Nuance Communications Annual Report 2015

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549_______________________________Form 10-K(Mark One) þþANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2015ORooTRANSITION 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 þ 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 þIndicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No 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 submitted andposted 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 to submit andpost such files). Yes þ 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 of Registrant’sknowledge, 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. þIndicate 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 þAccelerated 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 þThe 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 $2.8 billion based upon the last reported sales price on the Nasdaq National Market for such date. For purposes of this disclosure, shares ofCommon 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, 2015, was 309,631,702.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s definitive Proxy Statement to be delivered to stockholders in connection with the Registrant’s 2016 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 Factors7Item 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 Risk46Item 8.Financial Statements and Supplementary Data49Item 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 bedeemed forward-looking, including statements pertaining to: our future revenue, cost of revenue, research and development expense, selling, general andadministrative expenses, amortization of intangible assets and gross margin, earnings, cash flows and liquidity; our strategy relating to our segments; thepotential of future product releases; our product development plans and investments in research and development; future acquisitions and anticipatedbenefits from acquisitions; international operations and localized versions of our products; our contractual commitments; our fiscal year 2016 revenue andexpense expectations and legal proceedings and litigation matters. You can identify these and other forward-looking statements by the use of words such as“may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue” or the negative of suchterms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth inItem 1A of this Annual Report under the heading “Risk Factors.” All forward-looking statements included in this document are based on informationavailable to us on the date hereof. The forward-looking statements do not include the potential impact of any mergers, acquisitions, divestitures, securitiesofferings or business combinations that may be announced or closed after the date hereof. We will not undertake and specifically decline any obligation toupdate any forward-looking statements.Item 1.BusinessOverviewWe are a leading provider of voice recognition solutions and natural language understanding technologies. We work with companies around the world,from banks and hospitals to airlines, carriers, and car manufacturers, who use our solutions and technologies to create better experiences for their customersand their users by enhancing the users' experience, increasing productivity and customer satisfaction. We offer our customers high accuracy in automatedspeech recognition, capabilities for natural language understanding, dialog and information management, biometric speaker authentication, text-to-speech,optical character recognition ("OCR") capabilities, and domain knowledge, along with professional services and implementation support. Using advancedanalytics and algorithms, our technologies create personalized experiences and transform the way people interact with information and the technologyaround them. We market and sell our solutions and technologies around the world directly through a dedicated sales force, through our e-commerce websiteand also through a global network of resellers, including system integrators, independent software vendors, value-added resellers, distributors, hardwarevendors, and telecommunications carriers.We are a global organization steeped in research and development. We have 1,700 language scientists, developers, and engineers dedicated tocontinually refining our core technologies and advancing our portfolio to better meet our customers’ diverse and changing needs. We have more than 45international operating locations and a sales presence in more than 65 countries. Our corporate headquarters is located in Burlington, Massachusetts, withinternational headquarters in Dublin, Ireland ("EMEA") and Sydney, Australia ("APAC").Our company has a history of developing advanced technologies. Under the laws of the state of Delaware, we were incorporated in 1992 as Visioneer,Inc., with a core business in OCR and document imaging. In 1999, we changed our name to ScanSoft, Inc. and also changed our ticker symbol to SSFT. Overthe course of several years, we made strategic acquisitions and investments to complement and broaden our portfolio, including entering the speech andnatural language market. In October 2005, we changed our name to Nuance Communications, Inc., and in November 2005 we changed our ticker symbol toNUAN. In fiscal year 2015, our revenue was $1.9 billion in conjunction with strong net new bookings, attractive cash flows and improving profitability.Our website is located at www.nuance.com. We are not including the information contained in our website as part of, or incorporating it by referenceinto, this annual report on Form 10-K. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, as soon as reasonably practicable after we electronically file these materials with, orotherwise furnish them to, the Securities and Exchange Commission ("SEC").1Table of ContentsOur StrategyWe have large addressable vertical markets, and we focus on growth by providing industry-leading, value-add solutions for our customers and partnersthrough a broad set of flexible technologies, solutions, and service offerings available directly and through our channel capabilities. The key elements of ourstrategy include:•Maintain global leadership in all of our major markets and solutions areas. We have historically targeted markets where we benefit from strongtechnology, sales and vertical market differentiation. Today, we enjoy a prominent position in the markets we serve, where we are considered one ofthe leading providers of voice recognition solutions and natural language understanding technologies. We invest considerable time and resourcesto ensure we maintain this position through customer satisfaction, technology leadership and market specialization.•Maintain depth in technology, intellectual property and innovation portfolio. We have built a world-class portfolio of intellectual property,technologies, applications and solutions through both internal development and acquisitions. We expect to continue to pursue opportunities toexpand our assets, geographic presence, distribution network and customer base through acquisitions of other businesses and technologies.•Continue to expand our extensive network of global operations, distribution and services networks. We market and sell our solutions andtechnologies directly through a dedicated sales force, through our e-commerce website and also through a global network of resellers, includingsystem integrators, independent software vendors, value-added resellers, distributors, hardware vendors, and telecommunications carriers. Inaddition, we continue to expand within our markets; such as mobile operators in our Mobile and Consumer segment, ambulatory markets in ourHealthcare segment and new customer services channels in our Enterprise segment, and we have expanded initiatives in geographic markets such asChina, Latin America and Southeast Asia.•Continue to expand hosting and transaction based offerings. We are focused on increasing our hosting and transaction based offerings. Ourhosting revenues are generated through on-demand models that typically have multi-year terms with pricing based on volume of usage, number oftransactions, number of seats or number of devices. This pricing structure allows customers to use our products at a lower initial cost whencompared to the sale of a perpetual license. This will enable us to deliver applications that our customers use, and pay for, on a repeat basis,providing us with the opportunity to enjoy the benefits of recurring revenue streams.•Maintain significant presence and customer preference in our markets. We specialize in creating large, enterprise-class solutions that are used bymany of the world’s largest companies. By combining our core technology, professional services and deep domain experience we are able to deliverthese customized offerings for our customers and partners. We have established a trusted position in numerous markets and today work with manyof the Fortune 100 companies.•Strengthen financial profile with improvement in revenue, earnings per share, margin, cash flow. We are focused on improving our financialperformance, executing upon our formal transformation program, evolving our business toward recurring revenue models, and positioning us forincreased future revenue and profitability growth. In fiscal year 2015, we initiated a formal program to focus our product investments on our growthopportunities, increase our operating efficiencies, reduce costs, and further enhance shareholder value through share buybacks. Our transformationprogram is already delivering measurable results that can be seen in our financial performance during fiscal 2015.Business Segments and Financial InformationWe are organized into four segments: Healthcare, Mobile and Consumer, Enterprise, and Imaging. See Note 19 to the consolidated financial statementsfor additional information about our reportable segments. We offer our solutions and technologies to our customers in a variety of ways, including perpetuallicenses, hosted cloud-based solutions, implementation and custom solution development services and maintenance and support. Our product revenuesinclude embedded original equipment manufacturers ("OEM") royalties, traditional perpetual licensing, term-based licensing and consumer sales. Ourhosting, royalty, term license and maintenance and support revenues are recurring in nature as our customers use our products on an ongoing basis to handletheir needs in medical transcription, medical coding and compliance, enterprise customer service and mobile connected services. Our professional servicesoffer a visible revenue stream, as we have a backlog of assignments that take time to complete.2Table of ContentsHealthcare SegmentOur Healthcare segment is a leading provider in clinical speech and clinical language understanding solutions that drive smart, efficient decisions andincrease productivity across healthcare. Our solutions and services improve the clinical documentation process - from capturing the complete patient recordto improving clinical documentation and quality measures for reimbursement. We support clinical documentation workflows and electronic medical record("EMR") adoption through our flexible offerings, including transcription services, dictation software for the EMR, diagnostics workflow, and mobileapplications. In addition, we continue to extend our strong hospital customer franchise into the automation and management of healthcare coding and billingprocesses in order to ensure timely and appropriate reimbursement. These solutions are designed to help healthcare organizations derive additional valuefrom EMR investments and are driven by industry trends such as value-based care, Meaningful Use requirements, which is a program that awards incentivesfor using certified EMR technology to improve patient care, and government regulations related to medical codes.Today, more than 500,000 clinicians and 10,000 healthcare facilities worldwide leverage our solutions to improve patient care and support thephysician in clinical workflow and on many devices. Our Healthcare segment revenues were $937.6 million, $942.7 million, and $911.6 million in fiscalyears 2015, 2014, and 2013, respectively. As a percentage of total segment revenue, Healthcare segment revenues represented 47.4%, 47.4% and 46.6% infiscal years 2015, 2014, and 2013, respectively.Our principal solutions for the Healthcare segment include the following:•Transcription solutions: Enable physicians in larger and mid-sized healthcare enterprises to streamline clinical documentation with an on-demand, enterprise-wide medical transcription platform, and allow healthcare organizations to outsource transcription services. Ourtranscription solutions are generally offered as an on-demand model.•Dragon Medical: Provide dictation software that empowers physicians to accurately capture and document patient care in real-time on manydevices and without disrupting existing workflows. This dictation software is generally sold under a traditional perpetual software licensemodel, with accelerated transition to on-demand and term-licensing models.•Clinical document improvement ("CDI") and coding solutions: Ensure patient health information is accurately documented, coded, andevaluated to provide more complete and accurate clinical documentation. These services and offerings assist organizations with regulatorycompliance and coding efficiency to receive appropriate and timely reimbursement and improve quality reporting. The solutions are generallysold under a term-licensing model.•Diagnostic solutions: Allow radiologists to easily document, collaborate, and share medical images and reports, to optimize patient care. Thesolutions are generally sold under a traditional perpetual license model, with accelerated transition to term-licensing and on-demand models.The channels for distribution in the Healthcare segment utilize a direct sales force to address the market and a professional services organization thatsupports the implementation requirements of the healthcare industry. Direct distribution is supplemented by distributors and partnerships with a variety ofhealthcare IT providers. Our Healthcare customers and partners include Cerner, Epic, McKesson, UPMC, Cleveland Clinic, Siemens, and the Mayo Clinic.Areas of expansion and focus for our Healthcare segment include providing customers deeper integration with our clinical documentation solutions;investing in our cloud-based products and operations; entering new and adjacent markets such as ambulatory care; and, expanding our internationalcapabilities.Mobile and Consumer SegmentOur Mobile and Consumer segment provides a broad portfolio of specialized virtual assistants and connected services built on voice recognition, text-to-speech, natural language understanding, dialog, and text input technologies. Our mobile platform includes embedded and cloud based technologies thatwork together through our hybrid (connected and embedded) architecture. As consumer demands for convenience, ease-of-use, and more personalizedexperiences increase, companies will need to embrace the Internet of Things ("IoT"), a market forecasted to grow to $3.0 trillion by 2020. Our technologieshelp leading manufacturers and operators provide the consistent, connected, and more human experience their customers are looking for with the devices andtechnology around them, including their phones, tablets, computers, cars, wearable devices, TVs, applications, and services.Mobile and Consumer segment revenues were $454.4 million, $441.0 million, and $461.5 million in fiscal years 2015, 2014, and 2013, respectively.As a percentage of total segment revenue, the Mobile and Consumer segment revenues represented 23.0%, 22.2% and 23.6% in fiscal years 2015, 2014, and2013, respectively.3Table of ContentsOur principal solutions for the Mobile and Consumer segment include the following:•Automotive solutions: Provide car makers intuitive, personalized, virtual assistants and connected services for connected cars that are safer,easier, and more enjoyable. Our automotive solutions are generally sold as on-demand models that are typically priced on a per-unit basis formulti-year service terms. We also have a worldwide professional services team to provide custom solution development services and sell ourtechnologies through a traditional perpetual software license model, including a royalty based model.•Devices solutions: Provide consumer electronics manufacturers, developers, and within the broad ecosystem around the IoT, with specializedvirtual assistants, virtual keyboards and connected services. Our connected solutions are sold through on-demand models that typically havemulti-year terms with pricing generally based on volume. We provide custom solution development and integration services, and sell ourtechnologies through a traditional perpetual software license model, including a royalty based model.•Mobile operator services: Provide mobile network operators value added services that assist in creating new, high-profit revenue streams fromtheir subscribers, especially in emerging markets such as Latin American, India and Southeast Asia. Our mobile operator services are soldthrough on-demand models that typically have multi-year terms and a revenue share-based model.•Dragon solutions: Provide professional and personal productivity solutions to business users and consumers with the ability to use their voiceto create content, reports and other documents, as well as control their computers and laptops without the use of a keyboard or mouse. Thisdictation software is similar to Dragon Medical in our Healthcare segment and used in markets such as law, public safety, social services,education and accessibility. Dragon solutions are sold generally through a traditional perpetual software license model and recently we haveintroduced an on-demand model.The channels for distribution in the Mobile and Consumer segment utilize a direct sales force to sell to car makers, device makers, and mobileoperators. Direct distribution is supplemented by OEM partnerships with electronics suppliers, integrators, and content providers.Areas of expansion and focus for our Mobile and Consumer segment include: cloud and content expansion of our Automotive solutions; expansionacross the IoT in our Device solutions; geographic expansion of our mobile operator services; and, the expansion of our Dragon solutions into the cloud andenterprise market.Enterprise SegmentOur Enterprise segment is a leading provider for automated customer solutions and services worldwide. Differentiated by speech and artificialintelligence (“AI”) technologies, and complemented by our large professional services organization, our solutions help enterprises reduce or replace humancontact center agents with conversational systems, across voice, mobile, web and messaging channels. Our intelligent self-service solutions are highlyaccurate and dependable, resulting in increased customer satisfaction levels while simultaneously reducing the costs associated with delivering customerservice for the enterprise. We are transforming this business, leveraging our presence on-premise interactive voice response ("IVR") solutions and services,and expanding into multichannel, self-service cloud solutions. Our solutions and services portfolio now span voice, mobile, web and messaging channels,with inbound, outbound, voice biometrics and digital virtual assistant capabilities.Enterprise segment revenues were $349.3 million, $367.1 million, and $341.1 million in fiscal years 2015, 2014, and 2013, respectively. As apercentage of total segment revenue, the Enterprise segment revenues represented 17.6%, 18.5% and 17.4% in fiscal years 2015, 2014, and 2013,respectively.Our principal solutions for the Enterprise segment include the following:•OnPremise solutions and services: Provide software that is leveraged to implement automated customer service solutions that are integratedwith a wide range of on premise third-party IVR and contact center platforms. Our products include speech recognition, voice biometrics,transcription, text-to-speech, dialog and analytics products. Our global professional services team leverages domain expertise to provide end-to-end services to customers and partners, including business consulting, design, development, and deployment integrated solutions. OurOnPremise licensed products are primarily sold through a traditional perpetual software license model, and our OnPremise professional servicesare sold under project-based and multi-year managed services contracts.•OnDemand multichannel cloud: Deliver a platform that provides enterprises with the ability to implement automatic customer service acrossinbound, outbound, and digital customer service channels in the cloud. Our OnDemand multichannel cloud leverages our speech, voicebiometrics, text to speech and, and virtual assistant4Table of Contentstechnologies, to implement intelligent, conversational self-service applications, including voice call steering and self-service, automatedidentification and verification, and account access, virtual chat, proactive SMS, messaging and email, and customer service for mobile devicecustomers. Our OnDemand multichannel cloud is sold through sales models that typically have multi-year terms with pricing based on channeland/or volume of usage.The channels for distribution in the Enterprise segment utilize direct and channel sales, which includes a network of partners such as Avaya, BT, Cisco,DiData, Genesys, Huawei, MoshiMoshi, NICE, Telstra, and Verint. Our customers include, American Airlines, Amtrak, Bank of America, Barclays, Dominos,Delta, Deutsche Telekom, e*trade, ING Bank, Lloyds Banking Group, T-Mobile, Telefonica, Telstra, and Vodafone.Areas of focus and expansion for our Enterprise segment include extending our technology capabilities with intelligent self-service and AI for customerservice; expansion of our OnDemand multichannel cloud to international markets; sales and solution expansion for voice biometrics; and expanding ourOnPremise product and services portfolio.Imaging SegmentOur Imaging segment provides software solutions and expertise that help professionals and organizations to gain optimal control of their document andinformation processes. Our portfolio of products and services helps business customers achieve compliance with information security policies and regulationswhile enabling organizations to streamline and eliminate gaps across their document workflows.We are continuing to grow our business through multi-function printer ("MFP") OEM channels, expanding our scanning and print managementsoftware solutions, and broadening our footprint with end-user customers to become a solution suite provider. We have built on our position in MFP OEMchannels and managed print services space by accelerating the integration of capture and print management technologies. Our intelligent document captureand workflow solutions transform manual, disconnected processes into dynamic, streamlined, and automated workflows. When combined with printmanagement technologies, organizations are also able to control, manage, and monitor their entire print environment. Our business has seen increasedcommitments from key OEMs, a broader number of OEM partners who embed multiple products, and stronger end-user demand in key verticals likehealthcare, legal, and financial services.Imaging segment revenues were $237.7 million, $236.3 million, and $243.4 million in fiscal years 2015, 2014, and 2013, respectively. As a percentageof total segment revenue, the Imaging segment revenues represented 12.0%, 11.9% and 12.4% in fiscal years 2015, 2014, and 2013, respectively.Our principal solutions for the Imaging segment include the following:•MFP Scan automation solutions: Deliver scanning and document management solutions that improve productivity, drive efficiency and assistin enhancing security.•MFP Print automation solutions: Offer printing and document management solutions to capture and automate paper to digital workflows andto increase efficiency.•PDF and OCR software: Provide intuitive technologies that enable the efficient capture, creation, and management of document workflows.The channels for distribution in the Imaging segment utilize a combination of our global reseller network and direct sales. Our Imaging solutions aregenerally sold under a traditional perpetual software license model with a subset of our offerings sold as term licenses. Our Imaging customers and partnersinclude Ricoh, Xerox, HP, Canon, and Samsung.Areas of expansion and focus in the Imaging segment include investing to merge the scan and print technology platforms improving mobile access toour solutions and technologies, expanding our distribution channels and embedding relationships, and expanding our language coverage for OCR in order todrive a more comprehensive and compelling offering to our partners.5Table of ContentsResearch and Development/Intellectual PropertyIn recent years, we have developed and acquired extensive technology assets, intellectual property, and industry expertise in voice recognition, naturallanguage understanding and imaging technologies that provide us with a competitive advantage in our markets. Our technologies are based on complexalgorithms which require extensive amounts of acoustic models, language models, and recognition and understanding techniques. A significant investmentin capital and time would be necessary to replicate our current capabilities.We continue to invest in technologies to maintain our market-leading position and to develop new applications. As of September 30, 2015, ourtechnologies are covered by approximately 3,600 patents and 1,000 patent applications. Our intellectual property, whether purchased or developedinternally, is critical to our success and competitive position and, ultimately, to our market value. We rely on a portfolio of patents, copyrights, trademarks,services marks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our intellectual property and proprietary rights.We incurred research and development expenses of $310.3 million, $338.5 million, and $289.2 million in fiscal years 2015, 2014, and 2013, 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 solutions and technologies that compete in our target markets; however, currently there is no one company that directly competeswith all of our solutions and technologies. While we expect competition to continue to increase both from existing competitors and new market entrants, webelieve that we will compete effectively based on many factors, including:•Specialized Professional Services. Our superior technology, when coupled with the high quality and domain knowledge of our professionalservices organization, allows our customers and partners to place a high degree of confidence and trust in our ability to deliver results. We supportour customers in designing and building powerful innovative applications that specifically address their needs and requirements.•International Coverage. The international reach of our solutions and technologies is due to the broad language coverage of our offerings,including our voice recognition and natural language understanding technologies, which provide recognition for approximately 70 languages anddialects and natural-sounding synthesized speech in over 150 voices, and support a broad range of hardware platforms and operating systems. Ourimaging technology supports more than 120 languages for OCR and document handling, with up to 20 screen language choices, including Asianlanguages.•Technological Superiority. Our voice recognition, natural language understanding and imaging technologies, applications and solutions are oftenrecognized as the most innovative and proficient in their respective categories. Our voice recognition and natural language understandingtechnologies have industry-leading recognition accuracy and provide a natural, voice-enabled interaction with systems, devices and applications.Our OCR technology in our Imaging segment is viewed as the most accurate in the industry. Technology publications, analyst research andindependent benchmarks have consistently indicated that our solutions and technologies rank at or above performance levels of alternativesolutions.