomas and Associates, Inc. (“JA Thomas”), the nation's premier provider of physician-oriented, clinicaldocumentation improvement programs for the healthcare industry, for approximately $265.0 million, of which $240.0 million was paid in cash at the closing,and the remaining $25.0 million is payable in cash or shares of our common stock, at our election, on the second anniversary of the closing date, subject tocertain adjustments and conditions.We believe our current cash and cash equivalents are sufficient to meet our operating needs for at least the next twelve months.Cash provided by operating activitiesFiscal 2012 Compared to Fiscal 2011Cash provided by operating activities for fiscal 2012 was $473.0 million, an increase of $115.6 million, or 32%, as compared to cash provided byoperating activities of $357.4 million for fiscal 2011. The increase was primarily driven by the following factors:•An increase of $89.8 million in cash flows resulting from higher net income, exclusive of non-cash adjustment items which includes deferred taxbenefit of $151.5 million driven by the release of our valuation allowance;•An increase of $42.5 million in cash flows generated by changes in working capital excluding deferred revenue, primarily driven by a onetimepayment of €18.0 million ($23.4 million equivalent) during the first quarter of fiscal 2011 for a fixed obligation assumed in connection with ouracquisition of SpinVox and a $30.8 million increase in cash flows due to changes in accounts payable; and•A decrease in cash flows of $16.8 million from deferred revenue.32Table of ContentsFiscal 2011 Compared to Fiscal 2010Cash provided by operating activities for fiscal 2011 was $357.4 million, an increase of $61.1 million, or 21%, as compared to cash provided byoperating activities of $296.3 million for fiscal 2010. The increase was primarily driven by the following factors:•An increase of $90.0 million in cash flows resulting from an increase in net income, exclusive of non-cash adjustment items which include a one-time non-cash tax benefit adjustment of $34.7 million reducing the valuation allowance on deferred tax assets as a result of the Equitrac acquisition;•An increase in cash flows of $16.8 million from an overall increase in deferred revenue; and•A decrease of $45.6 million in cash flows generated by changes in working capital excluding deferred revenue, primarily driven by an€18.0 million ($23.4 million equivalent) payment in fiscal 2011 for a fixed obligation assumed in connection with our acquisition of SpinVox and a$24.8 million decrease in cash flows due to changes in accounts receivable.Cash used in investing activitiesFiscal 2012 compared to Fiscal 2011Cash used in investing activities for fiscal 2012 was $924.5 million, an increase of $498.6 million, or 117%, as compared to cash used in investingactivities of $425.9 million for fiscal 2011. The net increase was primarily driven by the following factors:•An increase in cash outflows of $475.9 million for business and technology acquisitions, primarily driven by the cash consideration paid inconnection with our acquisitions in fiscal 2012; and•An increase in cash outflows of $28.0 million resulting from additional capital expenditure, primarily related to the purchase of a corporate assetduring fiscal 2012.Fiscal 2011 compared to Fiscal 2010Cash used in investing activities for fiscal 2011 was $425.9 million, an increase of $110.3 million or 35%, as compared to cash used in investingactivities of $315.6 million for fiscal 2010. The net increase was primarily driven by the following factors:•An increase in cash outflows of $198.6 million for acquisitions in fiscal 2011 as compared to fiscal 2010;•A decrease in net cash outflows of $34.4 million to purchase marketable securities net of proceeds; and•A decrease in cash outflows of $39.3 million related to restricted cash. During fiscal 2011, we received $17.2 million in cash upon satisfaction ofthe restriction of our restricted cash. During fiscal 2010, we used $22.1 million for an irrevocable standby letter of credit account for a fixedobligation in connection with our acquisition of SpinVox in 2010.Cash provided by financing activitiesFiscal 2012 compared to Fiscal 2011Cash provided by financing activities for fiscal 2012 was $1,133.0 million, an increase of $1,127.0 million, or 18,783%, as compared to cashprovided by financing activities of $6.0 million for fiscal 2011. The change was primarily driven by the following factors:•A $689.1 million cash inflow resulting from the issuance of the Senior Notes due 2020, net of issuance costs in August 2012;•A $676.1 million cash inflow resulting from the issuance of the 2031 Debentures, net of issuance costs, offset by $200.0 million that we used torepurchase 8.5 million shares of our common stock in October 2011;•Offset by a decrease of $21.1 million cash benefit resulting from excess tax benefits on employee equity awards; and•An increase in cash outflows of $13.0 million as a result of higher cash payments required to net share settle employee equity awards, due to anincrease in the number of shares vested and an increase in the intrinsic value of the shares vested as a result of the overall increase in our stock pricein fiscal 2012 as compared to fiscal 2011.33Table of ContentsFiscal 2011 compared to Fiscal 2010Cash provided by financing activities for fiscal 2011 was $6.0 million, a decrease of $3.9 million, or 39%, as compared to cash provided by financingactivities of $9.9 million for fiscal 2010. The change was primarily driven by the following factors:•An increase of $16.5 million cash benefit resulting from excess tax benefits on employee equity awards;•An increase in cash outflows of $14.9 million to net share settle employee equity awards, due to an increase in the number of shares vested and anincrease in the intrinsic value of the shares vested as a result of the overall increase in our stock price in fiscal 2011 as compared to fiscal 2010; and•A decrease in cash inflows of $12.4 million from the sale of our common stock. During fiscal 2010, warrants to purchase 2.5 million of our shareswere exercised, whereas we had no warrant activity in fiscal 2011.Credit Facilities and Debt5.375% Senior Notes due 2020On August 14, 2012, we issued $700 million aggregate principal amount of 5.375% Senior Notes (the "Notes") in a private placement due on August15, 2020. The proceeds from the Notes were approximately $689.1 million, net of issuance costs. The Notes bear interest at 5.375% per year, payable incash semi-annually in arrears, beginning on February 15, 2013.The Notes are the unsecured senior obligations of the Company and are guaranteed (the “Guarantees”) on an unsecured senior basis by substantially allof the Company's direct and indirect wholly owned domestic subsidiaries (the “Subsidiary Guarantors”). The Notes and Guarantees rank equally in right ofpayment with all of the Company's and the Subsidiary Guarantors' existing and future unsecured senior debt and rank senior in right of payment to all of theCompany's and the Subsidiary Guarantors' future unsecured subordinated debt. The Notes and Guarantees effectively rank junior to all secured debt of theCompany and the Subsidiary Guarantors to the extent of the value of the collateral securing such debt and to all liabilities, including trade payables, of theCompany's subsidiaries that have not guaranteed the Notes.At any time before August 15, 2016, we may redeem all or a portion of the Notes at a redemption price equal to 100% of the aggregate principal amountof the Notes to be redeemed, plus a “make-whole” premium and accrued and unpaid interest to, but excluding, the redemption date. At any time on or afterAugust 15, 2016, we may redeem all or a portion of the Notes at certain redemption prices expressed as percentages of the principal amount, plus accrued andunpaid interest to, but excluding, the redemption date. At any time and from time to time before August 15, 2015, we may redeem up to 35% of the aggregateoutstanding principal amount of the Notes with the net cash proceeds received by the Company from certain equity offerings at a price equal to 105.375%,plus accrued and unpaid interest to, but excluding, the redemption date, provided that the redemption occurs no later than the 120 day after the closing of therelated equity offering, and at least 50% of the original aggregate principal amount of the Notes remains outstanding immediately thereafter.Upon the occurrence of certain asset sales or a change in control, we must offer to repurchase the Notes at a price equal to 100%, in the case of an assetsale, or 101%, in the case of a change of control, of the principal amount plus accrued and unpaid interest to, but excluding, the repurchase date.2.75% Convertible Debentures due in 2031On October 24, 2011, we sold $690 million of 2.75% Convertible Debentures due in 2031 (the “2031 Debentures”) in a private placement. Totalproceeds, net of debt issuance costs, were $676.1 million. The 2031 Debentures bear interest at 2.75% per year, payable in cash semiannually in arrears,beginning on May 1, 2012. The 2031 Debentures mature on November 1, 2031, subject to the right of the holders to require us to redeem the 2031 Debentureson November 1, 2017, 2021, and 2026. The 2031 Debentures are general senior unsecured obligations and rank equally in right of payment with all of ourexisting and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the 2031Debentures. The 2031 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries.If converted, the principal amount of the 2031 Debentures is payable in cash and any amounts payable in excess of the $690 million principalamount, will (based on an initial conversion rate, which represents an initial conversion price of approximately $32.30 per share, subject to adjustment) bepaid in cash or shares of our common stock, at our election, only in the following circumstances and to the following extent: (i) on any date during any fiscalquarter beginning after December 31, 2011 (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the thencurrent conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the34Table of Contentsprevious fiscal quarter; (ii) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for$1,000 principal amount of the Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stockmultiplied by the then current conversion rate; (iii) upon the occurrence of specified corporate transactions, as described in the indenture for the 2031Debentures; or (iv) at the option of the holder at any time on or after May 1, 2031. Additionally, we may redeem the 2031 Debentures, in whole or in part, on orafter November 6, 2017 at par plus accrued and unpaid interest. Each holder shall have the right, at such holder's option, to require us to repurchase all orany portion of the 2031 Debentures held by such holder on November 1, 2017, November 1, 2021, and November 1, 2026 at par plus accrued and unpaidinterest. Upon conversion, we will pay the principal amount in cash and any amounts payable in excess of the $690 million principal amount will be paid incash or shares of our common stock, at our election. If we undergo a fundamental change (as described in the indenture for the 2031 Debentures) prior tomaturity, holders will have the option to require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amountof the debentures to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date. As ofSeptember 30, 2012, no conversion triggers were met. If the conversion triggers were met, we could be required to repay all or some of the principal amount incash prior to the maturity date.2.75% Convertible Debentures due in 2027We have $250 million of 2.75% convertible senior debentures due in 2027 (“the 2027 Debentures”) that were issued on August 13, 2007 in aprivate placement to Citigroup Global Markets Inc. and Goldman, Sachs & Co. The 2027 Debentures bear an interest rate of 2.75% per annum, payablesemi-annually in arrears beginning on February 15, 2008, and mature on August 15, 2027 subject to the right of the holders of the 2027 Debentures to requireus to redeem the 2027 Debentures on August 15, 2014, 2017 and 2022. The 2027 Debentures are general senior unsecured obligations, ranking equally inright of payment to all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that iscontractually subordinated to the 2027 Debentures. The 2027 Debentures are effectively subordinated to our secured indebtedness to the extent of the value ofthe collateral securing such indebtedness and are structurally subordinated to indebtedness and other liabilities of our subsidiaries. If converted, the principalamount of the 2027 Debentures is payable in cash and any amounts payable in excess of the $250 million principal amount, will (based on an initialconversion rate, which represents an initial conversion price of approximately $19.47 per share, subject to adjustment as defined therein) be paid in cash orshares of our common stock, at our election, only in the following circumstances and to the following extent: (i) on any date during any fiscal quarterbeginning after September 30, 2007 (and only during such fiscal quarter) if the closing sale price of our common stock was more than 120% of the thencurrent conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscalquarter; (ii) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for $1,000 principalamount of the Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by thethen current conversion rate; (iii) upon the occurrence of specified corporate transactions, as described in the indenture for the 2027 Debentures; and (iv) at theoption of the holder at any time on or after February 15, 2027. Additionally, we may redeem the 2027 Debentures, in whole or in part, on or after August 20,2014 at par plus accrued and unpaid interest. Each holder shall have the right, at such holder's option, to require us to repurchase all or any portion of the2027 Debentures held by such holder on August 15, 2014, August 15, 2017 and August 15, 2022 at par plus accrued and unpaid interest. Upon conversion,we will pay the principal amount in cash and any amounts payable in excess of the $250 million principal amount will be paid in cash or shares of ourcommon stock, at our election. If we undergo a fundamental change (as described in the indenture for the 2027 Debentures) prior to maturity, holders will havethe option to require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the debentures to bepurchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date.Our stock price exceeded the conversion threshold price of $23.36 per share for at least 20 days during the 30 consecutive trading days endedSeptember 30, 2012. Accordingly, the 2027 Debentures will be convertible at the holders' option during the quarter ended December 31, 2012 and therefore areclassified as current liabilities at September 30, 2012. Given that the debentures are traded in a secondary market and the current market value of the 2027Debentures exceeds the value that the holders would receive upon conversion, we believe that the holders may not have a significant economic incentive toexercise their conversion option prior to August 2014. As a result, we do not expect a material amount of the 2027 Debentures to be redeemed in the threemonths ended December 31, 2012.The difference between the carrying value of the 2027 Debentures and the $250.0 million principal amount reflects the unamortized portion of theoriginal issue discount recognized upon issuance of the notes, which is being amortized over the expected term of the convertible debt. Because the 2027Debentures were convertible at September 30, 2012, an amount equal to the 18.4 million unamortized portion of the original issue discount was separatelyclassified in our consolidated balance sheets as temporary equity and referred to as “Equity component of currently redeemable convertible debentures.”35Table of ContentsCredit FacilityOur credit facility consists of a $75 million revolving credit line including letters of credit, a $355 million term loan entered into on March 31, 2006, a$90 million term loan entered into on April 5, 2007 and a $225 million term loan entered into on August 24, 2007 (the “Credit Facility”). In July 2011, weentered into agreements to amend and restate our existing Credit Facility. Of the approximately $638.5 million remaining term loan as of July 1, 2011, lendersrepresenting $493.2 million elected to extend the maturity date by three years to March 31, 2016. The remaining term loans retained the original maturity dateof March 2013. In addition, lenders participating in the revolving credit facility have chosen to extend the maturity date by three years to March 31, 2015. Asof September 30, 2012, $630.6 million remained outstanding under the term loans, there were $17.9 million of letters of credit issued under the revolvingcredit line and there were no other outstanding borrowings under the revolving credit line. On October 31, 2012, we paid the remaining outstanding term loansbalance of $143.5 million originally maturing March 2013.The Credit Facility contains covenants, including, among other things, covenants that restrict our ability and those of our subsidiaries to incur certainadditional indebtedness, create or permit liens on assets, enter into sale-leaseback transactions, make loans or investments, sell assets, make certainacquisitions, pay dividends, or repurchase stock. The agreement also contains events of default, including failure to make payments of principal or interest,failure to observe covenants, breaches of representations and warranties, defaults under certain other material indebtedness, failure to satisfy materialjudgments, a change of control and certain insolvency events. As of September 30, 2012, we were in compliance with the covenants under the Credit Facility.Under terms of the amended Credit Agreement, interest is payable monthly at a rate equal to the applicable margin plus, at our option, either (a) the baserate which is the higher of the corporate base rate of UBS AG, Stamford Branch, or the federal funds rate plus 0.50% per annum or (b) LIBOR (equal to(i) the British Bankers’ Association Interest Settlement Rates for deposits in U.S. dollars divided by (ii) one minus the statutory reserves applicable to suchborrowing). The applicable margin for the borrowings is as follows:Description Base Rate Margin LIBOR MarginTerm loans maturing March 2013 0.75% - 1.50%(a) 1.75% - 2.50%(a)Term loans maturing March 2016 2.00% 3.00%Revolving facility due March 2015 1.25% - 2.25%(b) 2.25% - 3.25%(b)_______________________________________(a)The margin is determined based on our leverage ratio and credit rating at the date the interest rates are reset on the Term Loans.(b)The margin is determined based on our leverage ratio and credit rating at the date the interest rates are reset on the Revolving credit line.At September 30, 2012 the applicable margins were 2.00%, with an effective rate of 2.24%, on the remaining balance of $143.5 million maturing inMarch 2013 and 3.00%, with an effective rate of 3.24%, on the remaining balance of $487.1 million maturing in March 2016. We are required to pay acommitment fee for unutilized commitments under the revolving credit facility at a rate ranging from 0.375% to 0.50% per annum, based upon our leverageratio. As of September 30, 2012, the commitment fee rate was 0.375%.36Table of ContentsPrincipal payments on the extended loan are due in quarterly installments of 0.25% of the then outstanding balance through March 2016, at which pointthe remaining balance becomes due. In addition, an annual excess cash flow sweep, as defined in the Credit Facility, is payable in the first quarter of eachfiscal year, based on the excess cash flow generated in the previous fiscal year. We have not generated excess cash flows in any period and no additionalpayments are required. We will continue to evaluate the extent to which a payment is due in the first quarter of future fiscal years based on excess cash flowgeneration. At the current time, we are unable to predict the amount of the outstanding principal, if any, that may be required to be repaid in future fiscal yearspursuant to the excess cash flow sweep provisions. Any term loan borrowings not paid through the baseline repayment, the excess cash flow sweep, or anyother mandatory or optional payments that we may make, will be repaid upon maturity. If only the baseline repayments are made, the annual aggregateprincipal amount of the term loans repaid would be as follows (dollars in thousands):Year Ending September 30, Amount2013 148,3852014 4,8042015 4,7562016 472,651Total $630,596Our obligations under the Credit Facility are unconditionally guaranteed by, subject to certain exceptions, each of our existing and future direct andindirect wholly-owned domestic subsidiaries. The Credit Facility and the guarantees thereof are secured by first priority liens and security interests in thefollowing: 100% of the capital stock of substantially all of our domestic subsidiaries and 65% of the outstanding voting equity interests and 100% of the non-voting equity interests of first-tier foreign subsidiaries, all our material tangible and intangible assets and those of the guarantors, and any present and futureintercompany debt. The Credit Facility also contains provisions for mandatory prepayments of outstanding term loans upon receipt of the following, andsubject to certain exceptions: 100% of net cash proceeds from asset sales, 100% of net cash proceeds from issuance or incurrence of debt, and 100% ofextraordinary receipts. We may voluntarily prepay borrowings under the Credit Facility without premium or penalty other than breakage costs, as defined withrespect to LIBOR-based loans.We believe that cash flows from future operations in addition to cash and cash equivalents on-hand will be sufficient to meet our working capital,investing, financing and contractual obligations and the contingent payments for acquisitions, if any are realized, as they become due for at least the nexttwelve months. We also believe that in the event future operating results are not as planned, that we could take actions, including restructuring actions andother cost reduction initiatives, to reduce operating expenses to levels which, in combination with expected future revenue, will continue to generate sufficientoperating cash flow. In the event that these actions are not effective in generating operating cash flows we may be required to issue equity or debt securities onterms that may be less favorable.37Table of ContentsOff-Balance Sheet Arrangements, Contractual Obligations, Contingent Liabilities and CommitmentsContractual ObligationsThe following table outlines our contractual payment obligations as of September 30, 2012 (dollars in millions): Payments Due by Fiscal Year Ended September 30,Contractual Obligations Total 2013 2014 and 2015 2016 and 2017 ThereafterCredit Facility(1) $630.6 $148.4 $9.6 $472.6 $—Convertible Debentures(2) 940.0 — 250.0 — 690.0Senior Notes 700.0 — — — 700.0Interest payable on long-term debt(3) 462.1 80.7 150.9 120.8 109.7Letter of Credit(4) 17.9 17.9 — — —Operating leases 120.1 28.0 43.7 34.0 14.4Purchase commitments for inventory, property andequipment(5) 6.5 6.5 — — —Collaboration agreements(6) 30.9 23.4 7.5 — —Other long-term liabilities assumed(7) 8.5 2.5 5.0 1.0 —Deferred acquisition payments 27.9 27.9 — — —Total contractual cash obligations $2,944.5 $335.3 $466.7 $628.4 $1,514.1_______________________________________(1)Principal is paid on a quarterly basis under the Credit Facility.(2)Holders of the 2027 Debentures have the right to require us to repurchase the debentures on August 15, 2014, 2017 and 2022. Holders of the 2031Debentures have the right to require us to redeem the Debentures on November 1, 2017, 2021, and 2026.(3)Interest on the Credit Facility is due and payable monthly and is estimated using the effective interest rate as of September 30, 2012. Interest is due andpayable semi-annually under 2027 Debentures and 2031 Debentures at a rate of 2.75%. Interest is due and payable semi-annually on the Senior notes at arate of 5.375%.(4)Letters of Credit are in place primarily to secure future operating lease payments.(5)These amounts include non-cancelable purchase commitments for inventory in the normal course of business to fulfill customers’ orders currentlyscheduled in our backlog.(6)Payments under the research collaboration agreements are payable in cash or common stock at our option.(7)Obligations include assumed long-term liabilities relating to restructuring program initiated by a previous acquisition in 2003. The restructuring programrelated to the closing of a facility with lease term set to expire in 2016. Total contractual obligation under the lease is $8.5 million. As of September 30,2012, we have sub-leased certain of the office space related to the facility to unrelated third parties. Total sublease income under contractual terms isexpected to be $5.3 million, which ranges from $0.7 million to $1.6 million on an annualized basis through 2016.The gross liability for unrecognized tax benefits as of September 30, 2012 was $17.4 million. We do not expect a significant change in the amount ofunrecognized tax benefits within the next 12 months. We estimate that none of this amount will be paid within the next year and we are currently unable toreasonably estimate the timing of payments for the remainder of the liability.Contingent Liabilities and CommitmentsIn connection with our acquisition of Swype, Inc. in October 2011, we agreed to make deferred payments to the former shareholders of Swype of up to$25.0 million in April 2013, contingent upon the continued employment of three named executives and certain other conditions. The contingent payments willbe reduced by amounts specified in the merger agreement in the event that any of the three executives terminates employment prior to the payment date or if anylosses occur to which we would be entitled to indemnification under the merger agreement.In connection with our acquisition of Vocada, Inc. in November 2007, we agreed to make contingent earn-out payments of up to $21.0 million upon theachievement of certain financial targets measured over defined periods through December 31, 2010. We have notified the former shareholders of Vocada that thefinancial targets were not achieved. In December 2010, the former shareholders filed a demand for arbitration in accordance with their rights under the mergeragreement. On October 4, 2012, the38Table of Contentsarbitration panel issued its conclusion indicating that no additional payments to the former shareholders under the Vocada agreement are required. Vocadashareholders have filed a motion to vacate this ruling. At September 30, 2012, we have not recorded any obligation related to the Vocada earn-out provisions.Financial InstrumentsWe use financial instruments to manage our foreign exchange risk. We follow Financial Accounting Standards Board Accounting StandardsCodification 815 (“ASC 815”), Derivatives and Hedging, for our derivative instruments.We operate our business in countries throughout the world and transact business in various foreign currencies. Our foreign currency exposures typicallyarise from transactions denominated in currencies other than the local functional currency of our operations. We have a program that primarily utilizes foreigncurrency forward contracts to offset the risks associated with foreign currency denominated assets and liabilities. We established this program so that gainsand losses from remeasurement or settlement of these assets and liabilities are offset by gains or losses on the foreign currency forward contracts thusmitigating the risks and volatility associated with our foreign currency transactions. Generally, we enter into contracts with terms of 90 days or less, and atSeptember 30, 2012 we had outstanding contracts with a total notional value of $83.9 million.From time to time we will enter into agreements that allow us to issue shares of our common stock as part or all of the consideration related to partneringand technology acquisition activities. Generally these shares are issued subject to security price guarantees which are accounted for as derivatives. We havedetermined that these instruments would not be considered equity instruments if they were freestanding. The security price guarantees require payment fromeither us to the third party, or from the third party to us, based upon the difference between the price of our common stock on the issue date and an averageprice of our common stock approximately six months following the issue date. Changes in the fair value of these security price guarantees are reported inearnings in each period as non-operating income (expense) with other income, net. During the year ended September 30, 2012 and 2011, we recorded $8.0million and $13.2 million, respectively of gains associated with these contracts and received cash payments totaling $9.0 million and $9.4 million,respectively, upon to settlement of the agreements during the year.Pension PlansIn connection with our acquisition of Dictaphone in March 2006, we assumed the defined benefit pension plans for former Dictaphone employeeslocated in the United Kingdom and Canada. These two pension plans are closed to new participants and require periodic cash contributions. In fiscal 2012,total cash funding for the UK pension plan was $1.3 million. For the UK pension plan, we have a minimum funding requirement of £0.7 million(approximately $1.1 million based on the exchange rate at September 30, 2012) for fiscal 2013. We have announced a plan to terminate the Canadian pensionplan and do not expect to make any significant additional contributions to settle the obligations of the plan.In connection with our acquisition of SVOX A.G. in June 2011, we assumed an additional defined benefit pension plan for employees in Switzerland. Atthe end of September, 2012, the plan benefit obligations exceed the plan assets by approximately $1.4 million. The plan requires periodic cash contributions,including participant contributions from active employees. Company contributions in fiscal 2013 are expected to be $0.2 million.Off-Balance Sheet ArrangementsThrough September 30, 2012, we have not entered into any off-balance sheet arrangements or material transactions with unconsolidated entities or otherpersons.CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATESThe preparation of financial statements in conformity with U.S. generally accepted accounting principles, requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, assumptions andjudgments, including those related to revenue recognition; allowance for doubtful accounts and returns; the valuation of goodwill, intangible assets andtangible long-lived assets; accounting for business combinations; accounting for stock-based compensation; accounting for derivative instruments; accountingfor