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Upland SoftwareUNITED 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, 2013ORooTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 001-36056NUANCE 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 LLCPreferred share purchase rights 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 $4.3 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, 2013, was 314,880,222.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s definitive Proxy Statement to be delivered to stockholders in connection with the Registrant’s 2014 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 Factors6Item 1B.Unresolved Staff Comments16Item 2.Properties16Item 3.Legal Proceedings16Item 4.Mine Safety Disclosures16 PART IIItem 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities17Item 6.Selected Financial Data18Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations18Item 7A.Quantitative and Qualitative Disclosures about Market Risk44Item 8.Financial Statements and Supplementary Data45Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure94Item 9A.Controls and Procedures94Item 9B.Other Information94 PART IIIItem 10.Directors, Executive Officers and Corporate Governance95Item 11.Executive Compensation95Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters95Item 13.Certain Relationships and Related Transactions, and Director Independence95Item 14.Principal Accountant Fees and Services95 PART IVItem 15.Exhibits and Financial Statement Schedules96 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 2014 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 in automated speech recognition, capabilities for naturallanguage understanding, dialog management, text-to-speech, domain knowledge and implementation capabilities, built on our significant, long-terminvestments in research and development. Our solutions are based on our proprietary voice and language platforms and are used every day by millions ofpeople and thousands of businesses for tasks and services such as requesting information from a phone-based self-service solution, dictating medical records,searching the mobile Web by voice, entering a destination into a navigation system, or working with PDF documents. We continue to develop more intuitiveand comprehensive speech and natural language solutions that broaden our markets by expanding the types of solutions we offer. We offer our solutions to ourcustomers in a variety of ways, including through products, hosting, professional services and maintenance and support. Our product revenues includeembedded original equipment manufacturers ("OEM") royalties, traditional enterprise perpetual licensing, term-based enterprise licensing and consumer sales.Our hosting revenues are primarily generated through on-demand service models, comprised of hosted transaction-based pricing arrangements that typicallyhave multi-year terms. Our hosting, term license and maintenance and support revenues are recurring in nature as our customers use our products on a repeatbasis to handle their needs in medical transcription, medical coding and compliance, enterprise customer service and mobile connected services. Ourprofessional services also offer a visible revenue stream, as we have a backlog of assignments that take time to complete. We are seeing several trends in ourmarkets, including (i) the growing adoption of cloud-based, connected services and highly interactive mobile applications, (ii) deeper integration of virtualassistant capabilities and services, and (iii) the continued expansion of our core technology portfolio from speech recognition to natural languageunderstanding, semantic processing, domain-specific reasoning and dialog management capabilities.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, 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 have made additional investments in 2013 in protecting our patent portfolio with increasedspending on patent litigation and patent prosecution activities. We expect to continue to pursue opportunities to expand our assets, geographic presence,distribution network and customer base through acquisitions of other businesses and technologies.We are organized in four segments: Healthcare, Mobile and Consumer, Enterprise, and Imaging. In fiscal 2013, segment revenue as a percentage of totalsegment revenue for Healthcare, Mobile and Consumer, Enterprise and Imaging was 47%, 24%, 17% and 12%, respectively. In fiscal 2012, segment revenueas a percentage of total segment revenue for Healthcare, Mobile and Consumer, Enterprise and Imaging was 39%, 29%, 19% and 13%, respectively. SeeNote 20 to the consolidated financial statements for additional information about our reportable segments.1 Table of ContentsHealthcareThe 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.We provide a comprehensive set of solutions and services that support the clinical documentation process from capturing the patient encounter with theirphysician, to improved clinical documentation, coding, revenue cycle management and other functions. Our hosted and on-premise solutions provideplatforms to generate and distribute clinical documentation through the use of advanced dictation and transcription features, and allow us to deliver scalable,highly productive medical transcription solutions. Our Clintegrity suite of products offer solutions that leverage captured information with state-of-the-artcoding, compliance and record management, which streamlines health information management ("HIM") processes to assist compliance and reimbursementthrough professional services and time-based licenses. Through Clinical Documentation Improvement ("CDI") programs, computer-assisted coding ("CAC"),and computer-assisted physician documentation ("CAPD") we bridge the gap between physicians and coders. These solutions significantly streamline speedand completeness of documentation so that providers can shorten the time between the patient visit and the payment for that visit. Our solutions should enablefuture innovation to transform the way healthcare providers document patient care, through improved interface with electronic medical records and extractionof clinical information to support the billing and insurance reimbursement processes. We also offer speech recognition solutions for radiology, cardiology,pathology and related specialties, that help healthcare providers dictate, edit and sign reports without manual transcription.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 solutions, are also offered on an on-demand model and priced by volume of usage (such as number of lines transcribed). Our Clintegrity productline is sold under a term-licensing model. We continue to experience an increased preference for on-demand and term-license pricing models. Representativecustomers include Advocate Health Care, Adventist West, Banner Health, Carolinas HealthCare System, Cleveland Clinic, HCA, Kaiser Permanente, MayoClinic, NHS, Partners Healthcare System, Sharp Healthcare, Summit Health, Sutter Health, Tenet Healthcare, Trinity Health, Universal Health Services,U.S. Department of Veterans Affairs, UPMC, U.S. Army and WellSpan Health.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. We believe our market opportunity continues to grow as morecloud-connected devices are introduced, increasing the number of systems that can connect to Nuance Cloud Services. The more powerful capabilities ofmobile devices require us to supply a broader set of technologies to support the increasing scope and complexity of the solutions. These technologies includecloud-based speech recognition, natural language understanding, dialog management, text-to-speech and advanced keyboard technologies, where the complexityof the technologies allow us to charge a higher price. In addition, we have seen the adoption of these solutions on a broadening scope of devices, such astelevisions, set-top boxes, e-book readers, tablet computers, cameras and third-party downloadable applications. Our suite of mobile solutions and connectedservices provides a platform for our professional services team to design, develop and deploy custom solutions on a variety of mobile devices and otherconsumer electronics.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 Web search and voicemail-to-text. Our suite of Dragongeneral purpose desktop and portable computer dictation applications increases productivity by using speech to create documents, streamline repetitive andcomplex tasks, input data, complete forms and automate manual transcription processes. In particular, we have focused in recent quarters on integrating ourDragon technology and brand initiatives across mobile and consumer markets. Our Dragon desktop software licensing has been impacted by recent trends inPC sales and structural changes in the Windows software distribution channel. We have strategies in place to mitigate this, including expansion into an OEMdistribution model and new subscription based license models.2 Table of ContentsWe utilize a focused, enterprise sales team and professional services organization to address market and implementation requirements. We utilize directdistribution, supplemented by partnerships with electronics suppliers and integrators such as Clarion, Harman International and Rovi. Our solutions are usedby mobile phone, automotive, personal navigation device, computer, television and other consumer electronics manufacturers and their suppliers, includingAudi, BMW, Ford, GM, HTC, Intel, LG Electronics, Mercedes Benz, Nintendo, Nokia, Panasonic, Samsung, T-Mobile, TomTom and Toyota.Telecommunications carriers, web search companies and content providers are increasingly using our mobile search and communication solutions to offervalue-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. Although we generally charge a higher price forthe broader technology set needed to support the increasing scope and complexity of the latest solutions, at any given level of our technology set, we continue tosee pricing pressures from our OEM partners in our mobile handset business. Our connected mobile services are sold through telecommunications carriers,voicemail system providers, smartphone application developers or directly to consumers, and generally priced on a volume of usage model (such as persubscriber or per use). We continue to see an increasing proportion of revenue from on-demand and transactional arrangements as opposed to traditionalupfront licensing of our mobile products and solutions. At the end of fiscal 2013, our mobile cloud services powered handsets, cars, televisions and othermobile devices in 38 languages. Representative connected services customers and partners include Cisco, DirecTV, Rogers, Siemens, Telefonica, Telstra,Time Warner Cable, TISA, T-Mobile and Vodafone. In addition, various smartphone application stores include hundreds of applications that utilize ourtechnology, such as our Dragon Mobile Assistant, DragonDictation, DragonGo! and Swype, as well as third party applications including Ask.com, Bon’App, Coupons.com, Grainger, Grocery iQ, Kraft iFood App, Merriam-Webster, On-Star, PlaySay, Recipes.com, SayHi Translate, Snapguide, SonicoiTranslate, Vocre and Yellow Pages.Our most recent versions of Dragon NaturallySpeaking for Windows and Dragon Dictate for Mac were introduced in fiscal 2012 and are currentlyavailable in eight languages. Our desktop and portable computer dictation solutions are generally sold under a traditional perpetual software license model. Weutilize a combination of our global reseller network and direct sales to distribute our desktop and portable computer dictation products. Resellers includeretailers 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 voice recognition, natural language understanding,text-to-speech, voice biometrics, virtual assistants and analytics to automate caller identification and authorization, call steering, completion of tasks such asupdates, purchases and information retrieval, and automated outbound notifications. Our solutions improve the customer experience, increase the use of self-service and enable new revenue opportunities for our customers. In addition, we offer solutions that improve customer care experiences through web sites anddirect interaction with thin-client applications on cell phones, enabling customers to very quickly send and retrieve relevant information. Use of our voice andlanguage processing enabled web sites and mobile customer care solutions can dramatically decrease customer care costs, in comparison to calls handled byoperators.We have expanded our cloud-based, multi-channel portfolio, which include our speech recognition, text-to-speech offerings, voice biometrics and naturallanguage technologies as differentiators in the market. We have introduced two new intelligent virtual assistant services, Nina Mobile and Nina Web, expandedour outbound customer engagement services, and implemented voice biometrics in the cloud. We have also expanded our professional services team worldwide,both to support the increased demand of our cloud services and to enhance coverage for on-premise deployments.We complement our solutions and products with a global professional services organization that supports customers and partners with business andsystems consulting project management, user-interface design, voice science, application development and business performance optimization, allowing us todeliver end-to-end speech solutions and system integration for multi-channel automated customer care.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 professional3 Table of Contentsservices teams, we often work closely with industry partners, including Avaya, Cisco and Genesys, that integrate our solutions into their hardware andsoftware platforms. Our enterprise solutions offerings include both a traditional software perpetual licensing model and an on-demand model and are priced byvolume of usage (such as number of minutes callers use the system or number of calls completed in the system). Representative customers include Bank ofAmerica, Barclays, Cigna, Citibank, Comcast, Deutsche Bank, Disney, FedEx, OnStar, PG&E, Telecom Italia, Telefonica, T-Mobile, U.K. HM Revenue& Customs, USAA, US Airways, Verizon and Wells Fargo.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. 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 perpetual software license model, and some solutions are also offered as a hosted solution.We utilize a combination of our global reseller network and direct sales to distribute our imaging products. We license our software to multifunction printermanufacturers such as Brother, Canon, Dell, HP and Xerox, which bundle our solutions with multi-function devices, digital copiers, printers and scanners,on a royalty model, priced per unit sold. Representative customers include Aflac, Airbus, Amazon, Barclays, Blue Shield, Citibank, EMC, Ernst & Young,Eurostar, Franklin Templeton, HSBC, Intuit, Johnson & Johnson, JP Morgan Chase, Nationwide, Norwegian Tax Authorities, Office Depot, Phillips,PricewaterhouseCoopers, UPS and US Department of Justice.Research 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. As of September 30, 2013, ourtechnologies are covered by approximately 3,000 patents and 1,100 patent applications. Our intellectual property, whether purchased or developed internally, iscritical to our success and competitive position and, ultimately, to our market value. We rely on a portfolio of patents, copyrights, trademarks, servicesmarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our intellectual property and proprietary rights. Weincurred research and development expenses of $292.1 million, $225.4 million, and $179.4 million in fiscal 2013, 2012 and 2011, 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 2013, 2012 and 2011, 72%, 71% and73% of revenue was generated in the United States and 28%, 29% and 27% of revenue was generated by our international customers, 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:4 Table of Contents•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 in 151voices, and supports a broad range of hardware platforms and operating systems. Our imaging technology supports more than 120 languages forOptical 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, Google, M*Modal, Microsoft and 3M. 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, Genesys and Intervoice develop and market products and services that might be considered substitutes for our solutions. Current andpotential competitors have established, or may establish, cooperative relationships among themselves or with third parties to increase the ability of theirtechnologies to address the needs of our prospective customers.Some of our competitors or potential competitors, such as Adobe, Google, Microsoft and 3M, have significantly greater financial, technical andmarketing resources 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, 2013, 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 2,000 in research and development, approximately 1,000 in general and administrative andapproximately 6,000 that provide transcription and editing services. Approximately 36 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.5 Table of ContentsItem 1A.Risk FactorsYou should carefully consider the risks described below when evaluating our company and when deciding whether to invest in our company.The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we donot currently believe are important to an investor may also harm our business operations. If any of the events, contingencies, circumstances orconditions described in the following risks actually occurs, our business, financial condition or our results of operations could be seriously harmed. Ifthat happens, the trading price of our 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, bookings and operating results have fluctuated in the past and are expected to continue to fluctuate in the future. Given this fluctuation, webelieve that quarter to quarter comparisons of revenue, bookings and operating results are not necessarily meaningful or an accurate indicator of our futureperformance. 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 ourstock would likely decline. 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 and receipt of royalty reports;•our ability to generate additional revenue from our intellectual property portfolio;•customers delaying their purchasing decisions in anticipation of new versions of our products;•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, bookings and operating results are difficult to forecast. Our expense levels are based insignificant part on our 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 failure to meet revenue expectations would seriously harm our operating results, financial condition and cash flows.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;6 Table of Contents•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 and bookings 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;•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 may adversely affect our operating results and cashflows:•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, 2013, we had identified intangible assets of approximately $1.0 billion, net of accumulated amortization, and goodwill ofapproximately $3.3 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.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 to7 Table of Contentsissue 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, if available at all, may place additional restrictions on our ability to operateour business. Our 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, 2013, we had a total of $2,472.2 million of gross debt outstanding, $482.2 million in termloans due in August 2019, $1,050.0 million of senior notes due in 2020 and $940.0 million in convertible debentures. Investors may require us to redeem the2027 Debentures totaling $250.0 million in aggregate principal amount in August 2014, or sooner if the closing sale price of our common stock is more than120% of the then current conversion price for certain specified periods. If a holder elects to convert, we will be required to pay the principal amount in cashand any amounts payable in excess of the principal amount will be paid in cash or shares of our common stock, at our election. Investors may require us toredeem the 2031 Debentures, totaling $690.0 million in aggregate principal amount in November 2017, or sooner if the closing sale price of our common stockis more than 130% of the then current conversion price for certain specified periods. If a holder elects to convert, we will be required to pay the principalamount in cash and any amounts payable in excess of the principal amount will be paid in cash or shares of our common stock, at our election. We also havea $75.0 million revolving credit line available to us through August 2018. As of September 30, 2013, there were $6.5 million of letters of credit issued, butthere were no other outstanding 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 $482.2 million of our debt outstanding as of September 30, 2013 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 to8 Table of Contentsrespond to changes in business and economic conditions and to obtain additional financing, if needed, may be significantly restricted, and we may beprevented from engaging in transactions that might otherwise be beneficial to us. In addition, our failure to comply with these covenants could result in adefault under our debt agreements, which could permit the holders to accelerate our obligation to repay the debt. If any of our debt is accelerated, we may nothave 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 loss of $115.2 million in fiscal 2013, and net income of $207.1 million and $38.2 million for the fiscal years 2012 and 2011,respectively, and have a total accumulated deficit of $369.4 million as of September 30, 2013. If we are unable to maintain profitability, the market price forour stock may decline, perhaps substantially. We cannot assure you that our revenue or bookings will grow or that we will maintain profitability in the future.If we do not achieve and maintain profitability, we may be required to raise additional capital to maintain or grow our operations. Additional capital, ifavailable at all, may be highly dilutive 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 and bookings in the future depends in large measureon the continuing acceptance of these technologies in general and our products in particular. The continued development of the market for our current andfuture voice and 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 3M, 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 3M, 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 their competitive products or technologies. To the extent they do so, market acceptance andpenetration of our products, and therefore our revenue and bookings, may be adversely affected. Our success will depend substantially upon our ability toenhance our products and technologies and to develop and introduce, on a timely and cost-effective basis, new products and features that meet changingcustomer requirements and incorporate technological enhancements. If we are unable to develop new products and enhance functionalities or technologies toadapt to these changes, or if we are unable to realize synergies among our acquired products and technologies, our business will suffer.9 Table 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 and bookings are derived, and a significant portion of our research and development activities are based,outside the United States. Our results could be harmed by economic, political, regulatory and other risks associated with these internationalregions.Because we operate worldwide, our business is subject to risks associated with doing business internationally. We anticipate that revenue and bookingsfrom international operations could increase in the future. Most of our international revenue and bookings are generated by sales in Europe and Asia. Inaddition, some of our products are developed and manufactured outside the United States and we have a large number of employees in India that providetranscription services. We also have a large number of employees in Canada, Germany and United Kingdom that provide professional services. A significantportion of the development of our voice and language products is conducted in Canada and Germany, and a significant portion of our imaging research anddevelopment is conducted in Hungary. We also have significant research and development resources in Austria, Belgium, Italy, and United Kingdom.Accordingly, our future results could be 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;•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 and Hungarian forint. Changes in the value of foreign currencies relative to the value of theU.S. dollar could adversely affect future revenue and operating results.Tax matters may cause significant variability in our financial results.Our businesses are subject to income taxation in the U.S., as well as in many tax jurisdictions throughout the world. Tax rates in these jurisdictionsmay be subject to significant change. Our effective income tax rate can vary significantly between periods due to a number of complex factors including, butnot limited to: (i) projected levels of taxable income; (ii) pre-tax income being lower than anticipated in countries with lower statutory rates or higher thananticipated in countries with higher statutory rates; (iii) increases or decreases to valuation allowances recorded against deferred tax assets; (iv) tax auditsconducted by various tax authorities; (v) adjustments to income taxes upon finalization of income tax returns; (vi) the ability to claim foreign tax credits; and(vii) the repatriation of non-U.S. earnings for which we have not previously provided for income taxes. If our effective tax rate increases, our operating resultsand cash flow could be adversely affected.10 Table of ContentsWe are subject to laws and regulations worldwide, changes to which could increase our costs and adversely affect our business.We are subject to laws and regulations affecting our domestic and international operations in a number of areas. These U.S. and foreign laws andregulations affect various aspects of our business including, but not limited to, areas of labor, advertising, digital content, consumer protection, real estate,billing, e-commerce, promotions, quality of services, telecommunications, mobile communications and media, intellectual property ownership andinfringement, import and export requirements, anti-corruption, foreign exchange controls and cash repatriation restrictions, data privacy requirements, anti-competition, environmental, health and safety.Compliance with these laws, regulations and similar requirements may be onerous and expensive, and they may be inconsistent from jurisdiction tojurisdiction, further increasing the cost of compliance and doing business. Any such costs, which may rise in the future as a result of changes in these lawsand regulations or in their interpretation could individually or in the aggregate make our products and services less attractive to our customers, delay theintroduction of new products in one or more regions, or cause us to change or limit our business practices. We have implemented policies and proceduresdesigned to ensure compliance with applicable laws and regulations, but there can be no assurance that our employees, contractors, or agents will not violatesuch laws and regulations or our policies and procedures.