•Broad Distribution Channels. Our ability to address the needs of specific markets, such as financial, legal, healthcare and government, and tointroduce new solutions and technologies quickly and effectively is enhanced through our 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.In our segments, we compete with companies such as Adobe, Baidu, Google, M*Modal, Microsoft and 3M. In addition, a number of smaller companiesoffer solutions, technologies or products that are competitive with our solutions and technologies in the voice recognition, natural language understanding,text input and imaging markets. In certain markets, some of our partners such as Avaya, Cisco, Convergys, and Genesys develop and market products andservices that might be considered substitutes for our solutions and technologies. Current and potential competitors have established, or may establish,cooperative relationships among themselves or with third parties to increase the ability of their technologies to address the needs of our prospectivecustomers.Some of our competitors or potential competitors, such as 3M, Adobe, Baidu, Google, and Microsoft, 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.6Table of ContentsEmployeesAs of September 30, 2015, we had approximately 13,500 full-time employees, including approximately 1,100 in sales and marketing, approximately2,000 in professional services, approximately 1,700 in research and development, approximately 700 in general and administrative and approximately 8,000that provide transcription and editing services. Approximately 48% of our employees are based outside of the United States, approximately 63% of whomprovide transcription and editing services and are based in India. None of our employees in the United States are represented by a labor union; however, incertain foreign subsidiaries labor unions or workers’ councils represent some of our employees. We believe that our relationships with our employees aresatisfactory.Financial Information About Geographic AreasWe have offices in a number of international locations including: Australia, Belgium, Brazil, Canada, China, 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 years 2015, 2014, and 2013, 73%,73% and 72% of revenue was generated in the United States and 27%, 27% and 28% of revenue was generated by our international customers, respectively.Item 1A.Risk FactorsYou should carefully consider the risks described below when evaluating our company and when deciding whether to invest in our company. Therisks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we do notcurrently believe are important to an investor may also harm our business operations. If any of the events, contingencies, circumstances or conditionsdescribed in the following risks actually occurs, our business, financial condition or our results of operations could be seriously harmed. If that 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 BusinessThe 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 markets for our products and servicesare characterized by intense competition, evolving industry standards, emerging business and distribution models, disruptive software and hardwaretechnology developments, short product and service life cycles, price sensitivity on the part of customers, and frequent new product introductions, includingalternatives with limited functionality available at lower costs or free of charge. Within voice recognition and natural language understanding, we competewith AT&T, Baidu, Google, Microsoft and other smaller providers. Within healthcare, we compete with 3M, M*Modal, Optum and other smaller providers.Within imaging, we compete with ABBYY, Adobe, I.R.I.S. and NewSoft. In our enterprise business, some of our partners such as Avaya, Cisco, Intervoice andGenesys develop and market products that might be considered substitutes for our solutions. In addition, a number of smaller companies in voice recognition,natural language understanding, text input and imaging produce technologies or products that are in some markets competitive with our solutions. Currentand potential 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. Furthermore, there has been a trend toward industry consolidation in our markets for severalyears. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies areacquired or are unable to continue operations.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, Baidu, Google and Microsoft, 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, and in certain cases may be ableto include or combine their competitive products or technologies with other of their products or technologies in a manner whereby the competitivefunctionality is available at lower cost or free of charge within the larger offering. To the extent they do so, market acceptance and penetration of ourproducts, and therefore our revenue and bookings, may be adversely affected. Our success will depend substantially upon our ability to enhance our productsand technologies and to develop and introduce, on a timely and7Table of Contentscost-effective basis, new products and features that meet changing customer requirements and incorporate technological enhancements. If we are unable todevelop new products and enhance functionalities or technologies to adapt to these changes, or if we are unable to realize synergies among our acquiredproducts and technologies, our business will suffer.Our 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:•the pace of the transition to an on-demand and transactional revenue model;•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;•customers delaying their purchasing decisions in anticipation of new versions of our products;•contractual counterparties are unable to, or do not, meet their contractual commitments to us;•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.A significant portion of our revenue and bookings are derived, and a significant portion of our research and development activities are based, outsidethe United States. Our results could be harmed by economic, political, regulatory, foreign currency fluctuations and other risks associated with theseinternational regions.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 outside the United States and we have a large number of employees in India that provide transcription services.We also have a large number of employees in Canada, Germany and the United Kingdom that provide professional services. A significant portion of thedevelopment of our voice recognition and natural language understanding solutions is conducted in Canada and Germany, and a significant portion of ourimaging research and development is conducted in Hungary and Canada. We also have significant research and development resources in Austria, Belgium,Italy, and the United Kingdom. In addition, we are exposed to changes in foreign currencies including the euro, British pound, Brazilian Real, Canadiandollar, Japanese yen, Indian rupee and Hungarian forint. Changes in the value of foreign currencies relative to the value of the U.S. dollar could adverselyaffect future revenue and operating results. Accordingly, our future results could be harmed by a variety of factors associated with international sales andoperations, including:•changes in foreign currency exchange rates or the lack of ability to hedge certain foreign currencies;•changes in a specific country's or region's economic conditions;8Table of Contents•compliance with laws and regulations in many countries and any subsequent changes in such laws and regulations;•geopolitical turmoil, including terrorism and war;•trade protection measures and import or export licensing requirements imposed by the United States and/or by other countries;•negative consequences from changes in applicable tax laws;•difficulties in staffing and managing operations in multiple locations in many countries;•longer payment cycles of foreign customers and timing of collections in foreign jurisdictions; and•less effective protection of intellectual property than in the United States.If our efforts to design and execute our formal transformation program are not successful, our business could be harmed.We have been designing and executing a formal transformation program to focus our product investments on our growth opportunities, increase ouroperating efficiencies, reduce costs, and further enhance shareholder value through share buybacks. The design of this program requires numerousassumptions and estimates that are unpredictable and inherently uncertain. There can be no assurance that we will be successful in designing and/orexecuting this transformation program or be able to realize any of the anticipated benefits of this program, within the expected timeframes, or at all.Additionally, if we are not successful in strategically aligning our product portfolio, the activity of such businesses may dilute our earnings and we may notbe able to achieve the anticipated benefits of this program. As a result, our financial results may not meet our or the expectations of securities analysts orinvestors in the future and our business could be harmed.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 leavein the 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 qualifiedpersonnel, including software engineers and operational personnel, but may not be able to attract, assimilate or retain qualified personnel in the future. Anyfailure to attract, integrate, motivate and retain these employees could harm our business.Our strategy to increase term licensing and transaction based recurring revenue may adversely affect our near-term revenue growth and results ofoperations.Our shift to term licensing and transaction based recurring revenue models, from a perpetual software license model, will create a recurring revenuestream that is more predictable, however the transition creates risks related to the timing of revenue recognition. We also incur certain expenses associatedwith the infrastructures and selling efforts of our hosting offerings in advance of our ability to recognize the revenues associated with these offerings, whichmay adversely affect our near-term reported revenues, results of operations and cash flows. A decline in renewals of recurring revenue offerings in any periodmay not be immediately reflected in our results for that period, but may result in a decline in our revenue and results of operations in future quarters.Interruptions or delays in service from data center hosting facilities could impair the delivery of our services and harm our business.We currently serve our customers from our and 3rd party data center hosting facilities. Any damage to, or failure of, our systems in whole or in part couldresult in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers toterminate their on-demand services and adversely affect our renewal rates and our ability to attract new customers.Our business is subject to a variety of domestic 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 us and our subsidiaries, andamong us, our subsidiaries and other parties with which we have relations. Many jurisdictions have passed laws in this area, and other jurisdictions areconsidering imposing additional restrictions. These laws continue to evolve and may be inconsistent from jurisdiction to jurisdiction. Complying withemerging and changing requirements may cause us to incur substantial costs or require us to change our business practices. Noncompliance could result inpenalties or significant legal liability, and could affect our ability to retain and attract customers.9Table of ContentsAny 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.Security and privacy breaches may damage client relations and inhibit our growth.The confidentiality and security of our and third party information is critical to our business. Our services involve the transmission, use, and storage ofcustomers’ and their customer’s confidential information, and a failure of our security or privacy measures or policies could have a material adverse effect onour financial operation and results of operations. These measures may be breached as a result of third-party action, through a variety of means resulting insomeone obtaining unauthorized access to our or our customers’ information or our intellectual property. Because the techniques used to obtainunauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable toanticipate these techniques or to implement adequate preventative measures. Any security or privacy breach may:•cause our customers to lose confidence in our solutions;•harm our reputation;•expose us to litigation and liability; and•increase our expenses from potential remediation costs.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 losses of $115.0 million, $150.3 million and $115.2 million in fiscal years 2015, 2014 and 2013, respectively, and have a totalaccumulated deficit of $750.4 million as of September 30, 2015. If we are unable to return to profitability, the market price for our stock may decline, perhapssubstantially. We cannot assure you that our revenue or bookings will grow or that we will return to profitability in the future. If we do not achieveprofitability, we may be required to raise additional capital to maintain or grow our operations. Additional capital, if available at all, may be highly dilutiveto existing investors or contain other unfavorable terms, such as a high interest rate and/or restrictive covenants.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 weexpect future 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 into our products and technology;•potential difficulties in completing projects associated with in-process research and development;•unanticipated expenses and delays in completing acquired development projects and technology integration and upgrades;•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.10Table of ContentsAs 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 a material andadverse 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 assets 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 fromthe acquisition 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 is not subject to amortization but is subject to an impairmentanalysis, at least annually, which may result in an impairment charge if the carrying value exceeds its implied fair value. As of September 30, 2015, we hadidentified intangible assets of approximately $0.8 billion, net of accumulated amortization, and goodwill of approximately $3.4 billion. In addition,purchase accounting limits our ability to recognize certain revenue that otherwise would have been recognized by the acquired company as an independentbusiness. As a result, the combined company may delay revenue recognition or recognize less revenue than we and the acquired company would haverecognized 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, including contingent consideration, and alsoincurred significant debt to finance the cash consideration used for our acquisitions. We may continue to issue equity securities for future acquisitions, whichwould dilute existing stockholders, perhaps significantly, depending on the terms of such acquisitions. We may also incur additional debt in connection withfuture acquisitions, which, if available at all, may place additional restrictions on our ability to operate our business.Tax matters may cause significant variability in our financial results.Our businesses are subject to income taxation in the United States, as well as in many tax jurisdictions throughout the world. Tax rates in thesejurisdictions may be subject to significant change. If our effective tax rate increases, our operating results and cash flow could be adversely affected. Oureffective income tax rate can vary significantly between periods due to a number of complex factors including, but not limited to:•projected levels of taxable income;•pre-tax income being lower than anticipated in countries with lower statutory rates or higher than anticipated in countries withhigher statutory rates;•increases or decreases to valuation allowances recorded against deferred tax assets;11Table of Contents•tax audits conducted and settled by various tax authorities;•adjustments to income taxes upon finalization of income tax returns;•the ability to claim foreign tax credits;•the repatriation of non-U.S. earnings for which we have not previously provided for income taxes; and•changes in tax laws and their interpretations in countries in which we are subject to taxation.During 2014, Ireland enacted changes to the taxation of certain Irish incorporated companies effective as of January 2021. On October 5, 2015, theOrganization for Economic Cooperation and Development released the Final Reports for its Action Plan on Base Erosion and Profit Shifting. Theimplementation of one or more of these reports in jurisdictions in which we operate, together with the 2014 enactment by Ireland could result in an increaseto our effective tax rate.The failure to successfully maintain the adequacy of our system of internal control over financial reporting could have a material adverse impact onour 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 adverseimpact on 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.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 customer relationships, patents and core technology, completedtechnology 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 oversight, including audits and investigations which could identify violations ofthese agreements. Government contract violations could result in a range of consequences including, but not limited to, contract price adjustments, civil andcriminal penalties, contract termination, forfeiture of profit and/or suspension of payment, and suspension or debarment from future government contracts.We could also suffer serious harm to our reputation if we were found to have violated the terms of our government contracts.12Table of ContentsRisks 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 or discover aspects of our products or toobtain, license, sell or otherwise use information that we regard as proprietary. Policing unauthorized use of our products is difficult and we may not be ableto protect our technology from unauthorized use. Additionally, our competitors may independently develop technologies that are substantially the same orsuperior to our technologies and that do not infringe our rights. In these cases, we would be unable to prevent our competitors from selling or licensing thesesimilar or superior technologies. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of theUnited States. Although the source code for our proprietary software is protected both as a trade secret and as a copyrighted work, litigation may be necessaryto enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defendagainst claims of infringement or invalidity. Litigation, regardless of the outcome, can be very expensive and can divert management efforts.Third parties have claimed and may claim in the future that we are infringing their intellectual property, and we could be exposed to significantlitigation or licensing expenses or be prevented from selling our products if such claims are successful.From time to time, we are subject to claims that we or our customers may be infringing or contributing to the infringement of the intellectual propertyrights of others. We may be unaware of intellectual property rights of others that may cover some of our technologies and products. If it appears necessary ordesirable, we may seek licenses for these intellectual property rights. However, we may not be able to obtain licenses from some or all claimants, the terms ofany offered licenses may not be acceptable to us, and we may not be able to resolve disputes without litigation. Any litigation regarding intellectual propertycould be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Third partyintellectual 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, cause severe disruptions to our operations or the markets in which we compete, or requireus to satisfy indemnification commitments with our customers including contractual provisions under various arrangements. Any of these could seriouslyharm our business.Our software products may have bugs, which could result in delayed or lost revenue and bookings, expensive correction, liability to our customers andclaims 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 usor our 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, and could result in costly litigation and payment of damages. Such claims could harm ourreputation, financial results and competitive position.Risks Related to our Corporate Structure, Organization and Common StockOur debt agreements contain covenant restrictions that may limit our ability to operate our business.Our debt agreements contain, and any of our other future debt agreements or arrangements may contain, covenant restrictions that limit our ability tooperate 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;•repurchase capital stock or make other restricted payments;•declare or pay dividends or make other distributions to stockholders; and•merge or consolidate with any entity.13Table of ContentsOur ability to comply with these limitations is dependent on our future performance, which will be subject to many factors, some of which are beyondour control, including prevailing economic conditions. As a result of these limitations, our ability to respond to changes in business and economicconditions and to obtain additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that mightotherwise be beneficial to us. In addition, our failure to comply with our debt covenants could result in a default under our debt agreements, which couldpermit the holders to accelerate our obligation to repay the debt. If any of our debt is accelerated, we may not have sufficient funds available to repay theaccelerated debt. 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, 2015, we had a total of $2,220.2 million face value of debt outstanding, $472.5 million interm loans due in August 2019, $1,050.0 million of senior notes due in August 2020 and $697.7 million in convertible debentures. Investors may require usto redeem the 2031 Debentures or 2035 Debentures, totaling $433.8 million and $263.9 million, respectively, in aggregate principal amount in November2017 or November 2021, respectively, or sooner if the closing sale price of our common stock is more than 130% of the then current conversion price forcertain specified periods. If a holder elects to convert, we will be required to pay the principal amount in cash and any amounts payable in excess of theprincipal amount will be paid in cash or shares of our common stock, at our election. We also have a $75.0 million revolving credit line available to usthrough August 2018. As of September 30, 2015, there were $6.3 million of letters of credit issued, but there were no other outstanding borrowings under therevolving 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, exploiting business opportunities, and other business activities;•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 notable to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, including the convertible debentures,sell assets, 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 notbe able to meet our payment obligations under the convertible debentures and our other debt.In addition, approximately $472.5 million of our debt outstanding as of September 30, 2015 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.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, market andinterest rate risks that may be exacerbated by the recent global financial crisis. If the banking system or the fixed income, credit or equity markets deteriorateor remain volatile, our investment portfolio may be impacted and the values and liquidity of our investments could be adversely affected.14Table of ContentsThe 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 to resell thecommon 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 thathave experienced volatility in the market price of their stock often are subject to securities class action litigation. If we were the subject of such litigation, itcould result in substantial costs and divert management's attention and resources.Future sales of our common stock in the public market could adversely affect the trading price of our common stock and our ability to raise funds in newstock 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 or contingent consideration.We may continue to issue equity securities for future acquisitions, which would dilute existing stockholders, perhaps significantly depending on the terms ofsuch acquisitions. No prediction can be made as to the effect, if any, that future sales of shares of common stock, or the availability of shares of common stockfor future sale, will have on the trading price of our common stock.The holdings of our largest stockholder may enable them to influence matters requiring stockholder approval.As of September 30, 2015, High River Limited Partnership, Hopper Investments LLC, Barberry Corp., Icahn Partners LP, Icahn Partners Master Fund LP,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, Icahn CapitalLP, Icahn Onshore LP, Icahn Offshore LP, and Beckton Corp. (collectively, the “Icahn Group”), beneficially owned approximately 19.6% of the outstandingshares of our common stock. Brett Icahn and David Schechter of the Icahn Group have been appointed as directors of the Company. Because of its largeholdings of our capital stock relative to other stockholders, the Icahn Group has a strong influence over matters requiring approval by our stockholders.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.15Table of ContentsItem 1B.Unresolved Staff CommentsNone.Item 2.PropertiesOur corporate headquarters are located in Burlington, Massachusetts. As of September 30, 2015, we leased approximately 1.8 million square feet ofbuilding space, primarily in the United States, and to a lesser extent, in Europe, Canada, Japan and the Asia-Pacific regions. In addition, we own 130,000square feet of building space located in Melbourne, Florida. We lease research and development, and sales and support offices throughout the United Statesand maintain leased facilities in various countries around the world. Larger leased sites include properties located in Montreal, Quebec, Sunnyvale,California and Bangalore, India.We also include in the total square feet leased space in specialized data centers in Massachusetts, Texas, the United Kingdom and smaller facilitiesaround the world.We believe our existing facilities and equipment, which are used by all of our operating segments, are in good operating condition and are suitable forthe conduct of our business.Item 3.Legal ProceedingsSimilar to many companies in the software industry, we are involved in a variety of claims, demands, suits, investigations and proceedings that arisefrom time to time relating to matters incidental to the ordinary course of our business, including actions with respect to contracts, intellectual property,employment, benefits and securities matters. We have estimated the amount of probable losses that may result from all currently pending matters, and suchamounts are reflected in our consolidated financial statements. These recorded amounts are not material to our consolidated financial position nor results ofoperations and no additional material losses related to these pending matters are reasonably possible. While it is not possible to predict the outcome of thesematters with certainty, we do not expect the results of any of these actions to have a material adverse effect on our results of operations or financial position.However, each of these matters is subject to uncertainties, the actual losses may prove to be larger or smaller than the accruals reflected in our consolidatedfinancial statements, and we could incur judgments or enter into settlements of claims that could adversely affect our financial position, results of operationsor cash flows.Item 4.Mine Safety DisclosuresNot applicable.16Table 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 Year 2014: First quarter$13.00 $19.03Second quarter14.59 17.29Third quarter14.95 19.61Fourth quarter14.87 18.94Fiscal Year 2015: First quarter13.69 16.28Second quarter13.20 14.60Third quarter13.78 18.37Fourth quarter14.37 18.96HoldersAs of October 31, 2015, there were 699 stockholders of record of our common stock. Because many of our shares of common stock are held by brokersand other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.