income taxes and related valuation allowances; and loss contingencies. Our management bases its estimates on historical experience, market participant fairvalue considerations and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from these estimates.We believe the following critical accounting policies most significantly affect the portrayal of our financial condition and39Table of Contentsresults of operations and require our most difficult and subjective judgments.Revenue Recognition. We derive revenue from the following sources: (1) software license agreements, including royalty and other usage-basedarrangements, (2) professional services, (3) hosting services and (4) post-contract customer support ("PCS"). Our hosting services are generally providedthrough on-demand, usage-based or per transaction fee arrangements. Our revenue recognition policies for these revenue streams are discussed below.The sale and/or license of software products and technology is deemed to have occurred when a customer either has taken possession of or has access totake immediate possession of the software or technology. In select situations, we sell or license intellectual property in conjunction with, or in place of,embedding our intellectual property in software. We also have non-software arrangements including hosting services where the customer does not takepossession of the software at the outset of the arrangement either because they have no contractual right to do so or because significant penalties preclude themfrom doing so. Generally we recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed ordeterminable and (iv) collectibility is probable.Revenue from royalties on sales of our software products by original equipment manufacturers (“OEMs”), where no services are included, is recognizedin the quarter earned so long as we have been notified by the OEM that such royalties are due, and provided that all other revenue recognition criteria are met.Software arrangements generally include PCS, which includes telephone support and the right to receive unspecified upgrades/enhancements on a when-and-if-available basis, typically for one to five years. Revenue from PCS is recognized ratably on a straight-line basis over the term that the maintenanceservice is provided. When PCS renews automatically, we provide a reserve based on historical experience for contracts expected to be canceled for non-payment. All known and estimated cancellations are recorded as a reduction to revenue and accounts receivable.For our software and software-related multiple element arrangements, where customers purchase both software related products and software relatedservices, we use vendor-specific objective evidence (“VSOE”) of fair value for software and software-related services to separate the elements and account forthem separately. VSOE exists when a company can support what the fair value of its software and/or software-related services is based on evidence of theprices charged when the same elements are sold separately. VSOE of fair value is required, generally, in order to separate the accounting for various elements ina software and related services arrangement. We have established VSOE of fair value for the majority of our PCS, professional services, and training.When we provide professional services considered essential to the functionality of the software, we recognize revenue from the professional services aswell as any related software licenses on a percentage-of-completion basis whereby the arrangement consideration is recognized as the services are performed, asmeasured by an observable input. In these circumstances, we separate license revenue from professional service revenue for income statement presentation byallocating VSOE of fair value of the professional services as professional services and hosting revenue and the residual portion as product and licensingrevenue. We generally determine the percentage-of-completion by comparing the labor hours incurred to-date to the estimated total labor hours required tocomplete the project. We consider labor hours to be the most reliable, available measure of progress on these projects. Adjustments to estimates to complete aremade in the periods in which facts resulting in a change become known. When the estimate indicates that a loss will be incurred, such loss is recorded in theperiod identified. Significant judgments and estimates are involved in determining the percent complete of each contract. Different assumptions could yieldmaterially different results.We offer some of our products via a Software-as-a-Service ("SaaS") model also known as a hosted model. In this type of arrangement, we arecompensated in two ways: (1) fees for up-front set-up of the service environment and (2) fees charged on a usage or per transaction basis. Our up-front set-upfees are nonrefundable. We recognize the up-front set-up fees ratably over the longer of the contract lives, or the expected lives of the customer relationships.The on-demand, usage-based or per transaction fees are due and payable as each individual transaction is processed through the hosted service and isrecognized as revenue in the period the services are provided.We enter into multiple-element arrangements that may include a combination of our various software related and non-software related products andservices offerings including software licenses, PCS, professional services, and our hosting services. In such arrangements we allocate total arrangementconsideration to software or software-related elements and any non-software element separately based on the selling price hierarchy group following theguidance in Accounting Standards Codification ("ASC") 985-605, Software Revenue Recognition and our policies. We determine the selling price for eachdeliverable using VSOE of selling price, if it exists, or Third Party Evidence (“TPE”) of selling price. Typically, we are unable to determine TPE of sellingprice. Therefore, when neither VSOE nor TPE of selling price exist for a deliverable, we use our Estimate of Selling Price (“ESP”) for the purposes ofallocating the arrangement consideration. We determine ESP for a product or service by considering multiple40Table of Contentsfactors including, but not limited to, major project groupings, market conditions, competitive landscape, price list and discounting practices. Revenueallocated to each element is then recognized when the basic revenue recognition criteria are met for each element.When products are sold through distributors or resellers, title and risk of loss generally passes upon shipment, at which time the transaction is invoicedand payment is due. Shipments to distributors and resellers without right of return are recognized as revenue upon shipment, provided all other revenuerecognition criteria are met. Certain distributors and resellers have been granted rights of return for as long as the distributors or resellers hold the inventory. Wecannot estimate historical returns from these distributors and resellers; and therefore, cannot use such estimates as the basis upon which to estimate futuresales returns. As a result, we recognize revenue from sales to these distributors and resellers when the products are sold through to retailers and end-users.When products are sold directly to retailers or end-users, we make an estimate of sales returns based on historical experience. The provision for theseestimated returns is recorded as a reduction of revenue and accounts receivable at the time that the related revenue is recorded. If actual returns differsignificantly from our estimates, such differences could have a material impact on our results of operations for the period in which the actual returns becomeknown.We record consideration given to a reseller as a reduction of revenue to the extent we have recorded cumulative revenue from the customer or reseller.However, when we receive an identifiable benefit in exchange for the consideration, and can reasonably estimate the fair value of the benefit received, theconsideration is recorded as an operating expense.We record reimbursements received for out-of-pocket expenses as revenue, with offsetting costs recorded as cost of revenue. Out-of-pocket expensesgenerally include, but are not limited to, expenses related to transportation, lodging and meals. We record shipping and handling costs billed to customers asrevenue with offsetting costs recorded as cost of revenue.Our revenue recognition policies require management to make significant estimates. Management analyzes various factors, including a review of specifictransactions, historical experience, creditworthiness of customers and current market and economic conditions. Changes in judgments based upon thesefactors could impact the timing and amount of revenue and cost recognized and thus affects our results of operations and financial condition.Business Combinations. We determine and allocate the purchase price of an acquired company to the tangible and intangible assets acquired andliabilities assumed as of the business combination date. The purchase price allocation process requires us to use significant estimates and assumptions,including fair value estimates, as of the business acquisition date, including:•estimated fair values of intangible assets;•estimated fair market values of legal performance commitments to customers, assumed from the acquiree under existing contractual obligations(classified as deferred revenue) at the date of acquisition;•estimated fair market values of stock awards assumed from the acquiree that are included in the purchase price;•estimated fair market value of required payments under contingent consideration provisions;•estimated income tax assets and liabilities assumed from the acquiree; and•estimated fair value of pre-acquisition contingencies assumed from the acquiree.While we use our best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilitiesassumed at the business combination date, our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchaseprice allocation period, which is generally one year from the business combination date, we record adjustments to the assets acquired and liabilities assumed,with the corresponding offset to goodwill. For changes in the valuation of intangible assets between preliminary and final purchase price allocation, the relatedamortization is adjusted effective from the acquisition date. Subsequent to the purchase price allocation period any adjustment to assets acquired or liabilitiesassumed is included in operating results in the period in which the adjustment is determined.Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historicalexperience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuingcertain of the intangible assets we have acquired or may acquire in the future include but are not limited to:•future expected cash flows from software license sales, support agreements, consulting contracts, other customer41Table of Contentscontracts and acquired developed technologies and patents;•expected costs to develop in-process research and development projects into commercially viable products and the estimated cash flows from theprojects when completed;•the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be usedin the combined company’s product portfolio; and•discount rates.Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.In connection with the purchase price allocations for our acquisitions, we estimate the fair market value of legal performance commitments to customers,which are classified as deferred revenue. The estimated fair market value of these obligations is determined and recorded as of the acquisition date.For a given acquisition, we may identify certain pre-acquisition contingencies. If, during the purchase price allocation period, we are able to determinethe fair value of a pre-acquisition contingency, we will include that amount in the purchase price allocation. If we are unable to determine the fair value of a pre-acquisition contingency at the end of the purchase price allocation period, we will evaluate whether to include an amount in the purchase price allocation basedon whether it is probable a liability had been incurred and whether an amount can be reasonably estimated. After the end of the purchase price allocationperiod, any adjustment to amounts recorded for a pre-acquisition contingency will be included in our operating results in the period in which the adjustment isdetermined.Goodwill, Intangible and Other Long-Lived Assets and Impairment Assessments. We have significant long-lived tangible and intangible assets,including goodwill and intangible assets with indefinite lives, which are susceptible to valuation adjustments as a result of changes in various factors orconditions. The most significant finite-lived tangible and intangible assets are customer relationships, licensed technology, patents and core technology,completed technology, fixed assets and trade names. All finite-lived intangible assets are amortized over the estimated economic lives of the assets, generallyusing the straight-line method except where the pattern of the expected economic benefit is readily identifiable, primarily customer relationship intangibles,whereby amortization follows that pattern. The values of intangible assets determined in connection with a business combination, with the exception ofgoodwill, were initially determined by a risk-adjusted, discounted cash flow approach. We assess the potential impairment of intangible and fixed assetswhenever events or changes in circumstances indicate that the carrying values may not be recoverable. Goodwill and indefinite-lived intangible assets areassessed for potential impairment at least annually, but also whenever events or changes in circumstances indicate the carrying values may not be recoverable.Factors we consider important, which could trigger an impairment of such assets, include the following:•significant underperformance relative to historical or projected future operating results;•significant changes in the manner of or use of the acquired assets or the strategy for our overall business;•significant negative industry or economic trends;•significant decline in our stock price for a sustained period; and•a decline in our market capitalization below net book value.Future adverse changes in these or other unforeseeable factors could result in an impairment charge that would materially impact future results ofoperations and financial position in the reporting period identified.We test goodwill and intangible assets with indefinite lives for impairment annually in the fourth quarter, and between annual tests if indicators ofpotential impairment exist. The impairment test for goodwill and intangible assets with indefinite lives compares the fair value of identified reporting unit(s) toits (their) carrying amount to assess whether such assets are impaired. We have seven reporting units based on the level of information provided to, and reviewthereof, by our segment management.We determine fair values for each of the reporting units using an income approach. When available and appropriate, we also use a comparative marketapproach to derive the fair values. For purposes of the income approach, fair value is determined based on the present value of estimated future cash flows,discounted at an appropriate risk adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growthrates based on our most recent views of the long-term outlook for each business. Actual results may differ from those assumed in our forecasts. We derive ourdiscount rates using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the cost of42Table of Contentsequity financing. We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internallydeveloped forecasts. Discount rates used in our reporting unit valuations ranged from 12% to 21%. For purposes of the market approach, we use a valuationtechnique in which values are derived based on market prices of comparable publicly traded companies. We also use a market based valuation technique inwhich values are determined based on relevant observable information generated by market transactions involving comparable businesses. Compared to themarket approach, the income approach more closely aligns each reporting unit valuation to our business profile, including geographic markets served andproduct offerings. Required rates of return, along with uncertainty inherent in the forecasts of future cash flows, are reflected in the selection of the discountrate. Equally important, under this approach, reasonably likely scenarios and associated sensitivities can be developed for alternative future states that maynot be reflected in an observable market price. A market approach allows for comparison to actual market transactions and multiples. It can be somewhat morelimited in its application because the population of potential comparable entities is often limited to publicly-traded companies where the characteristics of thecomparative business and ours can be significantly different, market data is usually not available for divisions within larger conglomerates or non-publicsubsidiaries that could otherwise qualify as comparable, and the specific circumstances surrounding a market transaction (e.g., synergies between the parties,terms and conditions of the transaction, etc.) may be different or irrelevant with respect to our business. It can also be difficult, under certain marketconditions, to identify orderly transactions between market participants in similar businesses. We assess each valuation methodology based upon the relevanceand availability of the data at the time we perform the valuation and weight the methodologies appropriately.The carrying values of the reporting units were determined based on an allocation of our assets and liabilities through specific allocation of certain assetsand liabilities, to the reporting units and an apportionment method based on relative size of the reporting units’ revenues and operating expenses compared tothe Company as a whole. Goodwill was initially allocated to our reporting units based on the relative fair value of the units at the date we implemented thecurrent reporting unit structure. Goodwill subsequently acquired through acquisitions is allocated to the applicable reporting unit based upon the relative fairvalue of the acquired business. Certain corporate assets that are not instrumental to the reporting units’ operations and would not be transferred to hypotheticalpurchasers of the reporting units were excluded from the reporting units’ carrying values.Based on our assessments, we have not had any impairment charges during our history as a result of our impairment evaluation of goodwill. Significantadverse changes in our future revenues and/or cash flow results, or significant degradation in the enterprise values of comparable companies within oursegments, could result in the determination that all or a portion of our goodwill is impaired. However, as of our fiscal 2012 annual impairment assessmentdate, our estimated fair values of our reporting units significantly exceeded their carrying values.We periodically review long-lived assets other than goodwill or indefinite-lived intangible assets for impairment whenever events or changes in businesscircumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate.Each impairment test is based on a comparison of the undiscounted cash flows to the recorded carrying value for the asset or asset group. Asset groups utilizedin this analysis are identified as the lowest level grouping of assets for which largely independent cash flows can be identified. If impairment is indicated, theasset or asset group is written down to its estimated fair value.Significant judgments and estimates are involved in determining the useful lives of our long-lived assets, determining the reporting units and assessingwhen events or circumstances would require an interim impairment analysis of goodwill or other long-lived assets to be performed. Changes in ourorganization or management reporting structure, as well as other events and circumstances, including but not limited to technological advances, increasedcompetition and changing economic or market conditions, could result in (a) shorter estimated useful lives, (b) changes to reporting units, which may requirealternative methods of estimating fair values or greater disaggregation or aggregation in our analysis by reporting unit, and/or (c) other changes in previousassumptions or estimates. In turn, this could have a significant impact on our consolidated financial statements through accelerated amortization and/orimpairment charges.Accounting for Stock-Based Compensation. We account for share-based awards to employees and directors, including grants of employee stockoptions, purchases under employee stock purchase plans, awards in the form of restricted shares (“Restricted Stock”) and awards in the form of units ofstock purchase rights (“Restricted Units”) through recognition of the fair value of the share-based awards as a charge against earnings in the form of stock-based compensation expense. We recognize stock-based compensation expense over the requisite service period, net of estimated forfeitures. We will recognize abenefit from stock-based compensation in equity using the with-and-without approach for the utilization of tax attributes. The Restricted Stock and RestrictedUnits are collectively referred to as “Restricted Awards.” Determining the fair value of share-based awards at the grant date requires judgment, includingestimating expected dividends, share price volatility and the amount of share-based awards that are expected to be forfeited. If actual results differ significantlyfrom these estimates, stock-based compensation expense and our results of operations could be materially impacted.43Table of ContentsIncome Taxes. Deferred tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets andliabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. We do not provide for U.S. income taxes on theundistributed earnings of our foreign subsidiaries, which we consider to be indefinitely reinvested outside of the U.S.We make judgments regarding the realizability of our deferred tax assets. The balance sheet carrying value of our net deferred tax assets is based onwhether we believe that it is more likely than not that we will generate sufficient future taxable income to realize these deferred tax assets after consideration ofall available evidence. We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, theexpected timing of the reversals of existing temporary differences and tax planning strategies. In assessing the need for a valuation allowance, we consider bothpositive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence iscommensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projectedfuture taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. Generally,cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed.Through fiscal 2011, valuation allowances were established for certain deferred tax assets, which we believe did not meet the “more likely than not”criteria for recognition. At September 30, 2011, our valuation allowance was $274.8 million. Prior to year end 2012, the pattern of objectively measurednegative evidence of recent financial reporting losses outweighed the positive evidence of our profitability. By the end of fiscal 2012, our U.S. operations hadpre-tax income adjusted for permanent differences in items of income and expense for the most recent three-year period. We concluded that this record ofcumulative profitability in recent years and our business plan showing continued profitability provided assurance that our future tax benefits more likely thannot will be realized. Accordingly, by the end of fiscal 2012 , we made a determination that it is more likely than not that certain of our deferred taxes, primarilyin the U.S., will be realized which resulted in a release of $70.5 million of our valuation allowance (See Note 20 of Notes to our Consolidated FinancialStatements).As of September 30, 2012, we have $89.4 million of valuation allowances remaining for certain foreign deferred tax assets. If we are subsequently ableto utilize all or a portion of the deferred tax assets for which the remaining valuation allowance has been established, then we may be required to recognize thesedeferred tax assets through the reduction of the valuation allowance which could result in a material benefit to our results of operations in the period in whichthe benefit is determined.We establish reserves for tax uncertainties that reflect the use of the comprehensive model for the recognition and measurement of uncertain tax positions.Under the comprehensive model, when the minimum threshold for recognition is not met, no tax benefit can be recorded. When the minimum threshold forrecognition is met, a tax position is recorded as the largest amount that is more than fifty percent likely of being realized upon ultimate settlement.Loss Contingencies. We are subject to legal proceedings, lawsuits and other claims relating to labor, service and other matters arising in the ordinarycourse of business, as discussed in Note 18 of Notes to our Consolidated Financial Statements. Quarterly, we review the status of each significant matter andassess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonablyestimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as towhether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at thetime. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates.Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position.RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTSIn July 2012, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2012-02, Intangibles-Goodwill andOther (Topic 350)-Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"), to allow entities to use a qualitative approach to testindefinite-lived intangible assets for impairment. ASU 2012-02 permits an entity to first perform a qualitative assessment to determine whether it is more likelythan not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If it is concluded that this is the case, it is necessary to performthe currently prescribed quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying value. Otherwise, thequantitative impairment test is not required. ASU 2012-02 is effective for fiscal years beginning after September 15, 2012. As we do not have any indefinitelived intangible assets other than goodwill, we do not expect this update to have a significant impact on our financial statements.44Table of ContentsItem 7A.Quantitative and Qualitative Disclosures about Market RiskWe are exposed to market risk from changes in foreign currency exchange rates, interest rates and equity prices which could affect operating results,financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, whenappropriate, through the use of derivative financial instruments.Exchange Rate SensitivityWe are exposed to changes in foreign currency exchange rates. Any foreign currency transaction, defined as a transaction denominated in a currencyother than the U.S. dollar, will be reported in U.S. dollars at the applicable exchange rate. Assets and liabilities are translated into U.S. dollars at exchangerates in effect at the balance sheet date and income and expense items are translated at average rates for the period. The primary foreign currency denominatedtransactions include revenue and expenses and the resulting accounts receivable and accounts payable balances reflected on our balance sheet. Therefore, thechange in the value of the U.S. dollar compared to foreign currencies will have either a positive or negative effect on our financial position and results ofoperations. Historically, our primary exposure has related to transactions denominated in the euro, British pound, Canadian dollar, Japanese yen, Indian rupeeand Hungarian forint.A hypothetical change of 10% in appreciation or depreciation in foreign currency exchange rates from the quoted foreign currency exchange rates atSeptember 30, 2012 would not have a material impact on our revenue, operating results or cash flows in the coming year.Periodically, we enter into forward exchange contracts to hedge against foreign currency fluctuations. These contracts may or may not be designated ascash flow hedges for accounting purposes. We have in place a program which primarily uses forward contracts to offset the risks associated with foreigncurrency exposures that arise from transactions denominated in currencies other than the functional currencies of our worldwide operations. The program isdesigned so that increases or decreases in our foreign currency exposures are offset by gain or losses on the foreign currency forward contracts. These contractsare not designated as accounting hedges and generally are for periods less than 90 days. The notional contract amount of outstanding foreign currencyexchange contracts not designated as cash flow hedges was $83.9 million at September 30, 2012. Based on the nature of the transactions for which thecontracts were purchased, a hypothetical change of 10% in exchange rates would not have a material impact on our financial results.Interest Rate SensitivityWe are exposed to interest rate risk as a result of our significant cash and cash equivalents, and the outstanding debt under the Credit Facility.At September 30, 2012, we held approximately $1,129.8 million of cash and cash equivalents primarily consisting of cash and money-market funds.Due to the low current market yields and the short-term nature of our investments, a hypothetical change in market rates of one percentage point would nothave a material effect on the fair value of our portfolio. Assuming a one percentage point increase in interest rates, our interest income on our cash and cashequivalents would increase approximately $10.1 million, based on the September 30, 2012 reported balances of our investment accounts.At September 30, 2012, our total outstanding debt balance exposed to variable interest rates was $630.6 million. A hypothetical change in market rateswould have a significant impact on interest expense and amounts payable. Assuming a one percentage point increase in interest rates, our interest expenserelative to our outstanding variable rate debt would increase $6.4 million per annum.Equity Price RiskWe are exposed to equity price risk as a result of security price guarantees that we enter in to from time to time. Generally, these price guarantees are for aperiod of six months or less, and require payment from either us to a third party, or from the third party to us, based upon changes in our stock price duringthe contract term. As of September 30, 2012, we have security price guarantees outstanding for approximately 1.0 million shares of our common stock. A 10%change in our stock price during the next six months would not have a material impact on our statements of operations or cash flows.2027 