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;•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 and bookings from contracts with the United States government, as well as various state and local governments, andtheir respective agencies. Government contracts are generally subject to audits and investigations which could identify violations of these agreements.Government contract violations 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 sufferserious harm to our reputation 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 and11 Table of Contentsoperational personnel, but may not be able to attract, assimilate or retain qualified personnel in the future. Any failure to attract, integrate, motivate and retainthese employees could harm our business.Our business is subject to a variety of U.S. and international laws, rules, policies and other obligations regarding data protection.We are subject to federal, state and international laws relating to the collection, use, retention, disclosure, security and transfer of personally identifiableinformation. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between the Company and itssubsidiaries, and among the Company, its subsidiaries and other parties with which we have relations. Several jurisdictions have passed laws in this area,and other jurisdictions are considering imposing additional restrictions. These laws continue to evolve and may be inconsistent from jurisdiction tojurisdiction. Complying with emerging and changing requirements may cause us to incur substantial costs or require us to change our business practices.Noncompliance could result in penalties or significant legal liability.Any failure by us, our suppliers or other parties with whom we do business to comply with our privacy policy or with other federal, state or internationalprivacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others.Adverse 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 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 or policies could have a material adverse effect on our financial position and results of operations. If we are unable toprotect, or our clients perceive that we are unable to protect, the security and privacy of our confidential information, our growth could be materially adverselyaffected. A security 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.12 Table of ContentsInterruptions 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 we regard as proprietary. Policing unauthorized use of our products is difficult and we may not be able to protect ourtechnology from unauthorized use. Additionally, our competitors may independently develop technologies that are substantially the same or superior to ourtechnologies and that do not infringe our rights. In these cases, we would be unable to prevent our competitors from selling or licensing these similar or superiortechnologies. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. Althoughthe source code for our proprietary software is protected both as a trade secret and as a copyrighted work, litigation may be necessary to enforce our intellectualproperty rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringementor 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 and bookings, expensive correction, liability to ourcustomers and claims against 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 and bookings, adverse customer reaction and negative publicity about us orour products and services. Customers who are not satisfied with any of our products may also bring claims against us for damages, which, even ifunsuccessful, would likely be time-consuming to defend,13 Table of Contentsand could result in costly litigation and payment of damages. Such claims could harm our reputation, financial results and competitive position.Risks Related to our Corporate Structure, Organization and Common StockThe holdings of our largest stockholder may enable them to influence matters requiring stockholder approval.As of September 30, 2013, High River Limited Partnership, Hopper Investments LLC, Barberry Corp., Icahn Partners LP, Icahn Partners Master FundLP, Icahn Partners Master Fund II LP, Icahn Partners Master Fund III LP, Icahn Enterprises G.P. Inc., Icahn Enterprises Holdings L.P., IPH GP LLC, IcahnCapital LP, Icahn Onshore LP, Icahn Offshore LP, and Beckton Corp. (collectively, the “Icahn Group”), beneficially owned approximately 17% of theoutstanding shares of our common stock. Brett Icahn and David Schechter of the Icahn Group have been appointed as directors of the Company. Because ofits large holdings of our capital stock relative to other stockholders, the Icahn Group has a strong influence over matters requiring approval by ourstockholders.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 competitors and general economic and market conditions. Salesof a substantial number of shares of our common stock by our largest stockholders, or the perception that such sales could occur, could also contribute to thevolatility or our stock price. While we cannot predict the individual effect that these factors may have on the market price of our common stock, these factors,either individually or in the aggregate, could result in significant volatility in our stock price during any given period of time. Moreover, companies that haveexperienced 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 couldresult 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.Our business could be negatively affected as a result of the actions of activist stockholders.Responding to actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of managementand our employees. Furthermore, any perceived uncertainties as to our future direction could result in the loss of potential business opportunities, and maymake it more difficult to attract and retain qualified personnel and business partners.14 Table of ContentsWe 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.In addition, on August 19, 2013, we implemented a stockholder rights plan, also called a poison pill, that may have the effect of discouraging orpreventing a change of control by, among other things, making it uneconomical for a third party to acquire us without the consent of our Board of Directors.15 Table of ContentsItem 1B.Unresolved Staff CommentsNone.Item 2.PropertiesOur corporate headquarters are located in Burlington, Massachusetts. As of September 30, 2013, we leased approximately 1.1 million square feet ofbuilding space, primarily in the U.S., and to a lesser extent, in Europe, Canada, Japan and the Asia-Pacific regions. In addition, we own 130,000 square feetof building space located in Melbourne, Florida. We lease research and development, and sales and support offices throughout the United States and maintainleased facilities internationally in countries around the world. Larger leased sites include properties located in Montreal, Quebec, Sunnyvale, California andBangalore, India.As of September 30, 2013, we also lease space in specialized data centers in Massachusetts, Texas and smaller facilities around the world.We believe our existing facilities and equipment, which are used by all operating segments, are in good operating condition and are suitable for theconduct of our business.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 on, 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.Item 4.Mine Safety DisclosuresNot applicable.16 Table 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 2012: First quarter$19.28 $26.97Second quarter24.37 31.15Third quarter19.33 26.85Fourth quarter19.58 25.89Fiscal 2013: First quarter$19.99 $25.33Second quarter18.00 24.85Third quarter18.05 23.38Fourth quarter17.90 20.01HoldersAs of October 31, 2013, there were 768 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 SecuritiesThe following is a summary of our fourth quarter share repurchases:Period Total Number ofShares Purchased Average PricePaid per Share Total Number of SharesPurchased as Part ofPublicly AnnouncedProgram (1) Approximate DollarValue of Shares thatMay Yet Be PurchasedUnder the ProgramJuly 1, 2013 - July 31, 2013 3,158,155 $18.85 3,158,155 $325,441,738August 1, 2013 - August 31, 2013 522,287 $18.82 522,287 $315,612,135September 1, 2013 - September 30, 2013 — $— — $315,612,135Total 3,680,442 3,680,442 $315,612,135(1) On April 30, 2013, we announced a share repurchase program for up to $500 million of our outstanding shares of common stock. The plan has noexpiration date.For the majority of restricted stock units granted to employees, the number of shares issued on the date the restricted stock units vest is net of theminimum statutory income withholding tax requirements that we pay in cash to the applicable taxing authorities on behalf of our employees. We do notconsider these transactions to be common stock repurchases.17 Table of ContentsUnregistered Sales of Equity Securities and Use of ProceedsOn September 6, 2013, Warburg Pincus converted 3,562,238 shares of Series B Preferred Stock into an equivalent number of common shares. Theshares 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.On August 15, 2013, we issued 934,960 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.Item 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). Fiscal Year Ended September 30,(Dollars in millions, except per share amounts)2013 2012 2011 2010 2009Operations: Total revenues$1,855.3 $1,651.5 $1,318.7 $1,118.9 $950.4Gross profit1,088.7 1,046.6 818.9 709.6 590.8Income from operations48.5 126.2 52.6 32.9 57.6Provision (benefit) for income taxes18.6 (141.8) (8.2) 18.0 40.4Net (loss) income$(115.2) $207.1 $38.2 $(19.1) $(19.4)Net (Loss) Income Per Share Data: Basic$(0.37) $0.67 $0.13 $(0.07) $(0.08)Diluted$(0.37) $0.65 $0.12 $(0.07) $(0.08)Weighted average common sharesoutstanding: Basic313.6 306.4 302.3 287.4 253.6Diluted313.6 320.8 316.0 287.4 253.6Financial Position: Cash and cash equivalents and marketablesecurities$846.8 $1,129.8 $478.5 $550.0 $527.0Total assets5,958.6 5,799.0 4,095.3 3,769.7 3,499.5Long-term debt, net of current portion2,108.1 1,735.8 853.0 851.0 848.9Total stockholders’ equity2,638.0 2,728.3 2,493.4 2,297.2 2,043.0Selected Data and Ratios: Working capital$604.3 $736.5 $379.9 $459.2 $376.6Depreciation of property and equipment39.8 31.7 27.6 21.6 18.7Amortization of intangible assets168.8 155.5 143.3 135.6 115.4Gross margin percentage58.7% 63.4% 62.1% 63.4% 62.2%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.18 Table of ContentsTrends in Our BusinessWe are a leading provider of voice and language solutions for businesses and consumers around the world. Our solutions are used in the healthcare,mobile, consumer, enterprise customer service, and imaging markets. We are seeing several trends in our markets, including (i) the growing adoption of cloud-based, connected services and highly interactive mobile applications, (ii) deeper integration of virtual assistant capabilities and services, and (iii) the continuedexpansion of our core technology portfolio from speech recognition to natural language understanding, semantic processing, domain-specific reasoning anddialog management capabilities.•Healthcare. Trends in our healthcare business include continuing customer preference for hosted solutions and other time-based licenses, andincreasing interest in the use of mobile devices to access healthcare systems and records. We continue to see strong demand for transactions whichinvolve the sale and delivery of both software and non-software related services or products, as well as transactions which involve the sale ofmultiple solutions, such as both hosted transcription services and Dragon Medical licenses. Although the volume processed in our hostedtranscription services has steadily increased due to the expanding customer base, we have experienced some erosion in lines processed whencustomers adopt electronic medical record (EMR) systems, and when in some cases customers use our licensed Dragon Medical product to supportinput into the EMR. We believe an important trend in the healthcare market is the impending change in the coding standard from ICD-9 to ICD-10which is scheduled to take effect in October 2014. Customers are adopting our solutions under the current coding standard, and we believe themigration to ICD-10 is creating an imperative to increase automation of this important workflow. We are investing to expand our product set toaddress the various healthcare opportunities, including deeper integration with our clinical documentation solutions, as well as expand ourinternational capabilities, and reduce our time from contract signing to initiation of billable services.•Mobile and Consumer. Trends in our mobile and consumer segment include device manufacturers requiring custom applications to deliver uniqueand differentiated products such as virtual assistants, broadening keyboard technologies to take advantage of touch screens, increasing hands-freecapabilities on cell phones and automobiles to address the growing concern of distracted driving, and the adoption of our technology on abroadening scope of devices, such as televisions, set-top boxes, e-book readers, tablet computers, cameras and third-party applications. The morepowerful capabilities of mobile devices require us to supply a broader set of technologies to support the increasing scope and complexity of thesolutions. These technologies include cloud-based speech recognition, natural language understanding, dialog management, text-to-speech andenhanced text input, where the complexity of the technologies allow us to charge a higher price. Within given levels of our technology set, we haveseen pricing pressures from our OEM partners in our mobile handset business. We continue to see strong demand for transactions which involvethe sale and delivery of both software and non-software related services, as well as products to help customers define, design and implementincreasingly robust and complex custom solutions such as virtual assistants. We continue to see an increasing proportion of revenue from on-demand and transactional arrangements as opposed to traditional upfront licensing of our mobile products and solutions. Although this has anegative impact on near-term revenue, we believe this model will build stronger and more predictable revenues over time. We are investing to increaseour capabilities and capacity to help device manufacturers build custom applications, to increase the capacity of our data centers, to increase thenumber, kinds and capacity of network services, to enable developers to access our technology, and to expand both awareness and channels for ourdirect-to-consumer products.•Enterprise. Trends in our enterprise business include increasing interest in the use of mobile applications and web sites to access customer caresystems and records, voice-based authentication of users, increasing interest in coordinating actions and data across customer care channels, andthe ability of a broader set of hardware providers and systems integrators to serve the market. We are investing to expand our product set to addressthese opportunities, to increase efficiency of our hosted applications, expand our capabilities and capacity to help customers build customapplications, and broaden our relationships with new hardware and systems integrator partners serving the market.•Imaging. The imaging market is evolving to include more networked solutions, mobile access to networked solutions, and multi-function devices.We expect to expand our traditional packaged software sales with subscription versions. We are investing to improve mobile access to our networkedproducts, expand our distribution channels and embedding relationships, and expand our language coverage.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.19 Table of ContentsStrategyIn fiscal 2014, 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 have increased our focus on operating efficiencies, expense and hiring discipline andacquisition synergies 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 intend to leverage our globalresearch and development organization, and our broad portfolio of technologies, applications and intellectual property to foster technologicalinnovation and to maintain customer preference for our solutions. We also intend to invest further in our engineering resources and to 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 continue to deliver targeted solutions for a range of industries includingmobile device manufacturers, healthcare, telecommunications, financial services and government administration. We also intend to expand ourglobal sales and professional 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 allof our segments. This will enable us to deliver applications that our customers use, and pay for, on a repeat basis, providing us with theopportunity 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 established markets such as Europe, and also emerging markets such as Asia and Latin America. We continue to add regionalexecutives and sales employees across geographic 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, and to complement our organic growth. We have proven experience in integrating businesses and technologies to deliver enhanced value toour customers, partners, employees and shareholders. We intend to continue to pursue acquisitions that enhance our solutions, serve specificvertical markets and strengthen our technology portfolio. We have, however, recently slowed the pace and reduced the size of acquisitions to focusour resources more on driving organic growth. We also have formed key partnerships with other important companies in our markets of interest,and intend to continue to do so in the future where it will enhance the value of our business.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, 2013, as compared to the fiscalyear ended September 30, 2012, is as follows:•Total revenue increased by $203.8 million to 1,855.3 million;•Net income declined by $322.4 million to a loss of $115.2 million;•Gross margins decreased by 4.7 percentage points to 58.7%;•Operating margins decreased by 5.0 percentage points to 2.6%; and•Cash provided by operating activities for the fiscal year ended September 30, 2013 was $395.0 million, a decrease of $78.0 million from the priorfiscal year.In addition to the above key financial metrics, we also focus on certain operating metrics. A summary of these key operating metrics as of and for theperiod ended September 30, 2013 is as follows:•Annualized line run-rate in our on-demand healthcare solutions increased 5% to approximately 5.1 billion lines per year. The annualized line run-rate is determined using billed equivalent line counts in a given quarter, multiplied by four; and•Total bookings during fiscal 2013 were $1.92 billion which represent the contract value of transactions closed and recorded in the period asdetermined at the time of contract signing. For fixed price contracts, the bookings value represents the total contract value. For contracts whererevenue is based on transaction volume, the bookings value represents the contract price times the estimated future transaction volume during thecontract term, whether or not such transaction volumes are guaranteed under a minimum commitment clause.20 Table of Contents•Estimated three-year value of on-demand contracts increased 9% to approximately $2.1 billion. We determine this value as of the end of the periodreported, by using our best estimate of three years of anticipated future revenue streams under signed on-demand contracts then in place, whether ornot they are guaranteed through a minimum commitment clause. Our best estimate is based on estimates used in evaluating the contracts anddetermining sales compensation, adjusted for changes in estimated launch dates, actual volumes achieved and other factors deemed relevant. Forcontracts with an expiration date beyond three years, we include only the value expected within three years. For other contracts, we assume renewalconsistent with historic renewal rates unless there is a known cancellation. Contracts are generally priced by volume of usage and typically have noor low minimum commitments. Actual revenue could vary from our estimates due to factors such as cancellations, non-renewals or volumefluctuations.RESULTS 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 2013 Fiscal 2012 Fiscal 2011 % Change 2013 vs.2012 % Change 2012 vs.2011Product and licensing$753.7 $740.7 $607.4 1.8% 21.9%Professional services and hosting832.4 674.0 509.1 23.5% 32.4%Maintenance and support269.2 236.8 202.2 13.7% 17.1%Total Revenues$1,855.3 $1,651.5 $1,318.7 12.3% 25.2%United States$1,339.7 $1,175.2 $963.7 14.0% 21.9%International515.6 476.3 355.0 8.3% 34.2%Total Revenues$1,855.3 $1,651.5 $1,318.7 12.3% 25.2%Fiscal 2013 Compared to Fiscal 2012The geographic split for fiscal 2013 was 72% of total revenue in the United States and 28% internationally, as compared to 71% of total revenue in theUnited States and 29% internationally for the same period last year. The increase in the proportion of revenue generated domestically was primarily driven byour recent acquisitions in our Healthcare segment, which are primarily located in the United States.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 fiscal 2011. The increase in the proportion of revenue generated internationally was primarily due to contributionsfrom our Mobile and Consumer and Imaging segments.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 2013 Fiscal 2012 Fiscal 2011 % Change 2013 vs.2012 % Change 2012 vs.2011Product and licensing revenue$753.7 $740.7 $607.4 1.8% 21.9%As a percentage of total revenues40.6% 44.9% 46.1% Fiscal 2013 Compared to Fiscal 2012Product and licensing revenue for fiscal 2013 increased $13.0 million, as compared to fiscal 2012. The increase consisted of a $55.0 million increase inHealthcare revenue primarily driven by sales of our Clintegrity solutions from our recent acquisitions. This was offset by a $45.3 million decrease in Mobileand Consumer licensing revenue driven by lower sales of embedded licenses in handset and other consumer electronics resulting from continuing shift towardon-demand and ratable pricing models.21 Table of ContentsAs a percentage of total revenue, product and licensing revenue decreased from 44.9% to 40.6%. This decrease is driven by lower sales of embeddedlicenses in handset and other consumer electronics in our Mobile and Consumer segment, resulting from a continuing shift toward on-demand and ratablepricing models. In addition, the decrease include the impact of our Healthcare acquisitions in fiscal 2012 and 2013, which have a higher proportion of on-demand hosting revenue. We expect this revenue mix shift to continue in fiscal 2014.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.Professional 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 infotainment, searchand transcription, 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 2013 Fiscal 2012 Fiscal 2011 % Change 2013 vs.2012 % Change 2012 vs.2011Professional services and hosting revenue$832.4 $674.0 $509.1 23.5% 32.4%As a percentage of total revenues44.9% 40.8% 38.6% Fiscal 2013 Compared to Fiscal 2012Professional services and hosting revenue for fiscal 2013 increased $158.4 million, as compared to fiscal 2012. The increase consisted of a$135.4 million increase in Healthcare revenue primarily driven by transactional volume growth in our on-demand solutions, of which $126.9 million wasdue to our acquisitions closed during fiscal 2012 and 2013. Mobile and Consumer revenue increased $25.9 million, including a $19.2 million increasedriven by transactional volume growth in our connected mobile services, and an $8.3 million increase in professional services to support the custom designand implementation of next-generation mobile solutions in automobiles, handsets and other consumer electronics.As a percentage of total revenue, professional services and hosting revenue increased from 40.8% to 44.9%. This increase is driven by our Healthcareacquisitions in fiscal 2012 and 2013, which have a higher proportion of on-demand hosting revenue. The increase also includes the continuing shift towardon-demand and ratable pricing models in our handset and other consumer electronics sales in our Mobile and Consumer segment. We expect this revenue mixshift to continue in fiscal 2014.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.