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, or to purchase common stock under our share repurchase program and do not anticipate paying any cash dividends in theforeseeable future. Furthermore, the terms of our debt agreements place restrictions 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 (in thousands, except per share data): 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 Program (1)July 1, 2015 - July 31, 2015 1,606 $17.23 1,606 $518,847August 1, 2015 - August 31, 2015 1,107 $17.31 1,107 $499,688September 1, 2015 - September 30, 2015 577 $16.84 577 $489,967Total 3,290 3,290 (1)On April 29, 2013, our Board of Directors approved a share repurchase program for up to $500.0 million of our outstanding shares of common stock.On April 29, 2015, our Board of Directors approved an additional $500.0 million under our share repurchase program. The plan has no expiration 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.17Table of ContentsUnregistered Sales of Equity Securities and Use of ProceedsOn November 12, 2014, we issued 288,148 shares for our common stock as a settlement of a contingent earn-out obligation. On June 1, 2014, weissued 234,375 shares of our common stock to International Business Machines Corporation as consideration for a collaboration agreement. On September 6,2013, Warburg Pincus converted 3,562,238 shares of Series B Preferred Stock into an equivalent number of common shares. On August 15, 2013, we issued934,960 shares of our common stock to International Business Machines Corporation as consideration for a collaboration agreement. All of the proceedingshares were issued in reliance upon an exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Section 4(a)(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 conjunctionwith “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. Fiscal Year Ended September 30,(Dollars in millions, except per share amounts)2015 2014 2013 2012 2011Operations: Total revenues$1,931.1 $1,923.5 $1,855.3 $1,651.5 $1,318.7Gross profit1,101.3 1,079.1 1,088.7 1,046.6 818.9Income (loss) from operations54.9 (21.4) 48.5 126.2 52.6Provision (benefit) for income taxes34.5 (4.7) 18.6 (141.8) (8.2)Net (loss) income$(115.0) $(150.3) $(115.2) $207.1 $38.2Net (Loss) Income Per Share Data: Basic$(0.36) $(0.47) $(0.37) $0.67 $0.13Diluted$(0.36) $(0.47) $(0.37) $0.65 $0.12Weighted average common sharesoutstanding: Basic317.0 316.9 313.6 306.4 302.3Diluted317.0 316.9 313.6 320.8 316.0Financial Position: Cash and cash equivalents and marketablesecurities$568.8 $588.2 $846.8 $1,129.8 $478.5Total assets5,585.3 5,820.3 5,958.6 5,799.0 4,095.3Long-term debt, net of current portion2,118.8 2,127.4 2,108.1 1,735.8 853.0Total deferred revenue668.2 548.1 414.6 315.1 276.0Total stockholders’ equity2,265.3 2,582.0 2,638.0 2,728.3 2,493.4Selected Data and Ratios: Working capital$417.6 $522.5 $604.3 $736.5 $379.9Depreciation of property and equipment62.4 51.7 39.8 31.7 27.6Amortization of intangible assets168.3 170.1 168.8 155.5 143.3Gross margin percentage57.0% 56.1% 58.7% 63.4% 62.1%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 ofour business. 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.Trends in Our BusinessWe are a leading provider of voice recognition solutions and natural language understanding technologies. Our solutions and technologies are used inthe healthcare, mobile, consumer, enterprise customer service, and imaging markets. We are seeing18Table of Contentsseveral trends in our markets, including (i) the growing adoption of cloud-based, connected services and highly interactive mobile applications, (ii) deeperintegration of virtual assistant capabilities and services, and (iii) the continued expansion of our core technology portfolio from speech recognition to naturallanguage understanding, semantic processing, domain-specific reasoning, dialog management capabilities, artificial intelligence, and biometric speakerauthentication.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 solutionscan transform the way people use the Internet, telecommunications systems, electronic medical records, wireless and mobile networks and related corporateinfrastructure to conduct business.•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. The volume processed in our hosted transcriptionservices has experienced some erosion in lines processed when customers adopt EMR systems, and when in some cases customers use our licensedDragon Medical product to support input into the EMR, which has been partially offset by expansion in our customer base. We believe animportant trend in the healthcare market is the desire to improve efficiency in the coding and revenue cycle management process. Our solutionsreduce costs by increasing automation of this important workflow and also enable hospitals to improve documentation used to support billings. Inaddition to improved efficiency, there is an impending change in the industry coding standard from ICD-9 to ICD-10, which will significantlyincrease the number of possible codes, and therefore, increase the complexity of this process, which in turn reinforces our customers' desire forimproved efficiency. We are investing to expand our product set to address the various healthcare opportunities, including deeper integration withour clinical documentation solutions; investing in our cloud-based products and operations; entering new and adjacent markets such as ambulatorycare; and expanding our international capabilities.•Mobile and Consumer. Trends in our mobile and consumer business 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 in automobiles, the adoption of our technology on a broadening scope of devices, such as televisions, set-topboxes, e-book readers, tablet and laptop computers, cameras and third-party applications and away from consumer software. The more powerfulcapabilities of mobile devices require us to supply a broader portfolio of specialized virtual assistants and connected services built on voicerecognition, text-to-speech, natural language understanding, dialog and text input, where the complexity of the technologies allow us to charge ahigher price. Within given levels of our technology set, we have seen growth opportunities limited by the consolidation of this market to a smallnumber of customers as well as increased competition in voice recognition and natural language technologies and services sold to device OEMs.We continue to see strong demand involving the sale and delivery of both software and non-software related services, as well as products to helpcustomers define, design and implement increasingly robust and complex custom solutions such as virtual assistants. We continue to see anincreasing proportion of revenue from on-demand and transactional arrangements as opposed to traditional perpetual licensing of our mobileproducts and solutions. Although this has a negative impact on near-term revenue, we believe this model will build stronger and more predictablerevenues over time. We are investing to expand the cloud capabilities and content of our Automotive solutions; expansion across the IoT in ourDevice solutions; geographic expansion of our mobile operator services; and, the expansion of our Dragon solutions into the cloud and enterprisemarket.•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. In fiscal year 2015, revenues and bookings from on-demand solutions increased significantly, as a growing proportion of customers chose our cloud-based solutions for call center, web and mobilecustomer care solutions. We expect these trends to continue in fiscal year 2016. We are investing to extend our technology capabilities withintelligent self-service and AI for customer service; expand our OnDemand multichannel cloud to international markets; expand our sales andsolution for voice biometrics; and expand our OnPremise product and services portfolio.•Imaging. The imaging market is evolving to include more networked solutions to multi-function printing devices, as well as more mobile access tothose networked solutions, and away from packaged software. We are investing to merge the scan and print technology platforms to improvemobile access to our solutions and technologies; expand our19Table of Contentsdistribution channels and embedding relationships; and expand our language coverage for OCR in order to drive a more comprehensive andcompelling offering to our partners.Key MetricsIn evaluating the financial condition and operating performance of our business, management focuses on revenue, net loss, gross margins, operatingmargins, cash flow from operations and deferred revenue. A summary of these key financial metrics is as follows:For the fiscal year ended September 30, 2015, as compared to the fiscal year ended September 30, 2014:•Total revenue increased by $7.6 million to $1,931.1 million;•Net loss decreased by $35.3 million to a loss of $115.0 million;•Gross margins increased by 0.9 percentage points to 57.0%;•Operating margins increased by 3.9 percentage points to 2.8%;•Cash provided by operating activities for the fiscal year ended September 30, 2015 was $487.6 million, an increase of $129.5 million fromthe prior fiscal year.As of September 30, 2015, as compared to September 30, 2014:•Total deferred revenue increased 21.9% to $668.2 million driven primarily by mobile connected services and maintenance and supportcontracts.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, 2015, as compared to the same period in 2014, is as follows:•Net new bookings increased 3.6% from one year ago to $1.5 billion. The net new bookings growth was led by our Healthcare segment, offset bylower net new bookings in our mobile operator services and consumer desktop sales. In addition, the net new bookings performance was negativelyimpacted by fluctuation in currency exchange rates;Bookings represent the estimated gross revenue value of transactions at the time of contract execution, except for maintenance and supportofferings. For fixed price contracts, the bookings value represents the gross total contract value. For contracts where revenue is based on transactionvolume, the bookings value represents the contract price multiplied by the estimated future transaction volume during the contract term, whether ornot such transaction volumes are guaranteed under a minimum commitment clause. Actual results could be different than our initial estimate. Themaintenance and support bookings value represents the amounts the customer is invoiced in the period. Because of the inherent estimates requiredto determine bookings and the fact that the actual resultant revenue may differ from our initial bookings estimates, we consider bookings oneindicator of potential future revenue and not as an arithmetic measure of backlog.Net new bookings represents the estimated revenue value at the time of contract execution from new contractual arrangements or the estimatedrevenue value incremental to the portion of value that will be renewed under pre-existing arrangements.•Segment recurring revenue represented 66.4% and 63.6% of total segment revenue in fiscal years 2015 and 2014, respectively. Segment recurringrevenue represents the sum of recurring product and licensing, on-demand, and maintenance and support revenues as well as the portion ofprofessional services revenue delivered under ongoing contracts. Recurring product and licensing revenue comprises term-based and ratablelicenses as well as revenues from royalty arrangements;•Annualized line run-rate in our healthcare on-demand solutions decreased 2.6% from one year ago to approximately 5.3 billion lines per year. Theannualized line run-rate is determined using billed equivalent line counts in a given quarter, multiplied by four; and•Estimated three-year value of total on-demand contracts increased 2.4% from one year ago to approximately $2.3 billion. We determine this valueas of the end of the period reported, by using our estimate of three years of anticipated future revenue streams under signed on-demand contractsthen in place, whether or not they are guaranteed through a minimum commitment clause. Our estimate is based on estimates used in evaluating thecontracts and determining sales compensation, adjusted for changes in estimated launch dates, actual volumes achieved and other factors deemedrelevant. For contracts with an expiration date beyond three years, we include only the value expected within three years. For20Table of Contentsother contracts, we assume renewal consistent with historic renewal rates unless there is a known cancellation. Contracts are generally priced byvolume of usage and typically have no or low minimum commitments. Actual revenue could vary from our estimates due to factors such ascancellations, non-renewals or volume fluctuations.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 Year 2015 Fiscal Year 2014 Fiscal Year 2013 % Change 2015 vs.2014 % Change 2014 vs.2013Product and licensing$696.3 $711.0 $753.7 (2.1)% (5.7)%Professional services and hosting919.5 910.9 832.4 0.9 % 9.4 %Maintenance and support315.4 301.6 269.2 4.6 % 12.0 %Total Revenues$1,931.1 $1,923.5 $1,855.3 0.4 % 3.7 %United States$1,407.3 $1,408.3 $1,339.7 (0.1)% 5.1 %International523.9 515.2 515.6 1.7 % (0.1)%Total Revenues$1,931.1 $1,923.5 $1,855.3 0.4 % 3.7 %Fiscal Year 2015 Compared to Fiscal Year 2014The geographic split for fiscal years 2015 and 2014 was 73% of total revenue in the United States and 27% internationally. International revenue wasnegatively impacted by weakening foreign currencies offset by an increase in revenue driven by a recent acquisition in fiscal year 2015.Fiscal Year 2014 Compared to Fiscal Year 2013The geographic split for fiscal year 2014 was 73% of total revenue in the United States and 27% internationally, as compared to 72% of total revenuein the United States and 28% internationally for the same period last year. The increase in the proportion of revenue generated domestically was primarilydriven by our recent acquisitions, which are primarily located in the United States.Product and Licensing RevenueProduct and licensing revenue primarily consists of sales and licenses of our technology. The following table shows product and licensing revenue, indollars and as a percentage of total revenues (dollars in millions): Fiscal Year 2015 Fiscal Year 2014 Fiscal Year 2013 % Change 2015 vs.2014 % Change 2014 vs.2013Product and licensing revenue$696.3 $711.0 $753.7 (2.1)% (5.7)%As a percentage of total revenues36.1% 37.0% 40.6% Fiscal Year 2015 Compared to Fiscal Year 2014Product and licensing revenue for fiscal year 2015 decreased $14.7 million, as compared to fiscal year 2014. The decrease consisted of a $11.0 milliondecrease in our Healthcare business and a $1.9 million decrease in our Mobile and Consumer business. The decrease in Healthcare revenue was drivenprimarily by lower license sales of our clinical documentation solutions as we continue to see a shift toward a term-licensing model. Within our Mobile andConsumer business, license sales in our automotive business increased $25.2 million, partially offset by a $14.5 million decrease in Dragon solutions sales, aswell as a $10.2 million decrease in our devices solutions as the device market continues to consolidate.As a percentage of total revenue, product and licensing revenue decreased from 37.0% to 36.1% for the year ended September 30, 2015. This decreasewas primarily driven by our recent acquisitions which have a higher proportion of on-demand hosting revenue. Within product and licensing revenue, we arealso seeing transition from perpetual licensing model to term-licensing model which is recognized over time.21Table of ContentsFiscal Year 2014 Compared to Fiscal Year 2013Product and licensing revenue for fiscal year 2014 decreased $42.7 million, as compared to fiscal year 2013. The decrease consisted of a $35.3 milliondecrease in Mobile and Consumer revenue, a $29.1 million decrease in Enterprise revenue, offset by an increase of $22.2 million in Healthcare revenue. Thedecrease in Mobile and Consumer revenue was driven by a $24.2 million decrease in sales of our embedded licenses, resulting from a continuing shift towardon-demand and ratable pricing models, together with a decrease of $11.5 million in Dragon desktop consumer products due to an overall weakness indesktop software sales. The decrease in Enterprise revenues was primarily driven by lower sales of on-premise solutions. The increase in Healthcare revenue,included a $13.7 million increase in sales of our Clintegrity solutions, together with an $11.3 million increase in sales of Dragon Medical licenses.As a percentage of total revenue, product and licensing revenue decreased from 40.6% to 37.0% for the year ended September 30, 2014. This decreasewas driven by lower sales of embedded licenses in our Mobile and Consumer segment, resulting from a continuing shift toward on-demand and hostedservices. Within product and licensing revenue, we are also seeing more term-licensing and transactional models, which are recognized over time. In addition,the decrease includes the impact of our recent acquisitions, which have a higher proportion of on-demand hosting revenue.Professional Services and Hosting RevenueProfessional services revenue primarily consists of consulting, implementation and training services for customers. Hosting revenue primarily relates todelivering on-demand hosted services, such as medical transcription, automated customer care applications, mobile operator services, and mobileinfotainment, search and transcription, over a specified term. The following table shows professional services and hosting revenue, in dollars and as apercentage of total revenues (dollars in millions): Fiscal Year 2015 Fiscal Year 2014 Fiscal Year 2013 % Change 2015 vs.2014 % Change 2014 vs.2013Professional services and hosting revenue$919.5 $910.9 $832.4 0.9% 9.4%As a percentage of total revenues47.6% 47.3% 44.9% Fiscal Year 2015 Compared to Fiscal Year 2014Professional services and hosting revenue for fiscal year 2015 increased $8.6 million, as compared to fiscal year 2014, driven by a $19.3 millionincrease in hosting revenue offset by a $10.7 million decrease in professional services revenue. In our hosting business, Mobile and Consumer on-demandrevenue grew $21.2 million driven by a continued trend toward cloud services in our automotive and devices solutions, as well as a recent acquisition in ourmobile operator services. Enterprise on-demand revenue grew $7.3 million. These increases were offset by a $9.2 million decrease in Healthcare hostingrevenue as we continue to experience some volume erosion in our transcription solutions. In our professional services business, Enterprise professionalservices revenue decreased $20.2 million driven by lower professional services from our OnPremise solutions, partially offset by a $10.7 million increase inHealthcare professional services driven by our CDI and coding solutions.As a percentage of total revenue, professional services and hosting revenue increased from 47.3% for the year ended September 30, 2014 to 47.6% forthe year ended September 30, 2015. This increase was driven by our recent acquisitions which have a higher proportion of professional services and hostingrevenue. The increase also includes the continuing shift toward on-demand and hosting services in our Mobile and Consumer segment and Enterprisesegment.Fiscal Year 2014 Compared to Fiscal Year 2013Professional services and hosting revenue for fiscal year 2014 increased $78.5 million, as compared to fiscal year 2013. The increase included a$42.9 million increase in Enterprise revenue primarily driven by our recent acquisitions. Healthcare revenue increased $18.6 million driven by a $12.1million increase in revenues from our Clintegrity product line and a $6.4 million increase in revenues from our Clinical Documentation Solutions. Therevenue increase in our Clinical Documentation Solutions included $18.1 million of revenues from acquisitions, partially offset by the negative impact fromthe continued erosion resulting from customers' migration to electronic medical records.As a percentage of total revenue, professional services and hosting revenue increased from 44.9% for the year ended September 30, 2013 to 47.3% forthe year ended September 30, 2014. This increase was driven by our recent Healthcare and Enterprise acquisitions, which have a higher proportion ofprofessional services and hosting revenue. The increase also includes the continuing shift toward on-demand and hosting services in our Mobile andConsumer segment.22Table of ContentsMaintenance 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 revenues (dollars in millions): Fiscal Year 2015 Fiscal Year 2014 Fiscal Year 2013 % Change 2015 vs.2014 % Change 2014 vs.2013Maintenance and support revenue$315.4 $301.6 $269.2 4.6% 12.0%As a percentage of total revenues16.3% 15.7% 14.5% Fiscal Year 2015 Compared to Fiscal Year 2014Maintenance and support revenue for fiscal year 2015 increased $13.8 million, as compared to fiscal year 2014. The increase was driven by strongmaintenance renewals, including an increase of $11.0 million in Healthcare maintenance and support revenue and an increase of $5.9 million in Imagingmaintenance and support revenue.Fiscal Year 2014 Compared to Fiscal Year 2013Maintenance and support revenue for fiscal year 2014 increased $32.3 million, as compared to fiscal year 2013. The increase was driven by strongmaintenance renewals in all of our segments, including an increase of $11.5 million in Imaging revenue, a $10.8 million increase in Healthcare revenuedriven by sales of Dragon Medical solutions, together with an increase of $8.1 million in Enterprise revenue.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 the cost of product and licensing revenue, in dollars and as a percentage of product and licensing revenue (dollars inmillions): Fiscal Year 2015 Fiscal Year 2014 Fiscal Year 2013 % Change 2015 vs.2014 % Change 2014 vs.2013Cost of product and licensing revenue$91.8 $97.6 $99.4 (5.9)% (1.8)%As a percentage of product and licensingrevenue13.2% 13.7% 13.2% Fiscal Year 2015 Compared to Fiscal Year 2014Cost of product and licensing revenue for fiscal year 2015 decreased $5.8 million, as compared to fiscal year 2014. This decrease was primarily drivenby a $4.4 million and a $3.4 million decrease in costs within our Mobile and Consumer and Imaging segments, respectively. Mobile and Consumer costsdecreased primarily driven by lower sales of our Dragon desktop consumer products. These decreases in costs were offset by a $3.8 million increase inHealthcare costs primarily driven our Dragon Medical products and Clintegrity solutions. Gross margins increased 0.5 percentage points, primarily driven byhigher revenues from higher margin license products in our Mobile and Consumer business.Fiscal Year 2014 Compared to Fiscal Year 2013Cost of product and licensing revenue for fiscal year 2014 decreased $1.8 million, as compared to fiscal year 2013, primarily driven by a $3.5 millionreduction in Imaging costs due to lower revenues. Mobile and Consumer costs decreased $1.4 million primarily driven by lower sales of our Dragon desktopconsumer products. The decrease in costs was offset by a $2.5 million increase in Healthcare costs primarily driven by higher sales of our Dragon Medicalproducts and Clintegrity solutions. Gross margins decreased 0.5 percentage points, primarily driven by lower revenues from higher margin license products inour Enterprise and Mobile and Consumer businesses.23Table of ContentsCost 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 the cost of professional services andhosting revenue, in dollars and as a percentage of professional services and hosting revenue (dollars in millions): Fiscal Year 2015 Fiscal Year 2014 Fiscal Year 2013 % Change 2015 vs.2014 % Change 2014 vs.2013Cost of professional services and hostingrevenue$619.9 $633.2 $550.9 (2.1)% 14.9%As a percentage of professional services andhosting revenue67.4% 69.5% 66.2% Fiscal Year 2015 Compared to Fiscal Year 2014Cost of professional services and hosting revenue for fiscal year 2015 decreased $13.3 million, as compared to fiscal year 2014. The decrease was due toa $9.0 million and a $8.3 million reduction in costs in our Enterprise and Healthcare segments, respectively, driven by lower compensation related expenseand our on-going efforts to move costs to lower-cost countries during the fiscal year. These decreases were partially offset by a $3.6 million increase in costswithin our Mobile and Consumer business driven by investment in our connected services infrastructure. Gross margins improved 2.1 percentage pointsprimarily driven by our cost-savings initiatives including the impact from our on-going efforts to move costs to lower-cost countries in our Healthcarebusiness as well as higher revenues from higher margin hosting services in our Mobile and Consumer business.Fiscal Year 2014 Compared to Fiscal Year 2013Cost of professional services and hosting revenue for fiscal year 2014 increased $82.3 million, as compared to fiscal year 2013. The increase was due toa $25.8 million increase in Healthcare costs as a result of recent acquisitions and higher transcription related costs. Mobile and Consumer costs increased$24.9 million driven by investment in our connected services infrastructure, as we continue to fund an increasing volume of large-scale engagements in ourMobile and Consumer business, where the demand for advanced, cloud-based services continues to grow. Our Enterprise costs also increased $15.6 milliondriven by our recent acquisitions. In addition, stock-based compensation expense increased $14.1 million over the prior period. Performance-based awardsand annual bonuses were lower in the prior period as a result of weaker than planned operating results. Gross margins decreased 3.3 percentage pointsprimarily driven by investment in our connected services infrastructure in our Mobile business, as well as growth in transcription related costs in ourHealthcare segment. In addition, increased stock-based compensation expense reduced gross margins by 1.6 percentage points.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 Year 2015 Fiscal Year 2014 Fiscal Year 2013 % Change 2015 vs.2014 % Change 2014 vs.2013Cost of maintenance and support revenue$54.5 $52.6 $52.7 3.6% (0.2)%As a percentage of maintenance and supportrevenue17.3% 17.4% 19.6% Fiscal Year 2015 Compared to Fiscal Year 2014Cost of maintenance and support revenue for fiscal year 2015 increased $1.9 million, as compared to fiscal year 2014. The increase in cost was relatedto an acquisition in our Imaging segment that was completed during the fourth quarter of fiscal year 2014. Gross margins were flat.24Table of ContentsFiscal Year 2014 Compared to Fiscal Year 2013The cost of maintenance and support revenue for fiscal year 2014, as compared to fiscal year 2013, was essentially flat. Gross margins increased 2.2percentage points driven by cost improvements in all of our businesses.