and 2031 DebenturesThe fair value of our 2031 and 2027 Debentures is dependent on the price and volatility of our common stock as well as movements in interest rates.The fair market value of the debentures will generally increase or decrease as the market price of our45Table of Contentscommon stock changes. The fair market value of the debentures will generally increase as interest rates fall and decrease as interest rates rise. The marketvalue and interest rate changes affect the fair market value of the debentures, but do not impact our financial position, cash flows or results of operations dueto the fixed nature of the debt obligations. However, increases in the value of our common stock above the stated trigger price for each issuance for a specifiedperiod of time may provide the holders of the debentures the right to convert each bond using a conversion ratio and payment method as defined in thedebenture agreement.Our debentures trade in the financial markets, and the fair value at September 30, 2012 was $800.1 million for the 2031 Debentures and $359.0million for the 2027 Debentures, based on an average of the bid and ask prices for each of the issuances on that day. This compares to conversion values onSeptember 30, 2012 of approximately $531.7 million and $319.6 million for the 2031 Debentures and the 2027 Debentures, respectively. A 10% increase inthe stock price over the September 30, 2012 closing price of $24.89 would have an combined estimated $63.3 million increase to the fair value and acombined $85.1 million increase to the conversion value of the debentures. Given the current trading value of the debentures, the greatest value to the holdersof the debentures would be to sell the debentures in the open market in order to maximize their return. Based on this, we believe that the holders may not have asignificant economic incentive to convert prior to the first redemption date.Item 8.Financial Statements and Supplementary DataNuance Communications, Inc. Consolidated Financial Statements46Table of ContentsNUANCE COMMUNICATIONS, INC.INDEX TO FINANCIAL STATEMENTS PageReports of Independent Registered Public Accounting Firm48Consolidated Statements of Operations50Consolidated Statements of Comprehensive Income (Loss)51Consolidated Balance Sheets52Consolidated Statements of Stockholders’ Equity53Consolidated Statements of Cash Flows54Notes to Consolidated Financial Statements5547Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and StockholdersNuance Communications, Inc.Burlington, MassachusettsWe have audited the accompanying consolidated balance sheets of Nuance Communications, Inc. as of September 30, 2012 and 2011, and the relatedconsolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period endedSeptember 30, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NuanceCommunications, Inc. at September 30, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period endedSeptember 30, 2012, in conformity with accounting principles generally accepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Nuance Communications,Inc.’s internal control over financial reporting as of September 30, 2012, based on criteria established in Internal Control — Integrated Framework issuedby the Committee of Sponsoring Organizations (COSO), and our report dated November 28, 2012 expressed an unqualified opinion thereon. /s/ BDO USA, LLP BDO USA, LLPBoston, MassachusettsNovember 28, 201248Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and ShareholdersNuance Communications, Inc.Burlington, MassachusettsWe have audited Nuance Communications, Inc.’s internal control over financial reporting as of September 30, 2012, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).Nuance Communications, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control Over FinancialReporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.In our opinion, Nuance Communications, Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30,2012, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheets of Nuance Communications, Inc. as of September 30, 2012 and 2011, and the related consolidated statements of operations, comprehensive income(loss), stockholders’ equity and cash flows for each of the three years in the period ended September 30, 2012 and our report dated November 28, 2012expressed an unqualified opinion thereon. /s/ BDO USA, LLP BDO USA, LLPBoston, MassachusettsNovember 28, 201249Table of ContentsNUANCE COMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended September 30, 2012 2011 2010 (In thousands, except per share amounts)Revenues: Product and licensing$740,726 $607,358 $473,460Professional services and hosting673,943 509,141 463,567Maintenance and support236,840 202,242 181,921Total revenues1,651,509 1,318,741 1,118,948Cost of revenues: Product and licensing74,837 65,601 49,618Professional services and hosting424,733 341,055 280,725Maintenance and support45,325 38,057 31,269Amortization of intangible assets60,034 55,111 47,758Total cost of revenues604,929 499,824 409,370Gross profit1,046,580 818,917 709,578Operating expenses: Research and development225,441 179,377 152,071Sales and marketing369,205 306,439 266,208General and administrative163,318 147,603 122,061Amortization of intangible assets95,416 88,219 87,819Acquisition-related costs, net58,746 21,866 30,611Restructuring and other charges, net8,268 22,862 17,891Total operating expenses920,394 766,366 676,661Income from operations126,186 52,551 32,917Other income (expense): Interest income2,234 3,159 1,238Interest expense(85,286) (36,703) (40,993)Other income, net22,168 11,010 5,773Income (loss) before income taxes65,302 30,017 (1,065)(Benefit) provision for income taxes(141,833) (8,221) 18,034Net income (loss)$207,135 $38,238 $(19,099)Net income (loss) per share: Basic$0.67 $0.13 $(0.07)Diluted$0.65 $0.12 $(0.07)Weighted average common shares outstanding: Basic306,371 302,277 287,412Diluted320,822 315,960 287,412See accompanying notes.50Table of ContentsNUANCE COMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Year Ended September 30, 2012 2011 2010 (In thousands)Net income (loss)$207,135 $38,238 $(19,099)Other comprehensive income (loss): Unrealized (losses) gains on cash flow hedge derivatives(20) (210) 4,208Unrealized gains (losses) on marketable securities12 (42) 30Foreign currency translation adjustment(7,776) (8,746) (2,807)Unrealized (losses) gains on pensions(1,648) 2,895 (493)Total other comprehensive (loss) income, net(9,432) (6,103) 938Comprehensive income (loss)$197,703 $32,135 $(18,161)See accompanying notes. 51Table of ContentsNUANCE COMMUNICATIONS, INC.CONSOLIDATED BALANCE SHEETS September 30, 2012 September 30, 2011 (In thousands, exceptper share amounts)ASSETSCurrent assets: Cash and cash equivalents$1,129,761 $447,224Restricted cash (Note 9)— 6,799Marketable securities— 31,244Accounts receivable, less allowances for doubtful accounts of $6,933 and $5,707381,417 280,856Prepaid expenses and other current assets102,564 88,804Deferred tax asset87,564 —Total current assets1,701,306 854,927Land, building and equipment, net116,134 78,218Goodwill2,955,477 2,347,880Intangible assets, net906,538 731,577Other assets119,585 82,691Total assets$5,799,040 $4,095,293LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities: Current portion of long-term debt$148,542 $6,905Redeemable convertible debentures231,552 —Contingent and deferred acquisition payments49,685 23,783Accounts payable113,196 82,703Accrued expenses and other current liabilities215,178 176,074Deferred revenue206,610 185,605Total current liabilities964,763 475,070Long-term portion of debt1,735,811 853,020Deferred revenue, net of current portion108,481 90,382Deferred tax liability160,614 72,229Other liabilities82,665 111,221Total liabilities3,052,334 1,601,922Commitments and contingencies (Notes 3, 5, and 18) Equity component of currently redeemable convertible debentures (Note 10)18,430 —Stockholders’ equity: Series B preferred stock, $0.001 par value; 15,000 shares authorized; 3,562 shares issued and outstanding(liquidation preference $4,631)4,631 4,631Common stock, $0.001 par value; 560,000 shares authorized; 315,821 and 312,456 shares issued and312,070 and 308,705 shares outstanding316 312Additional paid-in capital2,908,302 2,745,931Treasury stock, at cost (3,751 and 3,751 shares)(16,788) (16,788)Accumulated other comprehensive (loss) income(7,030) 2,402Accumulated deficit(161,155) (243,117)Total stockholders’ equity2,728,276 2,493,371Total liabilities and stockholders’ equity$5,799,040 $4,095,293See accompanying notes.52Table of ContentsNUANCE COMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Preferred Stock Common Stock AdditionalPaid-InCapital Treasury Stock AccumulatedOtherComprehensiveIncome (Loss) AccumulatedDeficit TotalStockholders'Equity Shares Amount Shares Amount Shares Amount (In thousands)Balance at October 1, 20093,562 4,631 280,647 281 2,308,992 3,712 (16,214) 7,567 (262,256) 2,043,001Issuance of common stock under employeestock plans 10,139 10 29,500 29,510Cancellation of restricted stock, andrepurchase of common stock at cost foremployee tax withholding (1,635) (2) (25,973) (39) (574) (26,549)Stock-based compensation 100,139 100,139Excess tax benefit from share-basedpayment plans 1,060 1,060Issuance of common stock in connectionwith warrant exercises 2,509 3 12,347 12,350Issuance of common stock in connectionwith business and asset acquisitions 6,845 7 106,329 106,336Issuance of common stock in connectionwith collaboration agreements 2,524 2 39,298 39,300Payments for escrow, make-whole and earn-out settlements 594 1 10,209 10,210Net loss (19,099) (19,099)Other comprehensive income 938 938Balance at September 30, 20103,562 4,631 301,623 302 2,581,901 3,673 (16,788) 8,505 (281,355) 2,297,196Issuance of common stock under employeestock plans 11,052 11 36,656 36,667Cancellation of restricted stock, andrepurchase of common stock at cost foremployee tax withholding (1,996) (2) (36,705) 78 — (36,707)Stock-based compensation 112,469 112,469Excess tax benefit from share-basedpayment plans 17,520 17,520Issuance of common stock in connectionwith business and asset acquisitions 486 — 10,000 10,000Issuance of common stock in connectionwith collaboration agreements 1,274 1 23,399 23,400Payments for escrow, make-whole and earn-out settlements 17 — 691 691Net income 38,238 38,238Other comprehensive loss (6,103) (6,103)Balance at September 30, 20113,562 4,631 312,456 312 2,745,931 3,751 (16,788) 2,402 (243,117) 2,493,371Issuance of common stock under employeestock plans 9,891 10 27,737 27,747Cancellation of restricted stock, andrepurchase of common stock at cost foremployee tax withholding (2,158) (2) (52,000) (52,002)Stock-based compensation 161,165 161,165Excess tax benefit from share-basedpayment plans (3,583) (3,583)Repurchase of common stock (8,514) (8) (74,816) (125,173) (199,997)Equity portion of convertible debt issuance,net of tax effect 96,934 96,934Issuance of common stock in connectionwith collaboration agreements 1,010 1 23,399 23,400Payments for escrow, make-whole and earn-out settlements 60 — 1,968 1,968Issuance of common stock in connectionwith warrant exercises 3,076 3 (3) —Reclassification to temporary equity (18,430) (18,430)Net income 207,135 207,135Other comprehensive loss (9,432) (9,432)Balance at September 30, 20123,562 $4,631 315,821 $316 $2,908,302 3,751 $(16,788) $(7,030) $(161,155) $2,728,276 See accompanying notes.53Table of ContentsNUANCE COMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended September 30, 2012 2011 2010 (In thousands)Cash flows from operating activities Net income (loss)$207,135 $38,238 $(19,099)Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization187,183 170,933 157,156Stock-based compensation174,581 147,296 100,139Non-cash interest expense35,497 12,510 12,955Non-cash restructuring expense— 11,725 6,833Deferred tax (benefit) provision(151,547) (43,890) 3,742Gain on non-controlling strategic equity interest(13,726) — —Other4,016 16,492 1,576Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable(55,210) (25,530) (773)Prepaid expenses and other assets13,881 (11,793) (3,840)Accounts payable22,645 (8,193) 4,710Accrued expenses and other liabilities8,939 (6,775) (6,760)Deferred revenue39,605 56,398 39,643Net cash provided by operating activities472,999 357,411 296,282Cash flows from investing activities Capital expenditures(62,910) (34,907) (25,974)Payments for business and technology acquisitions, net of cash acquired(884,945) (409,005) (219,029)Purchases of marketable securities and other investments(15,156) (10,776) (48,499)Proceeds from sales and maturities of marketable securities and other investments31,789 11,650 —Change in restricted cash balances6,747 17,184 (22,070)Net cash used in investing activities(924,475) (425,854) (315,572)Cash flows from financing activities Payments of long-term debt(6,605) (7,535) (8,460)Proceeds from long-term debt, net of issuance costs1,364,925 (2,553) —Payments for repurchase of common stock(199,997) — —Proceeds from issuance of common stock, net of issuance costs— — 12,350Payments on other long-term liabilities(8,525) (10,643) (9,870)Proceeds from settlement of share-based derivatives, net9,020 9,414 7,306Excess tax benefits on employee equity awards(3,583) 17,520 1,060Proceeds from issuance of common stock from employee stock plans27,747 36,667 29,510Cash used to net share settle employee equity awards(49,947) (36,908) (22,016)Net cash provided by financing activities1,133,035 5,962 9,880Effects of exchange rate changes on cash and cash equivalents978 (6,925) (998)Net increase (decrease) in cash and cash equivalents682,537 (69,406) (10,408)Cash and cash equivalents at beginning of year447,224 516,630 527,038Cash and cash equivalents at end of year$1,129,761 $447,224 $516,630See accompanying notes.54Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1.Organization and PresentationNuance Communications, Inc. (“we,” “Nuance,” or “the Company”) is a leading provider of voice and language solutions for businesses andconsumers around the world. Our technologies, applications and services make the user experience more compelling by transforming the way people interactwith devices and systems. Our solutions are used for tasks and services such as requesting information from a phone-based self-service solution, dictatingmedical records, searching the mobile Web by voice, entering a destination into a navigation system, or working with PDF documents. Our solutions helpmake these interactions, tasks and experiences more productive, compelling and efficient.We leverage our global professional services organization and our extensive network of partners to design and deploy innovative solutions for businessesand organizations around the globe. We market and sell our products directly through a dedicated sales force, our e-commerce website and a global network ofresellers, including system integrators, independent software vendors, value-added resellers, hardware vendors, telecommunications carriers and distributors.We have built a portfolio of intellectual property, technologies, applications and solutions through both internal development and acquisitions. We expectto continue to pursue opportunities to expand our assets, geographic presence, distribution network and customer base through acquisitions of otherbusinesses and technologies. Significant business acquisitions during fiscal 2012, 2011 and 2010 were as follows:•June 1, 2012 —Vlingo Corporation ("Vlingo")•April 26, 2012 —Transcend Services, Inc. ("Transcend")•June 16, 2011 — SVOX, A.G. ("SVOX")•June 15, 2011 — Equitrac Corporation ("Equitrac")•December 30, 2009 — SpinVox, Limited ("SpinVox")The results of operations from the acquired businesses have been included in our consolidated financial statements from their respective acquisitiondates. See Note 3 for additional disclosure related to each of these acquisitions.We operate in four reportable segments; Healthcare, Mobile and Consumer, Enterprise, and Imaging. See Note 22 for a description of each of thesesegments.2.Summary of Significant Accounting PoliciesUse of EstimatesThe preparation of financial statements in conformity with U.S. generally accepted accounting principles, requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, assumptions andjudgments. The most important of these relate to revenue recognition; the allowances for doubtful accounts and sales returns; the valuation of goodwill andintangible assets; accounting for business combinations; accounting for stock-based compensation; the accounting for derivative instruments; accounting forincome taxes and related valuation allowances; and loss contingencies. We base our estimates on historical experience, market participant fair valueconsiderations and various other factors that are believed to be reasonable under the circumstances. Actual amounts could differ significantly from theseestimates.Basis of ConsolidationThe consolidated financial statements include our accounts and those of our wholly-owned domestic and foreign subsidiaries. Intercompanytransactions and balances have been eliminated.55Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)ReclassificationWe reclassified certain items included within the balance sheet as of September 30, 2011 to conform with the current year presentation. Thereclassification includes combining acquired unbilled accounts receivable with accounts receivable. Such reclassifications have no impact on earnings or cashflows provided by operations.Revenue RecognitionWe derive revenue from the following sources: (1) software license agreements, including royalty and other usage-based arrangements, (2) professionalservices, (3) hosting services and (4) post-contract customer support ("PCS"). Our hosting services are generally provided through on-demand, usage-based orper transaction fee arrangements. Our revenue recognition policies for these revenue streams are discussed below.The sale and/or license of software products and technology is deemed to have occurred when a customer either has taken possession of or has access totake immediate possession of the software or technology. In select situations, we sell or license intellectual property in conjunction with, or in place of,embedding our intellectual property in software. We also have non-software arrangements including hosting services where the customer does not takepossession of the software at the outset of the arrangement either because they have no contractual right to do so or because significant penalties preclude themfrom doing so. Generally we recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed ordeterminable and (iv) collectibility is probable.Revenue from royalties on sales of our software products by original equipment manufacturers (“OEMs”), where no services are included, is recognizedin the quarter earned so long as we have been notified by the OEM that such royalties are due, and provided that all other revenue recognition criteria are met.Software arrangements generally include PCS, which includes telephone support and the right to receive unspecified upgrades/enhancements on a when-and-if-available basis, typically for one to five years. Revenue from PCS is generally recognized ratably on a straight-line basis over the term that themaintenance service is provided. When PCS renews automatically, we provide a reserve based on historical experience for contracts expected to be canceled fornon-payment. All known and estimated cancellations are recorded as a reduction to revenue and accounts receivableFor our software and software-related multiple element arrangements, where customers purchase both software related products and software relatedservices, we use vendor-specific objective evidence (“VSOE”) of fair value for software and software-related services to separate the elements and account forthem separately. VSOE exists when a company can support what the fair value of its software and/or software-related services is based on evidence of theprices charged when the same elements are sold separately. VSOE of fair value is required, generally, in order to separate the accounting for various elements ina software and related services arrangement. We have established VSOE of fair value for the majority of our PCS, professional services, and training.When we provide professional services considered essential to the functionality of the software, we recognize revenue from the professional services aswell as any related software licenses on a percentage-of-completion basis whereby the arrangement consideration is recognized as the services are performed, asmeasured by an observable input. In these circumstances, we separate license revenue from professional service revenue for income statement presentation byallocating VSOE of fair value of the professional services as professional services and hosting revenue and the residual portion as product and licensingrevenue. We generally determine the percentage-of-completion by comparing the labor hours incurred to-date to the estimated total labor hours required tocomplete the project. We consider labor hours to be the most reliable, available measure of progress on these projects. Adjustments to estimates to complete aremade in the periods in which facts resulting in a change become known. When the estimate indicates that a loss will be incurred, such loss is recorded in theperiod identified. Significant judgments and estimates are involved in determining the percent complete of each contract. Different assumptions could yieldmaterially different results.We offer some of our products via a Software-as-a-Service ("SaaS") model also known as a hosted model. In this type of arrangement, we arecompensated in two ways: (1) fees for up-front set-up of the service environment and (2) fees charged on a usage or per transaction basis. Our up-front set-upfees are nonrefundable. We recognize the up-front set-up fees ratably over the longer of the contract lives, or the expected lives of the customer relationships.The on-demand, usage-based or per transaction fees are due and payable as each individual transaction is processed through the hosted service and isrecognized as revenue in the period the services are provided. 56Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)We enter into multiple-element arrangements that may include a combination of our various software related and non-software related products andservices offerings including software licenses, PCS, professional services, and our hosting services. In such arrangements we allocate total arrangementconsideration to software or software-related elements and any non-software element separately based on the selling price hierarchy group following theguidance in ASC 985-605 and our policies. We determine the selling price for each deliverable using VSOE of selling price, if it exists, or Third PartyEvidence (“TPE”) of selling price. Typically, we are unable to determine TPE of selling price. Therefore, when neither VSOE nor TPE of selling price exist fora deliverable, we use our Estimate of Selling Price (“ESP”) for the purposes of allocating the arrangement consideration. We determine ESP for a product orservice by considering multiple factors including, but not limited to, major project groupings, market conditions, competitive landscape, price list anddiscounting practices. Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element.When products are sold through distributors or resellers, title and risk of loss generally passes upon shipment, at which time the transaction is invoicedand payment is due. Shipments to distributors and resellers without right of return are recognized as revenue upon shipment, provided all other revenuerecognition criteria are met. Certain distributors and resellers have been granted rights of return for as long as the distributors or resellers hold the inventory. Wecannot use historical returns from these distributors and resellers as a basis upon which to estimate future sales returns. As a result, we recognize revenue fromsales to these distributors and resellers when the products are sold through to retailers and end-users.When products are sold directly to retailers or end-users, we make an estimate of sales returns based on historical experience. The provision for theseestimated returns is recorded as a reduction of revenue and accounts receivable at the time that the related revenue is recorded. If actual returns differsignificantly from our estimates, such differences could have a material impact on our results of operations for the period in which the actual returns becomeknown.We record consideration given to a reseller as a reduction of revenue to the extent we have recorded cumulative revenue from the customer or reseller.However, when we receive an identifiable benefit in exchange for the consideration, and can reasonably estimate the fair value of the benefit received, theconsideration is recorded as an operating expense.We record reimbursements received for out-of-pocket expenses as revenue, with offsetting costs recorded as cost of revenue. Out-of-pocket expensesgenerally include, but are not limited to, expenses related to transportation, lodging and meals. We record shipping and handling costs billed to customers asrevenue with offsetting costs recorded as cost of revenue.Deferred revenue at September 30, 2012 and 2011 were as follows (dollars in thousands): September 30, 2012 September 30, 2011Current Liabilities: Deferred maintenance revenue$114,036 $101,480Unearned revenue92,574 84,125Total current deferred revenue$206,610 $185,605Long-term Liabilities: Deferred maintenance revenue$43,763 $22,712Unearned revenue64,718 67,670Total long-term deferred revenue$108,481 $90,382Business CombinationsWe determine and allocate the purchase price of an acquired company to the tangible and intangible assets acquired and liabilities assumed as of thebusiness combination date. Results of operations and cash flows of acquired companies are included in our operating results from the date of acquisition. Thepurchase price allocation process requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination dateincluding:•estimated fair values of intangible assets;•estimated fair market values of legal performance commitments to customers, assumed from the acquiree under existing contractual obligations(classified as deferred revenue);57Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)•estimated fair market values of stock awards assumed from the acquiree that are included in the purchase price;•estimated fair market value of required payments under contingent consideration provisions;•estimated income tax assets and liabilities assumed from the acquiree; and•estimated fair value of pre-acquisition contingencies assumed from the acquiree.While we use our best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilitiesassumed at the business combination date, our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchaseprice allocation period, which is generally one year from the business combination date, we record adjustments to the assets acquired and liabilities assumed,with the corresponding offset to goodwill. For changes in the valuation of intangible assets between preliminary and final purchase price allocation, the relatedamortization is adjusted effective from the acquisition date. Subsequent to the purchase price allocation period any adjustment to assets acquired or liabilitiesassumed is included in operating results in the period in which the adjustment is determined.Goodwill and Indefinite-Lived Intangible AssetsGoodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired.Goodwill and intangible assets with indefinite lives are not amortized, but rather the carrying amounts of these assets are reviewed for impairment at leastannually or whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Our annual impairmentassessment date is July 1 of each fiscal year. Goodwill is evaluated for impairment based on a comparison of the fair value of our reporting units to theirrecorded carrying values. We have seven reporting units based on the level of information provided to, and review thereof, by our segment management.We determine fair values for each of the reporting units using an income approach. When available and appropriate, we also use a comparative marketapproach to derive the fair values. For purposes of the income approach, fair value is determined based on the present value of estimated future cash flows,discounted at an appropriate risk adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growthrates based on our most recent views of the long-term outlook for each business. Actual results may differ from those assumed in our forecasts. We derive ourdiscount rates using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the cost of equityfinancing. We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developedforecasts. Discount rates used in our reporting unit valuations ranged from 12% to 21%. For purposes of the market approach, we use a valuation technique inwhich values are derived based on market prices of comparable publicly traded companies. We also use a market based valuation technique in which valuesare determined based on relevant observable information generated by market transactions involving comparable businesses. We assess each valuationmethodology based upon the relevance and availability of the data at the time we perform the valuation and weight the methodologies appropriately. Thecarrying values of the reporting units were determined based on an allocation of our assets and liabilities through specific allocation of certain assets andliabilities to the reporting units and an apportionment method based on relative size of the reporting units’ revenues and operating expenses compared to theCompany as a whole. Certain corporate assets that are not instrumental to the reporting units’ operations and would not be transferred to hypotheticalpurchasers of the reporting units were excluded from the reporting units’ carrying values.Long-Lived AssetsOur long-lived assets consist principally of acquired intangible assets and land, building and equipment. Land, building and equipment are stated atcost. Building and equipment are depreciated over their estimated useful lives. Leasehold improvements are depreciated over the shorter of the related lease termor the estimated useful life. Costs of significant improvements on existing software for internal use are capitalized and depreciated over the estimated useful life.Depreciation is computed using the straight-line method. Repair and maintenance costs are expensed as incurred. The cost and related accumulated depreciationof sold or retired assets are removed from the accounts and any gain or loss is included in operations.We include in our amortizable intangible assets those intangible assets acquired in our business and asset acquisitions, including certain technology thatis licensed from third parties. We amortize