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 2013 Fiscal 2012 Fiscal 2011 % Change 2013 vs.2012 % Change 2012 vs.2011Maintenance and support revenue$269.2 $236.8 $202.2 13.7% 17.1%As a percentage of total revenues14.5% 14.3% 15.3% 22 Table of ContentsFiscal 2013 Compared to Fiscal 2012Maintenance and support revenue for fiscal 2013 increased $32.4 million, as compared to fiscal 2012 primarily driven by a $14.8 million increase inHealthcare revenue resulting from growth in sales of our Dragon Medical solutions, a $7.9 million increase in Enterprise, driven by strong maintenancerenewals and licenses bookings in prior periods, and a $5.4 million increase in Imaging.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.COSTS 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 2013 Fiscal 2012 Fiscal 2011 % Change 2013 vs.2012 % Change 2012 vs.2011Cost of product and licensing revenue$99.4 $74.8 $65.6 32.9% 14.0%As a percentage of product and licensingrevenue13.2% 10.1% 10.8% Fiscal 2013 Compared to Fiscal 2012Cost of product and licensing revenue for fiscal 2013 increased $24.6 million, as compared to fiscal 2012, primarily due to a $23.2 million increase incost driven by sales of our Clintegrity solutions in our healthcare segment. Gross margin decreased 3.1 percentage points primarily due to a 2.6 percentagepoint impact from higher costs related to our Clintegrity solutions.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.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 2013 Fiscal 2012 Fiscal 2011 % Change 2013 vs.2012 % Change 2012 vs.2011Cost of professional services and hostingrevenue$550.9 $424.7 $341.1 29.7% 24.5%As a percentage of professional services andhosting revenue66.2% 63.0% 67.0% Fiscal 2013 Compared to Fiscal 2012Cost of professional services and hosting revenue for fiscal 2013 increased $126.2 million, as compared to fiscal 2012. The increase was primarilydriven by a $116.3 million increase in Healthcare costs related to growth in our on-demand solutions, including the impact from our acquisitions closedduring fiscal 2012 and 2013. Gross margin decreased 3.2 percentage points primarily driven by an increased proportion of revenues coming from our on-demand services, including the impact of our acquisitions, as well as growth in labor costs from our hosting and transcription services.23 Table of ContentsFiscal 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.Cost 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 2013 Fiscal 2012 Fiscal 2011 % Change 2012 vs.2011 % Change 2011 vs.2010Cost of maintenance and support revenue$52.7 $45.3 $38.1 16.3% 18.9%As a percentage of maintenance and supportrevenue19.6% 19.1% 18.8% Fiscal 2013 Compared to Fiscal 2012Cost of maintenance and support revenue for fiscal 2013 increased $7.4 million, as compared to fiscal 2012. The increase was primarily due to a $5.5million increase in costs from our acquisitions in the Healthcare and Imaging segments during the period contributing, in part, to the decrease in gross margin.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.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 2013 Fiscal 2012 Fiscal 2011 % Change 2013 vs.2012 % Change 2012 vs.2011Research and development expense$292.1 $225.4 $179.4 29.6% 25.6%As a percentage of total revenues15.7% 13.6% 13.6% Fiscal 2013 Compared to Fiscal 2012Research and development expense for fiscal 2013 increased $66.7 million, as compared to fiscal 2012. The increase was attributable to a $43.6 millionincrease in compensation expense, driven by headcount growth, including additional headcount from our acquisitions during the period, together with a $5.4million increase in stock-based compensation expense. We increased investment in research and development expense to fund cloud-based speech systems andnatural language understanding advancements. We expect significant investment in research and development to continue in fiscal 2014.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 millionincrease in compensation expense, driven by headcount growth including additional headcount from our acquisitions during the period, as well as increase instock-based compensation expense.24 Table of ContentsSales 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 following table shows sales and marketing expense, in dollarsand as a percentage of total revenue (dollars in millions): Fiscal 2013 Fiscal 2012 Fiscal 2011 % Change 2013 vs.2012 % Change 2012 vs.2011Sales and marketing expense$420.2 $369.2 $306.4 13.8% 20.5%As a percentage of total revenues22.6% 22.4% 23.2% Fiscal 2013 Compared to Fiscal 2012Sales and marketing expense for fiscal 2013 increased $51.0 million, as compared to fiscal 2012. The increase was primarily attributable to a$34.2 million increase in compensation expense, including commission expense, driven primarily by headcount growth, including additional headcount fromour acquisitions during the period, together with a $4.2 million increase in stock-based compensation expense. Additionally, marketing and channel programspending increased $6.9 million to drive revenue growth as part of demand generation activities during the holiday season in the first quarter of fiscal 2013.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.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 2013 Fiscal 2012 Fiscal 2011 % Change 2013 vs.2012 % Change 2012 vs.2011General and administrative expense$176.7 $163.3 $147.6 8.2% 10.6%As a percentage of total revenues9.5% 9.9% 11.2% Fiscal 2013 Compared to Fiscal 2012General and administrative expense for fiscal 2013 increased $13.4 million, as compared to fiscal 2012. The increase was primarily attributable to a$12.9 million increase in compensation expense, driven primarily by headcount growth including additional headcount from our acquisitions during theperiod. In addition, legal expense increased $11.6 million as a result of increased spending on patent litigation and patent prosecution activities. Theseincreases were offset by a $19.5 million decrease in stock-based compensation due to less expense related to performance-based awards and bonus resultingfrom lower than expected results in fiscal 2013.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.25 Table 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 2013 Fiscal 2012 Fiscal 2011 % Change 2013 vs.2012 % Change 2012 vs.2011Cost of revenue$63.6 $60.0 $55.1 6.0% 8.9%Operating expense105.3 95.4 88.2 10.4% 8.2%Total amortization expense$168.9 $155.4 $143.3 8.7% 8.4%As a percentage of total revenues9.1% 9.4% 10.9% Fiscal 2013 Compared to Fiscal 2012Amortization of intangible assets expense for fiscal 2013 increased $13.5 million, as compared to fiscal 2012. The increase was primarily attributable tothe amortization of acquired customer relationships from our business acquisitions during fiscal 2013 and the second half of fiscal 2012.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.Based on our balance of amortizable intangible assets as of September 30, 2013, and assuming no impairment or change in useful lives, we expectamortization of intangible assets for fiscal 2014 to be $161.9 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 2013 Fiscal 2012 Fiscal 2011% Change 2013 vs.2012% Change 2012 vs.2011Transition and integration costs$28.3 $9.9 $3.4 185.9 % 191.2 %Professional service fees20.4 48.4 18.0 (57.9)% 168.9 %Acquisition-related adjustments(19.0) 0.4 0.5 (4,850.0)% (20.0)%Total Acquisition-related costs, net$29.7 $58.7 $21.9 (49.4)% 168.0 %As a percentage of total revenue1.6% 3.6% 1.7% Fiscal 2013 Compared to Fiscal 2012Acquisition-related costs, net for fiscal 2013 decreased $29.0 million, as compared to fiscal 2012. The decrease in net expense was driven by an incomeof $19.0 million recognized in fiscal 2013 related to the elimination of contingent liabilities established in the original allocations of purchase price for whichthe measurement period has ended, following the expiration of the applicable statute of limitations. In addition, professional service fees decreased $28.0million due to lower post-acquisition legal and regulatory costs associated with acquisitions in fiscal 2013 as compared to fiscal 2012. These decreases wereoffset by an $18.4 million increase in transition and integration costs attributable to a $12.5 million compensation expense recognized for the contingent earn-out obligation related to our acquisition of JA Thomas, as well as post-acquisition transition costs associated with recently completed acquisitions.26 Table of ContentsFiscal 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.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 2013, 2012and 2011 (dollars in millions): PersonnelRelated FacilitiesCosts Other TotalBalance at September 30, 2010$1.8 $0.3 $— $2.1Restructuring 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 charges, net6.7 0.4 0.4 7.5Cash payments(10.1) (1.3) (0.4) (11.8)Balance at September 30, 20121.7 0.1— 1.8Restructuring charges, net15.3 1.6 0.3 17.2Non-cash adjustment(0.5) — (0.3) (0.8)Cash payments(12.3) (0.5) — (12.8)Balance at September 30, 2013$4.2 $1.2 $— $5.4For fiscal 2013, we recorded net restructuring charges of $17.2 million, which included a $14.6 million severance charge related to the elimination ofapproximately 300 personnel across multiple functions. In addition to the restructuring charges, we recorded a net gain of $0.8 million related to the sales oftwo immaterial product lines, which is included in restructuring and other charges, net in our consolidated statements of operations.For 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 change in our Healthcare marketing strategy under which we plan to consolidate our brands and will nolonger 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.Other (Expense) IncomeOther (expense) income 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 (expense) income in dollars and as a percentage of totalrevenue (dollars in millions): Fiscal 2013 Fiscal 2012 Fiscal 2011 % Change 2013 vs.2012 % Change 2012 vs.2011Interest income$1.6 $2.2 $3.2 (27.3)% (31.3)%Interest expense(137.8) (85.3) (36.7) 61.5 % 132.4 %Other (expense) income, net(9.0) 22.2 11.0 (140.5)% 101.8 %Total other expense, net$(145.2) $(60.9) $(22.5) As a percentage of total revenue7.8% 3.7% 1.7% 27 Table of ContentsFiscal 2013 Compared to Fiscal 2012Interest expense for fiscal 2013 increased $52.5 million, as compared to fiscal 2012. The increase in interest expense was due to the issuance of $700.0million of Senior Notes in the fourth quarter of fiscal 2012, as well as an additional $350.0 million of Senior Notes issued in the first quarter of fiscal 2013.Other (expense) income, net decreased $31.2 million from income of $22.2 million in fiscal 2012 to an expense of $9.0 million in fiscal 2013. This decreaseincluded the impact of the fair value adjustments on our security price guarantees, which resulted in a gain of $8.0 million in fiscal 2012, as compared to aloss of $6.6 million in fiscal 2013, driven by our decreasing stock price in fiscal 2013. Also included in Other (expense) income, net in fiscal 2012 was a$13.7 million gain recognized on the original non-controlling equity interest in Vlingo upon the completion of the Vlingo acquisition.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.Provision (Benefit) for Income TaxesThe following table shows the (benefit) provision for income taxes and the effective income tax rate (dollars in millions): Fiscal 2013 Fiscal 2012 Fiscal 2011 % Change 2013 vs.2012 % Change 2012 vs.2011Provision (benefit) for income taxes$18.6 $(141.8) $(8.2) (113.1)% 1,629.3%Effective income tax rate(19.2)% (217.2)% (27.4)% Fiscal 2013 Compared to Fiscal 2012Our effective income tax rate was approximately (19.2)% in fiscal 2013, compared to approximately (217.2%) in fiscal 2012. Provision for income taxesincreased $160.4 million in fiscal 2013 as compared to fiscal 2012. In fiscal 2012, we recorded a release of valuation allowance totaling $145.6 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 as well as a release of valuation allowance for which it was more likely than not that certain deferred tax assets were realizable. In fiscal 2013, nocomparable benefit was recognized. During the third quarter of fiscal 2013, we determined that we had new negative evidence related to our domestic deferredtax asset recoverability assessment. This new evidence, resulting from two consecutive quarterly reductions in our earnings forecast during fiscal 2013,primarily due to the continuing shift toward on-demand and ratable product offerings and revenue streams, led us to establish a valuation allowance againstour net domestic deferred tax assets. This valuation allowance was offset by the tax benefits from our current year domestic losses and credits. We alsorecorded a $10.4 million tax provision representing the establishment of the valuation allowance related to our net domestic deferred tax assets at the beginningof the year.The effective income tax rate was also impacted by our foreign operations which are subject to a significantly lower tax rate than the U.S. statutory taxrate. This rate differential is driven by our subsidiaries in Ireland. In fiscal 2013, this lower foreign tax rate differential was offset by the impact of the transferof intangible property between certain of our foreign subsidiaries with significantly different local statutory tax rates. Although the transfer of intangibleproperty between consolidated entities did not result in any gain in the consolidated results of operations, we generated a taxable gain in certain jurisdictions.The future tax deductions associated with the amortization of the transferred intangibles will be generated in a jurisdiction that will not generate an offsetting taxbenefit in future periods. (See Note 19 of our Notes to Consolidated Financial Statements).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 in28 Table of Contentspurchase accounting. In addition, by the end of fiscal 2012, we made a determination that it is more likely than not that certain of our deferred tax assets,primarily in the U.S., will be realized which resulted in a release of $70.5 million of our valuation allowance.Our effective income tax rate is influenced by the level and mix of earnings and losses by taxing jurisdiction in combination with the applicabledifferences between U.S. and foreign tax rates. Accordingly, changes in the jurisdictional mix of pre-tax income in the current year can result in pre-tax incomebeing higher or lower than the prior year in countries with lower statutory tax rates, which causes our effective income tax rate to fluctuate. The impact of suchchanges could be meaningful in countries with statutory income tax rates that are significantly lower than the U.S. statutory income tax rate of 35%. In 2012,we consolidated international sales and financial management in a newly created international headquarters in Dublin, Ireland. This Irish entity is ourprincipal entity selling to customers in countries outside of North America and Japan. In years before fiscal 2012, sales to these regions were made by oursubsidiary in Belgium pursuant to a license which returned most of the Belgium profits back to the U.S. through a royalty arrangement. In connection withthe establishment of the international headquarters in Dublin, we implemented a new intellectual property strategy pursuant to which the right to use U.S.-owned intellectual property now resides with our Irish headquarter entity. While our Ireland subsidiaries make royalty and other payments to the U.S., themajority of profits earned by the Irish entities are retained offshore to fund our future growth in Europe, the Middle East, Africa and the Asia Pacific regions.In future periods, if our foreign profits grow, we expect substantially all of our income before income taxes from foreign operations will be earned in Ireland.The statutory rate related to our Ireland profits is lower than the U.S, statutory rate and as a result we would expect our effective tax rate to decrease as profitsin Ireland increase.SEGMENT ANALYSISWe operate in, and report financial information for, the following four reportable segments: Healthcare, Mobile and Consumer, Enterprise and Imaging.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. We include these revenues and the related cost of revenues to allow for more complete comparisons to thefinancial results of historical operations, forward-looking guidance and the financial results of peer companies and in assessing management performance.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.29 Table of ContentsThe following table presents segment results (dollars in millions):Fiscal 2013 Fiscal 2012 Fiscal 2011 % Change 2013 vs.2012 % Change 2012vs. 2011Segment Revenues Healthcare$911.6 $669.4 $526.8 36.2 % 27.1 %Mobile and Consumer479.2 508.3 393.3 (5.7)% 29.2 %Enterprise323.5 332.0 296.4 (2.6)% 12.0 %Imaging243.4 228.4 177.4 6.6 % 28.7 %Total segment revenues$1,957.7 $1,738.1 $1,393.9 12.6 % 24.7 %Less: acquisition related revenue adjustments(102.4) (86.6) (75.2) 18.2 % 15.2 %Total revenues$1,855.3 $1,651.5 $1,318.7 12.3 % 25.2 %Segment Profit Healthcare$352.2 $314.9 $269.4 11.8 % 16.9 %Mobile and Consumer143.0 227.6 170.9 (37.2)% 33.2 %Enterprise78.9 90.8 63.3 (13.1)% 43.4 %Imaging98.2 91.6 69.1 7.2 % 32.6 %Total segment profit$672.3 $724.9 $572.7 (7.3)% 26.6 %Segment Profit Margin Healthcare38.6% 47.0% 51.1% (8.4) (4.1)Mobile and Consumer29.8% 44.8% 43.5% (15.0) 1.3Enterprise24.4% 27.3% 21.4% (2.9) 5.9Imaging40.3% 40.1% 39.0% 0.2 1.1Total segment profit margin34.3% 41.7% 41.1% (7.4) 0.6Segment RevenueFiscal 2013 Compared to Fiscal 2012•Healthcare segment revenue increased $242.2 million. Our professional services and hosting revenue increased $149.4 million, primarily due togrowth in on-demand transactional volume, of which $141.3 million of the increase resulted from our acquisitions during fiscal 2012 and 2013.Our product and licensing revenues increased $78.0 million primarily driven by a $66.5 million increase in sales of our Clintegrity solutions fromour recent acquisitions.•Mobile and Consumer segment revenue decreased $29.1 million. Our product and licensing revenue declined $64.1 million, primarily driven bylower sales of embedded licenses in handset and other consumer electronics resulting from a continuing shift toward on-demand and ratable pricingmodels. Our professional services and hosting revenue grew $30.3 million primarily attributable to an increase of $23.4 million in on-demandrevenue driven by transactional volume growth of our connected mobile services, and an $8.6 million increase in professional services to supportthe custom design and implementation of our next generation mobile solutions in automobiles, handsets and other consumer electronics.•Enterprise segment revenue decreased $8.5 million. Our product and licensing revenue declined $16.0 million, driven primarily by lower productand licensing revenue in Europe. Maintenance and support revenue increased $8.1 million driven by strong maintenance renewals from licensebookings in prior periods.•Imaging segment revenue increased $15.0 million. Our product and licensing revenue grew $11.1 million primarily driven by our fiscal 2012 and2013 acquisitions.Fiscal 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 2012.30 Table of Contents•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.Segment ProfitFiscal 2013 Compared to Fiscal 2012•Healthcare segment profit in fiscal 2013 increased $37.3 million, or 11.8%, over fiscal 2012, driven primarily by segment revenue growth of36.2%, partially offset by increased costs from growth in sales of our on-demand solutions and investments in research and development. Segmentprofit margin declined 8.4 percentage points from 47.0% in fiscal 2012 to 38.6% in fiscal 2013. This decrease in profit margin was primarilydriven by lower segment gross margin of 6.5 percentage points due to pressures in margin resulting from our acquired businesses that have a largeservice component, yet are not fully at scale and are at a stage that requires significant infrastructure and labor investments for deployment. Inaddition, profit margin decreased 1.9 percentage points due to increased investments in research in development to support innovation and productinitiatives.•Mobile and Consumer segment profit in fiscal 2013 decreased $84.6 million, or 37.2%, over fiscal 2012, primarily due to lower product andlicensing revenue and increased investments in research and development. Segment profit margin declined by 15.0 percentage points, from 44.8% infiscal 2012 to 29.8% in the current period. This decrease in margin was primarily driven by a 6.2 percentage point increase in research anddevelopment spending to fund cloud-based speech systems and natural language understanding advancements, as well as a 5.8 percentage pointdecrease in segment gross margin due to a shift in revenue mix from product and licensing revenue to on-demand and professional services revenueas well as the costs to deploy large solutions for key customers.•Enterprise segment profit in fiscal 2013 decreased $11.9 million, or 13.1%, over fiscal 2012, driven primarily by lower product and licensingrevenue in Europe and higher selling expenses. Segment profit margin decreased 2.9 percentage points from 27.3% in fiscal 2012 to 24.4% in fiscal2013. This decrease in margin was primarily driven by higher sales and marketing expenses, which reduced margins by 3.5 percentage points,offset by gross margin improvement of 0.7 percentage points due to cost-saving measures during the period.•Imaging segment profit in fiscal 2013 increased $6.6 million, or 7.2%, over fiscal 2012, driven primarily by growth in revenue from ouracquisitions in fiscal 2012 and 2013. Segment profit margin of 40.3% in 2013 was relatively flat as compared to fiscal 2012.Fiscal 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 in31 Table of Contentsresearch and development to support new product offerings and a 1.1 percentage point decrease as a result of higher marketing demand creationcosts to drive Dragon 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 segment revenue,offset by increased investment in marketing and selling expenses. Segment profit margin increased 1.1 percentage points from 39.0% in fiscal 2011to 40.1% in fiscal 2012. The change in segment profit margin included a 2.5 percentage point improvement due to leveraging selling expense, offsetby 1.9 percentage points of segment margin erosion due to increased marketing spend to drive revenue growth.LIQUIDITY AND CAPITAL RESOURCESCash and cash equivalents and marketable securities totaled $846.8 million as of September 30, 2013, a decrease of $283.0 million as compared to$1,129.8 million as of September 30, 2012. Our working capital at September 30, 2013 was $604.3 million compared to $736.5 million of working capitalat September 30, 2012. Cash and cash equivalents and marketable securities held by our international operations totaled $65.8 million and $78.8 million atSeptember 30, 2013 and 2012, respectively. We expect the cash held overseas will continue to be used for our international operations and therefore do notanticipate repatriating these funds. If we were to repatriate these amounts, we do not believe that the resulting withholding taxes payable would have a materialimpact on our liquidity. As of September 30, 2013, our total accumulated deficit was $369.4 million. We do not expect our accumulated deficit to impact ourfuture ability to operate the business given our strong cash and operating cash flow positions.The holders of our 2027 Convertible Debentures may require us to redeem the outstanding balance of $250.0 million in August 2014. We expect that wewill be able to use our existing cash balances, including cash generated by our operating activities during fiscal 2014, to fund the retirement of the 2027Debentures, if required by the holders. However, we will assess our operating and investing cash flow requirements and the borrowing economics in the capitalmarkets at that time to determine the appropriate funding source.