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 revenues (dollars in millions): Fiscal Year 2015 Fiscal Year 2014 Fiscal Year 2013 % Change 2015 vs.2014 % Change 2014 vs.2013Research and development expense$310.3 $338.5 $289.2 (8.3)% 17.0%As a percentage of total revenues16.1% 17.6% 15.6% Fiscal Year 2015 Compared to Fiscal Year 2014Research and development expense for fiscal year 2015 decreased $28.2 million, as compared to fiscal year 2014. The decrease was primarilyattributable to a reduction of $17.2 million in costs associated with the expiration of collaboration agreements. In addition, compensation costs, includingstock-based compensation, decreased $7.9 million as we benefited from our cost-savings initiatives including the impact from our restructuring planexecuted during the third quarter of fiscal year 2015 and our on-going efforts to move costs to lower-cost countries during the fiscal year.Fiscal Year 2014 Compared to Fiscal Year 2013Research and development expense for fiscal year 2014 increased $49.3 million, as compared to fiscal year 2013. The increase was primarilyattributable to a $35.8 million increase in compensation expense, driven by headcount growth, including additional headcount from our recent acquisitions.We have increased investment in research and development to fund cloud-based speech systems and natural language understanding advancement to extendour technology capabilities. In addition, stock-based compensation increased $12.1 million. Performance-based awards and annual bonuses were lower in theprior year as a result of weaker than planned operating results.Sales and Marketing ExpenseSales and marketing expense includes salaries and benefits, commissions, advertising, direct mail, public relations, tradeshow costs and other costs ofmarketing programs, travel expenses associated with our sales organization and overhead. The following table shows sales and marketing expense, in dollarsand as a percentage of total revenues (dollars in millions): Fiscal Year 2015 Fiscal Year 2014 Fiscal Year 2013 % Change 2015 vs.2014 % Change 2014 vs.2013Sales and marketing expense$410.9 $424.5 $419.7 (3.2)% 1.1%As a percentage of total revenues21.3% 22.1% 22.6% Fiscal Year 2015 Compared to Fiscal Year 2014Sales and marketing expense for fiscal year 2015 decreased $13.6 million, as compared to fiscal year 2014. The decrease was primarily attributable to a$19.7 million decrease in marketing and channel program spending and a $3.1 million decrease in stock-based compensation expense driven by lowerheadcount. These decreases were partially offset by an increase of $8.0 million in expense for exclusive commercialization rights under a collaborationagreement.Fiscal Year 2014 Compared to Fiscal Year 2013Sales and marketing expense for fiscal year 2014 increased $4.8 million, as compared to fiscal year 2013. The increase in sales and marketing expensewas primarily attributable to a $14.5 million increase in compensation expense, including commission expense. The increase in compensation expense wasdriven primarily by headcount growth, including additional headcount from our recent acquisitions. The increase was offset by a decrease of $4.5 million instock-based compensation expense, a decrease of $3.5 million in marketing and channel program spending and a decrease of $1.5 million in travel expenses.25Table of ContentsGeneral and Administrative ExpenseGeneral and administrative expense primarily consists of personnel costs for administration, finance, human resources, general management, fees forexternal professional advisers including accountants and attorneys, and provisions for doubtful accounts. The following table shows general andadministrative expense, in dollars and as a percentage of total revenues (dollars in millions): Fiscal Year 2015 Fiscal Year 2014 Fiscal Year 2013 % Change 2015 vs.2014 % Change 2014 vs.2013General and administrative expense$182.5 $184.7 $180.0 (1.2)% 2.6%As a percentage of total revenues9.5% 9.6% 9.7% Fiscal Year 2015 Compared to Fiscal Year 2014General and administrative expense for fiscal year 2015 decreased $2.2 million, as compared to fiscal year 2014. The decrease was primarily attributableto a $9.5 million decrease in compensation costs, including stock-based compensation, as we benefited from our cost-savings initiatives including the impactfrom our restructuring plan executed during the third quarter of fiscal year 2015 as well as our on-going efforts to move costs to lower-cost countries duringthe fiscal year. The decrease in expense was partially offset by a $5.8 million increase in consulting and professional services fees.Fiscal Year 2014 Compared to Fiscal Year 2013General and administrative expense for fiscal year 2014 increased $4.7 million, as compared to fiscal year 2013. The increase was primarily attributableto a $12.1 million increase in stock-based compensation expense offset by lower expense of $5.5 million in professional services fees and $5.0 million incharitable contribution expense. Performance-based awards and annual bonuses were lower in the prior year as a result of weaker than planned operatingresults.Amortization 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(dollars in millions): Fiscal Year 2015 Fiscal Year 2014 Fiscal Year 2013 % Change 2015 vs.2014 % Change 2014 vs.2013Cost of revenue$63.6 $61.0 $63.6 4.3 % (4.1)%Operating expense104.6 109.1 105.3 (4.1)% 3.6 %Total amortization expense$168.2 $170.1 $168.9 (1.1)% 0.7 %As a percentage of total revenues8.7% 8.8% 9.1% Fiscal Year 2015 Compared to Fiscal Year 2014Amortization of intangible assets expense for fiscal year 2015 decreased $1.9 million, as compared to fiscal year 2014. The decrease in amortization ofintangible assets during fiscal year 2015 was primarily attributable to certain intangible assets becoming fully amortized in the period, partially offset by anincrease in amortization attributable to acquired patent and technology assets during fiscal year 2015.Based on our balance of amortizable intangible assets as of September 30, 2015, and assuming no impairment or change in useful lives, we expectamortization of intangible assets for fiscal year 2016 to be approximately $166.5 million.Fiscal Year 2014 Compared to Fiscal Year 2013Amortization of intangible assets expense for fiscal year 2014 increased $1.2 million, as compared to fiscal year 2013. The increase was primarilyattributable to the amortization of acquired intangible assets from our acquisitions during the period that have higher relative allocations of fair value tocustomer relationships. The decrease in amortization of intangible assets in our cost of revenue for the year ended September 30, 2014 was primarilyattributable to certain intangible assets becoming fully amortized in the period.26Table of ContentsAcquisition-Related Costs, NetAcquisition-related costs include costs related to business and other acquisitions, including potential acquisitions. These costs consist of (i) transitionand integration costs, including retention payments, transitional employee costs and earn-out payments treated as compensation expense, as well as the costsof 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. Acquisition-related costs were recorded as follows (dollars in millions): Fiscal Year 2015 Fiscal Year 2014 Fiscal Year 2013% Change 2015 vs.2014% Change 2014 vs.2013Transition and integration costs$10.1 $25.3 $28.3 (60.1)% (10.6)%Professional service fees8.4 9.9 20.4 (15.2)% (51.5)%Acquisition-related adjustments(4.1) (11.0) (19.0) (62.7)% (42.1)%Total Acquisition-related costs, net$14.4 $24.2 $29.7 (40.5)% (18.5)%As a percentage of total revenue0.7% 1.3% 1.6% Fiscal Year 2015 Compared to Fiscal Year 2014Acquisition-related costs, net for fiscal year 2015 decreased $9.8 million, as compared to fiscal year 2014. Fiscal year 2014 transition and integrationcosts include acquisition related contingent payments that were accounted for as compensation expense. In addition, fiscal year 2014 acquisition-relatedadjustments includes income of $7.7 million related to the elimination of contingent liabilities established in the original allocation of purchase price foracquisitions closed in fiscal years 2008 and 2007 following the expiration of the applicable statute of limitations.Fiscal Year 2014 Compared to Fiscal Year 2013Acquisition-related costs, net for fiscal year 2014 decreased $5.5 million, as compared to fiscal year 2013. Professional service fees decreased $10.5million as a result of our strategy to slow the pace and reduce the size of acquisitions in fiscal year 2014. Included in acquisition-related adjustments for theyears ended September 30, 2014 and 2013, is income of $7.7 million and $17.8 million related to the elimination of contingent liabilities established in theoriginal allocation of purchase price for acquisitions closed in fiscal years 2008 and 2007, respectively, following the expiration of the applicable statute oflimitations. As a result, we have eliminated these contingent liabilities, and included the adjustment in acquisition-related costs, net in our consolidatedstatements of operations in the applicable period.Restructuring and Other Charges, NetRestructuring and other charges, net include restructuring expenses together with other charges that are unusual in nature and are the result ofunplanned events, and arise outside of the ordinary course of continuing operations. Restructuring expenses consist of employee severance costs and mayalso include charges for excess facility space and other contract termination costs. Other charges may include gains or losses on non-controlling strategicequity interests, litigation contingency reserves and gains or losses on the sale or disposition of certain non-strategic assets or product lines.27Table of ContentsRestructuring and other charges, net by segment in fiscal years 2015, 2014 and 2013 are as follows (dollars in millions): Personnel Facilities Total Restructuring Other Charges TotalFiscal Year 2013 Healthcare$1.7 $0.8 $2.5 $0.3 $2.8Mobile and Consumer4.1 0.7 4.9 — 4.9Enterprise3.9 — 3.9 — 3.9Imaging1.4 0.1 1.4 — 1.4Corporate4.1 0.1 4.2 (0.8) 3.4Total fiscal year 2013$15.3 $1.6 $16.9 $(0.5) $16.4 Fiscal Year 2014 Healthcare$2.4 $— $2.4 $(0.1) $2.3Mobile and Consumer1.4 0.6 2.1 — 2.1Enterprise5.6 — 5.6 — 5.6Imaging2.7 0.1 2.8 — 2.8Corporate1.2 2.5 3.7 3.0 6.7Total fiscal year 2014$13.3 $3.2 $16.5 $2.9 $19.4 Fiscal Year 2015 Healthcare$0.5 $0.6 $1.1 $— $1.1Mobile and Consumer3.0 2.9 5.8 3.3 9.1Enterprise1.1 0.1 1.2 — 1.2Imaging2.0 1.8 3.9 — 3.9Corporate1.9 4.2 6.0 2.3 8.3Total fiscal year 2015$8.5 $9.6 $18.0 $5.6 $23.7For fiscal year 2015, we recorded restructuring charges of $18.0 million. The restructuring charges included $8.5 million for severance related to thereduction of approximately 200 employees as part of our initiatives to reduce costs and optimize processes as well as the reduction of approximately 60employees that eliminated duplicative positions resulting from acquisitions in fiscal year 2014. The restructuring charges also included a $9.6 million chargefor the closure of certain excess facility space, including facilities acquired from acquisitions. In addition, during fiscal year 2015, we have recorded certainother charges that totaled $5.6 million for the impairment of certain long-lived assets as a result of our strategic realignment of our product portfolio andlitigation contingency reserves.For fiscal year 2014, we recorded net restructuring charges of $16.5 million, which included a $13.3 million severance charge related to the reductionof headcount by approximately 250 employees across multiple functions including the impact of eliminating duplicative positions resulting fromacquisitions, and $3.2 million primarily resulting from the restructuring of facilities that will no longer be utilized. In addition, during fiscal year 2014, wehave recorded certain other charges that totaled $2.9 million primarily for litigation contingency reserves.For fiscal year 2013, we recorded net restructuring charges of $16.9 million, which included a $15.3 million severance charge related to the reductionof headcount by approximately 300 employees across multiple functions. In addition to the restructuring charges, we recorded a net gain of $0.5 millionprimarily related to the sale of two immaterial product lines.28Table of ContentsOther Expense, NetOther expense, net consists of interest income, interest expense, gain (loss) from security price guarantee derivatives, gain (loss) from foreign exchange,and gain (loss) from other non-operating activities. The following table shows other expense, net, in dollars and as a percentage of total revenues (dollars inmillions): Fiscal Year 2015 Fiscal Year 2014 Fiscal Year 2013 % Change 2015 vs.2014 % Change 2014 vs.2013Interest income$2.6 $2.3 $1.6 13.0 % 43.8 %Interest expense(118.6) (132.7) (137.8) (10.6)% (3.7)%Other expense, net(19.5) (3.3) (9.0) 490.9 % (63.3)%Total other expense, net$(135.5) $(133.7) $(145.2) As a percentage of total revenue(7.0)% (7.0)% (7.8)% Fiscal Year 2015 Compared to Fiscal Year 2014Total other expense for fiscal year 2015 increased $1.8 million, as compared to fiscal year 2014. The net increase in expense was driven by a $17.7million loss on extinguishment of debt resulting from the partial exchange of our 2031 debentures in fiscal year 2015, offset by the reduction in interestexpense due to the redemption of the $250.0 million 2.75% convertible debentures in the fourth quarter of fiscal year 2014.Fiscal Year 2014 Compared to Fiscal Year 2013Total other expense for fiscal year 2014 decreased $11.5 million, as compared to fiscal year 2013. The net decrease was driven by a $5.1 milliondecrease in interest expense and a $2.2 million decrease in the loss related to our security price guarantees as compared to the prior year.Provision (Benefit) for Income TaxesThe following table shows the provision (benefit) for income taxes and the effective income tax rate (dollars in millions): Fiscal Year 2015 Fiscal Year 2014 Fiscal Year 2013 % Change 2015 vs.2014 % Change 2014 vs.2013Provision (benefit) for income taxes$34.5 $(4.7) $18.6 (834.0)% (125.3)%Effective income tax rate(42.9)% 3.0% (19.2)% 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-taxincome being higher or lower than the prior year in countries with lower statutory tax rates, which causes our effective income tax rate to fluctuate. Theimpact of such changes could be meaningful in countries with statutory income tax rates that are significantly lower than the U.S. statutory income tax rate of35%. Our international headquarters is located in Dublin, Ireland and is our principal entity selling to customers in countries outside of North America andJapan. The international right to use U.S.-owned intellectual property resides with our Irish headquarters entity. While our Ireland subsidiaries make royaltyand other payments to the United States, the majority of profits earned by the Irish entities are retained offshore to fund our future growth in Europe, theMiddle East, Africa and the Asia Pacific regions. In future periods, if our foreign profits grow, we expect substantially all of our income before income taxesfrom 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 wouldexpect our effective tax rate to decrease as profits in Ireland increase.Fiscal Year 2015 Compared to Fiscal Year 2014Our effective income tax rate was approximately (42.9)% in fiscal year 2015, compared to approximately 3.0% in fiscal year 2014. Provision forincome taxes increased $39.2 million million in fiscal year 2015 as compared to fiscal year 2014 due to a non-recurring release of domestic valuationallowance totaling $31.2 million recorded in fiscal year 2014 in connection with our recording of acquired deferred tax liabilities established in purchaseaccounting. In addition, our mix of pre-tax income in each year impacts our provision for income taxes. 29Table of ContentsFiscal Year 2014 Compared to Fiscal Year 2013Our effective income tax rate was approximately 3.0% in fiscal year 2014, compared to approximately (19.2)% in fiscal year 2013. Provision forincome taxes decreased $23.3 million in fiscal year 2014 as compared to fiscal year 2013. In fiscal year 2014, we recorded a non-recurring release of domesticvaluation allowance totaling $31.2 million in connection with our recording of acquired deferred tax liabilities established in purchase accounting. Inaddition, the effective income tax rate in fiscal year 2014 was impacted by our foreign operations which are subject to a significantly lower tax rate than theU.S. statutory tax rate, driven primarily by our subsidiaries in Ireland.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 year 2013, this lower foreign tax rate differential was offset by the impact of thetransfer of intangible property between certain of our foreign subsidiaries with significantly different local statutory tax rates. Although the transfer ofintangible property between consolidated entities did not result in any gain in the consolidated results of operations, we generated a taxable gain in certainjurisdictions. The future tax deductions associated with the amortization of the transferred intangibles will be generated in a jurisdiction that will notgenerate an offsetting tax benefit in future periods. (See Note 18 of our Notes to Consolidated Financial Statements.)SEGMENT ANALYSISWe operate in, and report financial information for, the following four reportable segments: Healthcare, Mobile and Consumer, Enterprise, andImaging. Segment profit is an important measure used for evaluating performance and for decision-making purposes and reflects the direct controllable costsof 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 (loss) 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 expense, netand certain unallocated corporate expenses. We believe that these adjustments allow for more complete comparisons to the financial results of the historicaloperations.In October 2014, we realigned our product portfolio which resulted in a change in the composition of our Mobile and Enterprise reporting units.Accordingly, the segment results in prior periods have been reclassified to conform to the current period segment reporting presentation.30Table of ContentsThe following table presents segment results (dollars in millions):Fiscal Year 2015 Fiscal Year 2014 Fiscal Year 2013 % Change 2015 vs.2014 % Change 2014vs. 2013Segment Revenues(a) Healthcare$937.6 $942.7 $911.6 (0.5)% 3.4 %Mobile and Consumer454.4 441.0 461.5 3.0 % (4.4)%Enterprise349.3 367.1 341.1 (4.8)% 7.6 %Imaging237.7 236.3 243.4 0.6 % (2.9)%Total segment revenues$1,979.1 $1,987.1 $1,957.6 (0.4)% 1.5 %Less: acquisition related revenue adjustments(47.9) (63.6) (102.4) (24.7)% (37.9)%Total revenues$1,931.1 $1,923.5 $1,855.3 0.4 % 3.7 %Segment Profit Healthcare$333.6 $340.1 $352.2 (1.9)% (3.4)%Mobile and Consumer115.1 75.8 131.7 51.8 % (42.4)%Enterprise92.4 88.1 90.3 4.9 % (2.4)%Imaging89.3 89.1 98.2 0.2 % (9.3)%Total segment profit$630.5 $593.1 $672.3 6.3 % (11.8)%Segment Profit Margin Healthcare35.6% 36.1% 38.6% (0.5) (2.5)Mobile and Consumer25.3% 17.2% 28.5% 8.1 (11.3)Enterprise26.5% 24.0% 26.5% 2.5 (2.5)Imaging37.6% 37.7% 40.3% (0.1) (2.6)Total segment profit margin31.9% 29.8% 34.3% 2.1 (4.5)(a) Segment revenues differ from reported revenues due to certain revenue adjustments related to acquisitions that would otherwise have been recognizedbut for the purchase accounting treatment of the business combinations. Segment revenues also include revenue that the business would haveotherwise recognized had we not acquired intellectual property and other assets from the same customer. These revenues are included to allow for morecomplete comparisons to the financial results of historical operations and in evaluating management performance.Segment RevenuesFiscal Year 2015 Compared to Fiscal Year 2014•Healthcare segment revenues decreased $5.1 million for the year ended September 30, 2015, as compared to the year ended September 30, 2014.Maintenance and support revenue increased $10.9 million driven by strong renewals in Dragon Medical. Product and licensing revenue decreased$15.2 million driven by lower revenue from our Dragon Medical solutions as we continue to see a shift toward a term-licensing model. Professionalservices and hosting revenue decreased $0.8 million primarily driven by an increase of $7.5 million in professional services from both of our CDIand coding solutions and Diagnostic solutions, offset by a $8.3 million decrease in hosting revenue as we continue to experience some erosion ofrevenue in our transcription services.•Mobile and Consumer segment revenues increased $13.4 million for the year ended September 30, 2015, as compared to the year endedSeptember 30, 2014. Professional services and hosting revenue increased $18.5 million driven primarily by growth in our mobile connectedservices. Maintenance and support revenue decreased $3.2 million and product and licensing revenue decreased $1.9 million primarily driven by adecrease in mobile license sales as the device market continues to consolidate.•Enterprise segment revenues decreased $17.8 million for the year ended September 30, 2015, as compared to the year ended September 30, 2014.Professional services and hosting revenues decreased $17.5 million driven by lower sales in customer care OnPremise implementations which hasbeen challenged by customers' growing preference for on-demand implementation.31Table of Contents•Imaging segment revenues increased $1.4 million for the year ended September 30, 2015, as compared to the year ended September 30, 2014,primarily driven by revenues from a recent acquisition, partially offset by continued declines in our desktop product sales.Fiscal Year 2014 Compared to Fiscal Year 2013•Healthcare segment revenues increased $31.1 million for the year ended September 30, 2014, as compared to the year ended September 30, 2013.Maintenance and support revenue increased $10.8 million driven by strong renewals related to our Dragon Medical licenses. Product and licensingrevenue increased $10.6 million driven by higher sales in Dragon Medical licenses. Professional services and hosting revenue increased $9.7million due to acquisitions adding $18.8 million in revenues, offset by the negative impact from the continued erosion resulting from customers'migration to electronic medical records.•Mobile and Consumer segment revenues decreased $20.5 million for the year ended September 30, 2014, as compared to the year endedSeptember 30, 2013. Product and licensing revenue declined $37.3 million, driven primarily by a $25.8 million decrease in embedded license salesin our device business, as our markets and customers continued to shift toward on-demand and ratable pricing models. In addition, there was an$11.5 million decrease in sales of our Dragon desktop consumer products due to an overall weakness in desktop software sales. Professionalservices and hosting revenue increased $15.2 million driven primarily by our recent acquisitions.•Enterprise segment revenues increased $26.0 million for the year ended September 30, 2014, as compared to the year ended September 30, 2013.Professional services and hosting revenue increased $47.2 million driven by our recent acquisitions. Product and licensing revenue decreased$29.1 million as a result of lower sales of our on-premise solutions. Maintenance and support revenue increased $7.9 million driven by strongrenewals related to our on-premise solutions.•Imaging segment revenues decreased $7.1 million for the year ended September 30, 2014, as compared to the year ended September 30, 2013, as aresult of a decrease of $19.7 million in product and licensing revenue due to lower sales of our multi-functional peripheral products as well asreduced demand for packaged software, offset by a $10.2 million increase in maintenance and support revenue.Segment ProfitFiscal Year 2015 Compared to Fiscal Year 2014•Healthcare segment profit for the year ended September 30, 2015 decreased 1.9% from the same period last year, primarily driven by increasedresearch and development as well as selling expenses. Segment profit margin decreased 0.5 percentage points, from 36.1% for the same period lastyear to 35.6% during the current period. The decrease in segment profit margin was primarily driven by a decrease of 0.4 percentage points inmargin due to increased research and development spending driven by incremental costs associated with a collaboration agreement, and a 0.4percentage point decrease in margin due to higher selling expense, partially offset by a 0.3 percentage point increase due to improved grossmargins.•Mobile and Consumer segment profit for the year ended September 30, 2015 increased 51.8% from the same period last year, primarily driven byincreased revenues and lower operating expenses. Segment profit margin increased 8.1 percentage points, from 17.2% for the same period last yearto 25.3% during the current period. The increase in segment profit margin was primarily driven by our cost savings and process optimizationinitiatives with improvements of 4.9 percentage points related to lower sales and marketing expenses, 2.0 percentage points related to decreasedresearch and development spending and 1.2 percentage points in gross margin improvement.•Enterprise segment profit for the year ended September 30, 2015 increased 4.9% from the same period last year, driven by lower operating expensepartially offset by impact from lower revenues. Segment profit margin increased 2.5 percentage points, from 24.0% for the same period last year to26.5% in the current period. The increase in segment profit margin was primarily driven by our cost savings and process optimization initiativeswith improvements of 1.0 percentage point due to higher segment gross margins, 1.0 percentage point due to lower sales and marketing expensesand 0.5 percentage point due to decreased research and development spending.•Imaging segment profit for the year ended September 30, 2015 increased 0.2% from the same period last year, driven by improved gross profitpartially offset by higher sales and marketing expenses. Segment profit margin decreased 0.1 percentage point, from 37.7% for the same period lastyear to of 37.6% during the current period.32Table of ContentsFiscal Year 2014 Compared to Fiscal Year 2013•Healthcare segment profit for the year ended September 30, 2014 decreased 3.4% from the same period last year, primarily driven by increased costsfrom growth in sales of our on-demand solutions and increased investments in research and development. Segment profit margin decreased 2.5percentage points, from 38.6% for the same period last year to 36.1% during the current period. The decrease in segment profit margin wasprimarily driven by a decrease of 1.6 percentage points in segment gross margin due to higher transcription related costs. In addition, segmentprofit margin decreased 1.3 percentage points due to increased investments in research and development to support innovation and new productlaunches.•Mobile and Consumer segment profit for the year ended September 30, 2014 decreased 42.4% from the same period last year, primarily driven bylower product and licensing revenue, increased costs to support the growth of our on-demand services and increased investments in research anddevelopment. Segment profit margin decreased 11.3 percentage points, from 28.5% for the same period last year to 17.2% during the current period.The decrease in segment profit margin was primarily driven by a 6.5 percentage point decrease in segment gross margin as our markets andcustomers continued to shift from embedded to on-demand solutions, driving increased costs to deploy large custom solutions for key customers, aswell as a 5.4 percentage point increase in research and development spending related to acquisitions and investments to support cloud-basedspeech systems and natural language understanding advancements.•Enterprise segment profit for the year ended September 30, 2014 decreased 2.4% from the same period last year, driven by higher professionalservices and hosting revenue from our recent acquisitions. Segment profit margin decreased 2.5 percentage points, from 26.5% for the same periodlast year to 24.0% in the current period. The decrease in segment profit margin was driven by the decline in segment gross margin as a result oflower product and licensing sales.