acquired intangible assets with finite lives over the estimated economic lives of the assets, generally using thestraight-line method except where the pattern of the expected economic benefit is readily identifiable, primarily customer relationship intangibles, wherebyamortization follows that pattern. Each period, we evaluate the estimated remaining useful life of acquired and licensed intangible assets, as well as land,buildings and equipment, to determine whether events or changes in circumstances warrant a revision to the remaining period of depreciation or amortization.58Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset or asset group may notbe recoverable. We assess the recoverability of the asset or asset group based on the undiscounted future cash flows the assets are expected to generate, andrecognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the assets plus net proceeds expected fromdisposition of the assets, if any, are less than the carrying value of the assets. If an asset or asset group is deemed to be impaired, the amount of theimpairment loss, if any, represents the excess of the asset or asset group’s carrying value compared to its estimated fair value.Cash and Cash EquivalentsCash and cash equivalents consists of cash on hand, including money market funds and time deposits with original maturities of 90 days or less.Marketable Securities and Minority InvestmentsMarketable Securities: Investments are classified as available-for-sale and are recorded on the balance sheet at fair value with unrealized gains or lossesreported as a separate component of accumulated other comprehensive income, net of tax. Marketable securities consist primarily of high-quality corporate debtinstruments. As of September 30, 2011, the total cost basis was $31.3 million.Minority Investment: We record investments in other companies, where we do not have a controlling interest or significant influence in the equityinvestment, at cost within other assets in our consolidated balance sheet. We review our investments for impairment whenever declines in estimated fair valueare deemed to be other-than-temporary.Accounts Receivable AllowancesAllowances for Doubtful Accounts: We maintain an allowance for doubtful accounts for the estimated probable losses on uncollectible accountsreceivable. The allowance is based upon the credit worthiness of our customers, our historical experience, the age of the receivable and current market andeconomic conditions. Receivables are written off against these allowances in the period they are determined to be uncollectible.Allowances for Sales Returns: We maintain an allowance for sales returns from customers for which we have the ability to estimate returns based onhistorical experience. The returns allowance is recorded as a reduction in revenue and accounts receivable at the time the related revenue is recorded. Receivablesare written off against the allowance in the period the return is received.59Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)For the years ended September 30, 2012, 2011 and 2010, the activity related to accounts receivable allowances was as follows (dollars in thousands): Allowance forDoubtful Accounts Allowance for SalesReturnsBalance at October 1, 2009$6,833 $6,106Bad debt provision873 —Write-offs, net of recoveries(1,405) —Revenue adjustments, net— 723Balance at September 30, 2010$6,301 $6,829Bad debt provisions1,332 —Write-offs, net of recoveries(1,926) —Revenue adjustments, net— (596)Balance at September 30, 2011$5,707 $6,233Bad debt provisions2,706 —Write-offs, net of recoveries(1,480) —Revenue adjustments, net— 3,635Balance at September 30, 2012$6,933 $9,868InventoriesInventories are stated at the lower of cost, computed using the first-in, first-out method, or market value and are included in other current assets. Weregularly review inventory quantities on hand and record a provision for excess and/or obsolete inventory primarily based on future purchase commitmentswith our suppliers, and the estimated utility of our inventory as well as other factors including technological changes and new product development.Inventories, net of allowances, consisted of the following (dollars in thousands): September 30, 2012 September 30, 2011Components and parts$7,562 $6,279Inventory at customers— 275Finished products3,813 4,797 $11,375 $11,351Accounting for Collaboration AgreementsHealthcare Collaboration AgreementIn June 2011, we entered into an agreement with a large healthcare provider to acquire certain data for $10.0 million, to be used in a joint developmentproject. In addition, under the terms of the arrangement we will be reimbursed for certain research and development costs related to specified productdevelopment projects with the objective of commercializing the resulting products. All intellectual property derived from these research and development effortswill be owned by us. Upon product introduction, we will pay royalties to this party based on the actual sales. At the end of five years, the party can elect tocontinue with the arrangement, receiving royalties on future sales, or receive a buy-out payment from us and forgo future royalties. The buy-out payment iscalculated based on a number of factors including the net cash flows received and paid by the parties, as well as a minimum return on those net cash flows.As of the execution of the above arrangement, we have other arrangements where we have sold and will continue to sell our products and services to thisparty. As a result, under the guidance of ASC 605, Revenue Recognition, we are required to reduce the revenue recognized by the amount we pay to thiscustomer, up to our historical revenue recorded from them. We have therefore reduced reported revenue by $10.0 million for the fiscal year endedSeptember 30, 2011.60Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The above development arrangement will be accounted for in accordance with ASC 730, Research and Development. Accordingly, any buy-outobligation will be recorded as a liability and any reimbursement of the research and development costs in excess of the buy-out obligation will be recorded as anoffset to research and development costs. Royalties paid to this party upon commercialization of any products from these development efforts will be recordedas a reduction to revenue in accordance with ASC 605. For fiscal year ended September 30, 2012 and September 30, 2011, $5.8 million and $5.9 millionrespectively of expense reimbursement has been recorded as a reduction in research and development expense.Intellectual Property Collaboration AgreementsIn order to gain access to a third party’s extensive speech recognition technology, natural language and semantic process technology, in fiscal 2010 and2011 we entered into three intellectual property collaboration agreements with terms up to six years. Generally, the agreements call for annual payments in cashor shares of our common stock, at our election. Payments are estimated to be $23.4 million and $5.0 million in each of the next two years. Depending on theagreement, some or all intellectual property derived from these collaborations will be jointly owned by the two parties. For the majority of the developedintellectual property, we will have sole rights to commercialize such intellectual property for periods ranging between two to six years, depending on theagreement. We issued 1.0 million and 1.3 million shares of our common stock for payments totaling $23.4 million in each of the fiscal years ending in 2012and 2011, respectively.The payments are recorded as a prepaid asset when made, and will be expensed ratably over the contractual period. For the years ended September 30,2012 and 2011, we have recognized $21.0 million and $19.8 million as research and development expense, respectively, related to these agreements in ourconsolidated statements of operations.Research and Development CostsResearch and development costs related to software that is or will be sold or licensed externally to third-parties, or for which a substantive plan exists tosell or license such software in the future, incurred subsequent to the establishment of technological feasibility, but prior to the general release of the product,are capitalized and amortized to cost of revenue over the estimated useful life of the related products. We have determined that technological feasibility isreached shortly before the general release of our software products. Costs incurred after technological feasibility is established have not been material. Weexpense research and development costs as incurred.Capitalized Patent Defense CostsWe monitor the anticipated outcome of legal actions, and if we determine that the success of the defense of a patent is probable, and so long as we believethat the future economic benefit of the patent will be increased, we capitalize external legal costs incurred in the defense of these patents, up to the level of theexpected increased future economic benefit. If changes in the anticipated outcome occur, we write-off any capitalized costs in the period the change isdetermined. Upon successful defense of the patent, the amounts previously capitalized are amortized over the remaining life of the patent. During fiscal 2010,we expensed $6.8 million of deferred costs included in restructuring and other charges, net, as a result of unsuccessful litigation. As of September 30, 2012and 2011, there are no capitalized patent defense costs.61Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Acquisition-Related Costs, netAcquisition-related costs include those costs related to business and other acquisitions, including potential acquisitions. These costs consist of (i)transition and integration costs, including retention payments, transitional employee costs and earn-out payments treated as compensation expense, as well asthe costs of integration-related services provided by third-parties; (ii) professional service fees, including third-party costs related to the acquisitions, and legaland other professional service fees associated with disputes and regulatory matters related to acquired entities; and (iii) adjustments to acquisition-related itemsthat are required to be marked to fair value each reporting period, such as contingent consideration, and other items related to acquisitions for which themeasurement period has ended. The following is a summary of acquisition-related costs reported for the years ended September 30, 2012, 2011 and 2010,respectively (dollars in thousands): 2012 2011 2010Professional service fees$48,401 $18,030 $17,156Transition and integration costs9,888 3,361 13,562Acquisition-related adjustments457 475 (107)Total$58,746 $21,866 $30,611Advertising CostsAdvertising costs are expensed as incurred and are classified as sales and marketing expenses. Cooperative advertising programs reimburse customersfor marketing activities for certain of our products, subject to defined criteria. Cooperative advertising obligations are accrued and the costs expensed at thesame time the related revenue is recognized. Cooperative advertising expenses are recorded as expense to the extent that an advertising benefit separate from therevenue transaction can be identified and the cash paid does not exceed the fair value of that advertising benefit received. Any excess of cash paid over the fairvalue of the advertising benefit received is recorded as a reduction in revenue. We incurred advertising costs of $40.5 million, $30.6 million and $21.1 millionfor fiscal 2012, 2011 and 2010, respectively.Convertible DebtWe separately account for the liability (debt) and equity (conversion option) components of our convertible debt instruments that require or permitsettlement in cash upon conversion in a manner that reflects our nonconvertible debt borrowing rate at the time of issuance. The equity components of ourconvertible debt instruments are recorded to stockholders’ equity with an offsetting debt discount. The debt discount created is amortized to interest expense inour consolidated statement of operations using the effective interest method over the expected term of the convertible debt.Income TaxesDeferred tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and liabilities using enactedtax rates in effect in the years in which the differences are expected to reverse. We do not provide for U.S. income taxes on the undistributed earnings of ourforeign subsidiaries, which we consider to be indefinitely reinvested outside of the U.S.We make judgments regarding the realizability of our deferred tax assets. The balance sheet carrying value of our net deferred tax assets is based onwhether we believe that it is more likely than not that we will generate sufficient future taxable income to realize these deferred tax assets after consideration ofall available evidence. We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, theexpected timing of the reversals of existing temporary differences and tax planning strategies. In assessing the need for a valuation allowance, we consider bothpositive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence iscommensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projectedfuture taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. Generally,cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed.Valuation allowances have been established for certain foreign deferred tax assets, which we believe do not meet the “more likely than not” criteria forrecognition. If we are subsequently able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been established, then we maybe required to recognize these deferred tax assets through the reduction62Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)of the valuation allowance which could result in a material benefit to our results of operations in the period in which the benefit is determined.Comprehensive Income (Loss)In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-05, Comprehensive Income:Presentation of Comprehensive Income. This ASU amends FASB Codification Topic 220, Comprehensive Income, to require an entity to present the totalof comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement ofcomprehensive income or in two separate but consecutive statements. ASU 2011-05 is effective for fiscal years and interim periods within those fiscal yearsbeginning after December 15, 2011 and early adoption is permitted. We adopted this ASU during the year ended September 30, 2012 and elected to presentseparate consolidated statements of comprehensive income (loss). In December 2011, the FASB issued ASC 2011-12 which amends ASU 2011-05 to deferonly those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments to allow the Board time to re-deliberate whether to present onthe face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and othercomprehensive income for all periods presented. The adoption of this standard, will not have a significant impact on our financial statements.For the purposes of comprehensive income (loss) disclosures, we do not record tax provisions or benefits for the net changes in the foreign currencytranslation adjustment, as we intend to reinvest undistributed earnings in our foreign subsidiaries permanently.The components of accumulated other comprehensive (loss) income, reflected in the consolidated statements of stockholders’ equity, consisted of thefollowing (dollars in thousands): 2012 2011 2010Foreign currency translation adjustment$(3,456) $4,320 $13,067Unrealized (losses) gains on marketable securities— (12) 30Net unrealized gains on cash flow hedge derivatives— 20 230Net unrealized losses on post-retirement benefits(3,574) (1,926) (4,822)Total$(7,030) $2,402 $8,505Concentration of RiskFinancial instruments that potentially subject us to significant concentrations of credit risk principally consist of cash, cash equivalents, and tradeaccounts receivable. We place our cash and cash equivalents with financial institutions with high credit ratings. As part of our cash and investmentmanagement processes, we perform periodic evaluations of the credit standing of the financial institutions with whom we maintain deposits, and have notrecorded any credit losses to-date. For trade accounts receivable, we perform ongoing credit evaluations of our customers’ financial condition and limit theamount of credit extended when deemed appropriate. At September 30, 2012 and 2011, no customer accounted for greater than 10% of our net accountsreceivable balance or 10% of our revenue for fiscal 2012, 2011 or 2010.Fair Value of Financial InstrumentsFinancial instruments including cash equivalents, marketable securities, accounts receivable, accounts payable, and derivative instruments, are carriedin the financial statements at amounts that approximate their fair value based on the short maturities of those instruments. Refer to Note 10 for discussion ofthe fair value of our long-term debt.63Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Foreign Currency TranslationWe have significant foreign operations and transact business in various foreign currencies. In general, the functional currency of a foreign operation isthe local country’s currency. Non-functional currency monetary balances are re-measured into the functional currency of the subsidiary with any related gainor loss recorded in other income (expense), net, in the accompanying consolidated statements of operations. Assets and liabilities of operations outside theUnited States, for which the functional currency is the local currency, are translated into United States dollars using period-end exchange rates. Revenues andexpenses are translated at the average exchange rates in effect during each fiscal month during the year. The effects of foreign currency translation adjustmentsare included as a component of accumulated other comprehensive income (loss) in the accompanying consolidated balance sheets. Foreign currency transactiongains (losses) included in net income (loss) for fiscal 2012, 2011, and 2010 were $0.6 million, $(1.1) million, and $3.5 million, respectively.Financial Instruments and Hedging ActivitiesWe utilize derivative instruments to hedge specific financial risks such as interest rate and foreign exchange risk. We do not engage in speculativehedging activity. In order for us to account for a derivative instrument as a hedge, specific criteria must be met, including: (i) ensuring at the inception of thehedge that formal documentation exists for both the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge and(ii) at the inception of the hedge and on an ongoing basis, the hedging relationship is expected to be highly effective in achieving offsetting changes in fair valueattributed to the hedged risk during the period that the hedge is designated. Further, an assessment of effectiveness is required whenever financial statements orearnings are reported. Absent meeting these criteria, changes in fair value are recognized in other income (expense), net, in the consolidated statements ofoperations. Once the underlying forecasted transaction is realized, the gain or loss from the derivative designated as a hedge of the transaction is reclassifiedfrom accumulated other comprehensive income (loss) to the statement of operations, in the appropriate revenue or expense caption. Any ineffective portion ofthe derivatives designated as cash flow hedges is recognized in current earnings. We report cash flows arising from derivative financial instruments designatedas fair value or cash flow hedges consistent with the classification of the cash flows from the underlying hedged items that these derivatives are hedging. Cashflows from derivatives that do not qualify as hedges are generally reported in cash flows from investing activities. Cash payments or cash receipts on securityprice guarantees related to changes in the price of our own stock as discussed in Note 11, are reported as cash flows from financing activities.Accounting for Stock-Based CompensationWe account for stock-based compensation to employees and directors, including grants of employee stock options, purchases under employee stockpurchase plans, awards in the form of restricted shares (“Restricted Stock”) and awards in the form of units of stock purchase rights (“Restricted Units”)through recognition of the fair value of the stock-based compensation as a charge against earnings. We recognize stock-based compensation expense over therequisite service period, net of estimated forfeitures. We recognize benefits from stock-based compensation in equity using the with-and-without approach forthe utilization of tax attributes. The Restricted Stock and Restricted Units are collectively referred to as “Restricted Awards.”Net Income (Loss) Per ShareWe compute net income (loss) per share in accordance with the two-class method. Under the two-class method, basic net income per share is computedby dividing the net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Net losses arenot allocated to preferred stockholders. We have determined that our outstanding Series B convertible preferred stock represents a participating security and assuch the preferred shares are excluded from basic earnings per share.Diluted net income per share is computed using the more dilutive of (a) the two-class method, or (b) the if-converted method. We allocate net income firstto preferred stockholders based on dividend rights and then to common and preferred stockholders based on ownership interests. The weighted-averagenumber of common shares outstanding gives effect to all potentially dilutive common equivalent shares, including outstanding stock options and restrictedstock, shares held in escrow, contingently issuable shares under earn-out agreements once earned, warrants, and potential issuance of stock upon conversionof our 2.75% Convertible Debentures. The convertible debentures are considered Instrument C securities due to the fact that only the excess of the conversionvalue on the date of conversion can be paid in our common shares; the principal portion of the conversion must be paid in cash. Therefore, only the shares ofcommon stock potentially issuable with respect to the excess of the conversion value over its principal amount, if any, is considered as dilutive potentialcommon shares for purposes of calculating diluted net income per share.64Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The following table sets forth the computation for basic and diluted net income (loss) per share for the years ended September 30, 2012, 2011 and 2010(dollars in thousands, except per share amounts): 2012 2011 2010Numerator: Basic Net income (loss)$207,135 $38,238 $(19,099)Allocation of undistributed earnings to preferred stockholders(2,381) (445) —Net income (loss) available to common stockholders — basic$204,754 $37,793 $(19,099)Diluted Net income (loss) available to common stockholders — diluted$207,135 $38,238 $(19,099)Denominator: Basic Weighted average common shares outstanding306,371 302,277 287,412Diluted Weighted average common shares outstanding — basic306,371 302,277 287,412Weighted average effect of dilutive common equivalent shares: Assumed conversion of Series B Preferred Stock3,562 3,562 —Employee stock compensation plans6,074 8,457 —Warrants2,094 1,499 —Convertible Debt2,558 — —Other contingently issuable shares163 165 —Weighted average common shares outstanding — diluted320,822 315,960 287,412Net income (loss) per share: Basic$0.67 $0.13 $(0.07)Diluted$0.65 $0.12 $(0.07)Common equivalent shares are excluded from the computation of diluted net income (loss) per share if their effect is anti-dilutive. Potentially dilutivecommon equivalent shares aggregating to 3.2 million shares, 3.2 million shares and 20.7 million shares for the years ended September 30, 2012, 2011 and2010, respectively, have been excluded from the computation of diluted net income (loss) per share because their inclusion would be anti-dilutive.Recently Issued Accounting StandardsIn July 2012, the FASB issued Accounting Standards Update No. 2012-02, Intangibles-Goodwill and Other (Topic 350)-Testing Indefinite-LivedIntangible Assets for Impairment ("ASU 2012-02"), to allow entities to use a qualitative approach to test indefinite-lived intangible assets for impairment.ASU 2012-02 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of an indefinite-livedintangible asset is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed quantitativeimpairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying value. Otherwise, the quantitative impairment test is notrequired. ASU 2012-02 is effective for fiscal years beginning after September 15, 2012. As we do not have any indefinite lived intangible assets other thangoodwill, we do not expect this update to have a significant impact on our financial statements.3.Business Acquisitions2012 AcquisitionsFiscal 2012 AcquisitionsOn June 1, 2012, we acquired all of the outstanding capital stock of Vlingo for net cash consideration of $196.3 million,65Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)which excludes the amounts we received as a security holder of Vlingo, as described below. At the closing of the merger, $15.0 million of the mergerconsideration was deposited into an escrow account that will be held for twelve months after the closing date to satisfy any indemnification claims. Vlingoprovides technology that turns spoken words into action by combining speech recognition and natural language processing technology to understand the user'sintent and take the appropriate action. The acquisition is treated as a stock purchase for accounting purposes, and the goodwill resulting from this acquisitionis not expected to be deductible for tax purposes. The results of operations for Vlingo are included in our Mobile and Consumer Segment from the acquisitiondate.On April 26, 2012, we acquired all of the outstanding capital stock of Transcend, a provider of medical transcription and editing services. Theaggregate consideration payable to the former stockholders of Transcend was $332.3 million. The acquisition is treated as a stock purchase for accountingpurposes, and the goodwill resulting from this acquisition is not expected to be deductible for tax purposes. The results of operations for Transcend areincluded in our Healthcare segment from the acquisition date.A summary of the preliminary allocation of the purchase consideration for Vlingo, Transcend and our other fiscal 2012 acquisitions is as follows(dollars in thousands): Vlingo Transcend OtherTotal purchase consideration: Cash$196,304 $332,253 $339,194Fair value of contingent consideration— — 16,444Fair value of prior investment (a)28,696 — —Total purchase consideration$225,000 $332,253 $355,638Allocation of the purchase consideration: Cash$— $6,255 $10,194Accounts receivable(b)5,904 16,697 28,965Goodwill (c)192,758 218,089 205,046Identifiable intangible assets(d)29,382 142,160 156,200Other assets2,936 18,240 9,442Total assets acquired230,980 401,441 409,847Current liabilities(5,980) (18,285) (7,742)Deferred tax liability— (48,635) (45,142)Other long term liabilities— (2,268) (1,325)Total liabilities assumed(5,980) (69,188) (54,209)Net assets acquired$225,000 $332,253 $355,638(a)In October 2009, we acquired $15.0 million of convertible preferred securities of Vlingo. We have recognized a gain of $13.7 million included inother income, net, reflecting the fair value adjustment as a result of the conversion of our original investment in the non-controlling interest upon theclosing of the Vlingo acquisition.(b)Accounts receivable have been recorded at their estimated fair values, which consists of the gross accounts receivable assumed of $53.6 million,reduced by a fair value reserve of $2.0 million representing the portion of contractually owed accounts receivable which we do not expect to becollected.(c)At the time of the Vlingo acquisition, we ascribed significant value to future new customer relationships, future technologies that could be developed,as well as synergies and other benefits that do not meet the recognition criteria of acquired identifiable intangible assets. Accordingly, the value ofthese components is included within goodwill.(d)The following are the identifiable intangible assets acquired and their respective weighted average useful lives, as determined based on preliminaryvaluations (dollars in thousands):66Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Vlingo Transcend Other Amount WeightedAverageLife(Years) Amount WeightedAverageLife(Years) Amount WeightedAverageLife(Years)Core and completed technology$5,362 5.4 $5,410 5.0 $45,600 7.9Customer relationships23,200 14.0 130,260 13.0 101,400 11.5Trade name30 3.0 4,480 4.0 9,000 8.2Non-Compete agreements790 3.0 2,010 3.0 200 3.0Total$29,382 $142,160 $156,200 Other Fiscal 2012 AcquisitionsDuring fiscal 2012, we acquired three additional businesses including the acquisition of Quantim for total cash consideration of $230.2 million, whichis included in our Healthcare segment. The results of operations of these acquisitions have been included in our consolidated results from their respectiveacquisition dates. The goodwill resulting from these transactions is not expected to be deductible for tax purposes.2011 AcquisitionsFiscal 2011 AcquisitionsOn June 16, 2011, we acquired all of the outstanding capital stock of SVOX, a Swiss based seller of speech recognition, dialog, and text-to-speechsoftware products for the automotive, mobile and consumer electronics industries in our Mobile and Consumer segment. Total purchase consideration was€87.0 million which consists of cash consideration of €57.0 million ($80.9 million based on the exchange rate as of the date of acquisition) and aggregatedeferred acquisition payments of €30.0 million ($41.5 million based on the exchange rate as of the date of acquisition). The deferred acquisition payment ispayable in cash or shares of our common stock, at our option; €8.3 million of the deferred acquisition payment was paid in cash in June 2012 and theremaining €21.7 million is due on December 31, 2012. The acquisition is treated as a stock purchase for accounting purposes, and the goodwill resultingfrom this acquisition is not expected to be deductible for tax purposes. The results of operations of SVOX have been included in our results of operations fromthe acquisition date.On June 15, 2011, we acquired all of the outstanding capital stock of Equitrac, a leading provider of print management solutions, to expand theofferings of our Imaging segment, for cash consideration of approximately $162.0 million. The acquisition is treated as a stock purchase for accountingpurposes, and the goodwill resulting from this acquisition is not expected to be deductible for tax purposes. The results of operations of Equitrac have beenincluded in our results of operations from the acquisition date.67Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)A summary of the final allocation of the purchase consideration for Equitrac and SVOX is as follows (dollars in thousands): Equitrac SVOXTotal purchase consideration: Cash$161,950 $80,919Deferred acquisition payment— 41,456Total purchase consideration$161,950 $122,375Allocation of the purchase consideration: Cash$115 $—Accounts receivable(a)9,931 3,663Inventory2,462 —Goodwill90,077 86,767Identifiable intangible assets(b)91,900 42,165Other assets12,144 2,728Total assets acquired206,629 135,323Current liabilities(6,368) (9,663)Deferred tax liability(38,311) (3,285)Total liabilities assumed(44,679) (12,948)Net assets acquired$161,950 $122,375_______________________________________(a)Accounts receivable have been recorded at their estimated fair values, which consists of the gross accounts receivable assumed of $15.4 million,reduced by a fair value reserve of $1.8 million representing the portion of contractually owed accounts receivable which we do not expect to be collected.