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 2013 Compared to Fiscal 2012Cash provided by operating activities for fiscal 2013 was $395.0 million, a decrease of $78.0 million, or 16%, as compared to cash provided byoperating activities of $473.0 million for fiscal 2012. The net decrease was primarily driven by the following factors:•A decrease of $158.5 million in cash flows resulting from higher net loss, exclusive of non-cash adjustment items which includes a decrease indeferred tax benefit of $149.1 million driven by the change in our valuation allowance;•Offset by an increase of $35.6 million in cash flows generated by changes in working capital excluding deferred revenue; and•An increase in cash flows of $45.0 million from an overall increase in deferred revenue. The increase in deferred revenue was primarily attributableto continued growth in Imaging and Healthcare maintenance and support arrangements, new mobile on-demand service offerings where a portion ofthe fees are collected upfront, and the emergence of Healthcare term and subscription software arrangements that are recognized ratably.Fiscal 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;32 Table of Contents•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.Cash used in investing activitiesFiscal 2013 Compared to Fiscal 2012Cash used in investing activities for fiscal 2013 was $693.9 million, a decrease of $230.6 million, or 25%, as compared to cash used in investingactivities of $924.5 million for fiscal 2012. The net decrease was primarily driven by the following factors:•A decrease in cash outflows of $277.3 million for business and technology acquisitions;•A decrease in cash outflows of $7.3 million for capital expenditures; and•Offset by an increase in cash outflows of $24.3 million from purchases of marketable securities and other investments and a reduction in cashinflows of $23.0 million from the sales and maturities of marketable securities and other investments.Fiscal 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.Cash (used in) provided by financing activitiesFiscal 2013 Compared to Fiscal 2012Cash used in financing activities for fiscal 2013 was $20.7 million, a decrease of $1,153.7 million, or 102%, as compared to cash provided byfinancing activities of $1,133.0 million for fiscal 2012. The net decrease was primarily driven by the following factors:•A decrease in cash inflows of $739.8 million from proceeds of debt issuances. Fiscal 2012 activities included cash inflows of $689.1 million fromthe issuance of the Senior Notes due in 2020, as well as $676.1 million from the issuance of the 2031 Debentures, net of issuance costs andoriginal issue discount. Fiscal 2013 activities included proceeds of $351.7 million of Senior Notes due in 2020 issued in the first quarter of fiscal2013 together with $277.1 million related to the amendment of our Credit Facility in August 2013;•An increase in cash outflows of $419.0 million for the payment of long-term debt, which includes $277.1 million related to the amendment of ourCredit Facility in August 2013 and the October 2012 payment of $143.5 million on our term loan;•An increase in cash outflows of $10.6 million as a result of higher cash payments required to net share settle employee equity awards, due to anincrease in vesting activities during fiscal 2013 as compared to fiscal 2012; and•Offset by a decrease in cash outflows of $15.6 million related to our share repurchase program. We repurchased 9.8 million shares of our commonstock for total cash outflows of $184.4 million in fiscal 2013 as compared to our repurchase of 8.5 million shares of our common stock for totalcash outflows of $200.0 million in fiscal 2012.Fiscal 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:33 Table of Contents•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.Credit Facilities and Debt5.375% Senior Notes due 2020On October 22, 2012, we issued an additional $350.0 million aggregate principal amount of our 5.375% Senior notes due 2020 (the "Notes"). The Noteswere issued pursuant to an indenture agreement dated August 14, 2012, relating to our existing $700 million aggregate principal amount of 5.375% SeniorNotes due in 2020, issued in the fourth quarter of fiscal 2012. Total proceeds received, net of issuance costs, were $351.7 million. On October 31, 2012, weused $143.5 million of the net proceeds to pay the term loans under the Credit Facility originally maturing in March 2013.On August 14, 2012, we issued $700 million aggregate principal amount of 5.375% Senior Notes due on August 15, 2020, in a private placement. Thenet 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. The ending unamortized deferred debt issuance costs at September 30, 2013 and 2012 were $13.0 million and $12.1 million, respectively.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.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. The2031 Debentures mature on November 1, 2031, subject to the right of the holders to require us to redeem the 2031 Debentures on November 1, 2017, 2021,and 2026. The 2031 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured,unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the 2031 Debentures. The 2031Debentures 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 principal amount will (based onan initial conversion rate, which represents an initial conversion price of approximately $32.30 per share, subject to adjustment) be paid in cash or shares ofour common stock, at our election, only in the following circumstances34 Table of Contentsand to the following extent: (i) on any date during any fiscal quarter (and only during such fiscal quarter) if the closing sale price of our common stock wasmore than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading dayof the previous fiscal quarter; (ii) during the five consecutive business-day period following any five consecutive trading-day period in which the trading pricefor $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 commonstock multiplied 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. If we undergo a fundamental change (as described in the indenture for the 2031 Debentures) prior to maturity, holders will have the option to require usto repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the debentures to be purchased plus anyaccrued and unpaid interest, including any additional interest to, but excluding, the repurchase date. As of September 30, 2013, no conversion triggers weremet. If the conversion triggers were met, we could be required to repay all or some of the aggregate principal amount in cash 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 a privateplacement. The 2027 Debentures bear an interest rate of 2.75% per annum, payable semi-annually in arrears, and mature on August 15, 2027 subject to theright of the holders of the 2027 Debentures to require us to redeem the 2027 Debentures on August 15, 2014, 2017 and 2022. The 2027 Debentures are generalsenior unsecured obligations, ranking equally in right of payment to all of our existing and future unsecured, unsubordinated indebtedness and senior in rightof payment to any indebtedness that is contractually subordinated to the 2027 Debentures. The 2027 Debentures are effectively subordinated to our securedindebtedness to the extent of the value of the collateral securing such indebtedness and are structurally subordinated to indebtedness and other liabilities of oursubsidiaries.If converted, the principal amount of the 2027 Debentures is payable in cash and any amounts payable in excess of the principal amount will (based onan initial conversion rate, which represents an initial conversion price of approximately $19.47 per share, subject to adjustment as defined therein) be paid incash 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 fiscal quarter(and only 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 20trading 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 consecutivebusiness-day period following any five consecutive trading-day period in which the trading price for $1,000 principal amount of the Debentures for each dayduring such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; (iii) uponthe occurrence of specified corporate transactions, as described in the indenture for the 2027 Debentures; and (iv) at the option of the holder at any time on orafter 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 unpaidinterest. Each holder shall 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 onAugust 15, 2014, August 15, 2017 and August 15, 2022 at par plus accrued and unpaid interest. If we undergo a fundamental change (as described in theindenture for the 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 aprice equal to 100% of the principal amount of the debentures to be purchased plus any accrued and unpaid interest, including any additional interest to, butexcluding, the repurchase date.The 2027 Debentures are puttable at the holders option in August 2014. As a result, we have classified the obligation in current liabilities atSeptember 30, 2013. Our stock price exceeded the conversion threshold price of $23.36 per share for at least 20 days during the 30 consecutive trading daysended September 30, 2012. Accordingly, the 2027 Debentures were 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.” AtSeptember 30, 2013, we have no temporary equity.35 Table of ContentsCredit FacilityOn August 7, 2013, we entered into an amendment agreement to amend and restate our existing amended and restated credit agreement, as previouslyamended. The credit agreement was originally dated March 31, 2006, and was amended and restated on April 5, 2007, and further amended and restated onJuly 7, 2011, and includes a term loan and a $75 million revolving credit line including letters of credit (together, the "Credit Facility"). Of the $483.4 millionoutstanding term loans originally due March 31, 2016, existing Lenders representing $333.2 million have elected to extend the maturity to August 7, 2019 andthe balance of the term loans have been assigned to new lenders who have also agreed to the extended maturity date. The extended term loans bear interest, atour option, at a base rate determined in accordance with the amended and restated credit agreement, plus a spread of 1.75%, or a LIBOR rate plus a spread of2.75%. Also, under terms of the amendment, the maturity date of our $75 million revolving credit facility has been extended from March 31, 2015 toAugust 7, 2018. The extended revolving loans bear interest, at our option, at a base rate determined in accordance with the Amended and Restated CreditAgreement, plus a spread of 0.50% to 0.75%, or a LIBOR rate plus a spread of 1.50% to 1.75%, in each case determined based on our consolidated netleverage ratio. As of September 30, 2013, $482.2 million remained outstanding under the term loans, there were $6.5 million of letters of credit issued underthe revolving credit line and there were no other outstanding borrowings under the revolving credit line.Under terms of the amended Credit Facility, interest is payable monthly at a rate equal to the applicable margin plus, at our option, either (a) the baserate which is the corporate base rate of Morgan Stanley, the Administrative Agent, or (b) LIBOR (equal to (i) the British Bankers’ Association InterestSettlement Rates for deposits in U.S. dollars divided by (ii) one minus the statutory reserves applicable to such borrowing). The applicable margin for theborrowings is as follows:Description Base Rate Margin LIBOR MarginTerm loans maturing August 2019 1.75% 2.75%Revolving facility due August 2018 0.50% - 0.75% (a) 1.50% - 1.75% (a)(a)The margin is determined based on our net leverage ratio at the date the interest rates are reset on the revolving credit line.At September 30, 2013 the applicable margins were 1.75%, with an effective rate of 2.94% on the remaining balance of $482.2 million maturing inAugust 2019. We are required to pay a commitment fee for unutilized commitments under the revolving credit facility at a rate ranging from 0.375% to 0.50%per annum, based upon our leverage ratio. As of September 30, 2013, 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 August 2018 for costs associated with the revolving credit facility and through August 2019 for the remainder of the balance. As of September 30,2013 and 2012, the ending unamortized deferred financing fees were $2.9 million and $4.1 million, respectively.Principal payments on the term loan of $482.2 million are due in quarterly installments of $1.2 million through August 2019, at which point theremaining balance becomes due. In addition, an annual excess cash flow sweep, as defined in the Credit Facility, is payable in the first quarter of each fiscalyear, based on the excess cash flow generated in the previous fiscal year. We have not generated excess cash flows in any period and no additional paymentsare 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 flow generation. Atthe 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 years pursuant tothe excess cash flow sweep provisions. Any term loan borrowings not paid through the baseline repayment, the excess cash flow sweep, or any othermandatory or optional payments that we may make, will be repaid upon maturity. If only the baseline repayments are made, the annual aggregate principalamount of the term loans repaid would be as follows (dollars in thousands):Year Ending September 30, Amount2014 $4,8342015 4,8342016 4,8342017 4,8342018 4,834Thereafter 458,040Total $482,21036 Table of ContentsOur 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.Share Repurchase ProgramOn April 29, 2013, our Board of Directors approved a share repurchase program for up to $500 million of our outstanding shares of common stock.Approximately $315.6 million remained available for stock repurchases as of September 30, 2013, pursuant to our stock repurchase program. Werepurchased 9.8 million shares for $184.4 million during the year ended September 30, 2013. These shares were retired upon repurchase. Under the terms ofthe repurchase program, we expect to continue to repurchase shares from time to time through a variety of methods, which may include open marketpurchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The timing andthe amount of any purchases will be determined by management based on an evaluation of market conditions, capital allocation alternatives, and other factors.The share repurchase program does not require us to acquire any specific number of shares and may be modified, suspended, extended or terminated by us atany time without prior notice.Off-Balance Sheet Arrangements, Contractual Obligations, Contingent Liabilities and CommitmentsContractual ObligationsThe following table outlines our contractual payment obligations as of September 30, 2013 (dollars in millions): Payments Due by Fiscal Year Ended September 30,Contractual Obligations Total 2014 2015 and 2016 2017 and 2018 ThereafterCredit Facility(1) $482.2 $4.8 $9.7 $9.7 $458.0Convertible Debentures(2) 940.0 250.0 — 690.0 —Senior Notes 1,050.0 — — — 1,050.0Interest payable on long-term debt(3) 565.5 97.4 180.5 162.5 125.1Letter of Credit(4) 6.5 6.5 — — —Operating leases 191.9 41.3 68.9 41.5 40.2Purchase commitments for inventory, property andequipment(5) 7.6 5.1 2.5 — —Collaboration agreements(6) 3.8 3.8 — — —Other long-term liabilities assumed(7) 6.0 2.5 3.5 — —Total contractual cash obligations $3,253.5 $411.4 $265.1 $903.7 $1,673.3(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, 2013. 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 property and equipment as well as inventory in the normal course of business to fulfillcustomers’ orders currently scheduled 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 obligation37 Table of Contentsunder the lease is $6.1 million. As of September 30, 2013, we have sub-leased certain of the office space related to the facility to unrelated third parties.Total sublease income under contractual terms is expected to be $4.6 million, which ranges from $0.8 million to $1.9 million on an annualized basisthrough 2016.The gross liability for unrecognized tax benefits as of September 30, 2013 was $19.6 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 some of our acquisitions, we agreed to make contingent cash payments to the former shareholders of certain of the acquiredcompanies. The following represents the contingent cash payments that we may be required to make.In connection with our acquisition of J.A. Thomas ("JA Thomas") in October 2012, we agreed to make deferred payments to the former shareholders ofJA Thomas of up to $25.0 million, payable in cash or shares of our common stock, at our option. The payment is due in October 2014 and is contingentupon the continued employment of certain named executives and certain other conditions. The contingent payments will be reduced by amounts specified in themerger agreement in the event that any of the named executives terminates their employment prior to the payment date.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, 2013 we had outstanding contracts with a total notional value of $247.8 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 other (expense) income, net. During the year ended September 30, 2013, 2012 and 2011, we recorded $(6.6) million, $8.0 millionand $13.2 million, respectively of (losses) gains associated with these contracts and (paid) received cash payments totaling $(3.8) million, $9.0 million and$9.4 million, respectively, upon to settlement of the agreements during the year.Pension PlansWe sponsor certain defined benefit pension plans that are offered primarily by certain of our foreign subsidiaries. Many of these plans were assumedthrough our acquisitions or are required by local regulatory requirements. We may deposit funds for these plans with insurance companies, third partytrustees, or into government-managed accounts consistent with local regulatory requirements, as applicable. Our total defined benefit plan pension expenseswere $1.3 million, $0.1 million and $0.3 million for fiscal 2013, 2012 and 2011, respectively. The aggregate projected benefit obligation and aggregate netasset (liability) of our defined benefit plans as of September 30, 2013 was $28.1 million and $0.1 million, respectively, and as of September 30, 2012 was$34.2 million and $(3.2) million, respectively. In fiscal 2013, we settled the obligations under our Canadian defined benefit pension plan through a purchaseof annuities. The loss on settlement was $1.5 million, and is included in restructuring and other, net.Off-Balance Sheet ArrangementsThrough September 30, 2013, we have not entered into any off-balance sheet arrangements or material transactions with unconsolidated entities or otherpersons.38 Table of ContentsCRITICAL 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 sales returns; the valuation of goodwill and intangible assets;accounting for business combinations; accounting for stock-based compensation; accounting for derivative instruments; accounting for income taxes andrelated valuation allowances; and loss contingencies. Our management bases its estimates on historical experience, market participant fair value considerationsand 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 and results of operations andrequire 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 a39 Table of Contentsusage or per transaction basis. Our up-front set-up fees are nonrefundable. We recognize the up-front set-up fees ratably over the longer of the contract lives, orthe expected lives of the customer relationships. The on-demand, usage-based or per transaction fees are due and payable as each individual transaction isprocessed through the hosted service and is recognized 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 multiple factors including, but not limited to, major projectgroupings, market conditions, competitive landscape, price list and discounting practices. Revenue allocated to each element is then recognized when the basicrevenue 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.40 Table of ContentsWhile 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 customer contracts and acquired developedtechnologies 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 as acquisition-related cost, net in theperiod in which the adjustment is determined.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.41 Table of ContentsFuture 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 six 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 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 12.0% to 17.5%. 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 2013 annual impairment assessmentdate, our estimated fair values of our reporting units substantially 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 in42 Table of Contentsprevious assumptions or estimates. In turn, this could have a significant impact on our consolidated financial statements through accelerated amortizationand/or impairment 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, and restricted awards through recognition of the fair value of the share-based awards as a chargeagainst earnings in the form of stock-based compensation expense. We recognize stock-based compensation expense over the requisite service period, net ofestimated forfeitures. We recognize benefits from stock-based compensation in equity using the with-and-without approach for the utilization of tax attributes.Determining the fair value of share-based awards at the grant date requires judgment, including estimating expected dividends, share price volatility and theamount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expenseand our results of operations could be materially impacted.Income Taxes. In accordance with Accounting Standards Codification 740, “Income Taxes” ("ASC 740"), we account for income taxes using an assetand liability approach, which requires that the deferred tax consequences of temporary differences between the amounts recorded in our consolidated financialstatements and the amounts included in our federal, state and foreign income tax returns to be recognized in the balance sheet. As the income tax returns are notdue and filed until after the completion of our annual financial reporting requirements, the amounts recorded for the current period reflect estimates for the tax-based activity for the period. In addition, estimates are often required with respect to, among other things, the appropriate state income tax rates to use in thevarious states that we and our subsidiaries are required to file, the potential utilization of operating loss carry-forwards and valuation allowances required, ifany, for tax assets that may not be realizable in the future. ASC 740 requires balance sheet classification of current and long-term deferred income tax assetsand liabilities based upon the classification of the underlying asset or liability that gives rise to a temporary difference. As such, we have historically estimatedthe future tax consequence of certain items, including bad debts, inventory valuation, and accruals that cannot be deducted for income tax purposes until suchexpenses are actually paid. We believe the procedures and estimates used in our accounting for income taxes are reasonable and in accordance with establishedtax law. The income tax estimates used have not resulted in material adjustments to income tax expense in subsequent periods when the estimates are adjustedto the actual filed tax return amounts.Deferred 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.By the end of fiscal 2012, our U.S. operations had pre-tax income adjusted for permanent differences for the most recent three-year period. We concludedthat this record of cumulative profitability in recent years and our business plan showing continued profitability provided assurance that our future taxbenefits more likely than not would be realized. Accordingly, by the end of fiscal 2012, we made a determination that it is more likely than not that certain ofour deferred taxes, primarily in the U.S., would be realized which resulted in a release of $70.5 million of our valuation allowance. As of September 30, 2012,we had net domestic deferred tax assets that totaled $10.4 million.During the third quarter of fiscal 2013, we concluded that the recoverability of our net domestic deferred tax assets is not more likely than not due to twoconsecutive quarterly reductions in our earnings forecast, primarily due to the continuing shift toward on-demand and ratable product offerings and revenuestreams. This represented new negative evidence related to our domestic deferred tax asset recoverability assessment during fiscal 2013. The new evidence ledus to establish a valuation allowance, offsetting the tax benefits resulting from our current year domestic losses. We also recorded a $10.4 million tax provisionrepresenting the establishment of the valuation allowance related to our net domestic deferred tax assets at the beginning of the year. As of September 30, 2013,we have $86.5 million of valuation allowance against our domestic deferred tax assets.As of September 30, 2013, we have $139.7 million of valuation allowances recorded against all U.S. deferred tax assets and certain foreign deferred taxassets. If we are subsequently able to utilize all or a portion of the deferred tax assets for which the43 Table of Contentsremaining valuation allowance has been established, then we may be required to recognize these deferred tax assets through the reduction of the valuationallowance which could result in a material benefit to our results of operations in the period in which the 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 17 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 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-11, "Presentation of an UnrecognizedTax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" (ASU 2013-11) to provide guidance on thepresentation of unrecognized tax benefits. ASU 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, asa reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a netoperating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdictionto settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require theentity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financialstatements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective for us in our first quarter of fiscal 2015 with earlieradoption permitted. ASU 2013-11 should be applied prospectively with retroactive application permitted. We do not believe that this will have a materialimpact on our consolidated financial statements.In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-02, “Reporting Amounts Reclassified Outof Accumulated Other Comprehensive Income,” which amends Accounting Standards Codification 220, “Comprehensive Income.” The amended guidancerequires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Additionally, entities arerequired to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensiveincome by the respective line items of net income. The amended guidance does not change the current requirements for reporting net income or othercomprehensive income. The amendment is effective prospectively for annual periods, and interim periods within those annual periods, beginning afterDecember 15, 2012. We believe adoption of this new guidance will not have a material impact on our financial statements as these updates have an impact onpresentation only.Item 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, 2013 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 designated44 Table of Contentsas accounting hedges and generally are for periods less than 90 days. The notional contract amount of outstanding foreign currency exchange contracts notdesignated as cash flow hedges was $247.8 million at September 30, 2013. Based on the nature of the transactions for which the contracts were purchased, ahypothetical 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, 2013, we held approximately $846.8 million of cash and cash equivalents and marketable securities primarily consisting of cash andmoney-market funds. Due to the low current market yields and the short-term nature of our investments, a hypothetical change in market rates of onepercentage point would not have a material effect on the fair value of our portfolio. Assuming a one percentage point increase in interest rates, our interestincome on our investments classified as cash and cash equivalents and marketable securities would increase approximately $7.2 million, based on theSeptember 30, 2013 reported balances of our investment accounts.At September 30, 2013, our total outstanding debt balance exposed to variable interest rates was $482.2 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 $4.8 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, 2013, we have security price guarantees outstanding for approximately 1.1 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 our common stock changes. The fair market value of thedebentures will generally increase as interest rates fall and decrease as interest rates rise. The market value and interest rate changes affect the fair market valueof the debentures, but do not impact our financial position, cash flows or results of operations due to 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 specified period of time may provide the holders of thedebentures the right to convert each bond using a conversion ratio and payment method as defined in the debenture agreement.Our debentures trade in the financial markets, and the fair value at September 30, 2013 was $698.0 million for the 2031 Debentures and $284.0million 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, 2013 of approximately $399.1 million and $239.9 million for the 2031 Debentures and the 2027 Debentures, respectively. A 10% increase inthe stock price over the September 30, 2013 closing price of $18.68 would have an estimated combined $30.4 million increase to the fair value and a combined$63.9 million increase to the conversion value of the debentures. Given the current trading value of the debentures, the greatest value to the holders of thedebentures 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 Statements45 Table of ContentsNUANCE COMMUNICATIONS, INC.INDEX TO FINANCIAL STATEMENTS PageReports of Independent Registered Public Accounting Firm47Consolidated Statements of Operations49Consolidated Statements of Comprehensive (Loss) Income50Consolidated Balance Sheets51Consolidated Statements of Stockholders’ Equity52Consolidated Statements of Cash Flows53Notes to Consolidated Financial Statements5446 Table 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, 2013 and 2012, and the relatedconsolidated statements of operations, comprehensive (loss) income, stockholders’ equity and cash flows for each of the three years in the period endedSeptember 30, 2013. 