•Imaging segment profit for the year ended September 30, 2014 decreased 9.3% from the same period last year, driven by lower product andlicensing sales. Segment profit margin decreased 2.6 percentage points, from 40.3% for the same period last year to 37.7% during the currentperiod. The decrease in segment profit margin was primarily driven by increased sales and marketing spending to support new product launches.LIQUIDITY AND CAPITAL RESOURCESCash and cash equivalents and marketable securities totaled $568.8 million as of September 30, 2015, a decrease of $19.4 million as compared to $588.2million as of September 30, 2014. Our working capital at September 30, 2015 was $417.6 million compared to $522.5 million of working capital atSeptember 30, 2014. As of September 30, 2015, our total accumulated deficit was $750.4 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.Cash and cash equivalents and marketable securities held by our international operations totaled $164.2 million and $71.5 million at September 30,2015 and 2014, respectively. We utilize a variety of financing strategies to ensure that our worldwide cash is available in the locations in which it is needed.We expect the cash held overseas will continue to be used for our international operations, and that we will meet U.S. liquidity needs through future cashflows, use of U.S. cash balances, external borrowings, or some combination of these sources and therefore do not anticipate repatriating these funds.We believe our current cash and cash equivalents are sufficient to meet our operating needs for at least the next 12 months.Cash provided by operating activitiesFiscal Year 2015 Compared to Fiscal Year 2014Cash provided by operating activities for fiscal year 2015 was $487.6 million, an increase of $129.5 million, or 36%, as compared to cash provided byoperating activities of $358.1 million for fiscal year 2014. The net increase was primarily driven by the following factors:•An increase of $94.8 million in cash flows resulting from a lower net loss, exclusive of non-cash adjustment items;•An increase of $41.3 million in cash flows generated by changes in working capital excluding deferred revenue. The increase in cash inflows wasdriven cash generation from accounts receivables due to 9 days of DSO improvement; and•Offset by a decrease in cash inflows of $6.7 million from deferred revenue. Deferred revenue continues to grow contributing cash inflow of $135.2million in fiscal year 2015, as compared to $141.8 million in fiscal year 2014. The33Table of Contentsdeferred revenue growth in fiscal year 2015 was driven primarily by mobile connected services and maintenance and support contracts.Fiscal Year 2014 Compared to Fiscal Year 2013Cash provided by operating activities for fiscal year 2014 was $358.1 million, a decrease of $36.9 million, or 9%, as compared to cash provided byoperating activities of $395.0 million for fiscal year 2013. The net decrease was primarily driven by the following factors:•A decrease of $13.3 million in cash flows resulting from higher net loss, exclusive of non-cash adjustment items;•A decrease of $80.7 million in cash flows generated by changes in working capital excluding deferred revenue; and•Offset by an increase in cash inflows of $57.2 million from an overall increase in deferred revenue. The increase in deferred revenue was primarilyattributable to continued growth in new mobile on-demand service offerings where a portion of the fees are collected upfront, and recognized asrevenue over the life of the contract. Healthcare deferred revenue has also increased reflecting the shift to term-based licenses.Cash used in investing activitiesFiscal Year 2015 Compared to Fiscal Year 2014Cash used in investing activities for fiscal year 2015 was $206.1 million, a decrease of $104.9 million, or 34%, as compared to cash used in investingactivities of $311.0 million for fiscal year 2014. The net decrease was primarily driven by the following factors:•A decrease in cash outflows of $169.7 million for business and technology acquisitions;•An increase in cash inflows of $18.9 million from the sales and maturities of marketable securities and other investments; and•Offset by an increase in cash outflows of $86.1 million for purchases of marketable securities and other investments.Fiscal Year 2014 Compared to Fiscal Year 2013Cash used in investing activities for fiscal year 2014 was $311.0 million, a decrease of $383.0 million, or 55%, as compared to cash used in investingactivities of $693.9 million for fiscal year 2013. The net decrease was primarily driven by the following factors:•A decrease in cash outflows of $354.7 million for business and technology acquisitions; and•Offset by an increase in cash outflows of $23.2 million from purchases of marketable securities and other investments and an increase in cashinflows of $56.2 million from the sales and maturities of marketable securities and other investments.Cash used in financing activitiesFiscal Year 2015 Compared to Fiscal Year 2014Cash used in financing activities for fiscal year 2015 was $341.2 million, an increase of $34.0 million, or 11%, as compared to cash used in financingactivities of $307.2 million for fiscal year 2014. The net increase was primarily driven by the following factors:•An increase in cash outflows of $271.8 million related to our share repurchase program. We repurchased 19.8 million shares of our common stockfor total cash outflows of $298.3 million in fiscal year 2015 as compared to 1.6 million shares of our common stock for total cash outflows of $26.5million in fiscal year 2014;•An increase in cash outflows of $17.4 million as a result of higher cash payments required to net share settle employee equity awards due to anincrease in vesting during fiscal year 2015 as compared to fiscal year 2014;•An increase in cash outflows of $6.0 million for the payment of long-term debt. The fiscal year 2015 activity included extinguishment on part ofour 2031 Debentures for $256.2 million in exchange for $263.9 million of our new 2035 Debentures. The fiscal year 2014 activity included theredemption of the 2027 Debentures for $250.0 million; and34Table of Contents•Offset by an increase in cash inflows of $253.2 million from the issuance of the 2035 Debentures, net of issuance costs in fiscal year 2015.Fiscal Year 2014 Compared to Fiscal Year 2013Cash used in financing activities for fiscal year 2014 was $307.2 million, an increase of $286.5 million, or 1,387%, as compared to cash used infinancing activities of $20.7 million for fiscal year 2013. The net increase was primarily driven by the following factors:•A decrease in cash inflows of $625.2 million from proceeds of debt issuances. Fiscal year 2013 activities included proceeds of $351.7 million ofSenior Notes due in 2020 issued in the first quarter of fiscal year 2013 together with $277.1 million related to the amendment of our Credit Facilityin August 2013;•Offset by a decrease in cash outflows of $170.6 million for the payment of long-term debt. The fiscal year 2014 activity included the redemption ofthe 2027 Debentures for $250.0 million. Fiscal year 2013 activities included payments of $277.1 million related to the amendment of our CreditFacility in August 2013 and $143.5 million related to on our term loan in October 2012;•A decrease in cash outflows of $157.9 million related to our share repurchase program. We repurchased 1.6 million shares of our common stock fortotal cash outflows of $26.5 million in fiscal year 2014 as compared to 9.8 million shares of our common stock for total cash outflows of $184.4million in fiscal year 2013; and•A decrease in cash outflows of $20.4 million as a result of lower cash payments required to net share settle employee equity awards, due to ourlower stock price during fiscal year 2014 as compared to fiscal year 2013.Credit Facilities and Debt1.50% Convertible Debentures due 2035In June 2015, we issued $263.9 million in aggregate principal amount of 1.50% Senior Convertible Debentures due in 2035 (the “2035 Debentures”)in exchange for $256.2 million in aggregate principal amount of our 2.75% Senior Convertible Debentures due in 2031 (the “2031 Debentures”). Totalproceeds, net of debt issuance costs, were $253.2 million. The 2035 Debentures were issued at 97.09% of the principal amount, which resulted in a discountof $7.7 million. The 2035 Debentures bear interest at 1.50% per year, payable in cash semi-annually in arrears, beginning on November 1, 2015. In additionto ordinary interest and default additional interest, beginning with the semi-annual interest period commencing on November 1, 2021, contingent interestwill accrue during any regular semi-annual interest period where the average trading price of our 2035 Debentures for the ten trading day period immediatelypreceding the first day of such semi-annual period is greater than or equal to $1,200 per $1,000 principal amount of our 2035 Debentures, in which case,contingent interest will accrue at a rate of 0.50% per annum of such average trading price. The 2035 Debentures mature on November 1, 2035, subject to theright of the holders to require us to redeem the 2035 Debentures on November 1, 2021, 2026, or 2031. The 2035 Debentures are general senior unsecuredobligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment toany indebtedness that is contractually subordinated to the 2035 Debentures. The 2035 Debentures will be effectively subordinated to indebtedness and otherliabilities of our subsidiaries.We account separately for the liability and equity components of the 2035 Debentures in accordance with authoritative guidance for convertible debtinstruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuringthe fair value of a similar liability that does not have an associated conversion feature and record the remainder in stockholders’ equity. At issuance, weallocated $208.6 million to long-term debt, and $55.3 million has been recorded as additional paid-in capital. The aggregate debt discount of $63.0 millionis being amortized to interest expense using the effective interest rate method through November 2021. As of September 30, 2015, the ending unamortizeddiscount was $60.5 million and the ending unamortized deferred debt issuance costs were $2.3 million.If converted, the principal amount of the 2035 Debentures is payable in cash and any amounts payable in excess of the principal amount, will (basedon an initial conversion rate, which represents an initial conversion price of approximately $23.26 per share, subject to adjustment) be paid in cash or sharesof our common stock, at our election, only in the following circumstances and to the following extent: (i) prior to May 1, 2035, on any date during any fiscalquarter beginning after September 30, 2015 (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of thethen current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscalquarter; (ii) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for $1,000principal amount of the 2035 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stockmultiplied by the then current conversion rate; (iii) upon the occurrence35Table of Contentsof specified corporate transactions, as described in the indenture for the 2035 Debentures; or (iv) at the option of the holder at any time on or after May 1,2035. Additionally, we may redeem the 2035 Debentures, in whole or in part, on or after November 5, 2021 for cash at a price equal to 100% of the principalamount of the 2035 Debentures to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchasedate. Each holder shall have the right, at such holder’s option, to require us to repurchase all or any portion of the 2035 Debentures held by such holder onNovember 1, 2021, November 1, 2026, or November 1, 2031 at par plus accrued and unpaid interest. Upon repurchase, we will pay the principal amount incash and any amounts payable in excess of the principal amount will be paid in cash or shares of our common stock, at our election, with the exception thatwe may not elect to pay cash in lieu of more than 80% of the number of our common shares we would be obligated to deliver. If we undergo a fundamentalchange (as described in the indenture for the 2035 Debentures) prior to maturity, holders will have the option to require us to repurchase all or any portion oftheir debentures for cash at a price equal to 100% of the principal amount of the 2035 Debentures to be purchased plus any accrued and unpaid interest,including any additional interest to, but excluding, the repurchase date. As of September 30, 2015, none of the conversion criteria were met for the 2035Debentures. If the conversion criteria were met, we could be required to repay all or some of the aggregate principal amount in cash prior to the maturity date.5.375% Senior Notes due 2020On 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. As of September 30, 2015 and 2014, the ending unamortized premium was $3.8 million and $4.6 million, respectively, and the endingunamortized deferred debt issuance costs were $9.2 million and $11.1 million, respectively.On 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 the indenture agreement dated August 14, 2012, relating to our existing $700 million aggregate principal amount of 5.375% SeniorNotes due in 2020. Total proceeds received, net of issuance costs, were $351.7 million.The Notes are our unsecured senior obligations and are guaranteed (the “Guarantees”) on an unsecured senior basis by substantially all of our direct andindirect wholly owned domestic subsidiaries (the “Subsidiary Guarantors”). The Notes and Guarantees rank equally in right of payment with all of our andthe Subsidiary Guarantors' existing and future unsecured senior debt and rank senior in right of payment to all of our and the Subsidiary Guarantors' futureunsecured subordinated debt. The Notes and Guarantees effectively rank junior to all our secured debt and the Subsidiary Guarantors to the extent of thevalue of the collateral securing such debt and to all liabilities, including trade payables, our 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.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 $690.0 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. 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.We account separately for the liability and equity components of the 2031 Debentures in accordance with authoritative guidance for convertible debtinstruments that may be settled in cash upon conversion. We initially allocated $533.6 million to long-term debt, and $156.4 million has been recorded asadditional paid-in capital.In June 2015, we entered into separate privately negotiated agreements with certain holders of our 2031 Debentures to exchange, in a privateplacement, $256.2 million in aggregate principal amount of our 2031 Debentures for approximately $263.936Table of Contentsmillion in aggregate principal amount of our new 2035 Debentures. In accordance with the authoritative guidance for convertible debt instruments, a loss onextinguishment is equal to the difference between the reacquisition price and the net carrying amount of the extinguished debt for our 2031 Debentures,including any unamortized debt discount or issuance costs, and $17.7 million was recorded in other expense, net, in the accompanying consolidatedstatements of operations. Following the closings of the exchange, $433.8 million in aggregate principal amount of our 2031 Debentures remain outstanding.The aggregate debt discount is being amortized to interest expense using the effective interest rate method through November 2017. As of September 30,2015 and 2014, the ending unamortized discount was $39.1 million and $88.8 million, respectively, and the ending unamortized deferred debt issuance costswere $2.3 million and $5.5 million, respectively.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 suchfive trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; (iii) upon theoccurrence of specified corporate transactions, as described in the indenture for the 2031 Debentures; or (iv) at the option of the holder at any time on or afterMay 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 holder shall 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 onNovember 1, 2017, November 1, 2021, and November 1, 2026 at par plus accrued and unpaid interest. If we undergo a fundamental change (as described inthe indenture for the 2031 Debentures) prior to maturity, holders will have the option to require us to repurchase all or any portion of their debentures for cashat a price equal to 100% of the principal amount of the debentures to be purchased plus any accrued and unpaid interest, including any additional interest to,but excluding, the repurchase date. As of September 30, 2015 and 2014, no conversion triggers were met. If the conversion triggers were met, we could berequired to repay all or some of the aggregate principal amount in cash prior to the maturity date.Credit FacilityAs of September 30, 2015, the amended and restated credit agreement, entered into on August 7, 2013, includes a term loan, with a principal balance of$472.5 million, and a $75.0 million revolving credit line, including letters of credit (together, the "Credit Facility"). The term loans mature on August 7, 2019and the revolving credit line matures on August 7, 2018. As of September 30, 2015, there were $6.3 million of letters of credit issued, and there were no otheroutstanding borrowings under the revolving credit line.The term loans bear interest, at our option, at a base rate determined in accordance with the amended and restated credit agreement, plus a spread of1.75%, or a LIBOR rate plus a spread of 2.75%. The revolving credit line bears 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 based onour consolidated net leverage ratio.Under terms of the Credit Facility, interest is payable periodically at a rate equal to the applicable margin plus, at our option, either (a) the base ratewhich is the corporate base rate of Morgan Stanley, the Administrative Agent, or (b) LIBOR (equal to (i) the British Bankers’ Association Interest SettlementRates for deposits in U.S. dollars divided by (ii) one minus the statutory reserves applicable to such borrowing). The applicable margin for the borrowings atSeptember 30, 2015 is as follows:Description Base Rate Margin LIBOR Margin Term 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, 2015, the applicable margins were 2.75%, with an effective rate of 2.95%, on the remaining term loans balance of $472.5 millionmaturing in August 2019. We are required to pay a commitment fee for unutilized commitments under the revolving credit line at a rate ranging from 0.250%to 0.375% per annum, based upon our leverage ratio. As of September 30, 2015, the commitment fee rate was 0.375%.The Credit Facility contains covenants including, among other things, covenants that restrict our ability and those of our subsidiaries to incur certainadditional indebtedness or issue guarantees, create or permit liens on assets, enter into sale-leaseback37Table of Contentstransactions, make loans or investments, sell assets, make certain acquisitions, pay dividends, repurchase stock, or merge or consolidate with any entity, andenter into certain transactions with affiliates. The agreement also contains events of default, including failure to make payments of principal or interest,failure to observe covenants, breaches of representations and warranties, defaults under certain other material indebtedness, failure to satisfy materialjudgments, a change of control and certain insolvency events. As of September 30, 2015, we were in compliance with the covenants under the Credit Facility.The covenants on our other long-term debt are less restrictive, and as of September 30, 2015, we were in compliance with the requirements of our other long-term debt.We capitalized debt discount and issuance costs related to the Credit Facility and are amortizing the costs to interest expense using the effectiveinterest rate method, through August 2018 for costs associated with the revolving credit line and through August 2019 for the remainder of the balance. As ofSeptember 30, 2015 and 2014, the ending unamortized discount was $0.8 million and $1.0 million, respectively, and the ending unamortized deferred debtissuance costs were $1.8 million and $2.4 million, respectively.Principal payments on the term loan of $472.5 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.At the current time, we are unable to predict the amount of the outstanding principal, if any, that may be required to be repaid in future fiscal years pursuantto the 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, Amount2016 $4,8342017 4,8342018 4,8342019 458,040Total $472,542Our 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 thenon-voting equity interests of significant first-tier foreign subsidiaries, all our material tangible and intangible assets and those of the guarantors, and anypresent and future intercompany debt. The Credit Facility also contains provisions for mandatory prepayments of outstanding term loans upon receipt of thefollowing, and subject to certain exceptions: 100% of net cash proceeds from asset sales, 100% of net cash proceeds from issuance or incurrence of debt, and100% of extraordinary receipts. We may voluntarily prepay borrowings under the Credit Facility without premium or penalty other than breakage costs, asdefined with respect to LIBOR-based loans.Share Repurchase ProgramOn April 29, 2013, our Board of Directors approved a share repurchase program for up to $500.0 million of our outstanding shares of common stock. OnApril 29, 2015, our Board of Directors approved an additional $500.0 million under our share repurchase program. We repurchased 19.8 million shares for$299.2 million during the fiscal year ended September 30, 2015 under the program. These shares were retired upon repurchase. Approximately $490.0million remained available for stock repurchases as of September 30, 2015 pursuant to our stock repurchase program. Under the terms of the share 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.38Table of ContentsOff-Balance Sheet Arrangements, Contractual Obligations, Contingent Liabilities and CommitmentsContractual ObligationsThe following table outlines our contractual payment obligations as of September 30, 2015 (dollars in millions): Payments Due by Fiscal Year Ended September 30,Contractual Obligations Total 2016 2017 and 2018 2019 and 2020 ThereafterCredit Facility(1) $472.5 $4.8 $9.6 $458.1 $—Convertible Debentures(2) 697.7 — 433.8 — 263.9Senior Notes 1,050.0 — — 1,050.0 —Interest payable on long-term debt(3) 392.9 86.4 167.4 133.2 5.9Letter of Credit(4) 6.3 — 6.3 — —Lease obligations and other liabilities: Operating leases 222.8 36.7 57.0 31.6 97.5Operating leases under restructuring(5) 47.5 5.7 8.8 8.9 24.1Purchase Commitments(6) 9.5 9.5 — — —Total contractual cash obligations $2,899.2 $143.1 $682.9 $1,681.8 $391.4(1) Principal is paid on a quarterly basis under the Credit Facility.(2) Holders of the 2035 Debentures have the right to require us to redeem the Debentures on November 1, 2021, 2026, and 2035.(3) Interest on the Credit Facility is due and payable monthly and is estimated using the effective interest rate as of September 30, 2015. Interest is due andpayable semi-annually under the 2031 Debentures at a rate of 2.75% and under the 2035 Debentures at a rate of 1.5%. Interest is due and payable semi-annually on the Senior Notes at a rate of 5.375%.(4) Letters of Credit are in place primarily to secure future operating lease payments.(5) Obligations include contractual lease commitments related to facilities that were part of restructuring plans. As of September 30, 2015, we havesubleased certain of the facilities with total sublease income of $53.4 million through fiscal year 2025.(6) 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.The gross liability for unrecognized tax benefits as of September 30, 2015 was $22.2 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 certain acquisitions, we may agree to make contingent cash payments to the selling shareholders of the acquired companies uponthe achievement of specified objectives. As of September 30, 2015, we may be required to make up to $34.7 million of additional payments to the sellingshareholders contingent upon the achievement of specified objectives, including the achievement of future bookings and sales targets related to the productsof the acquired entities. In addition, there are deferred payment obligations to certain former shareholders, contingent upon their continued employment.These deferred payment obligations, totaling $4.7 million, are recorded as compensation expense over the applicable employment period.Financial InstrumentsWe use financial instruments to manage our foreign exchange risk. We operate our business in countries throughout the world and transact business invarious foreign currencies. Our foreign currency exposures typically arise from transactions denominated in currencies other than the functional currency ofour operations. We have a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effect of certain foreigncurrency exposures. Our program is designed so that increases or decreases in our foreign currency exposures are offset by gains or losses on the foreigncurrency forward contracts in order to mitigate the risks and volatility associated with our foreign currency transactions. Generally, we enter into suchcontracts for less than 90 days and have no cash requirements until maturity. At September 30, 2015 and 2014, we had outstanding contracts with a totalnotional value of $138.5 million and $283.1 million, respectively.39Table of ContentsFrom 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 businessacquisitions, partnering and technology acquisition activities. Some of these shares are issued subject to security price guarantees, which are accounted for asderivatives. We have determined that these instruments would not be considered equity instruments if they were freestanding. Certain of the security priceguarantees require payment from either us to a third party, or from a third party to us, based upon the difference between the price of our common stock on theissue date and an average price of our common stock approximately six months following the issue date. We have also issued minimum price guarantees thatmay require payments from us to a third party based on the average share price of our common stock approximately six months following the issue date if ourstock price falls below the minimum price guarantee. Changes in the fair value of these security price guarantees are reported in other expense, net in ourconsolidated statements of operations. We have no outstanding shares subject to security price guarantees at September 30, 2015. During the years endedSeptember 30, 2015, 2014 and 2013, we recorded $0.2 million, $4.4 million and $6.6 million, respectively of losses associated with these contracts and wepaid cash totaling $0.3 million, $5.3 million and $3.8 million, respectively, upon the settlement of the agreements.