(b)The following are the identifiable intangible assets acquired and their respective weighted average useful lives, as determined based on final valuations(dollars in thousands): Equitrac SVOX Amount WeightedAverageLife (Years) Amount WeightedAverageLife (Years)Customer relationships$55,800 15.0 $35,612 13.4Core and completed technology22,000 7.0 6,268 5.0Trade name14,100 10.0 285 3.0Total$91,900 $42,165 Other Fiscal 2011 AcquisitionsDuring fiscal 2011, we acquired three additional businesses, primarily to expand our product offerings and enhance our technology base. The results ofoperations of these acquisitions have been included in our consolidated results from their respective acquisition dates. The total consideration for theseacquisitions was $157.1 million, paid in cash. In allocating the total purchase consideration for these acquisitions based on estimated fair values, we recorded$94.4 million of goodwill and $57.8 million of identifiable intangible assets. Intangible assets acquired included primarily customer relationships and coreand completed technology with weighted average useful lives of 12.4 years. The goodwill resulting from these transactions is not expected to be deductible fortax purposes.2010 AcquisitionsAcquisition of SpinVoxOn December 30, 2009, we acquired all of the outstanding capital stock of SpinVox, a UK-based privately-held company68Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)engaged in the business of providing voicemail-to-text services, which is included in our Mobile and Consumer segment. The acquisition was a stockpurchase and the goodwill resulting from this acquisition is not expected to be deductible for tax purposes. The results of operations of SpinVox have beenincluded in our results of operations from January 1, 2010. The results of operations of SpinVox for the one day, December 31, 2009, of the fiscal first quarterduring which SpinVox was a part of Nuance were excluded from our consolidated results for the year ended September 30, 2010 as such amounts for that oneday were immaterial.A summary of the final allocation of the purchase consideration is as follows (dollars in thousands):Total purchase consideration: Cash$67,500Common Stock(a)36,352Total purchase consideration$103,852Allocation of the purchase consideration: Cash$4,061Accounts receivable(b)12,419Other assets5,861Property and equipment1,585Identifiable intangible assets32,400Goodwill109,726Total assets acquired166,052Current liabilities(c)(61,148)Deferred revenue(1,052)Total liabilities assumed(62,200)Net assets acquired$103,852_______________________________________(a)Approximately 2.3 million shares of our common stock, valued at $15.81 per share based on the closing price of our common stock on the acquisitiondate, were issued at closing.(b)Accounts receivable have been recorded at their estimated fair value, which consists of the gross accounts receivable assumed of $15.3 million, reducedby a fair value reserve of $2.9 million representing the portion of contractually owed accounts receivable which we do not expect to be collected.(c)Current liabilities include a commitment of €25.0 million ($36.0 million based on the December 31, 2009 exchange rate) fixed obligation, payable incash.The following are the identifiable intangible assets acquired and their respective weighted average useful lives, as determined based on final valuation(dollars in thousands): Amount WeightedAverageLife (Years)Customer relationships$23,400 12.0Core and completed technology8,400 4.7Non-compete agreements600 2.0Total$32,400 Other Fiscal 2010 AcquisitionsDuring fiscal 2010, we acquired an additional seven businesses primarily to expand our product offerings and enhance our technology base. The resultsof operations of these companies have been included in our consolidated results from their respective acquisition dates. The total consideration for theseacquisitions was $86.3 million, including the issuance of 1.2 million shares of69Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)our common stock valued at $21.8 million. In allocating the total purchase consideration for these acquisitions , we recorded $43.6 million of goodwill and$34.5 million of identifiable intangible assets. Intangible assets acquired included primarily core and completed technology and customer relationships withweighted average useful lives of 6.5 years. The acquisitions were primarily stock acquisitions and the goodwill resulting from these acquisitions is notexpected to be deductible for tax purposes.4.Pro Forma Results (Unaudited)The following table shows unaudited pro forma results of operations as if we had acquired Equitrac, SVOX,Transcend and Vlingo on October 1, 2010(dollars in thousands): 2012 2011Revenue$1,733,061 $1,503,840Net income (loss)$205,030 $(28,167)Net income (loss) per share (diluted)$0.64 $(0.09)We have not included subsequent acquisitions as discussed in Note 21 in the proforma results of operations as the amounts are immaterial. We have notfurnished pro forma financial information relating to our other fiscal 2012 and 2011 acquisitions because such information is not material, individually or inthe aggregate, to our financial results. The unaudited pro forma results of operations are not necessarily indicative of the actual results that would haveoccurred had the transactions actually taken place at the beginning of the periods indicated.5.Contingent Acquisition PaymentsEarn-out PaymentsFor business combinations occurring subsequent to the adoption of ASC 805 in fiscal 2010, the fair value of any contingent consideration is establishedat the acquisition date and included in the total purchase price. The contingent consideration is then adjusted to fair value as an increase or decrease in currentearnings in each reporting period. Contingent consideration related to acquisitions prior to our adoption of ASC 805 have been recorded as additional purchaseprice when the contingency is resolved and additional consideration is attributable.In connection with our acquisition of Swype in October 2011, we agreed to make deferred payments to the former shareholders of Swype of up to $25.0million in April 2013, contingent upon the continued employment of three named executives and certain other conditions. The contingent payments will bereduced by amounts specified in the merger agreement in the event that any of the three executives terminates employment prior to the payment date or if anylosses occur to which we would be entitled to indemnification under the merger agreement. The portion of the deferred payment that is payable to the threenamed executives will be recognized as compensation expense over the 18 month employment period. The remaining liability is included in the total purchaseconsideration and has been recorded at its estimated fair value at the acquisition date of $16.4 million.In connection with an immaterial acquisition during fiscal 2010, we agreed to make contingent earn-out payments of up to $2.5 million, payable instock, upon the achievement of certain financial targets for calendar year 2010 and 2011. At the acquisition date, we recorded $1.0 million as the fair value ofthe contingent consideration. For the years ended September 30, 2012 and 2011, we have recorded expense of $0.7 million and $1.1 million as fair valueadjustments included in acquisition-related costs, net in our consolidated statement of operations. In June, 2012, we paid $2.1 million in cash and stock to theformer shareholders related to the final earn-out. In September 2011, we paid $0.5 million in cash and stock to the former shareholders related to the calendaryear 2010 earn-out.In connection with our acquisition of Vocada, Inc. (“Vocada”) in November 2007, we agreed to make contingent earn-out payments of up to $21.0million upon the achievement of certain financial targets measured over defined periods through December 31, 2010, in accordance with the merger agreement.We notified the former shareholders of Vocada that the financial targets were not achieved. In December 2010, the former shareholders filed a demand forarbitration in accordance with their rights under the merger agreement. On October 4, 2012, the arbitration panel issued its conclusion indicating that noadditional payments to the former shareholders under the Vocada agreement are required. Vocada shareholders have filed a motion to vacate this ruling. AtSeptember 30, 2012, we have not recorded any obligation relative to these earn-out provisions.70Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Escrow and Holdback ArrangementsIn connection with certain of our acquisitions, we have placed either cash or shares of our common stock in escrow to satisfy any indemnificationclaims we may have. If no claims are made, the escrowed amounts will be released to the former shareholders of the acquired companies. Historically, inaccordance with the previous accounting guidance in Statement of Financial Accounting Standard No. 141, Business Combinations (“SFAS 141”), we couldnot make a determination, beyond a reasonable doubt, whether the escrow would become payable to the former shareholders of these companies until theescrow period had expired. Accordingly these amounts were treated as contingent purchase price until it was determined that the escrow was payable, at whichtime the escrowed amounts would be recorded as additional purchase price and allocated to goodwill. Under the revised accounting guidance of ASC 805,escrow payments are generally considered part of the initial purchase consideration and accounted for as goodwill.During fiscal 2011, the last amounts remaining in escrow accounted for under previous accounting guidance expired. Payments totaling $5.2 millionwere released to former shareholders of X-Solutions Group B.V. and eCopy, Inc. and were recorded as an increase to goodwill during the period.6.Goodwill and Intangible AssetsThe changes in the carrying amount of goodwill for our reportable segments for fiscal years 2012 and 2011 were as follows (dollars in thousands): Healthcare Mobile and Consumer Enterprise Imaging TotalBalance as of September 30, 2010$637,109 $910,890 $465,920 $64,024 $2,077,943Goodwill acquired35,128 109,747 39,792 87,439 272,106Escrow amounts released— — — 5,150 5,150Purchase accounting adjustments460 (1,646) 402 — (784)Effect of foreign currency translation(48) (576) (5,874) (37) (6,535)Balance as of September 30, 2011$672,649 $1,018,415 $500,240 $156,576 $2,347,880Goodwill acquired354,795 252,192 — 8,906 615,893Purchase accounting adjustments— (2,265) (1,042) 2,638 (669)Effect of foreign currency translation(2,776) (2,476) (2,365) (10) (7,627)Balance as of September 30, 2012$1,024,668 $1,265,866 $496,833 $168,110 $2,955,477Intangible assets consist of the following as of September 30, 2012 and 2011, which includes $108.8 million and $130.3 million of licensed technology,respectively (dollars in thousands): September 30, 2012 Gross CarryingAmount AccumulatedAmortization Net Carrying Amount Weighted AverageRemaining Life (Years)Customer relationships$957,043 $(364,161) $592,882 9.7Technology and patents461,356 (198,689) 262,667 5.8Trade names, trademarks, and other60,080 (12,239) 47,841 9.1Non-competition agreements5,144 (1,996) 3,148 2.4Total$1,483,623 $(577,085) $906,538 8.571Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) September 30, 2011 Gross CarryingAmount AccumulatedAmortization Net Carrying Amount Weighted AverageRemaining Life (Years)Customer relationships$727,284 $(302,979) $424,305 8.7Technology and patents428,597 (167,838) 260,759 5.9Trade names, trademarks, and other68,560 (23,337) 45,223 9.6Non-competition agreements2,769 (1,479) 1,290 2.2Total$1,227,210 $(495,633) $731,577 7.7In fiscal 2010 we purchased patents and licenses totaling $45 million, which is included with the technology and patents category. We made paymentsto third parties of both cash and shares of our common stock in connection with these acquisitions. A total of 2,180,600 shares of our common stock wereissued subject to price guarantees as described further in Note 11. The weighted average useful life related to these acquired assets is 10 years.Amortization expense for acquired technology and patents is included in the cost of revenue from amortization of intangible assets in the accompanyingstatements of operations and amounted to $60.0 million, $55.1 million and $47.8 million in fiscal 2012, 2011 and 2010, respectively. Amortization expensefor customer relationships, trade names, trademarks, and other, and non-competition agreements is included in operating expenses and amounted to $95.4million, $88.2 million and $87.8 million in fiscal 2012, 2011 and 2010, respectively. Estimated amortization expense for each of the five succeeding years asof September 30, 2012, is as follows (dollars in thousands):Year Ending September 30, Cost of Revenue Other OperatingExpenses Total2013 $57,578 $93,021 $150,5992014 48,437 86,705 135,1422015 44,621 79,724 124,3452016 38,374 70,492 108,8662017 29,615 58,547 88,162Thereafter 44,042 255,382 299,424Total $262,667 $643,871 $906,5387.Accounts ReceivableAccounts receivable consisted of the following (dollars in thousands): September 30, 2012 September 30, 2011Trade accounts receivable$369,585 $280,620Unbilled accounts receivable under long-term contracts28,633 12,176Gross accounts receivable398,218 292,796Less — allowance for doubtful accounts(6,933) (5,707)Less — allowance for sales returns(9,868) (6,233)Accounts receivable, net$381,417 $280,85672Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)8.Land, Building and Equipment, NetLand, building and equipment, net consisted of the following (dollars in thousands): Useful Life September 30, 2012 September 30, 2011 (In years) Land— $2,400 $2,400Building30 5,456 5,432Machinery and equipment3-5 37,706 13,048Computers, software and equipment3-5 173,022 136,204Leasehold improvements2-7 21,963 19,315Furniture and fixtures5 12,995 12,540Construction in progressn/a 1,649 2,695Subtotal 255,191 191,634Less: accumulated depreciation (139,057) (113,416)Land, building and equipment, net $116,134 $78,218Depreciation expense for fiscal 2012, 2011 and 2010 was $31.7 million, $27.6 million and $21.6 million, respectively.9.Accrued Expenses and Other Current LiabilitiesAccrued expenses and other current liabilities consisted of the following (dollars in thousands): September 30, 2012 September 30, 2011Compensation$125,180 $97,929Acquisition costs and liabilities17,258 8,414Accrued interest payable13,859 977Professional fees12,799 11,975Cost of revenue related liabilities12,050 8,698Sales and marketing incentives (a)10,795 16,253Sales and other taxes payable8,364 9,876Income taxes payable4,528 4,240Accrued business combination cost1,735 8,275Other8,610 9,437Total$215,178 $176,074_______________________________________(a)Included in accrued sales and marketing incentives as of September 30, 2011, is a €5.0 million ($6.8 million equivalent) fixed obligation assumed inconnection with our acquisition of SpinVox in 2009. At September 30, 2011, we had €5.0 million of restricted cash that has been placed in anirrevocable standby letter of credit related to the liability. The restricted cash was released upon the settlement of the liability during the three monthsended December 31, 2011.73Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)10.Credit Facilities and DebtAt September 30, 2012 and 2011, we had the following borrowing obligations (dollars in thousands): September 30, 2012 September 30, 20115.375% Senior Notes due 2020$700,000 $—2.75% Convertible Debentures due 2031, net of unamortized discount of $136.4 million553,587 —2.75% Convertible Debentures due 2027, net of unamortized discount of $18.4 million and $27.4 million,respectively231,552 222,557Credit Facility630,596 636,941Other170 427Total long-term debt2,115,905 859,925Less: current portion380,094 6,905Non-current portion of long-term debt$1,735,811 $853,020The estimated fair value of our long-term debt approximated $2,522.2 million (face value $2,270.7 million) and $937.8 million (face value $887.4million) at September 30, 2012 and 2011, respectively. These fair value amounts represent the value at which our lenders could trade our debt within thefinancial markets, and do not represent the settlement value of these long-term debt liabilities to us at each reporting date. The fair value of the long-term debtwill continue to vary each period based on fluctuations in market interest rates, as well as changes to our credit ratings. The term loan portion of our CreditFacility is traded and the fair values are based upon traded prices as of the reporting dates. The fair values of the 2.75% Convertible Debentures due 2027 andthe 2.75% Convertible Debentures due 2031 at each respective reporting date were estimated using the averages of the September 30, 2012 and September 30,2011, bid and ask trading quotes. We had no outstanding balance on the revolving credit line portion of our Credit Facility at September 30, 2012 andSeptember 30, 2011.5.375% Senior Notes due 2020On August 14, 2012, we issued $700 million aggregate principal amount of 5.375% Senior Notes (the "Notes") in a private placement due onAugust 15, 2020. The net proceeds from the Notes were approximately $689.1 million, net of issuance costs. The Notes bear interest at 5.375% per year,payable in cash semi-annually in arrears, beginning on February 15, 2013. The ending unamortized deferred debt issuance costs at September 30, 2012 were$12.1 million.The Notes are the unsecured senior obligations of the Company and are guaranteed (the “Guarantees”) on an unsecured senior basis by substantially allof the Company's direct and indirect wholly owned domestic subsidiaries (the “Subsidiary Guarantors”). The Notes and Guarantees rank equally in right ofpayment with all of the Company's and the Subsidiary Guarantors' existing and future unsecured senior debt and rank senior in right of payment to all of theCompany's and the Subsidiary Guarantors' future unsecured subordinated debt. The Notes and Guarantees effectively rank junior to all secured debt of theCompany and the Subsidiary Guarantors to the extent of the value of the collateral securing such debt and to all liabilities, including trade payables, of theCompany's subsidiaries that have not guaranteed the Notes.At any time before August 15, 2016, we may redeem all or a portion of the Notes at a redemption price equal to 100% of the aggregate principal amountof the Notes to be redeemed, plus a “make-whole” premium and accrued and unpaid interest to, but excluding, the redemption date. At any time on or afterAugust 15, 2016, we may redeem all or a portion of the Notes at certain redemption prices expressed as percentages of the principal amount, plus accrued andunpaid interest to, but excluding, the redemption date. At any time and from time to time before August 15, 2015, we may redeem up to 35% of the aggregateoutstanding principal amount of the Notes with the net cash proceeds received by the Company from certain equity offerings at a price equal to 105.375%,plus accrued and unpaid interest to, but excluding, the redemption date, provided that the redemption occurs no later than the 120 days after the closing of therelated equity offering, and at least 50% of the original aggregate principal amount of the Notes remains outstanding immediately thereafter.Upon the occurrence of certain asset sales or a change in control, we must offer to repurchase the Notes at a price equal to 100%, in the case of an assetsale, or 101%, in the case of a change of control, of the principal amount plus accrued and unpaid interest to, but excluding, the repurchase date.74Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)2.75% Convertible Debentures due 2031On October 24, 2011, we sold $690 million of 2.75% Convertible Debentures due in 2031 (the “2031 Debentures”) in a private placement. Totalproceeds, net of debt issuance costs, were $676.1 million. The 2031 Debentures bear interest at 2.75% per year, payable in cash semi-annually in arrears,beginning on May 1, 2012. The 2031 Debentures mature on November 1, 2031, subject to the right of the holders to require us to redeem the 2031 Debentureson November 1, 2017, 2021, and 2026.ASC 470-20, Debt with Conversion and Other Options, requires us to allocate the proceeds to the liability component based on the fair valuedetermined at the issuance date with the remainder allocated to the conversion right and recorded in stockholders' equity. We initially allocated $533.6 millionto long-term debt, and $156.4 million has been recorded as additional paid-in capital. The aggregate debt discount is being amortized to interest expense usingthe effective interest rate method through November 2017. As of September 30, 2012, the ending unamortized discount was $136.4 million and the endingunamortized deferred debt issuance costs were $9.1 million. The 2031 Debentures are general senior unsecured obligations and rank equally in right ofpayment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractuallysubordinated to the 2031 Debentures. The 2031 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries.If converted, the principal amount of the 2031 Debentures is payable in cash and any amounts payable in excess of the $690 million principal amount,will (based on an initial conversion rate, which represents an initial conversion price of approximately $32.30 per share, subject to adjustment) be paid in cashor shares of our common stock, at our election, only in the following circumstances and to the following extent: (i) on any date during any fiscal quarterbeginning after December 31, 2011 (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the then currentconversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter;(ii) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for $1,000 principal amountof the 2031 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by thethen current conversion rate; (iii) upon the occurrence of specified corporate transactions, as described in the indenture for the 2031 Debentures; or (iv) at theoption of the holder at any time on or after May 1, 2031. Additionally, we may redeem the 2031 Debentures, in whole or in part, on or after November 6, 2017at par plus accrued and unpaid interest. Each holder shall have the right, at such holder's option, to require us to repurchase all or any portion of the 2031Debentures held by such holder on November 1, 2017, November 1, 2021, and November 1, 2026 at par plus accrued and unpaid interest. Uponconversion, we will pay the principal amount in cash and any amounts payable in excess of the $690 million principal amount will be paid in cash or sharesof our common stock, at our election. If we undergo a fundamental change (as described in the indenture for the 2031 Debentures) prior to maturity, holderswill have the option to require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the debenturesto be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date. As of September 30, 2012, noconversion triggers were met. If the conversion triggers were met, we could be required to repay all or some of the principal amount in cash prior to the maturitydate.2.75% Convertible Debentures due 2027On August 13, 2007, we issued $250 million of 2.75% convertible senior debentures due in 2027 (“the 2027 Debentures”) in a private placement toCitigroup Global Markets Inc. and Goldman, Sachs & Co. Total proceeds, net of debt discount and deferred debt issuance costs were $241.4 million. The2027 Debentures bear an interest rate of 2.75% per annum, payable semi-annually in arrears beginning on February 15, 2008, and mature on August 15,2027 subject to the right of the holders of the 2027 Debentures to require us to redeem the 2027 Debentures on August 15, 2014, 2017 and 2022. Inaccordance with ASC 470-20, Debt with Conversion and Other Options, the difference of $54.7 million between the fair value of the liability component ofthe 2027 Debentures and the net proceeds on the date of issuance have been recorded as additional paid-in-capital and as debt discount. The aggregate debtdiscount is being amortized to interest expense using the effective interest rate method through August 2014. As of September 30, 2012 and 2011, the endingunamortized discount was $18.4 million and $27.4 million, respectively. The 2027 Debentures are general senior unsecured obligations, ranking equally inright of payment to all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that iscontractually subordinated to the 2027 Debentures. The 2027 Debentures are effectively subordinated to our secured indebtedness to the extent of the value ofthe collateral securing such indebtedness and are structurally subordinated to indebtedness and other liabilities of our subsidiaries. If converted, the principalamount of the 2027 Debentures is payable in cash and any amounts payable in excess of the $250 million principal amount, will (based on an initialconversion rate, which represents an initial conversion price of $19.47 per share, subject to adjustment) be paid in cash or shares of our common stock, atour election, only in the following circumstances and to the following extent: (i) on any date during any fiscal quarter beginning after September 30, 2007 (andonly during such fiscal quarter) if the closing sale price of our common stock was more than 120% of the then current conversion price for at least 20 tradingdays in75Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) during the five consecutive business-day periodfollowing any five consecutive trading-day period in which the trading price for $1,000 principal amount of the Debentures for each day during such fivetrading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; (iii) upon the occurrence ofspecified corporate transactions, as described in the indenture for the 2027 Debentures; and (iv) at the option of the holder at any time on or after February 15,2027. Additionally, we may redeem the 2027 Debentures, in whole or in part, on or after August 20, 2014 at par plus accrued and unpaid interest; each holdershall have the right, at such holder’s option, to require us to repurchase all or any portion of the 2027 Debentures held by such holder on August 15, 2014,August 15, 2017 and August 15, 2022. Upon conversion, we will pay the principal amount in cash and any amounts payable in excess of the $250 millionprincipal amount will be paid in cash or shares of our common stock, at our election. If we undergo a fundamental change (as described in the indenture forthe 2027 Debentures) prior to maturity, holders will have the option to require us to repurchase all or any portion of their debentures for cash at a price equal to100% of the principal amount of the debentures to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, therepurchase date.Our stock price exceeded the conversion threshold price of $23.36 per share for at least 20 days during the 30 consecutive trading days endedSeptember 30, 2012. Accordingly, the 2027 Debentures will be convertible at the holders' option during the quarter ended December 31, 2012 and thereforewere classified as current liabilities at September 30, 2012.The difference between the carrying value of the 2027 Debentures and the $250.0 million principal amount reflects the unamortized portion of theoriginal issue discount recognized upon issuance of the notes, which is being amortized over the expected term of the convertible debt. Because the 2027Debentures were convertible at September 30, 2012, an amount equal to the $18.4 million unamortized portion of the original issue discount was separatelyclassified in our consolidated balance sheets as temporary equity and referred to as “Equity component of currently redeemable convertible debentures.”Credit FacilityOur credit facility consists of a $75 million revolving credit line including letters of credit, a $355 million term loan entered into on March 31, 2006, a$90 million term loan entered into on April 5, 2007 and a $225 million term loan entered into on August 24, 2007 (the “Credit Facility”). In July 2011, weentered into agreements to amend and restate our existing Credit Facility. Of the approximately $638.5 million remaining term loan balances as of July 1,2011, lenders representing $493.2 million elected to extend the maturity date by three years to March 31, 2016. The remaining term loans are due March 2013.In addition, lenders participating in the revolving credit facility have chosen to extend the maturity date by three years to March 31, 2015. As of September 30,2012, $630.6 million remained outstanding under the term loans, there were $17.9 million of letters of credit issued under the revolving credit line and therewere no other outstanding borrowings under the revolving credit line.The Credit Facility contains covenants, including, among other things, covenants that restrict our ability and those of our subsidiaries to incur certainadditional indebtedness, create or permit liens on assets, enter into sale-leaseback transactions, make loans or investments, sell assets, make certainacquisitions, pay dividends, or repurchase stock. The agreement also contains events of default, including failure to make payments of principal or interest,failure to observe covenants, breaches of representations and warranties, defaults under certain other material indebtedness, failure to satisfy materialjudgments, a change of control and certain insolvency events. As of September 30, 2012, we were in compliance with the covenants under the Credit Facility.Under terms of the amended Credit Agreement, interest is payable monthly at a rate equal to the applicable margin plus, at our option, either (a) the baserate which is the higher of the corporate base rate of UBS AG, Stamford Branch, or the federal funds rate plus 0.50% per annum or (b) LIBOR (equal to(i) the British Bankers’ Association Interest Settlement Rates for deposits in U.S. dollars divided by (ii) one minus the statutory reserves applicable to suchborrowing). The applicable margin for the borrowings is as follows:Description Base Rate Margin LIBOR MarginTerm loans maturing