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, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period endedSeptember 30, 2013, 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, 2013, based on criteria established in Internal Control — Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated November 27, 2013 expressed an unqualifiedopinion thereon. /s/ BDO USA, LLP BDO USA, LLPBoston, MassachusettsNovember 27, 201347 Table 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, 2013, based on criteria established inInternal Control - Integrated Framework (1992) 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. Becauseof its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.As indicated in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting, management’s assessment of andconclusion on the effectiveness of internal control over financial reporting did not include the internal controls of certain acquisitions completed during fiscal2013 which are included in the consolidated balance sheets of Nuance Communications, Inc. as of September 30, 2013, and the related consolidatedstatements of operations, comprehensive loss, stockholders’ equity and cash flows for the year then ended. These excluded acquisitions constitutedapproximately 0.3% of consolidated assets as of September 30, 2013 and approximately 4.7% of consolidated revenues for the year then ended. The mostsignificant of these acquisitions was Accentus, Inc., which was acquired on November 19, 2012, and constituted approximately 0.3% of consolidated assetsand approximately 2.6% of consolidated revenues. Management did not assess the effectiveness of internal control over financial reporting of these acquisitionsbecause of the timing of the acquisitions which were completed during fiscal 2013. Our audit of internal control over financial reporting of NuanceCommunications, Inc. also did not include an evaluation of the internal control over financial reporting of these acquisitions.In our opinion, Nuance Communications, Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30,2013, 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, 2013 and 2012, and the related consolidated statements of operations, comprehensive (loss)income, stockholders’ equity and cash flows for each of the three years in the period ended September 30, 2013 and our report dated November 27, 2013expressed an unqualified opinion thereon. /s/ BDO USA, LLP BDO USA, LLPBoston, MassachusettsNovember 27, 201348 Table of ContentsNUANCE COMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended September 30, 2013 2012 2011 (In thousands, except per share amounts)Revenues: Product and licensing$753,665 $740,726 $607,358Professional services and hosting832,428 673,943 509,141Maintenance and support269,186 236,840 202,242Total revenues1,855,279 1,651,509 1,318,741Cost of revenues: Product and licensing99,381 74,837 65,601Professional services and hosting550,881 424,733 341,055Maintenance and support52,705 45,325 38,057Amortization of intangible assets63,583 60,034 55,111Total cost of revenues766,550 604,929 499,824Gross profit1,088,729 1,046,580 818,917Operating expenses: Research and development292,081 225,441 179,377Sales and marketing420,184 369,205 306,439General and administrative176,654 163,318 147,603Amortization of intangible assets105,258 95,416 88,219Acquisition-related costs, net29,685 58,746 21,866Restructuring and other charges, net16,385 8,268 22,862Total operating expenses1,040,247 920,394 766,366Income from operations48,482 126,186 52,551Other income (expense): Interest income1,615 2,234 3,159Interest expense(137,767) (85,286) (36,703)Other (expense) income, net(9,010) 22,168 11,010(Loss) income before income taxes(96,680) 65,302 30,017Provision (benefit) from income taxes18,558 (141,833) (8,221)Net (loss) income$(115,238) $207,135 $38,238Net (loss) income per share: Basic$(0.37) $0.67 $0.13Diluted$(0.37) $0.65 $0.12Weighted average common shares outstanding: Basic313,587 306,371 302,277Diluted313,587 320,822 315,960See accompanying notes.49 Table of ContentsNUANCE COMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME Year Ended September 30, 2013 2012 2011 (In thousands)Net (loss) income$(115,238) $207,135 $38,238Other comprehensive income (loss): Foreign currency translation adjustment11,244 (7,776) (8,746)Pension adjustments2,599 (1,648) 2,895Unrealized gains (losses) on marketable securities— 12 (42)Unrealized losses on cash flow hedge derivatives— (20) (210)Total other comprehensive income (loss), net13,843 (9,432) (6,103)Comprehensive (loss) income$(101,395) $197,703 $32,135See accompanying notes. 50 Table of ContentsNUANCE COMMUNICATIONS, INC.CONSOLIDATED BALANCE SHEETS September 30, 2013 September 30, 2012 (In thousands, exceptper share amounts)ASSETSCurrent assets: Cash and cash equivalents$808,118 $1,129,761Marketable securities38,728 —Accounts receivable, less allowances for doubtful accounts of 8,529 and $6,933382,741 381,417Prepaid expenses and other current assets104,971 102,564Deferred tax assets74,969 87,564Total current assets1,409,527 1,701,306Land, building and equipment, net143,465 116,134Goodwill3,293,198 2,955,477Intangible assets, net953,278 906,538Other assets159,135 119,585Total assets$5,958,603 $5,799,040LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities: Current portion of long-term debt$246,040 $148,542Redeemable convertible debentures— 231,552Contingent and deferred acquisition payments— 49,685Accounts payable91,016 113,196Accrued expenses and other current liabilities214,425 215,178Deferred revenue253,753 206,610Total current liabilities805,234 964,763Long-term portion of debt2,108,091 1,735,811Deferred revenue, net of current portion160,823 108,481Deferred tax liabilities162,774 160,614Other liabilities83,667 82,665Total liabilities3,320,589 3,052,334Commitments and contingencies (Notes 3, 5, and 17) Equity component of currently redeemable convertible debentures (Note 10)— 18,430Stockholders’ equity: Series B preferred stock, $0.001 par value; 15,000 shares authorized; -0- and 3,562 shares issued andoutstanding (liquidation preference $4,631 at September 30, 2012)— 4,631Common stock, $0.001 par value; 560,000 shares authorized; 319,365 and 315,821 shares issued and315,614 and 312,070 shares outstanding319 316Additional paid-in capital3,017,074 2,908,302Treasury stock, at cost (3,751 shares)(16,788) (16,788)Accumulated other comprehensive income (loss)6,813 (7,030)Accumulated deficit(369,404) (161,155)Total stockholders’ equity2,638,014 2,728,276Total liabilities and stockholders’ equity$5,958,603 $5,799,040See accompanying notes.51 Table of ContentsNUANCE COMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Accumulated Preferred Stock Common Stock AdditionalPaid-InCapital Treasury Stock OtherComprehensiveIncome (Loss) AccumulatedDeficit TotalStockholders'Equity Shares Amount Shares Amount Shares Amount (In thousands)Balance at October 1, 20103,562 $4,631 301,623 $302 $2,581,901 3,673 $(16,788) $8,505 $(281,355) $2,297,196Issuance of common stock underemployee stock plans 11,052 11 36,656 36,667Cancellation of restricted stock, andrepurchase of common stock at costfor employee 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 inconnection with acquisitions andcollaboration agreements 1,777 1 34,090 34,091Net 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 underemployee stock plans 9,891 10 27,737 27,747Cancellation of restricted stock, andrepurchase of common stock at costfor employee 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 and retirement ofcommon stock (8,514) (8) (74,816) (125,173) (199,997)Equity portion of convertible debtissuance, net of tax effect 96,934 96,934Issuance of common stock inconnection with acquisitions andcollaboration agreements 1,070 1 25,367 25,368Issuance of common stock inconnection with 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) 2,728,276Issuance of common stock underemployee stock plans, net 11,261 11 30,205 30,216Cancellation of restricted stock, andrepurchase of common stock at costfor employee tax withholding (2,854) (3) (59,688) (59,691)Stock-based compensation 179,442 179,442Repurchase and retirement ofcommon stock (9,805) (10) (91,367) (93,011) (184,388)Conversion of preferred stock(3,562) (4,631) 3,562 4 4,627 —Issuance of common stock inconnection with acquisitions andcollaboration agreements 1,146 1 22,461 22,462Reclassification from temporaryequity 18,430 18,430Other, net 234 — 4,662 4,662Net loss (115,238) (115,238)Other comprehensive income 13,843 13,843Balance at September 30, 2013— $— 319,365 $319 $3,017,074 3,751 $(16,788) $6,813 $(369,404) $2,638,014See accompanying notes.52 Table of ContentsNUANCE COMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended September 30, 2013 2012 2011 (In thousands)Cash flows from operating activities Net (loss) income$(115,238) $207,135 $38,238Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization208,659 187,183 170,933Stock-based compensation159,325 174,581 147,296Non-cash interest expense40,019 35,497 12,510Non-cash restructuring expense— — 11,725Deferred tax benefit(2,472) (151,547) (43,890)Loss (gain) on non-controlling strategic equity interest790 (13,726) —Other(6,537) 4,016 16,492Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable25,165 (55,210) (25,530)Prepaid expenses and other assets10,988 13,881 (11,793)Accounts payable(26,843) 22,645 (8,193)Accrued expenses and other liabilities16,506 8,939 (6,775)Deferred revenue84,648 39,605 56,398Net cash provided by operating activities395,010 472,999 357,411Cash flows from investing activities Capital expenditures(55,588) (62,910) (34,907)Payments for business and technology acquisitions, net of cash acquired(607,653) (884,945) (409,005)Purchases of marketable securities and other investments(39,435) (15,156) (10,776)Proceeds from sales and maturities of marketable securities and other investments8,768 31,789 11,650Change in restricted cash balances— 6,747 17,184Net cash used in investing activities(693,908) (924,475) (425,854)Cash flows from financing activities Payments of debt(425,634) (6,605) (7,535)Proceeds from long-term debt, net of issuance costs625,155 1,364,925 (2,553)Payments for repurchase of common stock(184,388) (199,997) —Payments on other long-term liabilities(1,688) (8,525) (10,643)Proceeds from settlement of share-based derivatives, net(3,801) 9,020 9,414Excess tax benefits on employee equity awards— (3,583) 17,520Proceeds from issuance of common stock from employee stock plans30,216 27,747 36,667Cash used to net share settle employee equity awards(60,517) (49,947) (36,908)Net cash (used in) provided by financing activities(20,657) 1,133,035 5,962Effects of exchange rate changes on cash and cash equivalents(2,088) 978 (6,925)Net (decrease) increase in cash and cash equivalents(321,643) 682,537 (69,406)Cash and cash equivalents at beginning of year1,129,761 447,224 516,630Cash and cash equivalents at end of year$808,118 $1,129,761 $447,224See accompanying notes.53 Table 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 2013, 2012 and 2011 were as follows:•May 31, 2013— Tweddle Technology Solutions Segment ("TGT")•October 1, 2012 —J.A. Thomas and Associates, Inc. ("JA Thomas")•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")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 20 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.54 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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. Generally we recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the feeis fixed or determinable and (iv) collectibility is probable. 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.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 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 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 determine55 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)ESP for a product or service by considering multiple factors including, but not limited to, major project groupings, market conditions, competitive landscape,price list and discounting 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, 2013 and 2012 was as follows (dollars in thousands): September 30, 2013 September 30, 2012Current Liabilities: Deferred maintenance revenue$134,213 $114,036Unearned revenue119,540 92,574Total current deferred revenue$253,753 $206,610Long-term Liabilities: Deferred maintenance revenue$51,784 $43,763Unearned revenue109,039 64,718Total long-term deferred revenue$160,823 $108,481Business 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);•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.56 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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 six 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 12.0% to 17.5%. 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. We assess eachvaluation methodology based upon the relevance and 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 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 and liabilities that are not instrumental to the reporting units’ operations and would not be transferred tohypothetical purchasers 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.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.57 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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: Marketable securities consist of time deposits and high-quality corporate debt instruments with stated maturities of more than90 days. Investments are classified as available-for-sale and are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separatecomponent of accumulated other comprehensive income, net of tax. As of September 30, 2013, the total cost basis of our marketable securities was $38.7million.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.For the years ended September 30, 2013, 2012 and 2011, the activity related to accounts receivable allowances was as follows (dollars in thousands): Allowance forDoubtful Accounts Allowance for SalesReturnsBalance at October 1, 2010$6,301 $6,829Bad debt provision1,332 —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 $9,868Bad debt provisions4,781 —Write-offs, net of recoveries(3,185) —Revenue adjustments, net— (4,208)Balance at September 30, 2013$8,529 $5,660InventoriesInventories 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.58 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Inventories, net of allowances, consisted of the following (dollars in thousands): September 30, 2013 September 30, 2012Components and parts$11,504 $7,562Finished products3,212 3,813 $14,716 $11,375Accounting 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 September 30, 2013, we have estimated that no payment will be required if the buy-out option is exercised in 2016.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.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, 2013 and September 30, 2012, $2.2 million and $5.8 millionrespectively of expense reimbursement has been recorded as a reduction in research and development expense. In April 2013, we signed Amendment No. 1 tothe agreement. Under terms of the amendment, funding for future research and development expenses ended effective September 30, 2013.Intellectual Property Collaboration AgreementsIn order to gain access to a third party’s extensive speech recognition technology, natural language and semantic processing technology, in fiscal 2010and 2011, we entered into 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. The final payments under the current agreements are due in 2014 and total $3.8 million. 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 1.1 million and 1.0 million shares of our common stock for payments totaling $22.5 million and $23.4 million in each of the fiscalyears ending in 2013 and 2012, 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 30,2013, 2012 and 2011, we have recognized $20.6 million, $21.0 million, and $19.8 million as research and development expense, respectively, related to theseagreements in our consolidated 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 our59 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)software products. Costs incurred after technological feasibility is established have not been material. We expense research and development costs as incurred.Acquisition-Related Costs, netAcquisition-related costs (income) 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 wellas the costs of integration-related activities including services provided by third-parties; (ii) professional service fees, including third-party costs related to theacquisitions, and legal and other professional service fees associated with disputes and regulatory matters related to acquired entities; and (iii) adjustments toacquisition-related items that are required to be marked to fair value each reporting period, such as contingent consideration, and other items related toacquisitions for which the measurement period has ended. The following is a summary of acquisition-related costs (income) reported for the years endedSeptember 30, 2013, 2012 and 2011, respectively (dollars in thousands): 2013 2012 2011Transition and integration costs$28,302 $9,888 $3,361Professional service fees20,381 48,401 18,030Acquisition-related adjustments(18,998) 457 475Total$29,685 $58,746 $21,866Included in Acquisition-related adjustments for the year ended September 30, 2013, is income of $17.8 million related to the elimination of a contingentliability established in the original allocation of purchase price for an acquisition closed in fiscal 2007 following the expiration of the applicable statute oflimitations. As a result, we have eliminated the contingent liability, and included the adjustment in acquisition-related costs, net in our consolidated statementsof operations.Advertising 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 expensed at the same timethe related revenue is recognized. Cooperative advertising expenses are recorded as expense to the extent that an advertising benefit separate from the revenuetransaction 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 fair value ofthe advertising benefit received is recorded as a reduction in revenue. We incurred advertising costs of $52.1 million, $48.2 million and $35.2 million forfiscal 2013, 2012 and 2011, 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 for60 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recentfinancial reporting losses. Generally, cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that avaluation allowance is not needed.As of September 30, 2013, valuation allowances have been established for all U.S. and for certain foreign deferred tax assets, which we believe do notmeet the “more likely than not” criteria for recognition. If we are subsequently able to utilize all or a portion of the deferred tax assets for which a valuationallowance has been established, then we may be required to recognize these deferred tax assets through the reduction of the valuation allowance which couldresult in a material benefit to our results of operations in the period in which the benefit is determined.Comprehensive Income (Loss)Pursuant to our adoption of Accounting Standard Update No. 2011-05, Comprehensive Income (Topic 220) - Presentation of ComprehensiveIncome and Accounting Standards Update No. 2011-12, Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to thePresentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, we elected topresent separate consolidated statements of comprehensive income for fiscal 2013, 2012, and 2011.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 income (loss), reflected in the consolidated statements of stockholders’ equity, consisted of thefollowing (dollars in thousands): 2013 2012 2011Foreign currency translation adjustment$7,788 $(3,456) $4,320Unrealized losses on marketable securities— — (12)Net unrealized gains on cash flow hedge derivatives— — 20Net unrealized losses on post-retirement benefits(975) (3,574) (1,926)Total$6,813 $(7,030) $2,402Concentration of RiskFinancial instruments that potentially subject us to significant concentrations of credit risk principally consist of cash, cash equivalents, marketablesecurities and trade accounts receivable. We place our cash and cash equivalents and marketable securities with financial institutions with high credit ratings.As part of our cash and investment management processes, we perform periodic evaluations of the credit standing of the financial institutions with whom wemaintain deposits, and have not recorded any credit losses to-date. For trade accounts receivable, we perform ongoing credit evaluations of our customers’financial condition and limit the amount of credit extended when deemed appropriate. At September 30, 2013 and 2012, no customer accounted for greater than10% of our net accounts receivable balance or 10% of our revenue for fiscal 2013, 2012 or 2011.