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 $0.3 million, $0.2 million and $1.3 million for fiscal years 2015, 2014 and 2013, respectively. The aggregate projected benefit obligation and aggregatenet liability of our defined benefit plans as of September 30, 2015 was $35.5 million and $7.3 million, respectively, and as of September 30, 2014 was $34.9million and $5.0 million, respectively.Off-Balance Sheet ArrangementsThrough September 30, 2015, we have not entered into any off-balance sheet arrangements or material transactions with unconsolidated entities orother persons.CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATESThe preparation of financial statements in conformity with U.S. generally accepted accounting principles, requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, assumptions andjudgments, including those related to revenue recognition; allowance for doubtful accounts and sales returns; accounting for deferred costs; accounting forinternally developed software; the valuation of goodwill and intangible assets; accounting for business combinations, including contingent consideration;accounting for stock-based compensation; accounting for derivative instruments; accounting for income taxes and related valuation allowances; and losscontingencies. Our management bases its estimates on historical experience, market participant fair value considerations, projected future cash flows andvarious 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 solutions and technology is deemed to have occurred when a customer either has taken possession of or has accessto take 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 precludethem from 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 aremet.40Table of ContentsSoftware arrangements generally include PCS, which includes telephone support and the right to receive unspecified upgrades/enhancements on awhen-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 themaintenance service is provided. When PCS renews automatically, we provide a reserve based on historical experience for contracts expected to be canceledfor 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. For the undelivered elements, VSOE of fair value is required in order to separate the accountingfor various elements in a 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,as measured by an observable input. In these circumstances, we separate license revenue from professional service revenue for income statement presentationby allocating 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 completeare made 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 inthe period identified. Significant judgments and estimates are involved in determining the percent complete of each contract. Different assumptions couldyield materially 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 ourpolicies. We determine the selling price for each deliverable using VSOE of selling price, if it exists, or Third Party Evidence (“TPE”) of selling price.Typically, we are unable to determine TPE of selling price. Therefore, when neither VSOE nor TPE of selling price exist for a deliverable, we use our Estimateof Selling Price (“ESP”) for the purposes of allocating the arrangement consideration. We determine ESP for a product or service by considering multiplefactors including, but not limited to, major project groupings, market conditions, competitive landscape, price list and discounting practices. Revenueallocated to each element is then recognized when the basic revenue recognition criteria are met for each element.When products are sold through distributors or resellers, title and risk of loss generally passes upon shipment, at which time the transaction is invoicedand payment is due. Shipments to distributors and resellers without right of return are recognized as revenue upon shipment, provided all other revenuerecognition criteria are met. Certain distributors and resellers have been granted rights of return for as long as the distributors or resellers hold the inventory.We cannot 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.41Table of ContentsWe 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 ofspecific transactions, historical experience, creditworthiness of customers and current market and economic conditions. Changes in judgments based uponthese factors could impact the timing and amount of revenue and cost recognized and thus affects our results of operations and financial condition.Business Combinations. We determine and allocate the purchase price of an acquired company to the tangible and intangible assets acquired andliabilities assumed as of the business combination date. The purchase price allocation process requires us to use significant estimates and assumptions,including fair value estimates, as of the business acquisition date, including:•estimated fair values of intangible assets;•estimated fair market values of legal performance commitments to customers, assumed from the acquiree under existing contractual obligations(classified as deferred revenue) at the date of acquisition;•estimated fair market values of stock awards assumed from the acquiree that are included in the purchase price;•estimated fair market value of required payments under contingent consideration provisions;•estimated income tax assets and liabilities assumed from the acquiree; and•estimated fair value of pre-acquisition contingencies assumed from the acquiree.While we use our best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilitiesassumed at the business combination date, our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchaseprice allocation period, which is generally one year from the business combination date, we record adjustments to the assets acquired and liabilities assumed,with the corresponding offset to goodwill. For changes in the valuation of intangible assets between preliminary and final purchase price allocation, therelated amortization is adjusted effective from the acquisition date. Subsequent to the purchase price allocation period any adjustment to assets acquired orliabilities assumed 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 beused in 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 tocustomers, 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.42Table of ContentsIf 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 toinclude an amount in the purchase price allocation based on whether it is probable a liability had been incurred and whether an amount can be reasonablyestimated. After the end of the purchase price allocation period, any adjustment to amounts recorded for a pre-acquisition contingency will be included in ouroperating results as acquisition-related cost, net in the period 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 with indefinite lives, which are susceptible to valuation adjustments as a result of changes in various factors or conditions. The mostsignificant 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, generally using the straight-linemethod except where the pattern of the expected economic benefit is readily identifiable, primarily customer relationship intangibles, whereby amortizationfollows that pattern. The values of intangible assets determined in connection with a business combination, with the exception of goodwill, were initiallydetermined by a risk-adjusted, discounted cash flow approach. Goodwill and intangible assets with indefinite lives are not amortized, but rather the carryingamounts of these assets are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value of theseassets may not be recoverable. Goodwill is tested for impairment based on a comparison of the fair value of our reporting units to their recorded carryingvalues. The test consists of a two-step process. The first step is the comparison of the fair value to the carrying value of the reporting unit to determine if thecarrying value exceeds the fair value. The second step measures the amount of an impairment loss and is only performed if the carrying value exceeds the fairvalue of the reporting unit. Our annual impairment assessment date is July 1 of each fiscal year. We have six reporting units based on the level of informationprovided to, and review thereof, by our segment management. Factors we consider important, which could trigger an impairment of such assets, include thefollowing:•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.We determine fair values for each of the reporting units based on consideration of the income approach, the market comparable approach and the markettransaction approach. For purposes of the income approach, fair value is determined based on the present value of estimated future after-tax cash flows,discounted at an appropriate risk adjusted rate. We use our internal forecasts to estimate future after-tax cash flows and include an estimate of long-term futuregrowth rates based on our most recent views of the long-term outlook for each reporting unit, which we believe are consistent with other market participants.Actual results may differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing model and analyzing published ratesfor industries relevant to our reporting units to estimate the weighted average cost of capital. We use discount rates that are commensurate with the risks anduncertainty inherent in the respective businesses and in our internally developed forecasts. Discount rates used in our reporting unit valuations ranged from10.6% to 15.2%. For purposes of the market approach, we use a valuation technique in which values are derived based on market prices of comparablepublicly traded companies. We also use a market based valuation technique in which values are determined based on relevant observable informationgenerated by market transactions involving comparable businesses. Compared to the market approach, the income approach more closely aligns eachreporting unit valuation to our business profile, including geographic markets served and product offerings. Required rates of return, along with uncertaintyinherent in the forecasts of future cash flows, are reflected in the selection of the discount rate. Equally important, under this approach, reasonably likelyscenarios and associated sensitivities can be developed for alternative future states that may not be reflected in an observable market price. A marketapproach allows for comparison to actual market transactions and multiples. It can be somewhat more limited in its application because the population ofpotential comparable entities is often limited to publicly-traded companies where the characteristics of the comparative business and ours can besignificantly different, market data is usually not available for divisions within larger conglomerates or non-public subsidiaries that could otherwise qualifyas 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 market conditions, to identify orderly transactionsbetween market participants in similar businesses. We assess each valuation methodology based upon the relevance and availability of the data at the timewe 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 certainassets and liabilities, to the reporting units and an apportionment method based on relative size of the reporting units’ revenues and operating expensescompared to our total revenues and operating expenses. Goodwill was initially allocated to our reporting units based on the relative fair value of the units atthe date we implemented the current reporting unit structure. Goodwill subsequently acquired through acquisitions is allocated to the applicable reportingunit based upon the relative fair value43Table of Contentsof the acquired business. 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.As of our annual impairment assessment date for fiscal year 2015, our estimated fair values of our reporting units substantially exceeded their carryingvalues and we concluded, based on the first step of the process, that there was no impairment of goodwill. The fair value exceeded the carrying value by morethan 50% for each of our reporting units, with the exception of our Mobile reporting unit. The fair value exceeded the carrying value of our Mobile reportingunit by approximately 16%. Goodwill allocated to our Mobile reporting unit is approximately $1.1 billion as of July 1, 2015 and September 30, 2015. OurMobile reporting unit, specifically our devices business, has experienced a decline in fair value as a result of a weakening revenue stream from sales to deviceOEMs with growth opportunity limited by the consolidation of this market to a small number of customers as well as increased competition in speech andnatural language technologies and services sold to device OEMs. The operating plans and projections, which are the basis for the reporting unit fair value,anticipate these weakening conditions for the device business and include revenue from new device markets and product offerings currently underdevelopment to offset this weakness in revenue. Determining the fair value of a reporting unit or asset group involves the use of significant estimates andassumptions, which we believe to be reasonable, that are unpredictable and inherently uncertain. These estimates and assumptions include revenue growthrates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, our ability tolaunch new product and new market penetrations, and determination of appropriate market comparables. Significant adverse changes in our future revenuesand/or operating margins, significant degradation in the enterprise values of comparable companies for our reporting units, changes in our organization ormanagement reporting structure, as well as other events and circumstances, including but not limited to technological advances, increased competition andchanging economic or market conditions, could result in (a) shorter estimated useful lives, (b) changes to reporting units or asset groups, which may requirealternative methods of estimating fair values or greater disaggregation or aggregation in our analysis by reporting unit, and/or (c) other changes in previousassumptions or estimates, could result in the determination that all or a portion of our goodwill is impaired that could materially impact future results ofoperations and financial position in the reporting period identified.In October 2014, we realigned our product portfolio which resulted in a change in the composition of our Mobile and Enterprise reporting units. Wehave reallocated goodwill among the affected reporting units, based on their relative fair value. We reallocated $29.9 million of goodwill from our DragonConsumer ("DNS") reporting unit into our Mobile reporting unit, and reallocated $10.5 million of goodwill from our Mobile reporting unit to our Enterprisereporting unit. The DNS and Mobile reporting units are both included in our Mobile and Consumer reportable segment. As a result of this change, wedetermined that we had a triggering event requiring us to perform an impairment test on our DNS, Mobile, and Enterprise reporting units. We completed ourimpairment test during the first quarter of fiscal year 2015, and the fair value of the reorganized reporting units, both before and after the product realignment,substantially exceeded their carrying values.We periodically review long-lived assets other than goodwill for impairment whenever events or changes in business circumstances indicate that thecarrying 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 acomparison of the undiscounted cash flows to the recorded carrying value for the asset or asset group. Asset groups utilized in this analysis are identified asthe lowest level grouping of assets for which largely independent cash flows can be identified. If impairment is indicated, the asset or asset group is writtendown to its estimated fair value.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 taxattributes. Determining the fair value of share-based awards at the grant date requires judgment, including estimating expected dividends, share pricevolatility and the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-basedcompensation expense and our results of operations could be materially impacted.Income Taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between thefinancial statement carrying amounts of assets and liabilities and their respective tax bases. This method also requires the recognition of future tax benefitssuch as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not after consideration of all available evidence. Asthe income tax returns are not due and filed until after the completion of our annual financial reporting requirements, the amounts recorded for the currentperiod reflect estimates for the tax-based activity for the period. In addition, estimates are often required with respect to, among other things, the appropriatestate and foreign income tax rates to use, the potential utilization of operating loss carry-forwards and valuation allowances required, if any, for tax assets thatmay not be realizable in the future. Tax laws and tax rates vary substantially in these jurisdictions, and are subject to change given the political andeconomic climate. We report and pay income tax based on operational results and applicable law. Our tax provision contemplates tax rates currently in effectto determine both our current and deferred tax provisions.44Table of ContentsAny significant fluctuation in rates or changes in tax laws could cause our estimates of taxes we anticipate either paying or recovering in the future tochange. Such changes could lead to either increases or decreases in our effective tax rate.Balance sheet classification of current and long-term deferred income tax assets and liabilities is based upon the classification of the underlying asset orliability that gives rise to a temporary difference. As such, we have historically estimated the future tax consequence of certain items, including bad debts,inventory valuation, and accruals that cannot be deducted for income tax purposes until such expenses are actually paid or disposed. We believe theprocedures and estimates used in our accounting for income taxes are reasonable and in accordance with established tax law. The income tax estimates usedhave not resulted in material adjustments to income tax expense in subsequent periods when the estimates are adjusted to the actual filed tax return amounts.Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporarydifferences are expected to be recovered or settled. With respect to earnings expected to be indefinitely reinvested offshore, we do not accrue tax for therepatriation of such foreign earnings.We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timingof the reversals of existing temporary differences and tax planning strategies. In assessing the need for a valuation allowance, we consider both positive andnegative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensuratewith the extent to which the evidence may be objectively verified. If positive evidence regarding projected future taxable income, exclusive of reversingtaxable temporary differences, existed it would be difficult for it 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 notneeded.As of September 30, 2015, we have $241.8 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 the remaining valuation allowance has been established, thenwe may be required to recognize these deferred tax assets through the reduction of the valuation allowance which could result in a material benefit to ourresults 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 taxpositions. Under the comprehensive model, when the minimum threshold for recognition is not met, no tax benefit can be recorded. When the minimumthreshold for recognition is met, a tax position is recorded as the largest amount that is more than fifty percent likely of being realized upon ultimatesettlement.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 16 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 atthe time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise ourestimates. 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 PRONOUNCEMENTSFrom time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board and are adopted by us as of the specifiedeffective dates. Unless otherwise discussed, such pronouncements did not have or will not have a significant impact on our consolidated financial position,results of operations and cash flows or do not apply to our operations.In September 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-16, "Simplifying theAccounting for Measurement-Period Adjustments" ("ASU 2015-16"). The new standard requires that an acquirer recognize adjustments to provisionalamounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined and sets forth newdisclosure requirements related to the adjustments. ASU 2015-16 is effective for us in the first quarter of fiscal year 2017. We do not believe that ASU 2015-16 will have a material impact on our consolidated financial statements.In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). The amendments in theASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carryingamount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for us in the first quarter of fiscal year 2017, with early adoptionpermitted. ASU 2015-03 should be applied on a45Table of Contentsretrospective basis to each individual period presented. Upon implementation, the change in reporting debt issuance costs will require us to reclassify ourdeferred financing costs, which are $15.7 million and $19.0 million at September 30, 2015 and 2014, respectively, from an asset to a reduction of the reporteddebt balance. ASU 2015-03 will reduce our assets and liabilities but will have no impact on our shareholders' equity, results of operations or cash flows.In February 2015, the FASB issued Accounting Standards Update No. 2015-02, “Amendments to the Consolidation Analysis” ("ASU 2015-02"). Theamendments in ASU 2015-02 provide guidance on evaluating whether a company should consolidate certain legal entities. In accordance with the guidance,all legal entities are subject to reevaluation under the revised consolidation model. ASU 2015-02 is effective for us in the first quarter of fiscal year 2017 withearly adoption permitted. We do not believe that ASU 2015-02 will have a material impact on our consolidated financial statements.In August 2014, the FASB issued Accounting Standards Update No. 2014-15, "Disclosure of Uncertainties about an Entity's Ability to Continue as aGoing Concern" ("ASU 2014-15"), to provide guidance on management's responsibility in evaluating whether there is substantial doubt about a company'sability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for us in the first quarter of fiscal year 2017, withearly adoption permitted. We do not believe that ASU 2014-15 will have a material impact on our consolidated financial statements.In June 2014, the FASB issued Accounting Standards Update No. 2014-12, "Accounting for Share-Based Payments When the Terms of an AwardProvide That a Performance Target Could Be Achieved after the Requisite Service Period" ("ASU 2014-12"). ASU 2014-12 requires that a performance targetthat affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existingguidance in ASC 718, "Compensation - Stock Compensation," as it relates to such awards. ASU 2014-12 is effective for us in our first quarter of fiscal year2017 with early adoption permitted using either of two methods: (i) prospective to all awards granted or modified after the effective date; or (ii) retrospectiveto all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to allnew or modified awards thereafter, with the cumulative effect of applying ASU 2014-12 as an adjustment to the opening retained earnings balance as of thebeginning of the earliest annual period presented in the financial statements. We do not believe that ASU 2014-12 will have a material impact on ourconsolidated financial statements.In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers: Topic 606" ("ASU 2014-09"), tosupersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promisedgoods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within therevenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount ofvariable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 iseffective for us in our first quarter of fiscal year 2019 using either of two methods: (i) retrospective to each prior reporting period presented with the option toelect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. We are currently evaluating the impactof our pending adoption of ASU 2014-09 on our consolidated financial statements.In April 2014, the FASB issued Accounting Standards Update No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals ofComponents of an Entity" ("ASU 2014-08"), to change the criteria for determining which disposals can be presented as discontinued operations andenhanced the related disclosure requirements. ASU 2014-08 is effective for us on a prospective basis in our first quarter of fiscal year 2016 with earlyadoption permitted for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued. We do not believethat ASU 2014-08 will have a material impact on our consolidated financial statements.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 local functional currency, will be reported in the functional currency at the applicable exchange rate in effect at the time of the transaction. Achange in the value of the functional currency compared to the foreign currency of the transaction will have either a positive or negative impact on ourfinancial position and results of operations.46Table of ContentsAssets and liabilities of our foreign entities are translated into U.S. dollars at exchange rates in effect at the balance sheet date and income and expenseitems are translated at average rates for the applicable period. Therefore, the change in the value of the U.S. dollar compared to foreign currencies will haveeither a positive or negative effect on our financial position and results of operations. Historically, our primary exposure has related to transactionsdenominated in the euro, British pound, Brazilian Real, Canadian dollar, Japanese yen, Indian rupee and 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, 2015 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 gains or losses on the foreign currency forward contracts. Theoutstanding contracts are not designated as accounting hedges and generally are for periods less than 90 days. The notional contract amount of outstandingforeign currency exchange contracts not designated as cash flow hedges was $138.5 million at September 30, 2015. Based on the nature of the transactionsfor which the contracts were purchased, a hypothetical change of 10% in exchange rates would not have a material impact on our financial results.Interest Rate SensitivityWe are exposed to interest rate risk as a result of our significant cash and cash equivalents, and the outstanding debt under the Credit Facility.At September 30, 2015, we held approximately $568.8 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 $4.5 million, based on theSeptember 30, 2015 reported balances of our investment accounts.At September 30, 2015, our total outstanding debt balance exposed to variable interest rates was $472.5 million. A hypothetical change in market rateswould have an impact on interest expense and amounts payable. Assuming a one percentage point increase in interest rates, our interest expense relative toour outstanding variable rate debt would increase $4.7 million per annum.Equity Price RiskWe are exposed to equity price risk as a result of security price guarantees that we enter into from time to time. Generally, these price guarantees are fora period 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, 2015, we have no security price guarantees outstanding.2031 Debentures and 2035 DebenturesThe fair values of our 2031 Debentures and 2035 Debentures are dependent on the price and volatility of our common stock as well as movements ininterest rates. The fair market values of these debentures will generally increase or decrease as the market price of our common stock changes. The fair marketvalues of these debentures will generally increase as interest rates fall and decrease as interest rates rise. The market value and interest rate changes affect thefair market values of these debentures but do not impact our financial position, results of operations or cash flows due to the fixed nature of the debtobligations. However, increases in the value of our common stock above the stated trigger price for each issuance for a specified period of time may providethe holders of these debentures 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, 2015 was $439.8 million for the 2031 Debentures, based on anaverage of the bid and ask prices for the issuances on that day. This compares to conversion values on September 30, 2015 of approximately $219.9 million.A 10% increase in the stock price over the September 30, 2015 closing price of $16.37 would have an estimated $2.6 million increase to the fair value and a$22.0 million increase to the conversion value of the debentures. The fair value at September 30, 2015 was $273.4 million for the 2035 Debentures, based onan average of the bid and ask prices for the issuances on that day. This compares to conversion values on September 30, 2015 of approximately $185.747Table of Contentsmillion. A 10% increase in the stock price over the September 30, 2015 closing price of $16.37 would have an estimated $13.1 million increase to the fairvalue and a $18.6 million increase to the conversion value of the debentures.48Table of ContentsItem 8.Financial Statements and Supplementary DataNuance Communications, Inc. Consolidated Financial StatementsNUANCE COMMUNICATIONS, INC.INDEX TO FINANCIAL STATEMENTS PageReports of Independent Registered Public Accounting Firm50Consolidated Statements of Operations52Consolidated Statements of Comprehensive Loss53Consolidated Balance Sheets54Consolidated Statements of Stockholders’ Equity55Consolidated Statements of Cash Flows56Notes to Consolidated Financial Statements5749Table 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, 2015 and 2014, and the relatedconsolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended September 30,2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.We conducted our audits 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 the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis 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, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period endedSeptember 30, 2015, 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, 2015, based on criteria established in Internal Control — Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated November 18, 2015 expressed anunqualified opinion thereon. /s/ BDO USA, LLP BDO USA, LLPBoston, MassachusettsNovember 18, 201550Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and StockholdersNuance Communications, Inc.Burlington, MassachusettsWe have audited Nuance Communications, Inc.’s internal control over financial reporting as of September 30, 2015, based on criteria established inInternal Control - Integrated Framework (2013) 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 financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.In our opinion, Nuance Communications, Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30,2015, 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, 2015 and 2014, and the related consolidated statements of operations, comprehensive loss,stockholders’ equity and cash flows for each of the three years in the period ended September 30, 2015 and our report dated November 18, 2015 expressed anunqualified opinion thereon. /s/ BDO USA, LLP BDO USA, LLPBoston, MassachusettsNovember 18, 201551Table of ContentsNUANCE COMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended September 30, 2015 2014 2013 (In thousands, except per share amounts)Revenues: Product and licensing$696,290 $710,988 $753,665Professional services and hosting919,479 910,916 832,428Maintenance and support315,367 301,547 269,186Total revenues1,931,136 1,923,451 1,855,279Cost of revenues: Product and licensing91,839 97,550 99,381Professional services and hosting619,880 633,248 550,881Maintenance and support54,514 52,553 52,705Amortization of intangible assets63,646 60,989 63,583Total cost of revenues829,879 844,340 766,550Gross profit1,101,257 1,079,111 1,088,729Operating expenses: Research and development310,332 338,543 289,209Sales and marketing410,882 424,544 419,691General and administrative182,456 184,663 180,019Amortization of intangible assets104,630 109,063 105,258Acquisition-related costs, net14,379 24,218 29,685Restructuring and other charges, net23,669 19,443 16,385Total operating expenses1,046,348 1,100,474 1,040,247Income (loss) from operations54,909 (21,363) 48,482Other income (expense): Interest income2,635 2,345 1,615Interest expense(118,564) (132,675) (137,767)Other expense, net(19,452) (3,327) (9,010)Loss before income taxes(80,472) (155,020) (96,680)Provision (benefit) for income taxes34,538 (4,677) 18,558Net loss$(115,010) $(150,343) $(115,238)Net loss per share: Basic$(0.36) $(0.47) $(0.37)Diluted$(0.36) $(0.47) $(0.37)Weighted average common shares outstanding: Basic317,028 316,936 313,587Diluted317,028 316,936 313,587See accompanying notes.52Table of ContentsNUANCE COMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS Year Ended September 30, 2015 2014 2013 (In thousands)Net loss$(115,010) $(150,343) $(115,238)Other comprehensive (loss) income: Foreign currency translation adjustment(89,844) (27,639) 11,244Pension adjustments(3,041) (3,189) 2,599Unrealized loss on marketable securities(45) — —Total other comprehensive (loss) income, net(92,930) (30,828) 13,843Comprehensive loss$(207,940) $(181,171) $(101,395)See accompanying notes. 