March 2013 0.75% - 1.50%(a) 1.75% - 2.50%(a)Term loans maturing March 2016 2.00% 3.00%Revolving facility due March 2015 1.25% - 2.25%(b) 2.25% - 3.25%(b)(a)The margin is determined based on our leverage ratio and credit rating at the date the interest rates are reset on the Term Loans.76Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(b)The margin is determined based on our leverage ratio and credit rating at the date the interest rates are reset on the revolving credit line.At September 30, 2012 the applicable margins were 2.00%, with an effective rate of 2.24%, on the remaining balance of $143.5 million maturing inMarch 2013 and 3.00%, with an effective rate of 3.24%, on the remaining balance of $487.1 million maturing in March 2016. We are required to pay acommitment fee for unutilized commitments under the revolving credit facility at a rate ranging from 0.375% to 0.50% per annum, based upon our leverageratio. As of September 30, 2012, the commitment fee rate was 0.375%.We capitalized debt issuance costs related to the Credit Facility and are amortizing the costs to interest expense using the effective interest rate method,through March 2013 for costs associated with the unextended portion of the term loan, through March 2015 for costs associated with the revolving creditfacility and through March 2016 for the remainder of the balance. As of September 30, 2012 and 2011, the ending unamortized deferred financing fees were$4.1 million and $5.8 million, respectively, and are included in other assets in the accompanying consolidated balance sheet.The Credit Facility amendment extended the payment terms on a portion of the loan. Principal is due in quarterly installments of 0.25% of the thenoutstanding balance through the original maturity date of March 2013 for $145.3 million, representing the portion of the loan that was not extended. Principalpayments on the extended loan of $493.2 million are due in quarterly installments of 0.25% of the then outstanding balance through March 2016, at whichpoint the remaining balance becomes due. In addition, an annual excess cash flow sweep, as defined in the Credit Facility, is payable in the first quarter ofeach fiscal year, based on the excess cash flow generated in the previous fiscal year. We have not generated excess cash flows in any period and no additionalpayments are required. We will continue to evaluate the extent to which a payment is due in the first quarter of future fiscal years based on excess cash flowgeneration. At the current time, we are unable to predict the amount of the outstanding principal, if any, that may be required to be repaid in future fiscal yearspursuant to the excess cash flow sweep provisions. Any term loan borrowings not paid through the baseline repayment, the excess cash flow sweep, or anyother mandatory or optional payments that we may make, will be repaid upon maturity. If only the baseline repayments are made, the annual aggregateprincipal amount of the term loans repaid would be as follows (dollars in thousands):Year Ending September 30,Amount2013$148,38520144,80420154,7562016472,651Total$630,596Our obligations under the Credit Facility are unconditionally guaranteed by, subject to certain exceptions, each of our existing and future direct andindirect wholly-owned domestic subsidiaries. The Credit Facility and the guarantees thereof are secured by first priority liens and security interests in thefollowing: 100% of the capital stock of substantially all of our domestic subsidiaries and 65% of the outstanding voting equity interests and 100% of the non-voting equity interests of first-tier foreign subsidiaries, all our material tangible and intangible assets and those of the guarantors, and any present and futureintercompany debt. The Credit Facility also contains provisions for mandatory prepayments of outstanding term loans upon receipt of the following, andsubject to certain exceptions: 100% of net cash proceeds from asset sales, 100% of net cash proceeds from issuance or incurrence of debt, and 100% ofextraordinary receipts. We may voluntarily prepay borrowings under the Credit Facility without premium or penalty other than breakage costs, as defined withrespect to LIBOR-based loans.11.Financial Instruments and Hedging ActivitiesDerivatives not Designated as HedgesForward Currency ContractsWe operate our business in countries throughout the world and transact business in various foreign currencies. Our foreign currency exposures typicallyarise from transactions denominated in currencies other than the local functional currency of our operations. During fiscal 2011, we commenced a programthat primarily utilizes foreign currency forward contracts to offset these risks associated with the effect of certain foreign currency exposures. We commencedthis program so that increases or decreases in our foreign currency exposures are offset by gains or losses on the foreign currency forward contracts in order tomitigate the77Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)risks and volatility associated with our foreign currency transactions. Generally, we enter into contracts for less than 90 days, and at September 30, 2012 and2011, we had outstanding contracts with a total notional value of $83.9 million and $75.7 million, respectively.We have not designated these forward contracts as hedging instruments pursuant to ASC 815, Derivatives and Hedging and accordingly, we recordedthe fair value of these contracts at the end of each reporting period in our consolidated balance sheet, with changes in the fair value recorded in earnings asother income, net in our consolidated statement of operations. During the years ended September 30, 2012 and 2011, we recorded losses of $2.3 million and$2.3 million, respectively, associated with these contracts.During fiscal 2010, we entered into an €18.0 million foreign currency contract to offset the foreign currency exposure on a fixed obligation assumed inconnection with our acquisition of SpinVox in December 2009. The contract matured in December 2010 and the realized gain was recorded in other income, netand was offset by the corresponding realized loss on the settlement of the obligation.During the three months ended December 31, 2008, we entered into foreign currency forward contracts to offset foreign currency exposure on the deferredacquisition payment of €44.3 million. The foreign currency contracts matured and were settled on October 22, 2009. The gain for the period fromSeptember 30, 2009 to settlement on October 22, 2009 was $1.6 million, which was offset in other income, net by the loss resulting from the correspondingchange in the associated deferred acquisition payment liability.Security Price GuaranteesFrom time to time we enter into agreements that allow us to issue shares of our common stock as part or all of the consideration related to partnering andtechnology acquisition activities. Generally these shares are issued subject to security price guarantees which are accounted for as derivatives. We havedetermined that these instruments would not be considered equity instruments if they were freestanding. The security price guarantees require payment fromeither us to a third party, or from a third party to us, based upon the difference between the price of our common stock on the issue date and an average priceof our common stock approximately six months following the issue date. Changes in the fair value of these security price guarantees are reported in earnings ineach period as other income, net. During the years ended September 30, 2012 and 2011, we recorded $8.0 million and $13.2 million, respectively of gainsassociated with these contracts and received net cash payments totaling $9.0 million and $9.4 million, respectively, upon the settlement of agreements duringthe year.The following is a summary of the outstanding shares subject to security price guarantees at September 30, 2012 (dollars in thousands):Issue Date Number of Shares Issued Settlement Date Total Value of Shares onIssue DateApril 2, 2012 97,733 October 2, 2012 $2,500June 1, 2012 116,822 December 1, 2012 $2,500August 14, 2012 795,848 February 14, 2013 $18,400Derivatives Designated as Cash Flow HedgesWe enter into foreign currency contracts to hedge the variability of cash flows in Canadian dollars and Hungarian forints which are designated as cashflow hedges. Contracts with notional value totaling $0.5 million settled in October 2011.78Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The following table provides a quantitative summary of the fair value of our hedged and non-hedged derivative instruments as of September 30, 2012and September 30, 2011 (dollars in thousands): Fair ValueDescription Balance Sheet Classification September 30, 2012 September 30, 2011Derivatives Not Designated as Hedges: Foreign currency contracts Prepaid expenses and other current assets $1,047 $—Foreign currency contracts Accrued expenses and other current liabilities — (1,025)Security Price Guarantees Prepaid expenses and other current assets 1,758 2,781Net asset value of non-hedged derivative instruments $2,805 $1,756Derivatives Designated as Hedges: Foreign currency contracts Prepaid expenses and other current assets $— $15Net asset value of hedged derivative instruments $— $15The following tables summarize the activity of derivative instruments for the fiscal 2012 and 2011 (dollars in thousands):Derivatives Not Designated as Hedges for the Fiscal Year Ended September 30 Location of Gain (Loss) Recognized in Income Amount of Gain (Loss) Recognized in Income 2012 2011Foreign currency contractsOther income, net $(2,324) $(2,332)Security price guaranteesOther income, net $7,997 $13,230Derivatives Designated as Hedges for the Fiscal Year Ended September 30 Amount of Gain (Loss)Recognized in OCI Location and Amount of Gain (Loss) Reclassified fromAccumulated OCI into Income (Effective Portion) 2012 2011 2012 2011Foreign currency contracts$— $475 Other income, net $15 $1,189Interest rate swaps$— $— Other income, net $— $(503)12.Fair Value MeasuresFair value is defined as the price that would be received for an asset, or paid to transfer a liability, in an orderly transaction between market participantsat the measurement date. Valuation techniques must maximize the use of observable inputs and minimize the use of unobservable inputs. When determiningthe fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which wewould transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions,and risk of nonperformance.ASC 820, Fair Value Measures and Disclosures, establishes a value hierarchy based on three levels of inputs, of which the first two are consideredobservable and the third is considered unobservable:•Level 1. Quoted prices for identical assets or liabilities in active markets which we can access.•Level 2. Observable inputs other than those described as Level 1.•Level 3. Unobservable inputs.79Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Assets and liabilities measured at fair value on a recurring basis at September 30, 2012 and 2011 consisted of (dollars in thousands): September 30, 2012 Level 1 Level 2 Level 3 TotalAssets: Money market funds(a)$971,091 $— $— $971,091Time deposits(b)— 39,344 — 39,344US government agency securities(a)1,000 — — 1,000Foreign currency exchange contracts(b)— 1,047 — 1,047Security price guarantees(c)— 1,758 — 1,758Total assets at fair value$972,091 $42,149 $— $1,014,240Liabilities: Contingent earn-out(d)— — 16,980 16,980Total liabilities at fair value$— $— $16,980 $16,980 September 30, 2011 Level 1 Level 2 Level 3 TotalAssets: Money market funds(a)$258,001 $— $— $258,001Time deposits(b)— 49,832 — 49,832US government agency securities(a)1,000 — — 1,000Marketable securities, $31,256 at cost(b)— 31,244 — 31,244Foreign currency exchange contracts(b)— 15 — 15Security price guarantees(c)— 2,781 — 2,781Total assets at fair value$259,001 $83,872 $— $342,873Liabilities: Foreign currency exchange contracts(b)— 1,025 — 1,025Contingent earn-out(d)— — 1,358 1,358Total liabilities at fair value$— $1,025 $1,358 $2,383(a)Money market funds and US government agency securities, included in cash and cash equivalents in the accompanying balance sheet, are valued atquoted market prices in active markets.(b)The fair value of our time deposits, marketable securities and foreign currency exchange contracts is based on the most recent observable inputs forsimilar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectlyobservable.(c)The fair values of the security price guarantees are determined using a modified Black-Scholes model, derived from observable inputs such as UStreasury interest rates, our common stock price, and the volatility of our common stock. The valuation model values both the put and call componentsof the guarantees simultaneously, with the net value of those components representing the fair value of each instrument.(d)The fair value of our contingent consideration arrangement is determined based on the Company’s evaluation as to the probability and amount of anyearn-out that will be achieved based on expected future performance by the acquired entity, as well as our common stock price for certain contingentconsideration arrangements payable in shares of our common stock. Refer to Note 5 for additional information.80Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The following table provides a summary of changes in fair value of our Level 3 financial instruments for the years ended September 30, 2012 and 2011(dollars in thousands): AmountBalance as of October 1, 2010$724Payments upon settlement(455)Charges to acquisition-related costs, net1,089Balance as of September 30, 2011$1,358Earn-out liability established at time of acquisition16,444Payments upon settlement(2,064)Charges to acquisition-related costs, net1,242Balance as of September 30, 2012$16,980Items Measured at Fair Value on a Nonrecurring BasisIn the fourth quarter of fiscal 2011, we performed our annual impairment test for our goodwill and indefinite lived intangible asset. Our indefinite-livedintangible asset is the Dictaphone trade name used in our Healthcare segment which was acquired in March 2006. A change in marketing strategy becameeffective in the fourth quarter of fiscal 2011 that will result in rebranding a number of our Healthcare offerings, and we will no longer be using the Dictaphonetrade name for any new product offerings. This new marketing strategy caused us to update our revenue forecasts used in estimating the fair value of the tradename. Because the Dictaphone trade name will no longer be used for new product offerings, we adjusted the future revenues associated with the Dictaphonetrade name in estimating the fair value of the asset. We calculated the fair value of the Dictaphone trade name using a discounted cash flow model based on theadjusted forecast for the existing customer base using the historical products that continue to use the existing trade name designation. In performing ouranalysis, we used assumptions that we believe a market participant would utilize in valuing the trade name. We determined the fair value of the Dictaphonetrade name to be $16.1 million with an estimated remaining useful life of 15 years as of September 30, 2011 and recorded an impairment of $11.7 million($1.2 million, net of taxes) in restructuring and other charges, net during fiscal 2011.13.Accrued Business Combination CostsWe have, in connection with certain of our business combinations, incurred restructuring costs. Restructuring costs are typically comprised ofseverance costs, costs of consolidating duplicate facilities and contract termination costs. In accordance with our adoption of ASC 805 in fiscal 2010,restructuring expenses are recognized at the date of acquisition if such restructuring costs meet the recognition criteria in ASC 420, Exit or Disposal CostObligations. Prior to our adoption of ASC 805, restructuring expenses were recognized based upon plans that were committed to by management at the date ofacquisition, but were generally subject to refinement during the purchase price allocation period (generally within one year of the acquisition date). In additionto plans resulting from the business combination, previous acquisitions have included companies which have established liabilities relating to lease exit costsas a result of their previous restructuring activities. Regardless of the origin of the lease exit costs, we are required to make assumptions relating to subleaseterms, sublease rates and discount rates. We base our estimates and assumptions on the best information available at the time of the obligation having arisen.These estimates are reviewed and revised as facts and circumstances dictate, with any changes being recorded to goodwill (for acquisitions completed prior toOctober 2009) or restructuring and other charges, net. Changes in these estimates could have a material effect on the amount accrued on the balance sheet.In connection with two previous acquisitions, we assumed two individually significant lease obligations that were abandoned prior to the acquisitiondates. These obligations expire in 2016 and 2012, respectively, and the fair value of the obligations, net of estimated sublease income, was recognized as aliability assumed by us in the allocation of the final purchase price. The net payments have been discounted in calculating the fair value of these obligations,and the discount is being accreted through the term of the lease. Cash payments net of sublease receipts are presented as cash used in financing activities on theconsolidated statements of cash flows.Additionally, prior to the adoption of ASC 805, we implemented restructuring plans to eliminate duplicate facilities, personnel or assets in connectionwith business combinations. These costs were recognized as liabilities assumed, and accordingly are included in the allocation of the purchase price, generallyresulting in an increase to the recorded amount of the goodwill.81Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The activity for the years ended September 30, 2012, 2011 and 2010, relating to all facilities and personnel recorded in accrued business combinationcosts, is as follows (dollars in thousands): Facilities Personnel TotalBalance at October 1, 2009$34,551 $2,497 $37,048Charged to goodwill(15) (759) (774)Charged to restructuring and other charges, net(769) — (769)Charged to interest expense1,241 — 1,241Cash payments, net of sublease receipts(11,137) (1,579) (12,716)Balance at September 30, 201023,871 159 24,030Charged to restructuring and other charges, net12 (100) (88)Charged to interest expense832 — 832Cash payments, net of sublease receipts(11,760) (59) (11,819)Balance at September 30, 201112,955 — 12,955Charged to restructuring and other charges, net802 — 802Charged to interest expense398 — 398Cash payments, net of sublease receipts(8,799) — (8,799)Balance at September 30, 2012$5,356 $— $5,356 September 30, 2012 September 30, 2011Reported as: Current$1,735 $8,275Long-term3,621 4,680Total$5,356 $12,95514.Restructuring and Other Charges, NetFiscal 2012For fiscal 2012, we recorded net restructuring and other charges of $7.5 million, which included a $6.7 million severance charge related to theelimination of approximately 160 personnel across multiple functions primarily to eliminate duplicative positions as a result of businesses acquired.Fiscal 2011For fiscal 2011, we recorded net restructuring and other charges of $23.0 million, which consisted primarily of an $11.7 million impairment chargerelated to our Dictaphone trade name resulting from a recent change in our Healthcare marketing strategy under which we plan to consolidate our brands andwill no longer be using the Dictaphone trade name in our new product offerings. In addition, we recorded a $9.1 million charge related to the elimination ofapproximately 200 personnel across multiple functions primarily to eliminate duplicative positions as a result of businesses acquired during the year and a$1.9 million charge related to the elimination or consolidation of excess facilities.Fiscal 2010For fiscal 2010, we recorded net restructuring and other charges of $18.7 million, which consisted primarily of $9.6 million related to the elimination ofapproximately 175 personnel across multiple functions within our company, including acquired entities, a $6.8 million write-off of previously capitalizedpatent defense costs as a result of unsuccessful litigation and $2.1 million of contract termination costs.82Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The following table sets forth the fiscal 2012, 2011 and 2010 accrual activity relating to restructuring and other charges (dollars in thousands): Personnel Facilities Other TotalBalance at October 1, 2009$607 $310 $28 $945Restructuring and other charges, net9,634 155 8,871 18,660Non-cash adjustment— — (6,833) (6,833)Cash payments(8,403) (182) (2,066) (10,651)Balance at September 30, 20101,838 283 — 2,121Restructuring and other charges, net9,077 1,890 11,983 22,950Non-cash adjustment208 — (11,890) (11,682)Cash payments(6,002) (1,233) (93) (7,328)Balance at September 30, 20115,121 940 — 6,061Restructuring and other charges, net6,707 359 400 7,466Cash payments(10,120) (1,267) (400) (11,787)Balance at September 30, 2012$1,708 $32 $— $1,740Restructuring and other charges, net by segment are as follows (dollars in thousands): Personnel Facilities Other TotalFiscal Year 2010 Healthcare$814 $— $— $814Mobile and Consumer5,307 — 2,038 7,345Enterprise1,794 — — 1,794Imaging215 155 — 370Corporate1,504 — 6,833 8,337Total fiscal year 2010$9,634 $155 $8,871 $18,660Fiscal Year 2011 Healthcare$419 $— $11,725 $12,144Mobile and Consumer5,091 — — 5,091Enterprise1,867 1,304 — 3,171Imaging839 — — 839Corporate861 586 258 1,705Total fiscal year 2011$9,077 $1,890 $11,983 $22,950Fiscal Year 2012 Healthcare$443 $61 $— $504Mobile and Consumer1,679 597 — 2,276Enterprise1,262 — — 1,262Imaging184 — — 184Corporate3,139 (299) 400 3,240Total fiscal year 2012$6,707 $359 $400 $7,46683Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)15.Supplemental Cash Flow InformationCash paid for Interest and Income Taxes: Year Ended September 30, 2012 2011 2010 (Dollars in thousands)Interest paid$36,907 $23,034 $27,899Income taxes paid$13,292 $15,949 $14,215Non Cash Investing and Financing Activities:During fiscal 2010, we issued shares of our common stock in connection with several of our business and asset acquisitions, including shares initiallyheld in escrow. Note 3 details the shares of our common stock, including per share prices thereof, issued in fiscal 2012, 2011, and 2010 to complete businessacquisitions during those years. Note 6 details the same information with regard to our fiscal 2012 and 2011 intangible asset acquisitions. In addition, inconnection with certain collaboration agreements we have issued shares of our common stock to our partners in satisfaction of our payment obligations underthe terms of the agreements, which is discussed in Note 2.16.Stockholders' EquityPreferred StockWe are authorized to issue up to 40,000,000 shares of preferred stock, par value $0.001 per share. We have designated 100,000 shares as Series APreferred Stock and 15,000,000 shares as Series B Preferred Stock. In connection with the acquisition of ScanSoft from Xerox Corporation (“Xerox”), weissued 3,562,238 shares of Series B Preferred Stock to Xerox. On March 19, 2004, we announced that Warburg Pincus, a global private equity firm, hadagreed to purchase all outstanding shares of our stock held by Xerox Corporation for approximately $80 million, including the 3,562,238 shares of Series BPreferred Stock. The Series B Preferred Stock is convertible into shares of common stock on a one-for-one basis and has a liquidation preference of $1.30 pershare plus all declared but unpaid dividends. The holders of Series B Preferred Stock are entitled to non-cumulative dividends at the rate of $0.05 per annumper share, payable when, and if, declared by the Board of Directors. To date, no dividends have been declared by the Board of Directors. Holders of Series BPreferred Stock have no voting rights, except those rights provided under Delaware law. The undesignated shares of preferred stock will have rights,preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shallbe determined by the Board of Directors upon issuance of the preferred stock. We have reserved 3,562,238 shares of our common stock for issuance uponconversion of the Series B Preferred Stock. Other than the 3,562,238 shares of Series B Preferred Stock that are issued and outstanding, there are no othershares of preferred stock issued or outstanding in fiscal 2012 or fiscal 2011.Common Stock and Common Stock WarrantsPrivate Placements of SecuritiesWe have, from time to time, entered into stock and warrant agreements with Warburg Pincus. In connection with these agreements, we granted WarburgPincus the right to request that we use commercially reasonable efforts to register some or all of the shares of common stock issued to them under each of theirpurchase transactions, including shares of common stock underlying the warrants. The following table summarizes the warrant and stock activities withWarburg Pincus during the three year period ended September 30, 2012:84Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Warrants ExercisedDate Exercise Price perShare Warrants Exercised Total Shares Issued Proceeds Received (Dollars in thousands)August 29, 2012 $11.57 3,862,422 1,998,547 $—February 15, 2012 20.00 3,700,000 1,077,744 —April 7, 2010 4.94 2,500,000 2,500,000 12,350We have determined that all of our common stock warrants should be classified within the stockholders’ equity section of the accompanyingconsolidated balance sheets based on the conclusion that the above-noted warrants are indexed to our common stock and are exercisable only into our commonstock. As of September 30, 2012, there are no outstanding warrants to purchase shares of our common stock.17.Stock-Based CompensationWe recognize stock-based compensation expense over the requisite service period. Our share-based awards are accounted for as equity instruments. Theamounts included in the consolidated statements of operations relating to stock-based compensation are as follows (dollars in thousands): 2012 2011 2010Cost of product and licensing$137 $36 $28Cost of professional services and hosting26,409 27,814 11,043Cost of maintenance and support956 2,186 756Research and development29,565 24,289 9,381Selling and marketing54,281 43,264 38,152General and administrative63,233 49,707 40,779Total$174,581 $147,296 $100,139Included in stock-based compensation for the year ended September 30, 2012 and 2011 is $46.3 million and $35.1 million, respectively, of expenserelated to awards that will be made as part of the annual bonus plan to employees which is included in accrued expenses at September 30, 2012 and 2011. Theannual bonus pool is determined by management and approved by the Compensation Committee of the Board of Directors based on financial performancetargets approved at the beginning of the year. If these targets are achieved, the awards will be settled in shares based on the total bonus earned and the grant datefair value of the shares awarded to each employee.Stock OptionsWe have share-based award plans under which employees, officers and directors may be granted stock options to purchase our common stock,generally at fair market value. Our plans do not allow for options to be granted at below fair market value, nor can they be re-priced at any time. Optionsgranted under our plans become exercisable over various periods, typically 2 to 4 years and have a maximum term of 10 years. We have also assumed optionsand option plans in connection with certain of our acquisitions. These stock options are governed by the plans and agreements that they were originally issuedunder, but are now exercisable for shares of our common stock.85Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The table below summarizes activity relating to stock options for the years ended September 30, 2012, 2011 and 2010: Number ofShares WeightedAverageExercisePrice WeightedAverageRemainingContractualTerm AggregateIntrinsicValue(1)Outstanding at September 30, 200913,553,866 $7.48 Granted1,200,000 $13.81 Exercised(3,433,701) $5.39 Forfeited(350,884) $13.65 Expired(266,044) $16.26 Outstanding at September 30, 201010,703,237 $8.44 Granted1,000,000 $16.44 Exercised(3,866,544) $6.23 Forfeited(90,813) $12.75 Expired(64,161) $15.03 Outstanding at September 30, 20117,681,719 $10.48 Assumed in the acquisition of Vlingo345,319 $7.57 Exercised(1,803,647) $7.40 Forfeited(79,781) $8.78 Expired(4,330) $8.72 Outstanding at September 30, 20126,139,280 $11.24 3.1 years $83.8 millionExercisable at September 30, 20125,994,586 $11.29 3.0 years $81.6 millionExercisable at September 30, 20116,565,907 Exercisable at September 30, 20109,137,554 _______________________________________(1)The aggregate intrinsic value on this table was calculated based on the positive difference, if any, between the closing market value of our common stockon September 30, 2012 ($24.89) and the exercise price of the underlying options.As of September 30, 2012, the total unamortized fair value of stock options was $1.7 million with a weighted average remaining recognition period of1.9 years. A summary of weighted-average grant-date (including assumed options) fair value and intrinsic value of stock options exercised is as follows: 2012 2011 2010Weighted-average grant-date fair value per share$14.38 $6.13 $5.90Total intrinsic value of stock options exercised (in millions)$30.9 $53.0 $36.1We use the Black-Scholes option pricing model to calculate the grant-date fair value of an award. The fair value of the assumed unvested stock optionswas calculated using a lattice model. The fair value of the stock options granted and unvested options assumed from acquisitions were calculated using thefollowing weighted-average assumptions: 2012 2011 2010Dividend yield0.0% 0.0% 0.0%Expected volatility46.6% 46.1% 50.9%Average risk-free interest rate1.5% 1.2% 2.4%Expected term (in years)3.5 4.1 4.2The dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. Expectedvolatility is based on the historical volatility of our common stock over the period commensurate with the expected life of the options and the historical impliedvolatility from traded options with a term of 180 days or greater. The risk-free interest rate is derived from the average U.S. Treasury STRIPS rate during theperiod, which approximates the rate in86Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)effect at the time of grant, commensurate with the expected life of the instrument. We estimate the expected term of options granted based on historical exercisebehavior.Restricted AwardsWe are authorized to issue equity incentive awards in the form of Restricted Awards, including Restricted Units and Restricted Stock, which areindividually discussed below. Unvested Restricted Awards may not be sold, transferred