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.61 Table 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 transaction(losses) gains included in other income (expense), net for fiscal 2013, 2012, and 2011 were $(0.5) million, $0.6 million, and $(1.1) 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, and restricted awards through recognition of the fair value of the share-based awards as a charge against earnings in the form of stock-basedcompensation. We recognize stock-based compensation expense over the requisite service period, net of estimated forfeitures. We recognize benefits from stock-based compensation in equity using the with-and-without approach for the utilization of tax attributes.Net (Loss) Income Per ShareWe compute net (loss) income 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 the Series B convertible preferred stock outstanding as of September 30, 2012 and 2011,represented a participating security and as such the preferred shares are excluded from basic earnings per share.Diluted net (loss) income per share is computed using the more dilutive of (a) the two-class method, or (b) the if-converted method. We allocate netincome first to preferred stockholders based on dividend rights and then to common and preferred stockholders based on ownership interests. The weighted-average number of common shares outstanding gives effect to all potentially dilutive common equivalent shares, including outstanding stock options andrestricted stock, shares held in escrow, contingently issuable shares under earn-out agreements once earned, warrants, and potential issuance of stock uponconversion of our 2.75% Convertible Debentures. The convertible debentures are considered Instrument C securities due to the fact that only the excess of theconversion value on the date of conversion can be paid in our common shares; the principal portion of the conversion must be paid in cash. Therefore, onlythe shares of common stock potentially issuable with respect to the excess of the conversion value over its principal amount, if any, is considered as dilutivepotential common shares for purposes of calculating diluted net (loss) income per share.62 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The following table sets forth the computation for basic and diluted net (loss) income per share for the years ended September 30, 2013, 2012 and 2011(dollars in thousands, except per share amounts): 2013 2012 2011Numerator: Basic Net (loss) income$(115,238) $207,135 $38,238Allocation of undistributed earnings to preferred stockholders— (2,381) (445)Net (loss) income available to common stockholders — basic$(115,238) $204,754 $37,793Diluted Net (loss) income available to common stockholders — diluted$(115,238) $207,135 $38,238Denominator: Basic Weighted average common shares outstanding313,587 306,371 302,277Diluted Weighted average common shares outstanding — basic313,587 306,371 302,277Weighted average effect of dilutive common equivalent shares: Assumed conversion of Series B Preferred Stock— 3,562 3,562Employee stock compensation plans— 6,074 8,457Warrants— 2,094 1,499Convertible Debt— 2,558 —Other contingently issuable shares— 163 165Weighted average common shares outstanding — diluted313,587 320,822 315,960Net (loss) income per share: Basic$(0.37) $0.67 $0.13Diluted$(0.37) $0.65 $0.12Common equivalent shares are excluded from the computation of diluted net (loss) income per share if their effect is anti-dilutive. Potentially dilutivecommon equivalent shares aggregating to 13.6 million shares, 3.2 million shares and 3.2 million shares for the years ended September 30, 2013, 2012 and2011, respectively, have been excluded from the computation of diluted net (loss) income per share because their inclusion would be anti-dilutive.Recently Issued Accounting StandardsIn July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-11, "Presentation of an UnrecognizedTax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" (ASU 2013-11) to provide guidance on thepresentation of unrecognized tax benefits. ASU 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, asa reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a netoperating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdictionto settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require theentity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financialstatements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective for us in our first quarter of fiscal 2015 with earlieradoption permitted. ASU 2013-11 should be applied prospectively with retroactive application permitted. We do not believe that this will have a materialimpact on our consolidated financial statements.In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-02, “Reporting Amounts Reclassified Outof Accumulated Other Comprehensive Income,” which amends Accounting Standards Codification 220, “Comprehensive Income.” The amended guidancerequires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Additionally, entities arerequired to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensiveincome by the63 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)respective line items of net income. The amended guidance does not change the current requirements for reporting net income or other comprehensive income.The amendment is effective prospectively for annual periods, and interim periods within those annual periods, beginning after December 15, 2012. We believeadoption of this new guidance will not have a material impact on our financial statements as these updates have an impact on presentation only.3.Business AcquisitionsFiscal 2013 AcquisitionsOn May 31, 2013, we acquired TGT for total consideration of $83.3 million in cash, including a purchase price adjustment as specified in the assetpurchase agreement. TGT provides cloud-based infotainment and communications solutions to the automotive industry. The transaction was structured as anasset acquisition, and therefore the goodwill is expected to be deductible for tax purposes. The results of operations for TGT are included in our Mobile andConsumer segment from the acquisition date.In October 2012, we acquired JA Thomas for cash consideration totaling approximately $244.8 million together with a deferred payment of $25.0million contingent on the continued employment of certain key executives. The deferred payment will be recorded as compensation expense over the requisiteemployment period, and included in acquisition-related costs, net in our consolidated statements of operations. JA Thomas provides Clinical DocumentationImprovement solutions to hospitals, primarily in the U.S., and the results of operations are included in our Healthcare segment from the acquisition date. Inaccordance with the JA Thomas stock purchase agreement, we reached an agreement with the sellers to treat this transaction as an asset purchase, andtherefore the goodwill is expected to be deductible for tax purposes.During fiscal 2013, we acquired several other businesses for total purchase consideration of $251.6 million. These acquisitions are not individuallymaterial and were made in each of our segments. These acquisitions are treated as stock purchases, and the goodwill resulting from these acquisitions is notexpected to be deductible for tax purposes.The results of operations of these acquisitions have been included in our financial results from the applicable acquisition date. A summary of thepreliminary allocation of the purchase consideration for our fiscal 2013 acquisitions is as follows (dollars in thousands): TGT JA Thomas Other Fiscal 2013AcquisitionsPurchase consideration: Cash$83,330 $244,777 $251,108Fair value of contingent consideration— — 450Total purchase consideration$83,330 $244,777 $251,558 Allocation of the purchase consideration: Cash$— $3,555 $18,004Accounts receivable (a)8,895 8,293 17,190Goodwill42,742 163,880 124,230Identifiable intangible assets (b)33,600 71,310 109,175Other assets10,330 2,935 29,150Total assets acquired95,567 249,973 297,749Current liabilities(1,452) (3,033) (9,788)Deferred tax liability— (1,474) (35,346)Other long term liabilities(10,785) (689) (1,057)Total liabilities assumed(12,237) (5,196) (46,191)Net assets acquired$83,330 $244,777 $251,55864 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(a)Accounts receivable have been recorded at their estimated fair values and the fair value reserve was not material.(b)The following are the identifiable intangible assets acquired and their respective weighted average useful lives, as determined based on preliminaryvaluations (dollars in thousands): TGT JA Thomas Other Fiscal 2013 Acquisitions Amount WeightedAverageLife(Years) Amount WeightedAverageLife(Years) Amount WeightedAverageLife(Years)Core and completed technology$7,700 7.0 $3,920 5.0 $33,653 6.6Customer relationships25,900 9.0 66,100 11.0 71,970 10.9Trade names— — 1,290 7.0 3,122 6.6Non-Compete agreements— — — — 430 2.8Total$33,600 $71,310 $109,175 The fair value estimates for the assets acquired and liabilities assumed for acquisitions completed during fiscal 2013 were based upon preliminarycalculations and valuations, and our estimates and assumptions for each of these acquisitions are subject to change as we obtain additional information duringthe respective measurement periods (up to one year from the respective acquisition dates). The primary areas of preliminary estimates that were not yetfinalized related to certain receivables and liabilities acquired and identifiable intangible assets.Fiscal 2012 AcquisitionsOn June 1, 2012, we acquired all of the outstanding capital stock of Vlingo for net cash consideration of $196.3 million, which excludes the amountswe received as a security holder of Vlingo, as described below. Vlingo provides technology that turns spoken words into action by combining speechrecognition and natural language processing technology to understand the user's intent and take the appropriate action. The acquisition is treated as a stockpurchase for accounting purposes, and the goodwill resulting from this acquisition is not expected to be deductible for tax purposes. The results of operationsfor Vlingo are included in our Mobile and Consumer Segment from the acquisition date.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.During fiscal 2012, we acquired three additional businesses for total cash consideration of $355.6 million. The most significant of these otheracquisitions was Quantim, for which we paid total consideration of $230.2 million, and is included in our Healthcare segment. The results of operations ofthese acquisitions have been included in our consolidated results from their respective acquisition dates. The goodwill resulting from these transactions is notexpected to be deductible for tax purposes.65 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)A summary of the final allocation of the purchase consideration for Vlingo, Transcend and our other fiscal 2012 acquisitions is as follows (dollars inthousands): Vlingo Transcend Other Fiscal 2012AcquisitionsPurchase 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 16,766 51,564Goodwill (c)189,420 214,209 208,102Identifiable intangible assets(d)29,382 142,160 144,900Other assets6,274 17,714 9,707Total assets acquired230,980 397,104 424,467Current liabilities(5,980) (21,583) (8,544)Deferred tax liability— (41,000) (57,247)Other long term liabilities— (2,268) (3,038)Total liabilities assumed(5,980) (64,851) (68,829)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 (expense) income, net, in year ended September 30, 2012, reflecting the fair value adjustment as a result of the conversion of our originalinvestment in the non-controlling interest upon the closing of the Vlingo acquisition.(b)Accounts receivable have been recorded at their estimated fair values, which consists of the gross accounts receivable assumed of $88.0 million,reduced by a fair value reserve of $13.8 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 finalvaluations (dollars in thousands): Vlingo Transcend Other Fiscal 2012 Acquisitions Amount WeightedAverageLife(Years) Amount WeightedAverageLife(Years) Amount WeightedAverageLife(Years)Core and completed technology$5,362 5.4 $5,410 5.0 $45,300 7.9Customer relationships23,200 14.0 130,260 13.0 90,400 11.5Trade name30 1.0 4,480 4.0 9,000 8.2Non-Compete agreements790 3.0 2,010 3.0 200 3.0Total$29,382 $142,160 $144,900 66 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Fiscal 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 cash payment of €21.7 million was made in December 2012. The acquisition is treated as a stock purchase for accounting purposes, and thegoodwill resulting from this acquisition is not expected to be deductible for tax purposes. The results of operations of SVOX have been included in our resultsof operations from the 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.A summary of the final allocation of the purchase consideration for Equitrac and SVOX is as follows (dollars in thousands): Equitrac SVOXPurchase 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 67 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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.4.Pro Forma Results (Unaudited)The following table shows unaudited pro forma results of operations as if we had acquired TGT, Vlingo, and Transcend on October 1, 2011 (dollars inthousands, except per share amounts): 2013 2012Revenue$1,862,132 $1,737,501Net (loss) income$(131,630) $193,742Net (loss) income per share (diluted)$(0.42) $0.60We have not furnished pro forma financial information relating to our other fiscal 2013 and 2012 acquisitions because such information is not material,individually or in the aggregate, to our financial results. The unaudited pro forma results of operations are not necessarily indicative of the actual results thatwould have occurred had the transactions actually taken place at the beginning of the periods indicated.5.Contingent Acquisition PaymentsEarn-out PaymentsThe fair value of any contingent consideration is established at the acquisition date and included in the total purchase price. The contingentconsideration is then adjusted to fair value as an increase or decrease in current earnings in each reporting period.In connection with our acquisition of JA Thomas in October 2012, we agreed to make deferred payments to the former shareholders of JA Thomas ofup to $25.0 million, payable in cash or shares of our common stock, at our option. The payment is due in October 2014 and is contingent upon the continuedemployment of certain named executives and certain other conditions. The contingent payments will be reduced by amounts specified in the merger agreementin the event that any of the named executives terminates their employment prior to the payment date. The portion of the deferred payment that is payable to thenamed executives will be recognized as compensation expense over the two year employment period and included in acquisition-related costs, net in ourconsolidated statements of operations.In connection with our acquisition of Swype, Inc. ("Swype") in October 2011, we agreed to make deferred payments to the former shareholders ofSwype of up to $25.0 million in April 2013, contingent upon the continued employment of three named executives and certain other conditions. The contingentpayments were subject to reduction by amounts specified in the merger agreement in the event that any of the three executives terminated employment prior tothe payment date or if any losses occurred to which we would be entitled to indemnification under the merger agreement. The portion of the deferred paymentthat was payable to the three named executives was recognized as compensation expense over the 18 month employment period and included in acquisition-related costs, net, in our consolidated statements of operations. The remaining liability due to the other shareholders was included in the total purchaseconsideration and was recorded at its estimated fair value at the acquisition date of $16.4 million. In April 2013, upon completion of the required employmentcondition, we made a cash payment of $25.0 million to the former shareholders of Swype.68 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)6.Goodwill and Intangible AssetsThe changes in the carrying amount of goodwill for our reportable segments for fiscal years 2013 and 2012 were as follows (dollars in thousands): Healthcare Mobile and Consumer Enterprise Imaging TotalBalance as of September 30, 2011$672,649 $1,018,415 $500,240 $156,576 $2,347,880Acquisitions354,795 252,192 — 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 $2,955,477Acquisitions232,545 47,597 17,372 33,338 330,852Dispositions(712) — (731) — (1,443)Purchase accounting adjustments(588) (3,829) — 265 (4,152)Effect of foreign currency translation1,314 4,001 6,495 654 12,464Balance as of September 30, 2013$1,257,227 $1,313,635 $519,969 $202,367 $3,293,198Intangible assets consist of the following as of September 30, 2013 and 2012, which includes $98.8 million and $108.8 million of licensed technology,respectively (dollars in thousands): September 30, 2013 Gross CarryingAmount AccumulatedAmortization Net Carrying Amount Weighted AverageRemaining Life (Years)Customer relationships$1,072,993 $(423,442) $649,551 9.4Technology and patents445,331 (188,585) 256,746 5.3Trade names, trademarks, and other63,651 (18,661) 44,990 8.3Non-competition agreements3,981 (1,990) 1,991 1.5Total$1,585,956 $(632,678) $953,278 8.2 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 8.5Amortization 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 $63.6 million, $60.0 million and $55.1 million in fiscal 2013, 2012 and 2011, respectively. Amortization expensefor customer relationships, trade names, trademarks, and other, and non-competition agreements is included in operating expenses and amounted to $105.3million, $95.4 million and $88.2 million in fiscal 2013, 2012 and 2011, respectively.69 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Estimated amortization expense for each of the five succeeding years as of September 30, 2013, is as follows (dollars in thousands):Year Ending September 30, Cost of Revenue Other OperatingExpenses Total2014 $57,714 $104,143 $161,8572015 53,927 97,028 150,9552016 47,644 87,048 134,6922017 38,610 74,368 112,9782018 27,899 55,736 83,635Thereafter 30,952 278,209 309,161Total $256,746 $696,532 $953,2787.Accounts ReceivableAccounts receivable consisted of the following (dollars in thousands): September 30, 2013 September 30, 2012Trade accounts receivable$375,044 $369,585Unbilled accounts receivable under long-term contracts21,886 28,633Gross accounts receivable396,930 398,218Less — allowance for doubtful accounts(8,529) (6,933)Less — allowance for sales returns(5,660) (9,868)Accounts receivable, net$382,741 $381,4178.Land, Building and Equipment, NetLand, building and equipment, net consisted of the following (dollars in thousands): Useful Life September 30, 2013 September 30, 2012 (In years) Land— $2,400 $2,400Building30 5,456 5,456Machinery and equipment3-5 59,941 37,706Computers, software and equipment3-5 210,647 173,022Leasehold improvements2-7 26,357 21,963Furniture and fixtures5 14,862 12,995Construction in progress— 1,945 1,649Subtotal 321,608 255,191Less: accumulated depreciation (178,143) (139,057)Land, building and equipment, net $143,465 $116,134Depreciation expense for fiscal 2013, 2012 and 2011 was $39.8 million, $31.7 million and $27.6 million, respectively.70 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)9.Accrued Expenses and Other Current LiabilitiesAccrued expenses and other current liabilities consisted of the following (dollars in thousands): September 30, 2013 September 30, 2012Compensation$112,756 $125,180Cost of revenue related liabilities17,992 12,050Professional fees17,682 12,799Accrued interest payable15,879 13,859Acquisition costs and liabilities15,722 17,258Sales and marketing incentives11,681 10,795Sales and other taxes payable10,625 8,364Other12,088 14,873Total$214,425 $215,17810.Credit Facilities and DebtAt September 30, 2013 and 2012, we had the following borrowing obligations (dollars in thousands): September 30, 2013 September 30, 20125.375% Senior Notes due 2020, net of unamortized premium of $5.4 million at September 30, 2013$1,055,385 $700,0002.75% Convertible Debentures due 2031, net of unamortized discount of $113.5 million and $136.4 million,respectively576,524 553,5872.75% Convertible Debentures due 2027, net of unamortized discount of $8.8 million and $18.4 million,respectively241,206 231,552Credit Facility, net of unamortized original issue discount of $1.2 million at September 30, 2013481,016 630,596Other— 170Total long-term debt2,354,131 2,115,905Less: current portion246,040 380,094Non-current portion of long-term debt$2,108,091 $1,735,811The estimated fair value of our long-term debt approximated $2,458.2 million (face value $2,472.2 million) and $2,522.2 million (face value $2,270.7million) at September 30, 2013 and 2012, 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 Senior Notes, the ConvertibleDebentures, and the term loan portion of our Credit Facility are traded and the fair values are based upon traded prices as of the reporting dates. The fairvalues of each borrowing was estimated using the averages of the bid and ask trading quotes at each respective date. We had no outstanding balance on therevolving credit line portion of our Credit Facility at September 30, 2013 and 2012.5.375% Senior Notes due 2020On October 22, 2012, we issued an additional $350.0 million aggregate principal amount of our 5.375% Senior notes due 2020 (the "Notes"). The Noteswere issued pursuant to an indenture agreement dated August 14, 2012, relating to our existing $700 million aggregate principal amount of 5.375% SeniorNotes due in 2020, issued in the fourth quarter of fiscal 2012. Total proceeds received, net of issuance costs, were $351.7 million. On October 31, 2012, weused $143.5 million of the net proceeds to pay the term loans under the Credit Facility originally maturing in March 2013.On August 14, 2012, we issued $700 million aggregate principal amount of 5.375% Senior Notes due on August 15, 2020 in a private placement. Thenet 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. The ending unamortized deferred debt issuance costs71 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)for the total 5.375% Senior Notes at September 30, 2013 and 2012 were $13.0 million and $12.1 million respectively.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.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.The 2031 Debentures mature on November 1, 2031, subject to the right of the holders to require us to redeem the 2031 Debentures on 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, 2013 and 2012, the ending unamortized discount was $113.5 million and136.4 million, respectively and the ending unamortized deferred debt issuance costs were $7.3 million and $9.1 million, respectively. The 2031 Debenturesare general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness andsenior in right of payment to any indebtedness that is contractually subordinated to the 2031 Debentures. The 2031 Debentures will be effectively subordinatedto 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 principal amount will (based onan initial conversion rate, which represents an initial conversion price of approximately $32.30 per share, subject to adjustment) be paid in cash or shares ofour common stock, at our election, only in the following circumstances and to the following extent: (i) on any date during any fiscal quarter (and only duringsuch fiscal quarter) if the closing sale price of our common stock was more than 130% of the then current conversion price for at least 20 trading days in theperiod 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 2031 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 2031 Debentures; 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 or after November 6, 2017 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 2031 Debentures held by such holder on November 1,2017, November 1, 2021, and November 1, 2026 at par plus accrued and unpaid interest. If we undergo a fundamental change (as described in the indenturefor the 2031 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 priceequal to 100% of the principal amount of the debentures to be purchased plus any accrued and unpaid interest, including any additional interest to, butexcluding, the repurchase date. As of September 30, 2013, no conversion triggers were met. If the conversion triggers were met, we could be required to repayall or some of the aggregate principal amount in cash prior to the maturity date.72 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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. Totalproceeds, net of debt discount and deferred debt issuance costs were $241.4 million. The 2027 Debentures bear an interest rate of 2.75% per annum, payablesemi-annually in arrears, and mature on August 15, 2027 subject to the right of the holders of the 2027 Debentures to require us to redeem the 2027Debentures on August 15, 2014, 2017 and 2022. In accordance with ASC 470-20, Debt with Conversion and Other Options, the difference of $54.7million between the fair value of the liability component of the 2027 Debentures and the net proceeds on the date of issuance have been recorded as additionalpaid-in-capital and as debt discount. The aggregate debt discount is being amortized to interest expense using the effective interest rate method through August2014. As of September 30, 2013 and 2012, the ending unamortized discount was $8.8 million and $18.4 million, respectively, and the ending unamortizeddeferred debt issuance costs were $0.8 million and $1.7 million, respectively. The 2027 Debentures are general senior unsecured obligations, ranking equallyin right 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 principal amount of the 2027 Debentures is payable in cash and any amounts payable in excess of the principal amount will (based onan initial conversion rate, which represents an initial conversion price of $19.47 per share, subject to adjustment) be paid in cash or shares of our commonstock, at our election, only in the following circumstances and to the following extent: (i) on any date during any fiscal quarter (and only during such fiscalquarter) if the closing sale price of our common stock was more than 120% of the then current conversion price for at least 20 trading days in the period of the30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) during the five consecutive business-day period following anyfive 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 periodwas less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; (iii) upon the occurrence of specified corporatetransactions, 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 holder shallhave 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. If we undergo a fundamental change (as described in the indenture for the 2027 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.The 2027 Debentures are puttable at the holders option in August 2014. As a result, we have classified the obligation in current liabilities at September30, 2013. 