53Table of ContentsNUANCE COMMUNICATIONS, INC.CONSOLIDATED BALANCE SHEETS September 30, 2015 September 30, 2014 (In thousands, exceptper share amounts)ASSETSCurrent assets: Cash and cash equivalents$479,449 $547,230Marketable securities57,237 40,974Accounts receivable, less allowances for doubtful accounts of $9,184 and $11,491373,162 428,266Prepaid expenses and other current assets76,777 92,040Deferred tax assets57,309 55,990Total current assets1,043,934 1,164,500Marketable securities32,099 —Land, building and equipment, net186,007 191,411Goodwill3,378,334 3,410,893Intangible assets, net796,285 915,483Other assets148,686 137,997Total assets$5,585,345 $5,820,284LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities: Current portion of long-term debt$4,834 $4,834Contingent and deferred acquisition payments15,651 35,911Accounts payable56,581 61,760Accrued expenses and other current liabilities224,609 241,279Deferred revenue324,709 298,225Total current liabilities626,384 642,009Long-term portion of debt2,118,821 2,127,392Deferred revenue, net of current portion343,452 249,879Deferred tax liabilities162,476 156,235Other liabilities68,960 62,777Total liabilities3,320,093 3,238,292Commitments and contingencies (Note 16) Stockholders’ equity: Common stock, $0.001 par value; 560,000 shares authorized; 313,531 and 324,621 shares issued and 309,781and 320,870 shares outstanding, respectively314 325Additional paid-in capital3,149,060 3,153,033Treasury stock, at cost (3,751 shares)(16,788) (16,788)Accumulated other comprehensive loss(116,945) (24,015)Accumulated deficit(750,389) (530,563)Total stockholders’ equity2,265,252 2,581,992Total liabilities and stockholders’ equity$5,585,345 $5,820,284See accompanying notes.54Table 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 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 11,261 11 30,205 30,216Cancellation of restricted stock, andrepurchase of common stock at cost foremployee tax withholding (2,854) (3) (59,688) (59,691)Stock-based compensation 179,442 179,442Repurchase and retirement of commonstock (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 in connectionwith acquisitions and collaborationagreements 1,146 1 22,461 22,462Reclassification from temporary equity 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) 2,638,014Issuance of common stock underemployee stock plans 9,339 9 22,643 22,652Cancellation of restricted stock, andrepurchase of common stock at cost foremployee tax withholding (2,678) (1) (40,993) (40,994)Stock-based compensation 166,224 166,224Repurchase and retirement of commonstock (1,639) (2) (15,665) (10,816) (26,483)Issuance of common stock in connectionwith acquisitions and collaborationagreements 234 — 3,750 3,750Net loss (150,343) (150,343)Other comprehensive income (30,828) (30,828)Balance at September 30, 2014— — 324,621 325 3,153,033 3,751 (16,788) (24,015) (530,563) 2,581,992Issuance of common stock underemployee stock plans 12,322 12 25,764 25,776Cancellation of restricted stock, andrepurchase of common stock at cost foremployee tax withholding (3,917) (4) (59,904) (59,908)Stock-based compensation 175,714 175,714Repurchase and retirement of commonstock (19,783) (19) (194,374) (104,816) (299,209)Issuance of common stock in connectionwith acquisitions 288 — 4,469 4,469Equity portion of convertible debtissuance/retirement, net of tax effect 44,358 44,358Net loss (115,010) (115,010)Other comprehensive loss (92,930) (92,930)Balance at September 30, 2015— $— 313,531 $314 $3,149,060 3,751 $(16,788) $(116,945) $(750,389) $2,265,252See accompanying notes.55Table of ContentsNUANCE COMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended September 30, 2015 2014 2013 (In thousands)Cash flows from operating activities Net loss$(115,010) $(150,343) $(115,238)Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization230,645 221,776 208,659Stock-based compensation176,776 192,964 159,325Non-cash interest expense29,378 36,719 40,019Deferred tax provision (benefit)16,690 (22,172) (2,472)Loss on extinguishment of debt17,714 — —Other9,843 (7,726) (5,747)Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable41,657 (39,502) 25,165Prepaid expenses and other assets(3,931) (396) 10,988Accounts payable(3,218) (28,617) (26,843)Accrued expenses and other liabilities(48,118) 13,617 16,506Deferred revenue135,151 141,827 84,648Net cash provided by operating activities487,577 358,147 395,010Cash flows from investing activities Capital expenditures(58,039) (60,287) (55,588)Payments for business and technology acquisitions, net of cash acquired(83,278) (253,000) (607,653)Purchases of marketable securities and other investments(148,697) (62,639) (39,435)Proceeds from sales and maturities of marketable securities and other investments83,867 64,975 8,768Net cash used in investing activities(206,147) (310,951) (693,908)Cash flows from financing activities Payments of debt(261,051) (255,038) (425,634)Proceeds from long-term debt, net of issuance costs253,224 — 625,155Payments for repurchase of common stock(298,279) (26,483) (184,388)Payments on other long-term liabilities(3,003) (2,890) (1,688)Payments for settlement of share-based derivatives, net(340) (5,286) (3,801)Proceeds from issuance of common stock from employee stock plans25,776 22,652 30,216Cash used to net share settle employee equity awards(57,560) (40,121) (60,517)Net cash used in financing activities(341,233) (307,166) (20,657)Effects of exchange rate changes on cash and cash equivalents(7,978) (918) (2,088)Net decrease in cash and cash equivalents(67,781) (260,888) (321,643)Cash and cash equivalents at beginning of year547,230 808,118 1,129,761Cash and cash equivalents at end of year$479,449 $547,230 $808,118See accompanying notes.56Table 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 recognition solutions and natural languageunderstanding technologies. We work with companies around the world, from banks and hospitals to airlines, carriers, and car manufacturers, who use oursolutions and technologies to create better experiences for their customers and their users by enhancing the users' experience, increasing productivity andcustomer satisfaction. We offer our customers high accuracy in automated speech recognition, capabilities for natural language understanding, dialog andinformation management, biometric speaker authentication, text-to-speech, optical character recognition capabilities, and domain knowledge, along withprofessional services and implementation support. Using advanced analytics and algorithms, our technologies create personalized experiences and transformthe way people interact with information and the technology around them. We market and sell our solutions and technologies around the world directlythrough a dedicated sales force, through our e-commerce website and also through a global network of resellers, including system integrators, independentsoftware vendors, value-added resellers, distributors, hardware vendors, and telecommunications carriers.We operate in four reportable segments: Healthcare, Mobile and Consumer, Enterprise, and Imaging. See Note 19 for a description of each of thesesegments. We have completed several business acquisitions during the three years ended September 30, 2015, including Tweddle Technology SolutionsSegment ("TGT") on May 31, 2013, J.A. Thomas and Associates, Inc. ("JA Thomas") on October 1, 2012, and numerous immaterial acquisitions. The results ofoperations from these acquired businesses have been included in our consolidated financial statements from their respective acquisition dates. See Note 3 foradditional disclosure related to these acquisitions.We have evaluated subsequent events from September 30, 2015 through the date of the issuance of these consolidated financial statements and havedetermined that no material subsequent events have occurred that would affect the information presented in these consolidated financial statements.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; accounting for deferred costs;accounting for internally developed software; the valuation of goodwill and intangible assets; accounting for business combinations, including contingentconsideration; accounting for stock-based compensation; accounting for derivative instruments; accounting for income taxes and related valuationallowances; and loss contingencies. We base our estimates on historical experience, market participant fair value considerations, projected future cash flows,and various other factors that are believed to be reasonable under the circumstances. Actual amounts could differ significantly from these estimates.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.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) thefee is 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 solutions 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 precludethem from doing so.57Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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 aremet.Software arrangements generally include PCS, which includes telephone support and the right to receive unspecified upgrades/enhancements on awhen-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 canceledfor 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. For the undelivered elements, VSOE of fair value is required in order to separate the accountingfor various elements in a 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,as measured by an observable input. In these circumstances, we separate license revenue from professional service revenue for income statement presentationby allocating 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 completeare made 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 inthe period identified. Significant judgments and estimates are involved in determining the percent complete of each contract. Different assumptions couldyield materially 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 three ways: (1) fees for up-front set-up of the service environment (2) fees charged on a usage or per transaction basis, and (3) fees charged foron-demand service. Our up-front set-up fees are nonrefundable. We recognize the up-front set-up fees ratably over the longer of the contract lives or theexpected 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. The on-demand service fees are recognized ratablyover our estimate of the useful life of devices on which the hosted service is 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 ourpolicies. We determine the selling price for each deliverable using VSOE of selling price, if it exists, or Third Party Evidence (“TPE”) of selling price.Typically, we are unable to determine TPE of selling price. Therefore, when neither VSOE nor TPE of selling price exist for a deliverable, we use our Estimateof Selling Price (“ESP”) for the purposes of allocating the arrangement consideration. We determine ESP for a product or service by considering multiplefactors including, but not limited to, major project groupings, market conditions, competitive landscape, price list and discounting practices. Revenueallocated to each element is then recognized when the basic revenue recognition criteria are met for each element.When products are sold through distributors or resellers, title and risk of loss generally passes upon shipment, at which time the transaction is invoicedand payment is due. Shipments to distributors and resellers without right of return are recognized as revenue upon shipment, provided all other revenuerecognition criteria are met. Certain distributors and resellers have been granted rights of return for as long as the distributors or resellers hold the inventory.We cannot use historical returns from these distributors and resellers as a basis upon which to estimate future sales returns. As a result, we recognize revenuefrom sales to these distributors and resellers when the products are sold through to retailers and end-users.58Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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.Business 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 values of legal performance commitments to customers, assumed from the acquiree under existing contractual obligations (classified asdeferred revenue);•estimated fair values of stock awards assumed from the acquiree that are included in the purchase price;•estimated fair 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.The 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 included in acquisition-related costs, net in each reporting period.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, therelated amortization is adjusted effective from the acquisition date. Subsequent to the purchase price allocation period, any adjustment to assets acquired orliabilities assumed 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. Goodwill is tested forimpairment based on a comparison of the fair value of our reporting units to their recorded carrying values. The test consists of a two-step process. The firststep is the comparison of the fair value to the carrying value of the reporting unit to determine if the carrying value exceeds the fair value. The second stepmeasures the amount of an impairment loss and is only performed if the carrying value exceeds the fair value of the reporting unit. Our annual impairmentassessment date is July 1 of each fiscal year. We have six reporting units based on the level of information provided to, and review thereof, by our segmentmanagement.We determine fair values for each of the reporting units based on consideration of the income approach, the market comparable approach and themarket transaction approach. For purposes of the income approach, fair value is determined based on the present value of estimated future after-tax cashflows, discounted at an appropriate risk adjusted rate. We use our internal forecasts to59Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)estimate future after-tax cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for eachreporting unit, which we believe are consistent with other market participants. 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 weighted averagecost of capital. We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internallydeveloped forecasts. Discount rates used in our reporting unit valuations ranged from 10.6% to 15.2%. For purposes of the market approach, we use avaluation technique in which values are derived based on market prices of comparable publicly traded companies. We also use a market based valuationtechnique in which values are determined based on relevant observable information generated by market transactions involving comparable businesses. Weassess each valuation methodology based upon the relevance and availability of the data at the time we perform the valuation and weight the methodologiesappropriately.The carrying values of the reporting units were determined based on an allocation of our assets and liabilities, through specific allocation of certainassets and liabilities, to the reporting units and an apportionment method based on relative size of the reporting units’ revenues and operating expensescompared to our total revenues and operating expenses. Goodwill was initially allocated to our reporting units based on the relative fair value of the units atthe date we implemented the current reporting unit structure. Goodwill subsequently acquired through acquisitions is allocated to the applicable reportingunit based upon the relative fair value of the acquired business. Certain corporate assets and liabilities that are not instrumental to the reporting units’operations and would not be transferred to hypothetical purchasers of the reporting units were excluded from the reporting units’ carrying values.As of our annual impairment assessment date for fiscal year 2015, our estimated fair values of our reporting units substantially exceeded their carryingvalues and we concluded, based on the first step of the process, that there was no impairment of goodwill. The fair value exceeded the carrying value by morethan 50% for each of our reporting units, with the exception of our Mobile reporting unit. The fair value exceeded the carrying value of our Mobile reportingunit by approximately 16%. Goodwill allocated to our Mobile reporting unit is approximately $1.1 billion as of July 1, 2015 and September 30, 2015. OurMobile reporting unit, specifically our devices business, has experienced a decline in fair value as a result of a weakening revenue stream from sales to deviceOEMs with growth opportunity limited by the consolidation of this market to a small number of customers as well as increased competition in speech andnatural language technologies and services sold to device OEMs. The operating plans and projections, which are the basis for the reporting unit fair value,anticipate these weakening conditions for the device business and include revenue from new device markets and product offerings currently underdevelopment to offset this weakness in revenue. Determining the fair value of a reporting unit or asset group involves the use of significant estimates andassumptions, which we believe to be reasonable, that are unpredictable and inherently uncertain. These estimates and assumptions include revenue growthrates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, our ability tolaunch new product and new market penetrations, and determination of appropriate market comparables. Significant adverse changes in our future revenuesand/or operating margins, significant degradation in the enterprise values of comparable companies for our reporting units, changes in our organization ormanagement reporting structure, as well as other events and circumstances, including but not limited to technological advances, increased competition andchanging economic or market conditions, could result in (a) shorter estimated useful lives, (b) changes to reporting units or asset groups, which may requirealternative methods of estimating fair values or greater disaggregation or aggregation in our analysis by reporting unit, and/or (c) other changes in previousassumptions or estimates, could result in the determination that all or a portion of our goodwill is impaired that could materially impact future results ofoperations and financial position in the reporting period identified.Long-Lived AssetsOur long-lived assets consist principally of acquired intangible assets, internally developed software, land, and building and equipment. Internallydeveloped software consists of capitalized costs incurred during the application development stage, which include costs to design the software configurationand interfaces, coding, installation and testing. Costs incurred during the preliminary project stage, along with post-implementation stages of internallydeveloped software, are expensed as incurred. Internally developed software costs that have been capitalized are typically amortized over the estimateduseful life, beginning with the date that an asset is ready for its intended use. Land, building and equipment are stated at cost. Building and equipment aredepreciated over their estimated useful lives. Leasehold improvements are depreciated over the shorter of the related lease term or the estimated useful life.Depreciation is computed using the straight-line method. Repair and maintenance costs are expensed as incurred. The cost and related accumulateddepreciation of 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 technologythat is 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 economic60Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)benefit is readily identifiable, primarily customer relationship intangibles, whereby amortization follows that pattern. Each period, we evaluate the estimatedremaining useful life of acquired and licensed intangible assets, as well as land, buildings and equipment, to determine whether events or changes incircumstances 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 maynot be recoverable. We assess the recoverability of the asset or asset group based on the undiscounted future cash flows the assets are expected to generateand recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the assets plus net proceeds expectedfrom disposition of the assets, if any, are less than the carrying value of the assets. Estimating the future cash flows of an asset or asset group involves the useof significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projectedfuture cash flows, as well as future economic and market conditions. If an asset or asset group is deemed to be impaired, the amount of the impairment loss, ifany, represents the excess of the asset or asset group’s carrying value compared to its estimated fair value.Cash and Cash EquivalentsCash and cash equivalents consists of cash on hand, including money market funds and time deposits with original maturities of 90 days or less.Marketable Securities and Minority InvestmentsMarketable Securities: 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 aseparate component of accumulated other comprehensive income, net of tax. As of September 30, 2015, the total cost basis of our marketable securities was$57.2 million.Minority Investment: We record investments in other companies, where we do not have a controlling interest or significant influence in the equityinvestment, at cost within other assets in our consolidated balance sheet. We review our investments for impairment whenever declines in estimated fair valueare deemed to be other-than-temporary.Accounts Receivable AllowancesAllowances for Doubtful Accounts: We maintain an allowance for doubtful accounts for the estimated probable losses on uncollectible accountsreceivable. The allowance is based upon the credit worthiness of our customers, our historical experience, the age of the receivable and current market andeconomic conditions. Receivables are written off against these allowances in the period they are determined to be uncollectible.Allowances for Sales Returns: We maintain an allowance for sales returns from customers for which we have the ability to estimate returns based onhistorical experience. The returns allowance is recorded as a reduction in revenue and accounts receivable at the time the related revenue is recorded.Receivables are written off against the allowance in the period the return is received.61Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)For the years ended September 30, 2015, 2014 and 2013, the activity related to accounts receivable allowances was as follows (dollars in thousands): Allowance forDoubtful Accounts Allowance forSales ReturnsBalance at September 30, 2012$6,933 $9,868Bad debt provision4,781 —Write-offs, net of recoveries(3,185) —Revenue adjustments, net— (4,208)Balance at September 30, 2013$8,529 $5,660Bad debt provisions3,917 —Write-offs, net of recoveries(955) —Revenue adjustments, net— 4,268Balance at September 30, 2014$11,491 $9,928Bad debt provisions3,397 —Write-offs, net of recoveries(5,704) —Revenue adjustments, net— (1,756)Balance at September 30, 2015$9,184 $8,172InventoriesInventories are stated at the lower of cost, computed using the first-in, first-out method, or market value and are included in other current assets. Weregularly review inventory quantities on hand and record a provision for excess and/or obsolete inventory primarily based on future purchase commitmentswith our suppliers, and the estimated utility of our inventory as well as other factors including technological changes and new product development.Inventories, net of allowances, consisted of the following (dollars in thousands): September 30, 2015 September 30, 2014Components and parts$6,850 $8,591Finished products2,144 3,862Total Inventories$8,994 $12,453Accounting for Collaboration AgreementsHealthcare Collaboration AgreementWe have a collaboration agreement with a large healthcare provider and under the terms of the agreement we have been reimbursed for certain researchand development costs related to specified product development projects with the objective of commercializing the resulting products. All intellectualproperty derived from these research and development efforts will be owned by us. Upon product introduction, we will pay royalties to this party based on theactual sales. During fiscal year 2016, the party can elect to continue with the arrangement, receiving royalties on future sales, or receive a buy-out paymentfrom us and forgo future royalties. Royalties paid to this party upon commercialization of any products from these development efforts will be recorded as areduction to revenue. The buy-out payment is calculated based on a number of factors including the net cash flows received and paid by the parties, as well asa minimum return on those net cash flows. As of September 30, 2015 and September 30, 2014, the estimated maximum amount that would be payable if ourpartner were to elect to receive a buy-out at the option date is $6.5 million and $2.6 million, respectively, which was recorded as research and developmentcosts and included in accrued expenses in our consolidated statements of operations.Intellectual Property Collaboration AgreementsWe entered into collaboration agreements in order to gain access to a third party’s extensive speech recognition technology, natural languagetechnology, and semantic processing technology. Depending on the agreement, some or all intellectual property derived from these collaborations will bejointly owned by the two parties. For the majority of the developed intellectual property,62Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)we will have sole rights to commercialize such intellectual property for periods ranging between two to six years, depending on the agreement. Generally, theagreements call for annual payments in cash or shares of our common stock, at our election. We issued 0.2 million and 1.1 million shares of our commonstock for payments totaling $3.8 million and $22.5 million in the fiscal years ending in 2014 and 2013, respectively. The final payments under theagreements were paid in fiscal year 2014 for $3.8 million. The payments are recorded as a prepaid asset when made and are expensed ratably over thecontractual period. For the years ended September 30, 2015, 2014 and 2013, we have recognized $2.5 million, $19.7 million, and $20.6 million as researchand development expense, respectively, related to these agreements in our consolidated statements of operations. For the year ended September 30, 2015, wehave also recognized $8.0 million as sales and marketing expense for the exclusive commercialization rights related to one of these collaboration agreementsin our consolidated statements of operations. As of September 30, 2015, the ending unamortized prepaid asset was $4.0 million.Research and Development CostsResearch and development costs related to software that is or will be sold or licensed externally to third-parties, or for which a substantive plan exists tosell or license such software in the future, incurred subsequent to the establishment of technological feasibility, but prior to the general release of the product,are capitalized and amortized to cost of revenue over the estimated useful life of the related products. We have determined that technological feasibility isreached shortly before the general release of our software products. Costs incurred after technological feasibility is established have not been material. Weexpense research and development costs as incurred.Acquisition-Related Costs, netAcquisition-related costs include costs related to business and other acquisitions, including potential acquisitions. These costs consist of (i) transitionand integration costs, including retention payments, transitional employee costs and earn-out payments treated as compensation expense, as well as the costsof 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 components of acquisition-related costs, net are as follows (dollars in thousands): 2015 2014 2013Transition and integration costs$10,071 $25,290 $28,302Professional service fees8,441 9,929 20,381Acquisition-related adjustments(4,133) (11,001) (18,998)Total$14,379 $24,218 $29,685Fiscal years 2014 and 2013 transition and integration costs include acquisition related contingent payments that were accounted for as compensationexpense. In addition, fiscal years 2014 and 2013 acquisition-related adjustments include income of $7.7 million and $17.8 million, respectively, related tothe elimination of contingent liabilities established in the original allocation of purchase price for acquisitions closed in fiscal years 2008 and 2007,following the expiration of the applicable statute of limitations.