or assigned. The fair value of the Restricted Awards is measuredbased upon the market price of the underlying common stock as of the date of grant, reduced by the purchase price of $0.001 per share of the awards. TheRestricted Awards generally are subject to vesting over a period of two to four years, and may have opportunities for acceleration for achievement of definedgoals. We also issued certain Restricted Awards with vesting solely dependent on the achievement of specified performance targets. The fair value of theRestricted Awards is amortized to expense over the awards’ applicable requisite service periods using the straight-line method. In the event that the employees’employment with the Company terminates, or in the case of awards with only performance goals, if those goals are not met, any unvested shares are forfeitedand revert to the Company.Restricted Units are not included in issued and outstanding common stock until the shares are vested and released. The table below summarizes activityrelating to Restricted Units: Number of SharesUnderlyingRestricted Units —Contingent Awards Number of SharesUnderlyingRestricted Units —Time-BasedAwardsOutstanding at September 30, 20092,840,673 8,755,330Granted1,698,743 4,693,440Earned/released(950,253) (4,800,175)Forfeited(721,323) (853,481)Outstanding at September 30, 20102,867,840 7,795,114Granted1,779,905 5,167,589Earned/released(1,312,136) (4,977,397)Forfeited(380,430) (699,188)Outstanding at September 30, 20112,955,179 7,286,118Granted3,092,062 6,341,627Earned/released(1,057,207) (5,474,799)Forfeited(319,754) (412,334)Outstanding at September 30, 20124,670,280 7,740,612Weighted average remaining recognition period of outstanding Restricted Units1.7 years 1.9 yearsUnearned stock-based compensation expense of outstanding Restricted units$87.1 million $130.8 millionAggregate intrinsic value of outstanding Restricted Units(1)$116.2 million $192.8 million(1)The aggregate intrinsic value on this table was calculated based on the positive difference between the closing market value of our common stock onSeptember 30, 2012 ($24.89) and the exercise price of the underlying Restricted Units.A summary of weighted-average grant-date fair value, including those assumed in respective periods, and intrinsic value of all Restricted Units vested isas follows: 2012 2011 2010Weighted-average grant-date fair value per share$25.11 $18.74 $13.15Total intrinsic value of shares vested (in millions)$156.7 $116.0 $91.387Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Restricted Stock is included in the issued and outstanding common stock in these financial statements at the date of grant. There was no restricted stockactivity in fiscal 2011 or 2010. The table below summarizes activity relating to Restricted Stock for fiscal 2012: Number ofSharesUnderlyingRestricted Stock WeightedAverage GrantDate FairValueOutstanding at October 1, 2011— $—Granted750,000 $25.80Outstanding at September 30, 2012750,000 $25.80The purchase price for vested Restricted Stock is $0.001 per share. As of September 30, 2012, unearned stock-based compensation expense related to allunvested Restricted Stock is $13.6 million and the expense will be recognized over a weighted-average remaining period of 2.1 years.In order to satisfy our employees’ withholding tax liability as a result of the vesting of Restricted Awards, we have historically repurchased shares uponthe employees’ vesting. Similarly, in order to satisfy our employees’ withholding tax liability as a result of the release of our employees’ Restricted Units,including units released related to acquisitions, we have historically canceled a portion of the common stock upon the release. In fiscal 2012, we withheldpayroll taxes totaling $52.0 million relating to 2.2 million shares of common stock that were repurchased or canceled. Based on our estimate of the RestrictedAwards that will vest or be released in fiscal 2013, and further assuming that one-third of these Restricted Awards would be repurchased or canceled to satisfythe employee’s withholding tax liability (such amount approximating the tax rate of our employees), we would have an obligation to pay cash relating toapproximately 1.7 million shares during fiscal 2013.1995 Employee Stock Purchase PlanOur 1995 Employee Stock Purchase Plan (“the Plan”), as amended and restated on January 29, 2010, authorizes the issuance of a maximum of10,000,000 shares of common stock in semi-annual offerings to employees at a price equal to the lower of 85% of the closing price on the applicable offeringcommencement date or 85% of the closing price on the applicable offering termination date. Stock-based compensation expense for the employee stockpurchase plan is recognized for the fair value benefit accorded to participating employees. At September 30, 2012, we have reserved 2,875,661 shares forfuture issuance. A summary of the weighted-average grant-date fair value, shares issued and total stock-based compensation expense recognized related to thePlan are as follows: 2012 2011 2010Weighted-average grant-date fair value per share$6.84 $4.63 $3.80Total shares issued (in millions)0.8 0.9 1.0Total stock-based compensation expense (in millions)$4.6 $3.7 $3.5The fair value of the purchase rights granted under this plan was estimated on the date of grant using the Black-Scholes option-pricing model that usesthe following weighted-average assumptions, which were derived in a manner similar to those discussed above relative to stock options: 2012 2011 2010Dividend yield0.0% 0.0% 0.0%Expected volatility42.8% 35.7% 38.7%Average risk-free interest rate0.2% 0.1% 0.2%Expected term (in years)0.5 0.5 0.518.Commitments and ContingenciesOperating LeasesWe have various operating leases for office space around the world. In connection with many of our acquisitions, we assumed facility lease obligations.Among these assumed obligations are lease payments related to office locations that were vacated by88Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)certain of the acquired companies prior to the acquisition date (Note 13). Additionally, certain of our lease obligations have been included in variousrestructuring charges (Note 14). The following table outlines our gross future minimum payments under all non-cancelable operating leases as ofSeptember 30, 2012 (dollars in thousands):Year Ending September 30, Operating Leases Other ContractualObligations Assumed Total2013 $28,056 $2,496 $30,5522014 23,160 2,499 25,6592015 20,538 2,502 23,0402016 18,691 1,037 19,7282017 15,320 — 15,320Thereafter 14,380 — 14,380Total $120,145 $8,534 $128,679At September 30, 2012, we have subleased certain office space that is included in the above table to third parties. Total sublease income undercontractual terms is $5.3 million and ranges from approximately $0.7 million to $1.6 million on an annual basis through February 2016.Total rent expense charged to operations was approximately $26.4 million, $23.5 million and $20.5 million for the years ended September 30, 2012,2011 and 2010, respectively.Litigation and Other ClaimsLike many companies in the software industry, we have, from time to time, been notified of claims that we may be infringing, or contributing to theinfringement of, the intellectual property rights of others. These claims have been referred to counsel, and they are in various stages of evaluation andnegotiation. If it appears necessary or desirable, we may seek licenses for these intellectual property rights. There is no assurance that licenses will be offeredby all claimants, that the terms of any offered licenses will be acceptable to us or that in all cases the dispute will be resolved without litigation, which may betime consuming and expensive, and may result in injunctive relief or the payment of damages by us.We do not believe that the final outcome of the above litigation matters will have a material adverse effect on our financial position and results ofoperations. However, even if our defense is successful, the litigation could require significant management time and will be costly. Should we not prevail, ouroperating results, financial position and cash flows could be adversely impacted.Guarantees and OtherWe include indemnification provisions in the contracts we enter into with customers and business partners. Generally, these provisions require us todefend claims arising out of our products’ infringement of third-party intellectual property rights, breach of contractual obligations and/or unlawful orotherwise culpable conduct. The indemnity obligations generally cover damages, costs and attorneys’ fees arising out of such claims. In most, but not allcases, our total liability under such provisions is limited to either the value of the contract or a specified, agreed upon amount. In some cases our total liabilityunder such provisions is unlimited. In many, but not all, cases, the term of the indemnity provision is perpetual. While the maximum potential amount offuture payments we could be required to make under all the indemnification provisions is unlimited, we believe the estimated fair value of these provisions isminimal due to the low frequency with which these provisions have been triggered.We indemnify our directors and officers to the fullest extent permitted by law. These agreements, among other things, indemnify directors and officersfor expenses, judgments, fines, penalties and settlement amounts incurred by such persons in their capacity as a director or officer of the company, regardlessof whether the individual is serving in any such capacity at the time the liability or expense is incurred. Additionally, in connection with certain acquisitionswe have agreed to indemnify the former officers and members of the boards of directors of those companies, on similar terms as described above, for a periodof six years from the acquisition date. In certain cases we purchase director and officer insurance policies related to these obligations, which fully cover the sixyear periods. To the extent that we do not purchase a director and officer insurance policy for the full period of any contractual indemnification, we would berequired to pay for costs incurred, if any, as described above.89Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)19.Pension and Other Post-Retirement BenefitsDefined Contribution PlanWe have established a retirement savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan coverssubstantially all of our U.S. employees who meet minimum age and service requirements, and allows participants to defer a portion of their annualcompensation on a pre-tax basis. Effective July 1, 2003, Company match of employee’s contributions was established. We match 50% of employeecontributions up to 4% of eligible salary. Employees who were hired prior to April 1, 2004 were 100% vested into the plan as soon as they started to contributeto the plan. Employees hired on or after April 1, 2004, vest one-third of the contribution annually over a three-year period. Our contributions to the 401(k) Plantotaled $4.6 million, $3.6 million and $3.3 million for fiscal 2012, 2011 and 2010, respectively. We make contributions to various other plans in certain ofour foreign operations, total contributions to these plans are not material.Defined Benefit Pension PlansIn accordance with the provisions set forth in ASC 715, Compensation — Retirement Benefits, we recognized the funded status, which is thedifference between the fair value of plan assets and the projected benefit obligations, of our postretirement benefit plans in the consolidated balance sheets witha corresponding adjustment to accumulated other comprehensive income (loss), net of tax. These amounts in accumulated other comprehensive income (loss)will be subsequently recognized as net periodic pension expense.In connection with our acquisition of Dictaphone in March 2006, we assumed the defined benefit pension plans for former Dictaphone employeeslocated in the United Kingdom and Canada. These two pension plans are closed to new participants. In fiscal 2012, we announced a plan to terminate ourCanadian pension plan. Once we have obtained regulatory approvals, we expect to purchase annuities to benefit the remaining plan participants, and settle ourliabilities. We expect any gain or loss related to the settlement will not be material. In connection with our acquisition of SVOX in June 2011, we assumed anadditional defined benefit pension plan for employees in Switzerland.90Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The following table shows the changes in fiscal 2012 and 2011 in the projected benefit obligation, plan assets and funded status of the defined benefitpension plans (dollars in thousands): Pension Benefits 2012 2011Change in Benefit Obligations: Benefit obligation at beginning of period$31,577 $25,067Acquisitions— 11,149Service cost654 294Interest cost1,353 1,343Curtailment gain(393) (356)Actuarial loss (gain)3,357 (3,944)Currency exchange rate changes594 (738)Benefits paid(2,923) (1,238)Benefit obligation at end of period34,219 31,577Change in Plan Assets: Fair value of plan assets, beginning of period$28,253 $19,750Acquisitions— 9,062Actual return on plan assets3,142 14Employer contributions1,600 1,206Employee contributions230 128Currency exchange rate changes679 (669)Benefits paid(2,923) (1,238)Fair value of plan assets, end of period30,981 28,253Funded status at end of period$(3,238) $(3,324)The amounts recognized in our consolidated balance sheets consisted of the following (dollars in thousands): Pension Benefits 2012 2011Other assets$70 $107Other liabilities(3,308) (3,431)Net liability recognized$(3,238) $(3,324)The amounts recognized in accumulated other comprehensive loss as of September 30, 2012 consisted of the following (dollars in thousands): Pension BenefitsActuarial loss recognized in accumulated other comprehensive loss$4,398The following represents the amounts included in accumulated other comprehensive loss on the consolidated balance sheet as of September 30, 2012 thatwe expect to recognize in earnings during fiscal 2013 (dollars in thousands): Pension ExpenseActuarial loss$18391Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Included in the table below are the amounts relating to our UK and Swiss pension plans, which have accumulated benefit obligations and projectedbenefit obligations in excess of plan assets (dollars in thousands): Pension Benefits 2012 2011Aggregate projected benefit obligations$30,397 $28,525Aggregate accumulated benefit obligations29,922 28,017Aggregate fair value of plan assets27,090 25,094The components of net periodic benefit cost of the pension plans were as follows (dollars in thousands): Pension Benefits 2012 2011Service cost$654 $294Interest cost1,353 1,343Expected return on plan assets(1,428) (1,212)Curtailment gain(393) (356)Employee contributions(230) —Amortization of unrecognized loss97 261Net periodic pension cost$53 $330Plan Assumptions:Weighted-average assumptions used in developing the net periodic benefit cost for the pension plans were as follows: PensionBenefits 2012 2011Discount rate4.6% 4.8%Average compensation increase2.0% 2.0%Expected rate of return on plan assets4.9% 5.5%The weighted average discount rate used in developing the benefit obligations was 3.7% and 4.4% at September 30, 2012 and 2011, respectively.Asset Allocation and Investment Strategy:The percentages of the fair value of pension plan assets actually allocated and targeted for allocation, by asset category, at September 30, 2012 andSeptember 30, 2011, were as follows (dollars in thousands): Actual TargetAsset Category 2012 2011 2012 2011Equity securities 41% 41% 29% 32%Debt securities 52% 52% 65% 63%Real estate and other 7% 7% 6% 5%Total 100% 100% 100% 100%The plan administrators have updated the target investment allocation to reflect changes in the participant population and have approved a plan toredistribute the investments over time. The weighted average expected long-term rate of return for the plan assets is 4.9%. The expected long-term rate of returnon plan assets is determined based on a variety of considerations, including established asset allocation targets and expectations for those asset classes,historical returns of the plans’ assets and other market considerations. We invest our pension assets with the objective of achieving a total rate of return, overthe long term, sufficient to fund future pension obligations and to minimize future pension contribution requirements. All of the assets are invested92Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)in funds offered to institutional investors that are similar to mutual funds in that they provide diversification by holding various debt and equity securities.The fair value of total pension plan assets by major category at September 30, 2012 is as follows: September 30, 2012Equity securities$12,741Debt securities15,996Real estate and other2,244Total pension assets$30,981The assets are all invested in funds which are not quoted on any active market and are valued based on the underlying debt and equity investments andtheir individual prices at any given time, and thus are classified as Level 2 within the fair value hierarchy as defined in ASC 820 and described in Note 12.Employer Contributions:We expect to contribute $1.4 million to our pension plans in fiscal 2013, primarily made up of the minimum funding requirement associated with ourUK pension.Estimated Future Benefit Payments:The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (dollars in thousands):Year Ending September 30, Pension Benefits2013 $1,2332014 1,2642015 1,2782016 1,2752017 1,2722018-2022 6,843Total $13,16520.Income TaxesThe components of income (loss) before income taxes are as follows (dollars in thousands): Year Ended September 30, 2012 2011 2010Domestic$(85,897) $10,197 $(15,543)Foreign151,199 19,820 14,478Income (loss) before income taxes$65,302 $30,017 $(1,065)93Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The components of the (benefit) provision for income taxes are as follows (dollars in thousands): Year Ended September 30, 2012 2011 2010Current: Federal$(10,967) $11,846 $(1,634)State4,626 6,810 2,484Foreign16,055 17,013 13,442 9,714 35,669 14,292Deferred: Federal(131,889) (37,453) 7,052State(7,317) (243) 942Foreign(12,341) (6,194) (4,252) (151,547) (43,890) 3,742(Benefit) provision for income taxes$(141,833) $(8,221) $18,034Effective income tax rate(217.2)% (27.4)% (1,693.3)%The (benefit) provision for income taxes differed from the amount computed by applying the federal statutory rate to our income (loss) before incometaxes as follows (dollars in thousands): 2012 2011 2010Federal tax provision (benefit) at statutory rate$22,856 $10,506 $(373)State tax, net of federal benefit(1,569) 4,182 3,059Foreign tax rate and other foreign related tax items(42,087) 2,831 (2,274)Stock-based compensation11,870 6,459 3,185Non-deductible expenditures5,862 10,965 509Change in U.S. and foreign valuation allowance(145,644) (44,792) 10,217Executive compensation4,585 3,946 4,063Other2,294 (2,318) (352)(Benefit) provision for income taxes$(141,833) $(8,221) $18,034The most significant item impacting the fiscal 2012 effective tax rate to vary from the U.S. statutory rate of 35% is the $145.6 million benefit fromreleasing the valuation allowance. This includes a net decrease in the valuation allowance of $75.1 million resulting from our acquisitions during fiscal 2012,driven primarily by Transcend and Quantim, for which a net deferred tax liability was recorded in purchase accounting at the time of the acquisitions,resulting in a release of our valuation allowance. This also includes a tax benefit of $70.5 million in connection with the release of the U.S. and certain foreignvaluation allowances by the end of fiscal year 2012, described in more detail below. The effective income tax rate was also impacted by our foreign operationswhich are subject to a significantly lower tax rate than the U.S. statutory tax rate.Included in fiscal 2011 benefit for income taxes is a decrease in the valuation allowance of $34.7 million related to a tax benefit in connection with theEquitrac acquisition for which a net deferred tax liability was recorded in purchase accounting. Additionally, we have released a $10.6 million valuationallowance associated with a previously acquired intangible asset which has been changed from an indefinite life asset to a finite life asset during fiscal 2011.Included in fiscal 2010 provision for income taxes is an increase in the valuation allowance of $7.0 million related to the un-benefited losses in the U.K.subsequent to the December 2009 acquisition of SpinVox. Additionally, tax benefits were recorded for the favorable settlements of a $1.1 million U.S. federaltax audit contingency related to our acquisition of eCopy and a $1.0 million state tax penalty contingency related to our acquisition of eScription. We alsorecorded a $1.1 million U.S. federal tax benefit related to certain tax loss carrybacks resulting from a tax law change and a $1.1 million tax benefit resultingfrom certain international research and development credits.94Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The cumulative amount of undistributed earnings of our foreign subsidiaries amounted to $211.9 million at September 30, 2012. We have not providedany additional federal or state income taxes or foreign withholding taxes on the undistributed earnings; as such earnings have been indefinitely reinvested in thebusiness. Based on our business plan, we expect the cash held overseas will continue to be used for our international operations and therefore do not anticipaterepatriating these funds. An estimate of the tax consequences from the repatriation of these earnings is not practicable at this time resulting from thecomplexities of the utilization of foreign tax credits and other tax assets.Deferred tax assets (liabilities) consist of the following at September 30, 2012 and 2011 (dollars in thousands): 2012 2011Deferred tax assets: Net operating loss carryforwards$237,273 $258,179Federal and state credit carryforwards22,840 10,727Capitalized research and development costs5,347 22,910Accrued expenses and other reserves55,323 48,882Deferred revenue13,888 38,294Deferred compensation43,078 35,968Other4,422 6,365Total deferred tax assets382,171 421,325Valuation allowance for deferred tax assets(89,404) (274,807)Net deferred tax assets292,767 146,518Deferred tax liabilities: Depreciation(26,802) (11,610)Convertible debt(62,012) (12,000)Acquired intangibles(256,939) (189,138)Net deferred tax liabilities$(52,986) $(66,230)Reported as: Short-term deferred tax asset$87,564 $—Long-term deferred tax asset20,064 5,999Long-term deferred tax liability(160,614) (72,229)Net deferred tax liabilities$(52,986) $(66,230)As of September 30, 2012, we had no valuation allowance against our U.S. deferred tax assets and we had $89.4 million of valuation allowance againstthe majority of our international deferred tax assets. At September 30, 2011, all of our U.S. deferred tax assets had a full valuation allowance totaling $172.7million and our international deferred tax assets had a valuation allowance totaling $102.1 million.Deferred tax assets are reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not thatsome portion or all of the deferred tax assets will not be realized. During 2012, the valuation allowance for deferred tax assets was decreased by $185.4million. This primarily related to the recognition of $145.6 million of benefit in the year. This includes a release of valuation allowance of $75.1 million as aresult of tax benefits recorded in connection with our acquisitions during the period for which a net deferred tax liability was established in purchaseaccounting. In addition, by the end of fiscal 2012, our U.S. operations had pre-tax income adjusted for permanent differences in items of income and expensefor the most recent three-year period. We concluded that this record of cumulative profitability in recent years and our business plan showing continuedprofitability provided assurance that our future tax benefits more likely than not will be realized. Accordingly, by the end of fiscal 2012 , we made adetermination that it is more likely than not that certain of our deferred taxes, primarily in the U.S., will be realized which resulted in a release of $70.5million of our valuation allowance.The majority of foreign deferred tax assets relate to net operating losses, the use of which may not be available as a result of limitations on the use ofacquired losses. With respect to these foreign losses, there is no assurance that they will be used given95Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)the current assessment of the limitations on their use or our current projection of future taxable income in the entities for which these losses relate. Based on ouranalysis, we have concluded that it is not more likely than not that the majority of our foreign deferred tax assets can be realized and therefore a valuationallowance has been assigned to these deferred tax assets. If we are subsequently able to utilize all or a portion of the foreign deferred tax assets for which avaluation allowance has been established, then we may be required to recognize these deferred tax assets through the reduction of the valuation allowance whichcould result in a material benefit to our results of operations in the period in which the benefit is determined.At September 30, 2012 and 2011, we had U.S. federal net operating loss carryforwards of $629.3 million and $499.6 million, respectively, of which$181.1 million and $148.0 million, respectively, relate to tax deductions from stock-based compensation which will be recorded as additional paid-in-capitalwhen realized. At September 30, 2012 and 2011, we had state net operating loss carryforwards of $183.1 million and $191.6 million, respectively. The netoperating loss and credit carryforwards are subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of1986 and similar state tax provisions. At September 30, 2012 and 2011, we had foreign net operating loss carryforwards of $420.4 million and $447.0million, respectively. These carryforwards will expire at various dates beginning in 2013 and extending through 2030, if not utilized.At September 30, 2012 and 2011, we had federal research and development carryforwards of $16.3 million and $17.7 million, respectively. AtSeptember 30, 2012 and 2011, we had state research and development credit carryforwards of $4.7 million and $6.4 million, respectively.Uncertain Tax PositionsIn accordance with the provisions of ASC 740-10, Income Taxes, we establish reserves for tax uncertainties that reflect the use of the comprehensivemodel for the recognition and measurement of uncertain tax positions. Under the comprehensive model, reserves are established when we have determined thatit is more likely than not that a tax position will or will not be sustained and at the greatest amount for which the result is more likely than not.The aggregate changes in the balance of our gross unrecognized tax benefits were as follows (dollars in thousands): September 30, 2012 2011Balance, beginning of year$14,935 $12,819Increases for tax positions taken during current period555 1,268Increases for interest and penalty charges1,127 848Increases for acquisitions1,925 —Decreases for tax settlements and lapse in statutes(1,160) —Balance, at end of year$17,382 $14,935As of September 30, 2012, $17.4 million of the unrecognized tax benefits, if recognized, would impact our effective tax rate. We do not expect asignificant change in the amount of unrecognized tax benefits within the next 12 months. We recognized interest and penalties related to uncertain tax positionsin our provision for income taxes and had accrued $3.5 million of such interest and penalties as of September 30, 2012.We are subject to U.S. federal income tax, various state and local taxes, and international income taxes in numerous jurisdictions. The federal, state andforeign tax returns are generally subject to tax examinations for the tax years ended in 2008 through 2012.21.Subsequent EventsDebt IssuanceOn October 22, 2012, we issued $350.0 million aggregate principal amount of our 5.375% Senior Notes due 2020 (the "Notes"). The Notes wereissued pursuant to an indenture agreement dated August 14, 2012 related to our 700.0 million aggregate principal amount of 5.375% Senior Notes due 2020issued in the fourth quarter of fiscal 2012. Total proceeds, net of issuance96Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)costs, were $353.3 million. On October 31, 2012, we used $143.5 million of the net proceeds to pay the term loans maturing in March 2013.AcquisitionOn October 1, 2012, we acquired J.A. Thomas and Associates, the nation's premier provider of physician-oriented, clinical documentation improvementprograms for the healthcare industry, for approximately $265.0 million, of which $240.0 million was paid in cash at the closing, and the remaining $25.0million is payable in cash or shares of our common stock, at our election, on the second anniversary of the closing date, subject to certain adjustments andconditions, including the requirement that certain key executives not terminate their employment with Nuance or have their employment terminated for certainreasons. This remaining amount will be recorded as compensation expense over the required employment period.22.Segment and Geographic Information and Significant CustomersWe follow the provisions of ASC 280, Segment Reporting, which established standards for reporting information about operating segments. ASC 280also established standards for disclosures about products, services and geographic areas. Operating segments are defined as components of an enterprise forwhich separate financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and inassessing performance. Our chief operating decision maker (“CODM”) is the Chief Executive Officer of the Company.We have identified four reportable segments as defined by ASC 280-50-1 based on the level of financial information regularly reviewed by the CODM inallocating resources and assessing performance of each segment; Healthcare, Mobile and Consumer, Enterprise and Imaging.The Healthcare segment is primarily engaged in voice and language processing for healthcare information management offered both by licensing and on-demand. The Mobile and Consumer segment is primarily engaged in sales of voice and language solutions that are embedded in a device (such as a cell phone,car or tablet computer) or installed on a personal computer. Our Enterprise segment offers voice and language solutions by licensing as well as on-demandsolutions hosted by us that are designed to help companies better support, understand and communicate with their customers. The Imaging segment sellsdocument capture and print management solutions that are embedded in copiers and multi-function printers as well as packaged software for documentmanagement.Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit reflects the direct controllablecosts of each segment together with an allocation of sales and corporate marketing expenses, and certain research and development project costs that benefitmultiple product offerings. Segment profit represents income from operations excluding stock-based compensation, amortization of intangible assets,acquisition-related costs, net, restructuring and other charges, net, costs associated with intellectual property collaboration agreements, other income (expense),net and certain unallocated corporate expenses. Segment profit includes an adjustment for acquisition-related revenues and cost of revenues which includesrevenue from acquisitions that would have otherwise been recognized but for the purchase accounting treatment of these transactions. We believe that theseadjustments allow for more complete comparisons to the financial results of the historical operations.97Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)We do not track our assets by operating segment. Consequently, it is not practical to show assets by operating segment nor depreciation by operatingsegment. The following table presents segment results along with a reconciliation of segment profit to income (loss) before income taxes (dollars in thousands): Year Ended September 30, 2012 2011 2010Segment revenues(a): Healthcare$669,354 $526,804 $449,270Mobile and Consumer508,256 393,343 309,480Enterprise332,034 296,373 296,170Imaging228,421 177,418 140,750Total segment revenues1,738,065 1,393,938 1,195,670Acquisition related revenue(86,556) (75,197) (76,722)Total consolidated revenue1,651,509 1,318,741 1,118,948Segment profit: Healthcare314,862 269,357 227,417Mobile and Consumer227,641 170,918 120,022Enterprise90,846 63,276 82,266Imaging91,585 69,116 55,641Total segment profit724,934 572,667 485,346Corporate expenses and other, net(102,847) (100,288) (88,035)Acquisition-related revenues and costs of revenue adjustment(77,856) (64,724) (63,447)Non-cash stock based compensation(174,581) (147,296) (100,139)Amortization of intangible assets(155,450) (143,330) (135,577)Acquisition-related costs, net(58,746) (21,866) (30,611)Restructuring and other charges, net(8,268) (22,862) (17,891)Costs associated with IP collaboration agreements(21,000) (19,750) (16,729)Other expense, net(60,884) (22,534) (33,982)Income (loss) before income taxes$65,302 $30,017 $(1,065)(a)Segment revenues differ from reported revenues due to certain revenue adjustments related to acquisitions that would otherwise have been recognized butfor the purchase accounting treatment of the business combinations. Segment revenues also include revenue that the business would have otherwiserecognized had we not acquired intellectual property and other assets from the same customer. These revenues are included to allow for more completecomparisons to the financial results of historical operations and in evaluating management performance.No country outside of the United States provided greater than 10% of our total revenue. Revenue, classified by the major geographic areas in which ourcustomers are located, was as follows (dollars in thousands): 2012 2011 2010United States$1,175,158 $963,688 $802,049International476,351 355,053 316,899Total$1,651,509 $1,318,741 $1,118,94898Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)No country outside of the United States held greater than 10% of our long-lived or total assets. Our long-lived assets, including intangible assets andgoodwill, were located as follows (dollars in thousands): September 30, 2012 September 30, 2011United States$3,161,995 $2,431,038International935,739 809,328Total$4,097,734 $3,240,36623.Quarterly Data (Unaudited)The following information has been derived from unaudited consolidated financial statements that, in the opinion of management, include all recurringadjustments necessary for a fair statement of such information (dollars in thousands, except per share amounts): FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Year2012 Total revenue$360,643 $390,341 $431,744 $468,781 $1,651,509Gross profit$225,771 $249,669 $273,844 $297,296 $1,046,580Net income$9,340 $890 $79,264 $117,641 $207,135Net income per share: Basic$0.03 $0.00 $0.26 $0.38 $0.67Diluted$0.03 $0.00 $0.25 $0.36 $0.65Weighted average common shares outstanding: Basic304,011 305,282 306,766 309,307 306,371Diluted320,536 322,642 320,559 322,424 320,822In the quarter ended September 30, 2012, we recorded a tax benefit of $97.1 million which included $70.5 million in connection with the release of theU.S. and certain foreign valuation allowances as well as $26.6 million in connection with the establishment of a net deferred tax liability in purchaseaccounting related to our acquisition of Quantim. See Note 20 for additional discussion. FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Year2011 Total revenue$303,829 $318,962 $328,909 $367,041 $1,318,741Gross profit$186,907 $193,789 $207,865 $230,356 $818,917Net income (loss)$(9) $1,735 $41,621 $(5,109) $38,238Net income (loss) per share: Basic$0.00 $0.01 $0.14 $(0.02) $0.13Diluted$0.00 $0.01 $0.13 $(0.02) $0.12Weighted average common shares outstanding: Basic298,633 300,937 303,100 306,541 302,277Diluted298,633 314,756 317,802 306,541 315,96099Table of ContentsItem 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNot applicable.Item 9A.Controls and ProceduresDisclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosurecontrols and procedures. Our disclosure controls and procedures are designed (i) to ensure that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed and summarized and reported within the time periods specified in the SEC’s rules and forms and(ii) to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2012, our disclosure controls and procedures wereeffective.Management Report on Internal Control Over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally acceptedaccounting principles. Our internal control over financial reporting includes those policies and procedures that:•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management anddirectors; and,•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have amaterial effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree ofcompliance with the policies or procedures may deteriorate.Management has assessed the effectiveness of our internal control over financial reporting as of September 30, 2012, utilizing the criteria set forth inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on theresults of this assessment, management (including our Chief Executive Officer and our Chief Financial Officer) has concluded that, as of September 30,2012, our internal control over financial reporting was effective.The attestation report concerning the effectiveness of our internal control over financial reporting as of September 30, 2012 issued by BDO USA, LLP,an independent registered public accounting firm, appears in Item 8 of this Annual Report on Form 10-K.Changes in Internal Controls Over Financial ReportingThere have been no changes in our internal controls over financial reporting during the fourth quarter of fiscal 2012 that have materially affected, or arereasonably likely to materially affect, our internal controls over financial reporting.Item 9B.Other InformationNone.100Table of ContentsPART IIICertain information required by Part III is omitted from this Annual Report on Form 10-K since we intend to file our definitive Proxy Statement for ournext Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the “Proxy Statement”), within120 days of the end of the fiscal year covered by this report, and certain information to be included in the Proxy Statement is incorporated herein by reference.Item 10.Directors, Executive Officers and Corporate GovernanceThe information required by this item concerning our directors is incorporated by reference to the information set forth in the section titled “Election ofDirectors” in our Proxy Statement. Information required by this item concerning our executive officers is incorporated by reference to the information set forthin the section entitled “Executive Compensation, Management and Other Information” in our Proxy Statement. Information regarding Section 16 reportingcompliance is incorporated by reference to the information set forth in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in ourProxy Statement.Our Board of Directors adopted a Code of Business Conduct and Ethics for all of our directors, officers and employees on February 24, 2004. OurCode of Business Conduct and Ethics can be found at our website: www.nuance.com. We will provide to any person without charge, upon request, a copy ofour Code of Business Conduct and Ethics. Such a request should be made in writing and addressed to Investor Relations, Nuance Communications, Inc., 1Wayside Road, Burlington, MA 01803.To date, there have been no waivers under our Code of Business Conduct and Ethics. We will post any waivers, if and when granted, of our Code ofBusiness Conduct and Ethics on our website at www.nuance.com.Item 11.Executive CompensationThe information required by this item regarding executive compensation is incorporated by reference to the information set forth in the section titled“Executive Compensation, Management and Other Information” in our Proxy Statement.Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholders MattersThe information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference to theinformation set forth in the sections titled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information”in our Proxy Statement.Item 13.Certain Relationships and Related Transactions, and Director IndependenceIt is the policy of the Board that all transactions required to be reported pursuant to Item 404 of Regulation S-K be subject to approval by the AuditCommittee of the Board. In furtherance of relevant NASDAQ rules and our commitment to corporate governance, the charter of the Audit Committee providesthat the Audit Committee shall review and approve any proposed related party transactions including, transactions required to be reported pursuant to Item 404of Regulation S-K for potential conflict of interest situations. The Audit Committee reviews the material facts of all transactions that require the committee’sapproval and either approves or disapproves of the transaction. In determining whether to approve a transaction, the Audit Committee will take into account,among other factors it deems appropriate, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third-partyunder the same or similar circumstances.The additional information required by this item regarding certain relationships and related party transactions is incorporated by reference to theinformation set forth in the sections titled “Transactions with Related Persons” and “Corporate Governance-Board Independence” in our Proxy Statement.Item 14.Principal Accountant Fees and ServicesThe information required by this section is incorporated by reference from the information in the section entitled “Ratification of Appointment ofIndependent Registered Public Accounting Firm” in our Proxy Statement.101Table of ContentsPART IVItem 15.Exhibits and Financial Statement Schedules(a)The following documents are filed as a part of this Report:(1)Financial Statements — See Index to Financial Statements in Item 8 of this Report.(2)Financial Statement Schedules — All schedules have been omitted as the requested information is inapplicable or the information ispresented in the financial statements or related notes included as part of this Report.(3)Exhibits — See Item 15(b) of this Report below.(b)Exhibits.102Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report onForm 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. NUANCE COMMUNICATIONS, INC. By: /s/ Paul A. Ricci Paul A. Ricci Chief Executive Officer and Chairman of the BoardPursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in thecapacities and on the dates indicated.POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Paul A. Ricci andThomas L. Beaudoin, and each of them acting individually, as his or her true and lawful attorneys-in-fact and agents, each with full power of substitutionand resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report onForm 10-K and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, grantingunto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary tobe done, as fully to all intents and purposes as he or she might or could do in person, and hereby ratifying and confirming all that said attorneys-in-fact andagents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney may be executed incounterparts. /s/ Paul A. RicciDate: November 28, 2012 Paul A. Ricci, Chief Executive Officer andChairman of the Board(Principal Executive Officer) /s/ Thomas L. BeaudoinDate: November 28, 2012 Thomas L. Beaudoin, Executive Vice President andChief Financial Officer(Principal Financial Officer) /s/ Daniel D. TempestaDate: November 28, 2012 Daniel D. Tempesta, Chief Accounting Officer andCorporate Controller(Principal Accounting Officer) /s/ Robert J. FrankenbergDate: November 28, 2012 Robert J. Frankenberg, Director /s/ Patrick T. HackettDate: November 28, 2012 Patrick T. Hackett, Director Table of Contents /s/ William H. JanewayDate: November 28, 2012 William H. Janeway, Director /s/ Mark R. LaretDate: November 28, 2012 Mark R. Laret, Director /s/ Katharine A. MartinDate: November 28, 2012 Katharine A. Martin, Director /s/ Mark MyersDate: November 28, 2012 Mark Myers, Director /s/ Philip QuigleyDate: November 28, 2012 Philip Quigley, Director /s/ Robert G. TeresiDate: November 28, 2012 Robert G. Teresi, DirectorTable of ContentsEXHIBIT INDEX Incorporated by ReferenceExhibitIndex Exhibit Description Form File No. Exhibit Filing Date FiledHerewith2.1 Agreement for the acquisition of the entire issued share capital ofSpinVox Limited, the substitution of Foxtrot Acquisition Limited as theissuer of a debt instrument issued by SpinVox Limited, and the releaseand cancellation of such debt instrument in consideration of shares inFoxtrot Acquisition Limited dated December 29, 2009 8-K 0-27038 2.1 1/5/2010 2.2 Agreement for the acquisition of shares in Foxtrot Acquisition Limitedand the payment of certain sums to the Mezzanine Lenders and otherparties dated December 29, 2009 8-K 0-27038 2.2 1/5/2010 2.3 Share Purchase Agreement, dated as of June 6, 2011, by and amongNuance, Ruetli Holding Corporation, the shareholders of SVOX andsmac partners GmbH, as the shareholder representative. 10-Q 0-27038 2.1 8/9/2011 2.4 Agreement and Plan of Merger, dated as of May 10, 2011, by andamong Nuance, Ellipse Acquisition Corporation, EquitracCorporation, U.S. Bank National Association, as escrow agent, andCornerstone Equity Investors, LLC, as the stockholder representative. 10-Q 0-27038 2.2 8/9/2011 2.5 Agreement and Plan of Merger dated as of October 6, 2011, by andamong Nuance Communications, Inc., Sonic AcquisitionCorporation, Swype, Inc., and Adrian Smith, as shareholderrepresentative. 8-K 0-27038 2.1 10/7/2011 2.6 Agreement and Plan of Merger among Nuance Communications, Inc.,Vertigo Acquisition Corporation, Vlingo Corporation, U.S. BankNational Association, as Escrow Agent, and StockholderRepresentative, dated December 16, 2011 8-K 0-27038 2.1 6/7/2012 2.7 Agreement and Plan of Merger, dated as of March 6, 2012, by andamong Nuance Communications, Inc., Townsend Merger Corporationand Transcend Services, Inc. 8-K 0-27038 2.1 3/7/2012 3.1 Amended and Restated Certificate of Incorporation of the Registrant. 10-Q 0-27038 3.2 5/11/2001 3.2 Certificate of Amendment of the Amended and Restated Certificate ofIncorporation of the Registrant. 10-Q 0-27038 3.1 8/9/2004 3.3 Certificate of Ownership and Merger. 8-K 0-27038 3.1 10/19/2005 3.4 Amended and Restated Bylaws of the Registrant. 8-K 0-27038 3.1 11/13/2007 3.5 Certificate of Amendment of the Amended and Restated Certificate ofIncorporation of the Registrant, as amended. S-3 333-142182 3.3 4/18/2007 4.1 Specimen Common Stock Certificate. 8-A 0-27038 4.1 12/6/1995 4.2 Indenture, dated as of August 13, 2007, between NuanceCommunications, Inc. and U.S. Bank National Association, asTrustee (including form of 2.75% Convertible SubordinatedDebentures due 2027). 8-K 0-27038 4.1 8/17/2007 4.3 Third Amended and Restated Stockholders Agreement, dated as ofJanuary 29, 2009, by and among Nuance Communications, Inc.,Warburg Pincus Private Equity VIII, L.P., Warburg PincusNetherlands Private Equity VIII C.V. I, and WP-WPVIII Investors,L.P., Warburg Pincus Private Equity X, L.P. and Warburg Pincus XPartners, L.P. 10-Q 0-27038 4.1 2/9/2009 Table of Contents Incorporated by ReferenceExhibitIndex Exhibit Description Form File No. Exhibit Filing Date FiledHerewith4.4 Indenture, dated as of October 24, 2011, by and between NuanceCommunications, Inc. and U.S. Bank National Association 8-K 0-27038 4.1 10/24/2011 4.5 Indenture, dated August 14, 2012, among Nuance Communications,Inc., the guarantors party thereto and U.S. Bank NationalAssociation, relating to the 5.375% Senior Notes due 2020. 8-K 0-27038 4.1 8/14/2012 10.1 Form of Indemnification Agreement. S-8 333-108767 10.1 9/12/2003 10.2 Stand Alone Stock Option Agreement Number 1, dated as ofAugust 21, 2000, by and between the Registrant and Paul A. Ricci.* S-8 333-49656 4.3 11/9/2000 10.3 Caere Corporation 1992 Non-Employee Directors’ Stock OptionPlan.* S-8 333-33464 10.4 3/29/2000 10.4 1993 Incentive Stock Option Plan, as amended.* S-1 333-100647 10.17 10/21/2002 10.5 1995 Employee Stock Purchase Plan, as amended and restated onDecember 1, 2009.* 14A 0-27038 Annex B 12/18/2009 10.6 Amended and Restated 1995 Directors’ Stock Option Plan, asamended.* 14A 0-27038 Annex B 12/8/2010 10.7 1997 Employee Stock Option Plan, as amended.* S-1 333-100647 10.19 10/21/2002 10.8 1998 Stock Option Plan.* S-8 333-74343 99.1 3/12/1999 10.9 Amended and Restated 2000 Stock Option Plan.* S-8 0-27038 4.1 2/6/2012 10.10 2000 NonStatutory Stock Option Plan, as amended.* S-8 333-108767 4.1 9/12/2003 10.11 ScanSoft 2003 Stock Plan.* S-8 333-108767 4.3 9/12/2003 10.12 Nuance Communications, Inc. 2001 Nonstatutory Stock OptionPlan.* S-8 333-128396 4.1 9/16/2005 10.13 Nuance Communications, Inc. 2000 Stock Plan.* S-8 333-128396 4.2 9/16/2005 10.14 Nuance Communications, Inc. 1998 Stock Plan.* S-8 333-128396 4.3 9/16/2005 10.15 Nuance Communications, Inc. 1994 Flexible Stock Incentive Plan.* S-8 333-128396 4.4 9/16/2005 10.16 Mobeus Corporation 2006 Share Incentive Plan* S-8 0-23038 4.1 6/29/2012 10.17 Form of Restricted Stock Purchase Agreement.* 10-K/A 0-27038 10.17 12/15/2006 10.18 Form of Restricted Stock Unit Purchase Agreement.* 10-K/A 0-27038 10.18 12/15/2006 10.19 Form of Stock Option Agreement.* 10-K/A 0-27038 10.19 12/15/2006 10.20 2005 Severance Benefit Plan for Executive Officers.* 10-Q 0-27038 10.1 5/10/2005 10.21 Officer Short-term Disability Plan.* 10-Q 0-27038 10.2 5/10/2005 10.22 Letter, dated May 23, 2004, from the Registrant to Steven Chambersregarding certain employment matters.* 10-Q 0-27038 10.2 8/9/2004 10.23 Increase Joinder, dated as of August 24, 2007, by and among NuanceCommunications, Inc. and the other parties identified therein, to theAmended and Restated Senior Secured Credit Facility dated as ofApril 5, 2007. 8-K 0-27038 10.1 8/30/2007 10.24 Letter, dated June 3, 2008, from the Registrant to Thomas L. Beaudoinregarding certain employment matters. 10-K 0-27038 10.39 12/1/2008 Table of Contents Incorporated by ReferenceExhibitIndex Exhibit Description Form File No. Exhibit Filing Date FiledHerewith10.25 Amended and Restated Stock Plan.* 8-K 0-27038 99.1 2/5/2009 10.26 Amended and Restated Employment Agreement, dated as of June 23,2009, by and between Nuance Communications, Inc. and Paul Ricci.* 8-K 0-27038 99.1 6/26/2009 10.27 Letter, dated March 29, 2010, to Janet Dillione regarding certainemployment matters.* 10-Q 0-27038 10.1 8/9/2010 10.28 Letter, dated September 9, 2010, to Bruce Bowden regarding certainemployment matters.* 10-Q 0-27038 10.1 2/9/2011 10.29 Amendment Agreement, dated as of July 7, 2011, among NuanceCommunications, the Lenders party thereto, UBS AG, StamfordBranch, as administrative agent and as collateral agent, CitigroupGlobal Markets Inc. as sole lead arranger and sole book runner and theother parties thereto from time to time to the Credit Agreement. 10-Q 0-27038 10.1 7/7/2011 10.30 Amended and Restated Credit Agreement, dated as of July 7, 2011among Nuance, UBS AG, Stamford Branch, as administrative agent,Citicorp North America, Inc., as syndication agent, Credit SuisseSecurities (USA) LLC, as documentation agent, Citigroup GlobalMarkets Inc. and UBS Securities LLC, as joint lead arrangers, CreditSuisse Securities (USA) LLC and Banc Of America Securities LLCas co-arrangers, and Citigroup Global Markets Inc., UBS SecuritiesLLC and Credit Suisse Securities (USA) LLC as joint bookrunners. 10-Q 02-7308 10.2 7/7/2011 10.31 Letter dated March 14, 2011 to Bill Nelson regarding certainemployment matters.* 10-Q 02-7308 10.1 8/9/2011 10.32 Purchase Agreement, dated as of October 18, 2011, by and betweenNuance Communications, Inc. and Morgan Stanley & Co. LLC, asrepresentative of the initial purchasers named therein. 8-K 0-27038 10.1 10/24/2011 10.33 Employment Agreement dated November 11, 2011 between theRegistrant and Paul Ricci.* 10-Q 0-27038 10.2 2/9/2012 10.34 Purchase Agreement, dated August 9, 2012, by and among NuanceCommunications, Inc., the guarantors party thereto and BarclaysCapital Inc. 8-K 02-7038 10.1 8/14/2012 14.1 Registrant’s Code of Business Conduct and Ethics. 10-K 0-27038 14.1 3/15/2004 21.1 Subsidiaries of the Registrant. X23.1 Consent of BDO USA, LLP. X24.1 Power of Attorney. (See Signature Page). X31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or15d-14(a). X31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or15d-14(a). X32.1 Certification Pursuant to 18 U.S.C. Section 1350. X101 The following materials from Nuance Communications, Inc.’s AnnualReport on Form 10-K for the fiscal year ended September 30, 2012,formatted in XBRL (Extensible Business Reporting Language): (i) theConsolidated Statements of Operations, (ii) the Consolidated BalanceSheets, (iii) the Consolidated Statements of Stockholders’ Equity andComprehensive Loss, (iv) the Consolidated Statements of Cash Flows,and (v) Notes to Consolidated Financial Statements. X* Denotes management compensatory plan or arrangementExhibit 21.1 Subsidiary Name Jurisdiction Type ART Advanced Recognition Technologies, Inc. Delaware Domestic Caere Corporation Delaware Domestic Dictaphone Corporation Delaware Domestic eCopy, LLC Delaware Domestic eScription, Inc. Delaware Domestic Language and Computing Inc. Delaware Domestic Nuance Transcription Services, Inc. f/k/a Focus Infomatics, Inc. f/k/a FocusEnterprises Ltd. Delaware Domestic PerSay, Inc. Delaware Domestic Phonetic Systems Inc. Delaware Domestic Quadramed Quantim Corporation Delaware Domestic Ruetli Holding Corporation Delaware Domestic SNAPin Software LLC Delaware Domestic SVOX U.S.A., Inc. Delaware Domestic Transcend Services, Inc. Delaware Domestic Viecore Federal Systems Division, Inc. Delaware Domestic Viecore LLC Delaware Domestic Vlingo Corporation Delaware Domestic Voice Signal Technologies, Inc. Delaware Domestic Zi Holding Corporation Delaware Domestic Equitrac Corporation Florida Domestic Salar, Inc. Maryland Domestic AMS Solutions Corporation Massachusetts Domestic Medical Transcription Education Center Ohio Domestic Swype, Inc. Washington Domestic Tegic Communications, Inc. Washington Domestic Information Technologies Australia Pty Ltd. Australia International ITA Services Pty Ltd. Australia International Nuance Communications Australia Pty. Ltd. Australia International OTE Pty Limited Australia International Nuance Communications Austria GmbH Austria International SpeechMagic Holdings GmbH Austria International Multi-Corp International Ltd. Barbados International Language and Computing N.V. Belgium International Nuance Communications Belgium Limited Belgium International Nuance Communications International BVBA Belgium International Nuance Communications Ltda. Brazil International BlueStar Options Inc. British Virgin Islands International BlueStar Resources Limited British Virgin Islands International 1448451 Ontario Inc. Canada International 845162 Alberta Ltd. Canada International Equitrac Canada ULC Canada International Nuance Acquisition ULC Canada International Nuance Communications Canada, Inc. Canada International Subsidiary Name Jurisdiction Type Zi Corporation Canada International Zi Corporation of Canada, Inc. Canada International Foxtrot Acquisition Limited Cayman Islands International Foxtrot Acquisition II Limited Cayman Islands International Huayu Zi Software Technology (Beijing) Co., Ltd. China International Nuance Software Technology (Beijing) Co., Ltd. China International SafeCom A/S Denmark International Nuance Communications Finland OY Finland International Voice Signal Technologies Europe OY Finland International Nuance Communications France Sarl France International Nuance Communications Deutschland GmbH f/k/a Dictaphone DeutschlandGmbH Germany International Nuance Communications Germany GmbH Germany International Nuance Communications Healthcare Germany GmbH Germany International SafeCom GmbH Germany International SVOX Deutschland GmbH Germany International Asia Translation & Telecommunications Limited Hong Kong SAR International Huayu Zi Software Technology Limited Hong Kong SAR International Nuance Communications Hong Kong Limited Hong Kong SAR International Telecom Technology Corporation Limited Hong Kong SAR International Zi Corporation (H.K.) Limited Hong Kong SAR International Zi Corporation of Hong Kong Limited Hong Kong SAR International Nuance Recognita Corp. Hungary International Nuance India Pvt. Ltd. India International Nuance Transcription Services India Private Limited f/k/a/ FocusMT IndiaPrivate Limited India International Transcend India Private Limited India International Transcend MT Services Private Ltd. India International Nuance Communications International Holdings Ireland International Nuance Communications Ireland Limited Ireland International Nuance Communications Services Ireland Ltd. Ireland International Nuance Communications Israel, Ltd. f/k/a ART-Advanced RecognitionTechnologies Limited Israel International PerSay Ltd. Israel International Phonetic Systems Ltd. Israel International Loquendo S.p.a. Italy International Nuance Communications Italy Srl Italy International Nuance Communications Japan K.K. Japan International SVOX Japan K.K. Japan International Voice Signal K.K. Japan International Nuance Communications Netherlands B.V. Netherlands International X-Solutions Group B.V. Netherlands International Aangel Processing Limited New Zealand International Casseggers Holdings Limited New Zealand International Heartland Asia (Mauritius) Republic of Mauritius International Subsidiary Name Jurisdiction Type Rhetorical Group plc. Scotland International Rhetorical Systems Limited Scotland International Nuance Communications Asia Pacific Pte. Ltd. Singapore International Nuance Communications Korea Ltd. South Korea International Swype Limited South Korea International Vlingo Korea Ltd. South Korea International Nuance Communications Iberica SA Spain International Nuance Communications Sweden, A.B. Sweden International Zi Decuma AB Sweden International Nuance Communications Switzerland AG Switzerland International SVOX AG Switzerland International Nuance Communications Taiwan Taiwan International Nuance Communications Illetism Ltd. Sirketi Turkey International Equitrac UK Limited United Kingdom International Nuance Communications UK Limited United Kingdom International SafeCom UK Limited United Kingdom International SpinVox Limited United Kingdom International SVOX Speech Solutions Ltd. United Kingdom International EXHIBIT 23.1Consent of Independent Registered Public Accounting FirmNuance Communications, Inc.Burlington, MassachusettsWe hereby consent to the incorporation by reference in Registration Statements on Form S-3 (Nos. 333-142182, 333-100648 and 333-61862) and Form S-8 (Nos. 333-182459, 333-179399, 333-178436, 333-364955, 333-157579, 333-151088, 333-151087,333‑153911, 333-148684, 333-145971, 333-143465, 333-142183, 333-141819, 333-134687, 333-128396, 333-124856, 333-122718, 333108767, 333-99729, 333-75406, 333-49656, 333-33464, 333-30518, 333-74343, 333-45425 and 333-04131) of NuanceCommunications, Inc. of our reports dated November 28, 2012 relating to the consolidated financial statements and the effectiveness of NuanceCommunications, Inc.’s internal control over financial reporting, which appears in this Form 10-K./s/ BDO USA, LLPBoston, MassachusettsNovember 28, 2012Exhibit 31.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TOSECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002I, Paul A. Ricci, certify that:1.I have reviewed this Annual Report on Form 10-K of Nuance Communications, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and in 15d-15(f)) forthe registrant and have:a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared;b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrols over financial reporting. By: /s/ Paul A. Ricci Paul A. Ricci Chief Executive Officer and Chairman of the Board November 28, 2012 Exhibit 31.2CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TOSECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002I, Thomas L. Beaudoin, certify that:1.I have reviewed this Annual Report on Form 10-K of Nuance Communications, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and in 15d-15(f)) forthe registrant and have:a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared;b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrols over financial reporting. By: /s/ Thomas L. Beaudoin Thomas L. Beaudoin Executive Vice President and Chief Financial Officer November 28, 2012 Exhibit 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002I, Paul A. Ricci, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the AnnualReport of Nuance Communications, Inc. on Form 10-K for the period ended September 30, 2012 fully complies with the requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects thefinancial condition and results of operations of Nuance Communications, Inc. By: /s/ Paul A. Ricci Paul A. Ricci Chief Executive Officer and Chairman of the Board November 28, 2012 I, Thomas L. Beaudoin, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that theAnnual Report of Nuance Communications, Inc. on Form 10-K for the period ended September 30, 2012 fully complies with the requirements of Section 13(a)or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects thefinancial condition and results of operations of Nuance Communications, Inc. By: /s/ Thomas L. Beaudoin Thomas L. Beaudoin Executive Vice President and Chief Financial Officer November 28, 2012

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