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 were convertible at the holders' option during the quarter ended December 31, 2012 and therefore wereclassified 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 at the holders option, an amount equal to the $18.4 million unamortized portion of the original issuediscount was separately classified in our consolidated balance sheets as temporary equity and referred to as “Equity component of currently redeemableconvertible debentures.” At September 30, 2013, we have no temporary equity.Credit FacilityOn August 7, 2013, we entered into an amendment agreement to amend and restate our existing amended and restated credit agreement, as previouslyamended. The credit agreement was originally dated March 31, 2006, and was amended and restated on April 5, 2007, and further amended and restated onJuly 7, 2011. The amended credit agreement includes a term loan and a $75 million revolving credit line including letters of credit (together, the "CreditFacility"). Of the $483.4 million outstanding term loans originally due March 31, 2016, existing Lenders representing $333.2 million elected to extend thematurity to August 7, 2019 and the balance of the term loans have been assigned to new lenders who have also agreed to the extended maturity date. Weaccounted for the amendment in accordance with ASC 470-50-40, "Debt - Modifications and Extinguishments”and determined that the amendment should beaccounted for as an extinguishment for certain of the lenders participating in the credit facility,73 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)based on the new terms of the amended agreement. Of the total balance outstanding at the amendment date, $277.1 million was recorded as extinguished, andthe loss on extinguishment was not material.The extended term loans bear interest, at our option, at a base rate determined in accordance with the amended and restated credit agreement, plus aspread of 1.75%, or a LIBOR rate plus a spread of 2.75%. Also, under terms of the amendment, the maturity date of our $75 million credit facility has beenextended from March 31, 2015 to August 7, 2018. The extended revolving loans bear interest, at our option, at a base rate determined in accordance with theAmended and Restated Credit Agreement, plus a spread of 0.50% to 0.75%, or a LIBOR rate plus a spread of 1.50% to 1.75%, in each case determined basedon our consolidated net leverage ratio. As of September 30, 2013, there were $6.5 million of letters of credit issued under the revolving credit line and there wereno other outstanding borrowings under the revolving credit line.Under terms of the amended Credit Facility, interest is payable monthly at a rate equal to the applicable margin plus, at our option, either (a) the baserate which is the corporate base rate of Morgan Stanley, the Administrative Agent, or (b) LIBOR (equal to (i) the British Bankers’ Association InterestSettlement Rates for deposits in U.S. dollars divided by (ii) one minus the statutory reserves applicable to such borrowing). The applicable margin for theborrowings is as follows:Description Base Rate Margin LIBOR MarginTerm loans maturing August 2019 1.75% 2.75%Revolving facility due August 2018 0.50% - 0.75% (a) 1.50% - 1.75% (a)(a)The margin is determined based on our net leverage ratio at the date the interest rates are reset on the revolving credit line.At September 30, 2013 the applicable margins were 1.75%, with an effective rate of 2.94%, on the remaining balance of $482.2 million maturing inAugust 2019. We are required to pay a commitment fee for unutilized commitments under the revolving credit facility at a rate ranging from 0.375% to 0.50%per annum, based upon our leverage ratio. As of September 30, 2013, 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 August 2018 for costs associated with the revolving credit facility and through August 2019 for the remainder of the balance. As of September 30,2013 and 2012, the ending unamortized deferred financing fees were $2.9 million and $4.1 million, respectively.Principal payments on the term loan of $482.2 million are due in quarterly installments of $1.2 million through August 2019, at which point theremaining balance becomes due. In addition, an annual excess cash flow sweep, as defined in the Credit Facility, is payable in the first quarter of each fiscalyear, based on the excess cash flow generated in the previous fiscal year. We have not generated excess cash flows in any period and no additional paymentsare 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 flow generation. Atthe 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 years pursuant tothe excess cash flow sweep provisions. Any term loan borrowings not paid through the baseline repayment, the excess cash flow sweep, or any othermandatory or optional payments that we may make, will be repaid upon maturity. If only the baseline repayments are made, the annual aggregate principalamount of the term loans repaid would be as follows (dollars in thousands):Year Ending September 30, Amount2014 $4,8342015 4,8342016 4,8342017 4,8342018 4,834Thereafter 458,040Total $482,210Our 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 subsidiaries74 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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 andintangible assets and those of the guarantors, and any present and future intercompany debt. The Credit Facility also contains provisions for mandatoryprepayments of outstanding term loans upon receipt of the following, and subject to certain exceptions: 100% of net cash proceeds from asset sales, 100% ofnet cash proceeds from issuance or incurrence of debt, and 100% of extraordinary receipts. We may voluntarily prepay borrowings under the Credit Facilitywithout premium or penalty other than breakage costs, as defined with respect 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. We have a hedging program that primarily utilizesforeign currency forward contracts to offset these risks associated with the effect of certain foreign currency exposures. Our program is designed so thatincreases or decreases in our foreign currency exposures are offset by gains or losses on the foreign currency forward contracts in order to mitigate the risksand volatility associated with our foreign currency transactions. Generally, we enter into contracts for less than 90 days, and at September 30, 2013 and 2012,we had outstanding contracts with a total notional value of $247.8 million and $83.9 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 (expense), net in our consolidated statement of operations. During the years ended September 30, 2013, 2012 and 2011, we recorded gains(losses) of $2.2 million, $(2.3) million and $(2.3) million, respectively, associated with these contracts.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 (expense), net. During the years ended September 30, 2013, 2012 and 2011, we recorded $(6.6) million, $8.0 million and $13.2million, respectively of (losses) gains associated with these contracts and (paid) received cash totaling $(3.8) million, $9.0 million and $9.4 million,respectively, upon the settlement of agreements during the year.The following is a summary of the outstanding shares subject to security price guarantees at September 30, 2013 (dollars in thousands):Issue Date Number of Shares Issued Settlement Date Total Value of Shares onIssue DateJune 1, 2013 193,699 December 1, 2013 $3,750August 15, 2013 934,960 February 15, 2014 $18,40075 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The following table provides a quantitative summary of the fair value of our derivative instruments as of September 30, 2013 and 2012 (dollars inthousands): Fair ValueDescription Balance Sheet Classification September 30, 2013 September 30, 2012Derivatives Not Designated as Hedges: Foreign currency contracts Prepaid expenses and other current assets $2,201 $1,047Security Price Guarantees Prepaid expenses and other current assets — 1,758Security Price Guarantees Accrued expenses and other current liabilities (1,044) —Net asset value of non-hedged derivative instruments $1,157 $2,805The following tables summarize the activity of derivative instruments for the fiscal 2013 and 2012 (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 2013 2012Foreign currency contractsOther income, net $2,182 $(2,324)Security price guaranteesOther income, net $(6,603) $7,99712.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.76 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Assets and liabilities measured at fair value on a recurring basis at September 30, 2013 and 2012 consisted of (dollars in thousands): September 30, 2013 Level 1 Level 2 Level 3 TotalAssets: Money market funds(a)$684,697 $— $— $684,697US government agency securities(a)1,000 — — 1,000Marketable securities, $38,728 at cost (b)— 38,728 — 38,728Foreign currency exchange contracts(b)— 2,201 — 2,201Total assets at fair value$685,697 $40,929 $— $726,626Liabilities: Security price guarantees(c)— (1,044) — (1,044)Contingent earn-out(d)— — (450) (450)Total liabilities at fair value$— $(1,044) $(450) $(1,494) 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 $— $1,014,240Liabilities: Contingent earn-out(d)— — (16,980) (16,980)Total liabilities at fair value$— $— $(16,980) $(16,980)(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 our evaluation as to the probability and amount of any earn-out thatwill be achieved based on expected future performance by the acquired entity, as well as our common stock price when the contingent considerationarrangement is payable in shares of our common stock.77 Table 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, 2013 and 2012(dollars in thousands): AmountBalance 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$16,980Earn-out liability established at time of acquisition450Payments upon settlement(17,259)Charges to acquisition-related costs, net279Balance as of September 30, 2013$450Items 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.Restructuring and Other Charges, NetFiscal 2013For fiscal 2013, we recorded net restructuring charges of $17.2 million, which included a $14.6 million severance charge related to the elimination ofapproximately 300 personnel across multiple functions. In addition to the restructuring charges, we recorded a net gain of $0.8 million related to the sales oftwo immaterial product lines, which is included in restructuring and other charges, net in our consolidated statements of operations.Fiscal 2012For fiscal 2012, we recorded net restructuring charges of $7.5 million, which included a $6.7 million severance charge related to the elimination ofapproximately 160 personnel across multiple functions primarily to eliminate duplicative positions as a result of businesses acquired.Fiscal 2011For fiscal 2011, we recorded net restructuring charges of $23.0 million, which consisted primarily of an $11.7 million impairment charge related to ourDictaphone trade name resulting from a recent change in our Healthcare marketing strategy under which we plan to consolidate our brands and will no longerbe using the Dictaphone trade name in our new product offerings. In addition, we recorded a $9.1 million charge related to the elimination of approximately200 personnel across multiple functions primarily to eliminate duplicative positions as a result of businesses acquired during the year and a $1.9 millioncharge related to the elimination or consolidation of excess facilities.78 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The following table sets forth the fiscal 2013, 2012 and 2011 accrual activity relating to restructuring charges (dollars in thousands): Personnel Facilities Other TotalBalance at October 1, 2010$1,838 $283 $— $2,121Restructuring 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 charges, net6,707 359 400 7,466Cash payments(10,120) (1,267) (400) (11,787)Balance at September 30, 20121,70832—1,740Restructuring charges, net15,262 1,641 304 17,207Non-cash adjustment(452) — (304) (756)Cash payments(12,288) (482) — (12,770)Balance at September 30, 2013$4,230$1,191$—$5,421Restructuring charges, net by segment are as follows (dollars in thousands): Personnel Facilities Other TotalFiscal 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 $22,950 Fiscal 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 $7,466 Fiscal Year 2013 Healthcare$1,742 $757 $304 $2,803Mobile and Consumer4,124 736 — 4,860Enterprise3,942 — — 3,942Imaging1,370 55 — 1,425Corporate4,084 93 — 4,177Total fiscal year 2013$15,262 $1,641 $304 $17,207In connection with certain previous acquisitions in 2003 and 2005, we assumed two individually significant lease obligations that were abandoned priorto the acquisition dates. The fair value of the obligations, net of estimated sublease income, was recognized as a liability assumed by us in the allocation of thefinal purchase price. The net payments were discounted in calculating the fair value, and the discount is being accrued through the term of the lease. Cashpayments, net of sublease receipts are presented a79 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)s cash flows used in financing activities in the consolidated statements of cash flows. At September 30, 2013, the remaining liability related to the leaseobligations was $3.5 million. Total expense related to the lease obligations was $(0.1) million and $0.8 million for the years ended September 30, 2013 and2012, respectively, and is included in Restructuring and other charges, net in our statements of operations.14.Supplemental Cash Flow InformationCash paid for Interest and Income Taxes: Year Ended September 30, 2013 2012 2011 (Dollars in thousands)Interest paid$95,727 $36,907 $23,034Income taxes paid$18,329 $13,292 $15,949Non Cash Investing and Financing Activities:From time to time, we issue shares of our common stock in connection with our business and asset acquisitions, including shares initially held inescrow. In addition, in connection with certain collaboration agreements we have issued shares of our common stock to our partners in satisfaction of ourpayment obligations under the terms of the agreements, which is discussed in Note 2.15.Stockholders' EquityStock RepurchasesOn April 29, 2013, our Board of Directors approved a share repurchase program for up to $500 million of our outstanding shares of common stock.Approximately $315.6 million remained available for stock repurchases as of September 30, 2013 pursuant to our stock repurchase program. We repurchased9.8 million shares for $184.4 million during the year ended September 30, 2013. These shares were retired upon repurchase. Under the terms of the repurchaseprogram, we expect to continue to repurchase shares from time to time through a variety of methods, which may include open market purchases, privatelynegotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The timing and the amount of anypurchases will be determined by management based on an evaluation of market conditions, capital allocation alternatives, and other factors. The sharerepurchase program does not require us to acquire any specific number of shares and may be modified, suspended, extended or terminated by us at any timewithout prior notice.Stockholders' Rights PlanOn August 19, 2013, the Board of Directors adopted a stockholders' rights plan. Under this plan, the Board of Directors declared a distribution of oneright per share of common stock. The rights will become exercisable only following the acquisition by a person or group, without the prior consent of theBoard of Directors, of 20% or more of our common stock, or following the announcement of a tender offer or exchange offer to acquire an interest of 20% ormore. Each right entitles the holder to purchase one one-thousandth of a share of Series A Preferred Stock, par value $0.001 per share, at an exercise price of$87.00, subject to adjustment. In addition, if the rights become exercisable, the Board may exchange the rights, in whole or in part, for common shares at anexchange ratio of one common share per right. If the rights become exercisable, each right holder will be entitled to purchase, at the exercise price, commonstock with a market value equal to twice the exercise price. Should we be acquired, each right would entitle the holder to purchase, at the exercise price,common stock of the acquiring company with a market value equal to twice the exercise price. Any rights owned by the acquiring person or group wouldbecome void. The options are redeemable at our option for $0.001 per share at any time before an event that causes the rights to become exercisable. The rightsexpire on August 19, 2014.Stock IssuancesDuring the year ended September 30, 2013, we issued 234,009 shares of our common stock to the Nuance Foundation, an unconsolidated related-partyestablished to provide grants to educational institutions and other non-profit organizations to advance charitable, scientific, literary and educational purposes.For the years ended September 30, 2013, 2012 and 2011, we issued 1,145,783, 1,010,403 and 1,274,513 shares respectively, of our common stock asconsideration under our collaboration agreements, which is discussed in Note 2.80 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Preferred StockWe are authorized to issue up to 40,000,000 shares of preferred stock, par value $0.001 per share. The undesignated shares of preferred stock will haverights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences,as shall be determined by the Board of Directors upon issuance of the preferred stock.Series A Preferred StockOn August 20, 2013, we eliminated the previous designation of 100,000 shares of the existing Series A Participating Preferred Stock, par value $0.001.No shares of the existing Series A Preferred stock were ever issued or outstanding. On August 20, 2013, we filed a Certificate of Designation of Rights,Preferences and Privileges of Series A Participating Preferred Stock (the "Series A Preferred Stock") with the Secretary of State of Delaware to designate1,000,000 shares, par value $0.001. The Series A Preferred Stock is entitled to receive dividends equal to the greater of $1.00 and 1,000 times the aggregate pershare amount of all dividends declared on our Common Stock. Holders of each share of the Series A Preferred Stock are entitled to 1,000 votes on all matterssubmitted to a vote of the stockholders of the Corporation, and shall vote as one class. The Series A Preferred Stock is not redeemable, and has the right tocertain liquidation preferences over our Common Stock. The Series A Preferred Stock ranks junior to all other series of the Preferred Stock as to the paymentof dividends and the distribution of assets.Series B Preferred StockWe have designated 15,000,000 shares as Series B Preferred Stock, par value $0.001 per share. In connection with the acquisition of ScanSoft fromXerox Corporation (“Xerox”), we issued 3,562,238 shares of Series B Preferred Stock to Xerox. On March 19, 2004, we announced that Warburg Pincus, aglobal private equity firm, had agreed to purchase all outstanding shares of our stock held by Xerox Corporation for approximately $80 million, including the3,562,238 shares of Series B Preferred Stock. The Series B Preferred Stock is convertible into shares of common stock on a one-for-one basis and has aliquidation preference of $1.30 per share plus all declared but unpaid dividends. The holders of Series B Preferred Stock are entitled to non-cumulativedividends at the rate of $0.05 per annum per share, payable when, and if, declared by the Board of Directors. To date, no dividends have been declared by theBoard of Directors. Holders of Series B Preferred Stock have no voting rights, except those rights provided under Delaware law. On September 6, 2013,Warburg Pincus converted 3,562,238 shares of Series B Preferred Stock into an equivalent number of common shares. As of September 30, 2013, there areno outstanding shares of Series B Preferred Stock.Common Stock and Common Stock WarrantsWe 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 warrants exercised by WarburgPincus during the three year period ended September 30, 2013:Date Exercise Price perShare Warrants Exercised Total Shares Issued August 29, 2012 $11.57 3,862,422 1,998,547 February 15, 2012 $20.00 3,700,000 1,077,744 We 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, 2013, there are no outstanding warrants to purchase shares of our common stock.81 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)16.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): 2013 2012 2011Cost of product and licensing$769 $137 $36Cost of professional services and hosting17,924 26,409 27,814Cost of maintenance and support3,537 956 2,186Research and development34,957 29,565 24,289Selling and marketing58,451 54,281 43,264General and administrative43,687 63,233 49,707Total$159,325 $174,581 $147,296Stock 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.The table below summarizes activity relating to stock options for the years ended September 30, 2013, 2012 and 2011: Number ofShares WeightedAverageExercisePrice WeightedAverageRemainingContractualTerm AggregateIntrinsicValue(1)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 Exercised(1,884,330) $7.23 Forfeited(57,290) $9.10 Expired(13,502) $12.58 Outstanding at September 30, 20134,184,158 $13.08 2.9 years $23.5 millionExercisable at September 30, 20134,158,145 $13.08 2.9 years $23.4 millionExercisable at September 30, 20125,994,586 Exercisable at September 30, 20116,565,907 _______________________________________(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, 2013 ($18.68) and the exercise price of the underlying options.82 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)As of September 30, 2013, the total unamortized fair value of stock options was $0.3 million with a weighted average remaining recognition period of1.6 years. A summary of weighted-average grant-date (including assumed options) fair value and intrinsic value of stock options exercised is as follows: 2013 2012 2011Weighted-average grant-date fair value per share$— $14.38 $6.13Total intrinsic value of stock options exercised (in millions)$24.9 $30.9 $53.0We 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. There were no stock option grants in fiscal 2013. For fiscal 2012 and 2011, the fair value of the stock options grantedand unvested options assumed from acquisitions were calculated using the following weighted-average assumptions: 2012 2011Dividend yield0.0% 0.0%Expected volatility46.6% 46.1%Average risk-free interest rate1.5% 1.2%Expected term (in years)3.5 4.1The 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 in effect at the time of grant, commensurate with the expected life of the instrument. We estimate the expected term ofoptions granted based on historical exercise behavior.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.83 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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, 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 7,740,612Granted3,046,493 8,027,067Earned/released(1,682,164) (5,886,568)Forfeited(447,428) (785,687)Outstanding at September 30, 20135,587,181 9,095,424Weighted average remaining recognition period of outstanding Restricted Units1.8 years 1.9 yearsUnearned stock-based compensation expense of outstanding Restricted Units$72.0 million $132.6 millionAggregate intrinsic value of outstanding Restricted Units(1)$104.4 million $170.0 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, 2013 ($18.68) 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: 2013 2012 2011Weighted-average grant-date fair value per share$21.51 $25.11 $18.74Total intrinsic value of shares vested (in millions)$158.6 $156.7 $116.0Restricted 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. The table below summarizes activity relating to Restricted Stock for fiscal 2013 and 2012: Number ofSharesUnderlyingRestricted Stock WeightedAverage GrantDate FairValueOutstanding at September 30, 2011— $—Granted750,000 $25.80Outstanding at September 30, 2012750,000 $25.80Granted750,000 $22.32Vested(500,000) $24.06Outstanding at September 30, 20131,000,000 $24.06Weighted average remaining recognition period of outstanding Restricted Stock1.6 years Unearned stock-based compensation expense of outstanding Restricted Stock$19.2 million Aggregate intrinsic value of outstanding Restricted Stock(1)$18.7 million 84 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(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, 2013 ($18.68) 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 Stock vested isas follows: 2013 2012Weighted-average grant-date fair value per share$22.32 $25.80Total intrinsic value of shares vested (in millions)$10.0 $—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. In fiscal 2013, we withheld payroll taxes totaling $59.7 million relating to 2.9 million shares of common stock that were repurchasedor canceled. Based on our estimate of the Restricted Awards that will vest or be released in fiscal 2014, and further assuming that one-third of these RestrictedAwards would be repurchased or canceled to satisfy the employee’s withholding tax liability (such amount approximating the tax rate of our employees), wewould have an obligation to pay cash relating to approximately 1.8 million shares during fiscal 2014.1995 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, 2013, we have reserved 1,837,474 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: 2013 2012 2011Weighted-average grant-date fair value per share$4.79 $6.84 $4.63Total shares issued (in millions)1.0 0.8 0.9Total stock-based compensation expense (in millions)$5.1 $4.6 $3.7The 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: 2013 2012 2011Dividend yield0.0% 0.0% 0.0%Expected volatility36.9% 42.8% 35.7%Average risk-free interest rate0.1% 0.2% 0.1%Expected term (in years)0.5 0.5 0.517.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 by certain of the acquired companies prior to the acquisitiondate (Note 13). Additionally, certain of our lease obligations have been included in various restructuring charges (Note 13).85 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The following table outlines our gross future minimum payments under all non-cancelable operating leases as of September 30, 2013 (dollars inthousands):Year Ending September 30, Operating Leases Other ContractualObligations Assumed Total2014 $41,329 $2,525 $43,8542015 36,751 2,529 39,2802016 32,086 1,048 33,1342017 24,626 — 24,6262018 16,919 — 16,919Thereafter 40,214 — 40,214Total $191,925 $6,102 $198,027At September 30, 2013, we have subleased certain office space that is included in the above table to third parties. Total sublease income undercontractual terms is $4.6 million and ranges from approximately $0.8 million to $1.9 million on an annual basis through February 2016.Total rent expense was approximately $34.9 million, $26.4 million and $23.5 million for the years ended September 30, 2013, 2012 and 2011,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 on, 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 resolution of any such claim or litigation will have a material adverse effect on our financial position and results ofoperations. However, resolution of any such claim or litigation could require significant management time and adversely impact our operating results, financialposition and cash flows.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.86 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)18.Pension and Other Post-Retirement BenefitsDefined Contribution PlansWe 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 $6.1 million, $4.6 million and $3.6 million for fiscal 2013, 2012 and 2011, respectively. We make contributions to various other plans in certain ofour foreign operations, total contributions to these plans are not material.Defined Benefit Pension PlansWe sponsor certain defined benefit pension plans that are offered primarily by our foreign subsidiaries. Many of these plans were assumed through ouracquisitions or are required by local regulatory requirements. We may deposit funds for these plans with insurance companies, third party trustees, or intogovernment-managed accounts consistent with local regulatory requirements, as applicable. Our total defined benefit plan pension expenses were $1.3 million,$0.1 million and $0.3 million for fiscal 2013, 2012 and 2011, respectively. The aggregate projected benefit obligation and aggregate net asset (liability) of ourdefined benefit plans as of September 30, 2013 was $28.1 million and $0.1 million, respectively, and as of September 30, 2012 was $34.2 million and $(3.2)million, respectively. In fiscal 2013, we settled the obligations under our Canadian defined benefit pension plan through a purchase of annuities. The loss onsettlement was $1.5 million, and is included in restructuring and other, net.19.Income TaxesThe components of (loss) income before income taxes are as follows (dollars in thousands): Year Ended September 30, 2013 2012 2011Domestic$(208,592) $(85,897) $10,197Foreign111,912 151,199 19,820(Loss) income before income taxes$(96,680) $65,302 $30,017The components of the provision (benefit) for income taxes are as follows (dollars in thousands): Year Ended September 30, 2013 2012 2011Current: Federal$— $(10,967) $11,846State1,293 4,626 6,810Foreign19,737 16,055 17,013 21,030 9,714 35,669Deferred: Federal2,759 (131,889) (37,453)State176 (7,317) (243)Foreign(5,407) (12,341) (6,194) (2,472) (151,547) (43,890)Provision (benefit) for income taxes$18,558 $(141,833) $(8,221)Effective income tax rate(19.2)% (217.2)% (27.4)%87 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The provision (benefit) for income taxes differed from the amount computed by applying the federal statutory rate to our (loss) income before income taxesas follows (dollars in thousands): 2013 2012 2011Federal tax (benefit) provision at statutory rate$(33,838) $22,856 $10,506State tax, net of federal benefit(3,900) (1,569) 4,182Foreign tax rate and other foreign related tax items1,086 (42,087) 2,831Stock-based compensation8,816 11,870 6,459Non-deductible expenditures1,723 5,862 10,965Change in U.S. and foreign valuation allowance35,958 (145,644) (44,792)Executive compensation3,517 4,585 3,946Other5,196 2,294 (2,318)Provision (benefit) for income taxes$18,558 $(141,833) $(8,221)The effective income tax rate is based upon the income for the year, the composition of the income in different countries, changes relating to valuationallowances for certain countries if and as necessary, and adjustments, if any, for the potential tax consequences, benefits or resolutions of audits or other taxcontingencies. Our aggregate income tax rate in foreign jurisdictions is lower than our income tax rate in the United States; substantially all of our incomebefore provision for income taxes from foreign operations has been earned by subsidiaries in Ireland. Our effective tax rate may be adversely affected byearnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated in countries where we have higherstatutory tax rates.Included in the fiscal 2013 provision for income taxes is the establishment of a valuation allowance against our net domestic deferred tax assets. Duringthe third quarter of fiscal 2013, we determined that we had new negative evidence related to our domestic deferred tax asset recoverability assessment. This newevidence, resulting from two consecutive quarterly reductions in our earnings forecast during fiscal 2013, primarily due to the continuing shift toward on-demand and ratable product offerings and revenue streams, led us to establish a valuation allowance against our net domestic deferred tax asset. Thisvaluation allowance was offset by the tax benefits from our current year domestic losses and credits. We also recorded a $10.4 million tax provisionrepresenting the establishment of the valuation allowance related to our net domestic deferred tax assets at the beginning of the year.The effective income tax rate in fiscal 2013 was also impacted by our foreign operations which are subject to a significantly lower tax rate than the U.S.statutory tax rate. This rate differential is driven by our subsidiaries in Ireland. This lower foreign tax rate differential was offset by the impact of the transferof intangible property between certain of our foreign subsidiaries with significantly different local statutory tax rates. Although the transfer of intangibleproperty between consolidated entities did not result in any gain in the consolidated results of operations, we generated a taxable gain in certain jurisdictions.The future tax deductions associated with the amortization of the transferred intangibles will be generated in a jurisdiction that will not generate an offsetting taxbenefit in future periods. The impact of these additional foreign taxes totaled $27.1 million, and is included in the reported foreign tax rate and other foreignrelated tax items in our effective tax rate reconciliation table above. Excluding the effect of the transfer of intangible property between consolidated entities, theforeign tax rate and other foreign related tax items in the above effective tax rate reconciliation would have been a benefit of $(26.0) million.Included in fiscal 2012 benefit for income taxes is $145.6 million benefit from releasing the valuation allowance. This includes a net decrease in thevaluation allowance of $75.1 million resulting from our acquisitions during fiscal 2012, driven primarily by Transcend and Quantim, for which a netdeferred tax liability was recorded in purchase accounting at the time of the acquisitions, resulting in a release of our valuation allowance. This also includes atax benefit of $70.5 million in connection with the release of the U.S. and certain foreign valuation allowances by the end of fiscal year 2012. The effectiveincome tax rate was also impacted by our foreign operations which are subject to a significantly lower tax rate than the U.S. statutory tax rate. This ratedifferential is driven by our subsidiaries in Ireland.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.The cumulative amount of undistributed earnings of our foreign subsidiaries amounted to $238.0 million at September 30,88 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)2013. We have not provided any additional federal or state income taxes or foreign withholding taxes on the undistributed earnings; as such earnings have beenindefinitely reinvested in the business. Based on our business plan, we expect the cash held overseas will continue to be used for our international operationsand therefore do not anticipate repatriating these funds. An estimate of the tax consequences from the repatriation of these earnings is not practicable at this timeresulting from the complexities of the utilization of foreign tax credits and other tax assets.Deferred tax assets (liabilities) consist of the following at September 30, 2013 and 2012 (dollars in thousands): 2013 2012Deferred tax assets: Net operating loss carryforwards$252,693 $237,273Federal and state credit carryforwards28,201 22,840Capitalized research and development costs7,706 5,347Accrued expenses and other reserves58,156 55,323Difference in timing of revenue related items— 13,888Deferred compensation35,333 43,078Other7,045 4,422Total deferred tax assets389,134 382,171Valuation allowance for deferred tax assets(139,676) (89,404)Net deferred tax assets249,458 292,767Deferred tax liabilities: Difference in timing of revenue related items(10,133) —Depreciation(27,359) (26,802)Convertible debt(45,607) (62,012)Acquired intangibles(238,172) (256,939)Net deferred tax liabilities$(71,813) $(52,986)Reported as: Short-term deferred tax assets$74,969 $87,564Other assets15,992 20,064Long-term deferred tax liabilities(162,774) (160,614)Net deferred tax liabilities$(71,813) $(52,986)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 fiscal 2013, the valuation allowance for net deferred tax assets increased by $50.3million. This increase relates to the establishment of valuation allowance against our net domestic deferred tax assets. In the third quarter of fiscal 2013, weconcluded that the recoverability of our net domestic deferred tax assets is not more likely than not due to recent negative evidence on our business conditionsand trends. As a result, we established a valuation allowance against our net domestic deferred tax assets in the amount of $83.6 million. This increase indomestic valuation allowance was offset by the utilization of foreign deferred tax assets of $33.3 million during the period. As of September 30, 2013, we have$86.5 million and$53.2 million in valuation allowance against our net domestic and foreign deferred tax assets, respectively. As of September 30, 2012, wehad no valuation allowance against our U.S. deferred tax assets and we had $89.4 million of valuation allowance against the majority of our internationaldeferred tax assets.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 given the current assessment of the limitations on their use orour current projection of future taxable income in the entities for which these losses relate. Based on our analysis, we have concluded that it is not more likelythan not that the majority of our foreign deferred tax assets can be realized and therefore a valuation allowance has been assigned to these deferred tax assets. Ifwe are subsequently able to utilize all or a portion of the foreign deferred tax assets for which a valuation allowance has been established, then we may berequired to recognize these deferred tax assets through the reduction of the valuation allowance which could result in a material benefit to our results ofoperations in the period in which the benefit is determined.89 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)At September 30, 2013 and 2012, we had U.S. federal net operating loss carryforwards of $763.2 million and $629.3 million, respectively, of which$186.4 million and $181.1 million, respectively, relate to tax deductions from stock-based compensation which will be recorded as additional paid-in-capitalwhen realized. At September 30, 2013 and 2012, we had state net operating loss carryforwards of $246.0 million and $183.1 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, 2013 and 2012, we had foreign net operating loss carryforwards of $261.1 million and $420.4million, respectively. These carryforwards will expire at various dates beginning in 2014 and extending through 2031, if not utilized.At September 30, 2013 and 2012, we had federal research and development carryforwards of $30.9 million and $16.3 million, respectively. AtSeptember 30, 2013 and 2012, we had state research and development credit carryforwards of $1.1 million and $4.7 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, 2013 2012Balance at beginning of year$17,382 $14,935Increases for tax positions taken during current period1,586 555Increases for interest and penalty charges1,170 1,127Increases for acquisitions— 1,925Decreases for tax settlements and lapse in statutes(521) (1,160)Balance at end of year$19,617 $17,382As of September 30, 2013, $19.6 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 $4.6 million of such interest and penalties as of September 30, 2013.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 2009 through 2013.20.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 designed90 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)to help companies better support, understand and communicate with their customers. The Imaging segment sells document capture and print managementsolutions that are embedded in copiers and multi-function printers as well as packaged software for document management.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. We believe that these adjustments allow for more complete comparisons to the financial results of the historicaloperations.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 (loss) income before income taxes (dollars in thousands): Year Ended September 30, 2013 2012 2011Segment revenues(a): Healthcare$911,611 $669,354 $526,804Mobile and Consumer479,195 508,256 393,343Enterprise323,452 332,034 296,373Imaging243,372 228,421 177,418Total segment revenues1,957,630 1,738,065 1,393,938Acquisition related revenue adjustments(102,351) (86,556) (75,197)Total consolidated revenue1,855,279 1,651,509 1,318,741Segment profit: Healthcare352,157 314,862 269,357Mobile and Consumer142,998 227,641 170,918Enterprise78,937 90,846 63,276Imaging98,187 91,585 69,116Total segment profit672,279 724,934 572,667Corporate expenses and other, net(135,300) (102,847) (100,288)Acquisition-related revenues and costs of revenue adjustment(93,679) (77,856) (64,724)Non-cash stock-based compensation(159,325) (174,581) (147,296)Amortization of intangible assets(168,841) (155,450) (143,330)Acquisition-related costs, net(29,685) (58,746) (21,866)Restructuring and other charges, net(16,385) (8,268) (22,862)Costs associated with IP collaboration agreements(20,582) (21,000) (19,750)Other expense, net(145,162) (60,884) (22,534)(Loss) income before income taxes$(96,680) $65,302 $30,017(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.91 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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): 2013 2012 2011United States$1,339,733 $1,175,158 $963,688International515,546 476,351 355,053Total$1,855,279 $1,651,509 $1,318,741No 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, 2013 September 30, 2012United States$3,718,009 $3,161,995International957,059 935,739Total$4,675,068 $4,097,73421.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 Year2013 Total revenue$462,268 $450,999 $469,769 $472,243 $1,855,279Gross profit$279,696 $259,814 $275,711 $273,508 $1,088,729Net loss$(22,096) $(25,848) $(34,974) $(32,320) $(115,238)Net loss per share: Basic$(0.07) $(0.08) $(0.11) $(0.10) $(0.37)Diluted$(0.07) $(0.08) $(0.11) $(0.10) $(0.37)Weighted average common shares outstanding: Basic312,571 315,473 315,441 310,944 313,587Diluted312,571 315,473 315,441 310,944 313,58792 Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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 19 for additional discussion.93 Table 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, 2013, 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, 2013, utilizing the criteria set forth inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The internalcontrols over financial reporting for certain of our acquisitions completed during fiscal 2013 were excluded from management's assessment. These excludedacquisitions constituted approximately 0.3% of our consolidated assets as of September 30, 2013 and approximately 4.7% of our consolidated revenues for thefiscal year ended September 30, 2013 The most significant of these acquisitions was Accentus, Inc., which we acquired on November 19, 2012, andconstituted approximately 0.3% of our consolidated assets and approximately 2.6% of our consolidated revenues. Based on the results of this assessment,management (including our Chief Executive Officer and our Chief Financial Officer) has concluded that, as of September 30, 2013, our internal control overfinancial reporting was effective.The attestation report concerning the effectiveness of our internal control over financial reporting as of September 30, 2013 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 2013 that have materially affected, or arereasonably likely to materially affect, our internal controls over financial reporting.Item 9B.Other InformationNone.94 Table 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.95 Table 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.96 Table 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 27, 2013 Paul A. Ricci, Chief Executive Officer andChairman of the Board(Principal Executive Officer) /s/ Thomas L. BeaudoinDate: November 27, 2013 Thomas L. Beaudoin, Executive Vice President andChief Financial Officer(Principal Financial Officer) /s/ Daniel D. TempestaDate: November 27, 2013 Daniel D. Tempesta, Chief Accounting Officer andCorporate Controller(Principal Accounting Officer) /s/ Robert J. FrankenbergDate: November 27, 2013 Robert J. Frankenberg, Director /s/ Patrick T. HackettDate: November 27, 2013 Patrick T. Hackett, Director Table of Contents /s/ Brett IcahnDate: November 27, 2013 Brett Icahn, Director /s/ William H. JanewayDate: November 27, 2013 William H. Janeway, Director /s/ Mark R. LaretDate: November 27, 2013 Mark R. Laret, Director /s/ Katharine A. MartinDate: November 27, 2013 Katharine A. Martin, Director /s/ Mark MyersDate: November 27, 2013 Mark Myers, Director /s/ Philip QuigleyDate: November 27, 2013 Philip Quigley, Director /s/ David SchechterDate: November 27, 2013 David Schechter, Director /s/ Robert G. TeresiDate: November 27, 2013 Robert G. Teresi, Director Table 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 4/27/2012 2.8 Stock Purchase Agreement by and among Nuance, J.A. Thomas andAssociates, Inc., the shareholders of J.A. Thomas and Associates andDonald Leeper, as the shareholder representative, dated October 1,2012 8-K 0-27038 2.1 12/17/2012 2.9 Asset Purchase Agreement, dated as of May 24, 2013, by and amongNuance, Telluride, Inc., Tweddle Group, Inc., Tweddle GroupTechnologies, LLC, The Andrew M. Tweddle Revocable Living Trustand Andrew M. Tweddle 8-K 0-27038 2.1 6/5/2013 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 3.6 Certificate of Elimination of the Series A Participating Preferred Stock 8-K 0-27038 3.1 8/20/2013 3.7 Certificate of Designation of Rights, Preferences and Privileges ofSeries A Participating Preferred Stock 8-K 0-27038 3.2 8/20/2013 Table of Contents Incorporated by ReferenceExhibitIndex Exhibit Description Form File No. Exhibit Filing Date FiledHerewith4.1 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 4.4 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 4.6 Preferred Shares Rights Agreement, dated as of August 19, 2013, byand between Nuance Communications, Inc. and American StockTransfer & Trust Company, LLC, as rights agent 8-K 0-27038 4.1 8/20/2013 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 Stock Plan.* 8-K 0-27038 99.1 2/5/2009 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 Table of Contents Incorporated by ReferenceExhibitIndex Exhibit Description Form File No. Exhibit Filing Date FiledHerewith10.20 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 10.25 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 10.26 Letter, dated March 29, 2010, to Janet Dillione regarding certainemployment matters.* 10-Q 0-27038 10.1 8/9/2010 10.27 Letter, dated September 9, 2010, to Bruce Bowden regarding certainemployment matters.* 10-Q 0-27038 10.1 2/9/2011 10.28 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 10.29 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 10.30 Letter dated March 14, 2011 to Bill Nelson regarding certainemployment matters.* 10-Q 02-7308 10.1 8/9/2011 10.31 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 10.32 Employment Agreement dated November 11, 2011 between theRegistrant and Paul Ricci.* 10-Q 0-27038 10.2 2/9/2012 10.33 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 10.34 Purchase Agreement dated October 15, 2012, by and among NuanceCommunications, Inc., the guarantors party thereto and MorganStanley & Co. LLC 8-K 0-27038 10.1 10/16/2012 10.35 Amended and Restated 2000 Stock Plan* S-8 333-128396 4.1 5/7/2013 10.36 Amendment Agreement 8-K 0-27038 10.1 8/12/2013 10.37 Amended and Restated Credit Agreement 8-K 0-27038 10.2 8/12/2013 Table of Contents Incorporated by ReferenceExhibitIndex Exhibit Description Form File No. Exhibit Filing Date FiledHerewith10.38 Nomination and Standstill Agreement Dated October 7, 2013 by andbetween Nuance Communications, Inc., High River LimitedPartnership, Hopper Investments LLC, Barberry Corp., IcahnPartners LP, Icahn Partners Master Fund LP, Icahn Partners MasterFund II LP, Icahn Partners Master Fund III LP, Icahn Enterprises G.P.Inc., Icahn Enterprises Holdings L.P., IPH GP LLC, Icahn Capital LP,Icahn Onshore LP, Icahn Offshore LP, and Beckton Corp. 8-K 001-36056 99.1 10/8/2013 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, 2013,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 arrangement Exhibit 21.1 Subsidiary Name Jurisdiction Type Accentus U.S. Holding, Inc. Delaware Domestic ART Advanced Recognition Technologies, Inc. Delaware Domestic Caere Corporation Delaware Domestic Cognition Technologies, Inc. Delaware Domestic Dictaphone Corporation Delaware Domestic Ditech Networks, Inc. Delaware Domestic Ditech Networks International, Inc. Delaware Domestic eCopy, LLC Delaware Domestic eScription, Inc. Delaware Domestic Language and Computing Inc. Delaware Domestic MRecord 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 Probity Medical Transcription, 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 Telluride Inc. Delaware Domestic Transcend Services, Inc. Delaware Domestic Transolutions Inc. Delaware Domestic Viecore Federal Systems Division, Inc. Delaware Domestic Viecore LLC Delaware Domestic VirtuOz Inc. Delaware Domestic Vlingo Corporation Delaware Domestic Voice Signal Technologies, Inc. Delaware Domestic Zi Holding Corporation Delaware Domestic Nuance Document Imaging, Inc. f/k/aEquitrac Corporation Florida Domestic J,A. Thomas and Associates, Inc. Georgia Domestic AMS Solutions Corporation Massachusetts Domestic Zylomed Inc. Nevada 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 Nuance Communications Services 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 2350111 Ontario Inc. Canada International 845162 Alberta Ltd. Canada International Accentus Inc. Canada International Accentus Holding Inc. Canada International Ditech Networks Canada, Inc. Canada International Nuance Document Imaging ULC Canada International Nuance Acquisition ULC Canada International Nuance Communications Canada, Inc. Canada International Nuance Copitrak B.C. Unlimited Liability Company Canada International 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 VirtuOz S.A. France International Communology GmbH Germany International HFN Medien GmbH Germany 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 Ditech Communications India Pvt. Ltd. India International Nuance India Pvt. Ltd. India International Nuance Transcription Services India Private Limited f/k/a/ FocusMT IndiaPrivate Limited India International ServTech Systems India Pvt. Ltd. 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 Heartland Asia (Mauritius) Republic of Mauritius International Nuance Communications Asia Pacific Pte. Ltd. Singapore International Nuance Communications Korea Ltd. South Korea International Nuance Communications Iberica SA Spain International Nuance Communications Sweden, A.B. Sweden International Nuance Communications Switzerland AG Switzerland International SVOX AG Switzerland International Nuance Communications Taiwan Taiwan International Nuance Communications Illetism Ltd. Sirketi Turkey International Ditech Communications Europe Ltd. United Kingdom 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, 333-147715 and 333-61862) andForm S-8 (Nos. 333-188397, 333-182459, 333-179399, 333-178436, 333-164955, 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, 333-108767, 333-99729, 333-75406, 333-49656,333-33464, 333-30518, 333-74343, 333-45425 and 333-04131) of Nuance Communications, Inc. of our reports dated November 27, 2013 relating to theconsolidated financial statements and the effectiveness of Nuance Communications, Inc.’s internal control over financial reporting, which appear in this Form10-K./s/ BDO USA, LLPBoston, MassachusettsNovember 27, 2013 Exhibit 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 our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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 most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, 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 are reasonablylikely 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 internal controlsover financial reporting. By: /s/ Paul A. Ricci Paul A. Ricci Chief Executive Officer and Chairman of the BoardNovember 27, 2013 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 our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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 most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, 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 are reasonablylikely 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 internal controlsover financial reporting. By: /s/ Thomas L. Beaudoin Thomas L. Beaudoin Executive Vice President and Chief Financial OfficerNovember 27, 2013 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, 2013 fully complies with the requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q 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 BoardNovember 27, 2013I, 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, 2013 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 Quarterly Report on Form 10-Q fairly presents in all material respectsthe financial condition and results of operations of Nuance Communications, Inc. By: /s/ Thomas L. Beaudoin Thomas L. Beaudoin Executive Vice President and Chief Financial OfficerNovember 27, 2013
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