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 therevenue transaction can be identified and the cash paid does not exceed the fair value of that advertising benefit received. Any excess of cash paid over thefair value of the advertising benefit received is recorded as a reduction in revenue. We incurred advertising costs of $32.1 million, $49.4 million and $52.1million for fiscal years 2015, 2014 and 2013, 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 the63Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)time of issuance. The equity components of our convertible debt instruments are recorded to stockholders’ equity with an offsetting debt discount. The debtdiscount created is amortized to interest expense in our consolidated statement of operations using the effective interest method over the expected term of theconvertible debt.Income TaxesDeferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statementcarrying amounts of assets and liabilities and their respective tax bases. This method also requires the recognition of future tax benefits such as net operatingloss carryforwards, to the extent that realization of such benefits is more likely than not after consideration of all available evidence. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected tobe recovered or settled. We do not accrue tax for the repatriation of foreign earnings expected to be indefinitely reinvested offshore.We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timingof the reversals of existing temporary differences and tax planning strategies. In assessing the need for a valuation allowance, we consider both positive andnegative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensuratewith the extent to which the evidence may be objectively verified. If positive evidence regarding projected future taxable income, exclusive of reversingtaxable temporary differences, existed it would be difficult for it 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 notneeded.As of September 30, 2015 and 2014, valuation allowances have been established for all U.S. and for certain foreign deferred tax assets which we believedo not meet 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 avaluation allowance has been established, then we may be required to recognize these deferred tax assets through the reduction of the valuation allowancewhich could result in a material benefit to our results of operations in the period in which the benefit is determined.Comprehensive Income (Loss)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): 2015 2014 2013Foreign currency translation adjustment$(109,695) $(19,851) $7,788Unrealized losses on marketable securities(45) — —Net unrealized losses on post-retirement benefits(7,205) (4,164) (975)Total$(116,945) $(24,015) $6,813Concentration 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, 2015 and 2014, no customer accounted for greaterthan 10% of our net accounts receivable balance or 10% of our revenue for fiscal years 2015, 2014 or 2013.Fair Value of Financial InstrumentsFinancial instruments including cash equivalents, accounts receivable, and accounts payable are carried in the financial statements at amounts thatapproximate their fair value based on the short maturities of those instruments. Marketable securities and derivative instruments are carried at fair value. Referto Note 9 for discussion of the fair value of our long-term debt.64Table 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 expense, net, in the accompanying consolidated statements of operations. Assets and liabilities of operations outside the UnitedStates ("U.S."), for which the functional currency is the local currency, are translated into United States dollars using period-end exchange rates. Revenuesand expenses are translated at the average exchange rates in effect during each fiscal month during the year. The effects of foreign currency translationadjustments are included as a component of accumulated other comprehensive loss in the accompanying consolidated balance sheets. Foreign currencytransaction gains (losses) included in other expense, net for fiscal years 2015, 2014, and 2013 were $0.02 million, $0.9 million, and $(0.5) million,respectively.Financial Instruments and Hedging ActivitiesWe utilize derivative instruments to hedge specific financial risks including foreign exchange risk. We do not engage in speculative hedging 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 the hedge that formaldocumentation exists for both the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge and (ii) at theinception 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 statementsor earnings are reported. Absent meeting these criteria, changes in fair value are recognized in other 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 loss to the statement of operations, in the appropriate revenue or expense caption. Any ineffective portion of thederivatives designated as cash flow hedges is recognized in current earnings. We report cash flows arising from derivative financial instruments designated asfair 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 10, 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 fromstock-based compensation in equity using the with-and-without approach for the utilization of tax attributes.Net Loss Per ShareThe weighted-average number of common shares outstanding gives effect to all potentially dilutive common equivalent shares, including outstandingstock options and restricted stock, shares held in escrow, contingently issuable shares under earn-out agreements once earned, warrants, and potentialissuance of stock upon conversion of our 2.75% and 1.50% Convertible Debentures. The convertible debentures are considered Instrument C securities dueto the fact that only the excess of the conversion value on the date of conversion can be paid in our common shares; the principal portion of the conversionmust be paid in cash. Therefore, only the shares of common stock potentially issuable with respect to the excess of the conversion value over its principalamount, if any, is considered as dilutive to the weighted average common shares calculation.As of September 30, 2015, 2014 and 2013, diluted weighted average common shares outstanding is equal to basic weighted average common sharesdue to our net loss position. Common equivalent shares are excluded from the computation of diluted net loss per share if their effect is anti-dilutive.Potentially dilutive common equivalent shares aggregating to 10.7 million shares, 10.9 million shares and 13.6 million shares for the years endedSeptember 30, 2015, 2014 and 2013, respectively, have been excluded from the computation of diluted net loss per share because their inclusion would beanti-dilutive.Recently Issued Accounting StandardsFrom time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board and are adopted by us as of the specifiedeffective dates. Unless otherwise discussed, such pronouncements did not have or will not have a significant impact on our consolidated financial position,results of operations and cash flows or do not apply to our operations.65Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)In September 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-16, "Simplifying theAccounting for Measurement-Period Adjustments" ("ASU 2015-16"). The new standard requires that an acquirer recognize adjustments to provisionalamounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined and sets forth newdisclosure requirements related to the adjustments. ASU 2015-16 is effective for us in the first quarter of fiscal year 2017. We do not believe that ASU 2015-16 will have a material impact on our consolidated financial statements.In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). The amendments in theASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carryingamount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for us in the first quarter of fiscal year 2017, with early adoptionpermitted. ASU 2015-03 should be applied on a retrospective basis to each individual period presented. Upon implementation, the change in reporting debtissuance costs will require us to reclassify our deferred financing costs, which are $15.7 million and $19.0 million at September 30, 2015 and 2014,respectively, from an asset to a reduction of the reported debt balance. ASU 2015-03 will reduce our assets and liabilities but will have no impact on ourshareholders' equity, results of operations or cash flows.In February 2015, the FASB issued Accounting Standards Update No. 2015-02, “Amendments to the Consolidation Analysis” ("ASU 2015-02"). Theamendments in ASU 2015-02 provide guidance on evaluating whether a company should consolidate certain legal entities. In accordance with the guidance,all legal entities are subject to reevaluation under the revised consolidation model. ASU 2015-02 is effective for us in the first quarter of fiscal year 2017 withearly adoption permitted. We do not believe that ASU 2015-02 will have a material impact on our consolidated financial statements.In August 2014, the FASB issued Accounting Standards Update No. 2014-15, "Disclosure of Uncertainties about an Entity's Ability to Continue as aGoing Concern" ("ASU 2014-15"), to provide guidance on management's responsibility in evaluating whether there is substantial doubt about a company'sability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for us in the first quarter of fiscal year 2017, withearly adoption permitted. We do not believe that ASU 2014-15 will have a material impact on our consolidated financial statements.In June 2014, the FASB issued Accounting Standards Update No. 2014-12, "Accounting for Share-Based Payments When the Terms of an AwardProvide That a Performance Target Could Be Achieved after the Requisite Service Period" ("ASU 2014-12"). ASU 2014-12 requires that a performance targetthat affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existingguidance in ASC 718, "Compensation - Stock Compensation," as it relates to such awards. ASU 2014-12 is effective for us in our first quarter of fiscal year2017 with early adoption permitted using either of two methods: (i) prospective to all awards granted or modified after the effective date; or (ii) retrospectiveto all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to allnew or modified awards thereafter, with the cumulative effect of applying ASU 2014-12 as an adjustment to the opening retained earnings balance as of thebeginning of the earliest annual period presented in the financial statements. We do not believe that ASU 2014-12 will have a material impact on ourconsolidated financial statements.In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers: Topic 606" ("ASU 2014-09"), tosupersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promisedgoods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within therevenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount ofvariable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 iseffective for us in our first quarter of fiscal year 2019 using either of two methods: (i) retrospective to each prior reporting period presented with the option toelect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. We are currently evaluating the impactof our pending adoption of ASU 2014-09 on our consolidated financial statements.In April 2014, the FASB issued Accounting Standards Update No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals ofComponents of an Entity" ("ASU 2014-08"), to change the criteria for determining which disposals can be presented as discontinued operations andenhanced the related disclosure requirements. ASU 2014-08 is effective for us on a prospective basis in our first quarter of fiscal year 2016 with earlyadoption permitted for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued. We do not believethat ASU 2014-08 will have a material impact on our consolidated financial statements.66Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)3.Business AcquisitionsFiscal Year 2015 AcquisitionsDuring fiscal year 2015, we acquired several immaterial businesses in our Mobile and Consumer and Healthcare segments for total aggregate cashconsideration of $47.6 million together with future contingent payments. The future contingent payments may require us to make payments up to $19.9million as additional consideration contingent upon the achievement of specified objectives, which at closing had an estimated fair value of $17.3 million.In allocating the total purchase consideration for these acquisitions based on preliminary estimated fair values, we recorded $23.4 million of goodwill and$35.8 million of identifiable intangibles assets. Intangible assets acquired included customer relationships and core and completed technology withweighted average useful lives of 6.9 years. The most significant of these acquisitions is treated as an asset purchase, and the goodwill resulting from thisacquisition is expected to be deductible for tax purposes.The fair value estimates for the assets acquired and liabilities assumed for acquisitions completed during fiscal year 2015 were based upon preliminarycalculations and valuations, and our estimates and assumptions for each of these acquisitions are subject to change as we obtain additional informationduring the 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. There were no significant changes to the fair value estimates during the current year.We have not furnished pro forma financial information related to our current year acquisitions because such information is not material, individuallyor in the aggregate, to our financial results.Fiscal Year 2014 AcquisitionsDuring fiscal year 2014, we acquired several immaterial businesses in our Imaging, Healthcare and Enterprise segments for total aggregate cashconsideration of $258.3 million together with future contingent payments. The future contingent payments may require us to make payments up to $13.5million as additional consideration contingent upon the achievement of specified objectives, which at closing had an estimated fair value of $7.7 million. Inaddition, there are deferred payment obligations to certain former shareholders, contingent upon their continued employment. These deferred paymentobligations, totaling $18.9 million, will be recorded as compensation expense over the applicable employment period, and included in acquisition-relatedcosts, net in our consolidated statements of operations. In allocating the total purchase consideration for these acquisitions based on final estimated fairvalues, we recorded $139.2 million of goodwill and $134.5 million of identifiable intangibles assets. Intangible assets acquired included customerrelationships and core and completed technology with weighted average useful lives of 10.2 years. The majority of these acquisitions are treated as stockpurchases, and the goodwill resulting from these acquisitions is not expected to be deductible for tax purposes.Fiscal Year 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.On October 1, 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 was recorded as compensation expense over the requisiteemployment period, and included in acquisition-related costs, net in our consolidated statements of operations. In October 2014, upon completion of therequired employment condition, we made a cash payment of $25.0 million to the former shareholders of JA Thomas. JA Thomas provides ClinicalDocumentation Improvement solutions to hospitals, primarily in the United States, and the results of operations are included in our Healthcare segment fromthe acquisition date. In accordance with the JA Thomas stock purchase agreement, we reached an agreement with the sellers to treat this transaction as anasset purchase, and therefore the goodwill is expected to be deductible for tax purposes.During fiscal year 2013, we acquired several other businesses for total purchase consideration of $251.7 million. These acquisitions are notindividually material and were made in each of our segments. These acquisitions are treated as stock purchases, and the goodwill resulting from theseacquisitions is not expected to be deductible for tax purposes.67Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The results of operations of these acquisitions have been included in our financial results from the applicable acquisition date. A summary of the finalallocation of the purchase consideration for our fiscal year 2013 acquisitions is as follows (dollars in thousands): TGT JA Thomas Other FiscalYear 2013AcquisitionsPurchase consideration: Cash$83,330 $244,777 $251,215Fair value of contingent consideration— — 450Total purchase consideration$83,330 $244,777 $251,665 Allocation of the purchase consideration: Cash$— $3,555 $18,004Accounts receivable(a)8,779 8,310 17,237Goodwill42,858 163,863 122,375Identifiable intangible assets(b)33,600 71,310 109,383Other assets10,330 2,745 31,554Total assets acquired95,567 249,783 298,553Current liabilities(1,452) (2,843) (10,274)Deferred tax liability— (1,474) (35,557)Other long term liabilities(10,785) (689) (1,057)Total liabilities assumed(12,237) (5,006) (46,888)Net assets acquired$83,330 $244,777 $251,665(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 finalvaluations (dollars in thousands): TGT JA Thomas Other Fiscal Year 2013 Acquisitions Amount WeightedAverageLife(Years) Amount WeightedAverageLife(Years) Amount WeightedAverageLife(Years)Core and completed technology$7,700 7.0 $3,920 5.0 $33,663 6.6Customer relationships25,900 9.0 66,100 11.0 72,188 10.9Trade names— — 1,290 7.0 3,102 6.6Non-Compete agreements— — — — 430 2.8Total$33,600 $71,310 $109,383 68Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)4.Goodwill and Intangible AssetsThe changes in the carrying amount of goodwill for our reportable segments for fiscal years 2015 and 2014 were as follows (dollars in thousands): Healthcare Mobile and Consumer Enterprise Imaging TotalBalance as of September 30, 2013$1,257,227 $1,313,635 $519,969 $202,367 $3,293,198Acquisitions52,483 — 29,047 59,609 141,139Purchase accounting adjustments(303) 2,595 (4,496) 500 (1,704)Effect of foreign currency translation(5,308) (6,905) (8,319) (1,208) (21,740)Balance as of September 30, 20141,304,099 1,309,325 536,201 261,268 3,410,893Acquisitions 23,286 23,286Purchase accounting adjustments275 (2,215) (1,940)Product realignment— (10,521) 10,521 — —Effect of foreign currency translation(9,856) (34,562) (7,415) (2,072) (53,905)Balance as of September 30, 2015$1,294,518 $1,287,528 $539,307 $256,981 $3,378,334In October 2014, we realigned our product portfolio which resulted in a change in the composition of our Mobile and Enterprise reporting units. Wehave reallocated goodwill among the affected reporting units, based on their relative fair value. We reallocated $29.9 million of goodwill from our DragonConsumer ("DNS") reporting unit into our Mobile reporting unit, and reallocated $10.5 million of goodwill from our Mobile reporting unit to our Enterprisereporting unit. The DNS and Mobile reporting units are both included in our Mobile and Consumer reportable segment. As a result of this change, wedetermined that we had a triggering event requiring us to perform an impairment test on our DNS, Mobile, and Enterprise reporting units. We completed ourimpairment test during the first quarter of fiscal year 2015, and the fair value of the reorganized reporting units, both before and after the product realignment,substantially exceeded their carrying values.Intangible assets consist of the following as of September 30, 2015 and 2014, which includes $80.5 million and $76.8 million of licensed technology,respectively (dollars in thousands): September 30, 2015 Gross CarryingAmount AccumulatedAmortization Net CarryingAmount Weighted AverageRemaining Life(Years)Customer relationships$1,028,197 $(474,518) $553,679 8.4Technology and patents451,669 (245,191) 206,478 4.6Trade names, trademarks, and other61,006 (24,983) 36,023 6.7Non-competition agreements597 (492) 105 1.0Total$1,541,469 $(745,184) $796,285 7.4 September 30, 2014 Gross CarryingAmount AccumulatedAmortization Net CarryingAmount Weighted AverageRemaining Life(Years)Customer relationships$1,103,092 $(466,144) $636,948 9.1Technology and patents457,567 (225,137) 232,430 5.1Trade names, trademarks, and other67,252 (21,996) 45,256 7.1Non-competition agreements3,988 (3,139) 849 1.0Total$1,631,899 $(716,416) $915,483 7.969Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Amortization expense for acquired technology and patents is included in the cost of revenue in the accompanying statements of operations andamounted to $63.6 million, $61.0 million and $63.6 million in fiscal 2015, 2014 and 2013, respectively. Amortization expense for customer relationships,trade names, trademarks, and other, and non-competition agreements is included in operating expenses and amounted to $104.6 million, $109.1 million and$105.3 million in fiscal 2015, 2014 and 2013, respectively.Estimated amortization expense for each of the five succeeding years as of September 30, 2015, is as follows (dollars in thousands):Year Ending September 30, Cost of Revenue Other OperatingExpenses Total2016 $60,069 $106,384 $166,4532017 48,963 91,234 140,1972018 37,820 68,854 106,6742019 22,704 65,728 88,4322020 18,782 60,499 79,281Thereafter 18,140 197,108 215,248Total $206,478 $589,807 $796,2855.Accounts ReceivableAccounts receivable consisted of the following (dollars in thousands): September 30, 2015 September 30, 2014Trade accounts receivable$377,695 $432,584Unbilled accounts receivable under long-term contracts12,823 17,101Gross accounts receivable390,518 449,685Less — allowance for doubtful accounts(9,184) (11,491)Less — allowance for sales returns(8,172) (9,928)Accounts receivable, net$373,162 $428,2666.Land, Building and Equipment, NetLand, building and equipment, net consisted of the following (dollars in thousands): Useful Life (InYears) September 30, 2015 September 30, 2014Land— $2,400 $2,400Building30 5,456 5,456Machinery and equipment3-5 100,838 78,539Computers, software and equipment3-7 213,897 271,278Leasehold improvements2-10 26,689 34,867Furniture and fixtures5-7 15,879 20,306Construction in progress— 5,363 3,764Subtotal 370,522 416,610Less: accumulated depreciation (184,515) (225,199)Land, building and equipment, net $186,007 $191,411At September 30, 2015 and 2014, capitalized internally developed software costs, net were $43.7 million and $49.8 million, respectively, which areincluded in computers, software and equipment and construction in progress.Depreciation expense for fiscal years 2015, 2014 and 2013 was $62.4 million, $51.7 million and $39.8 million, respectively, which includedamortization expense of $13.6 million, $7.9 million and $5.3 million, respectively, for internally developed software costs.70Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)7.Accrued Expenses and Other Current LiabilitiesAccrued expenses and other current liabilities consisted of the following (dollars in thousands): September 30, 2015 September 30, 2014Compensation$142,150 $146,730Cost of revenue related liabilities25,584 22,340Accrued interest payable11,793 15,092Professional fees6,874 10,852Sales and marketing incentives6,845 10,188Acquisition costs and liabilities6,666 9,307Facilities related liabilities6,312 5,720Sales and other taxes payable6,026 9,367Other12,359 11,683Total$224,609 $241,2798.Deferred RevenueDeferred maintenance revenue consists of prepaid fees received for post-contract customer support for our products, including telephone support andthe right to receive unspecified upgrades/updates on a when-and-if-available basis. Unearned revenue includes upfront fees for setup and implementationactivities as well as fees related to hosted offerings; certain software arrangements for which we do not have fair value of post-contract customer support,resulting in ratable revenue recognition for the entire arrangement on a straight-line basis; and fees in excess of estimated earnings on percentage-of-completion service contracts.Deferred revenue at September 30, 2015 and 2014 was as follows (dollars in thousands): September 30, 2015 September 30, 2014Current Liabilities: Deferred maintenance revenue$155,967 $140,737Unearned revenue168,742 157,488Total current deferred revenue$324,709 $298,225Long-term Liabilities: Deferred maintenance revenue$62,201 $60,398Unearned revenue281,251 189,481Total long-term deferred revenue$343,452 $249,87971Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)9.Credit Facilities and DebtAt September 30, 2015 and 2014, we had the following borrowing obligations (dollars in thousands): September 30, 2015 September 30, 20145.375% Senior Notes due 2020, net of unamortized premium of $3.8 million and $4.6 million, respectively.Effective interest rate 5.28%.$1,053,818 $1,054,6012.75% Convertible Debentures due 2031, net of unamortized discount of $39.1 million and $88.8 million,respectively. Effective interest rate 7.43%.394,698 601,2261.50% Convertible Debentures due 2035, net of unamortized discount of $60.5 million at September 30,2015. Effective interest rate 5.50%.203,373 —Credit Facility, net of unamortized original issue discount of $0.8 million and $1.0 million respectively.471,766 476,399Total long-term debt2,123,655 2,132,226Less: current portion4,834 4,834Non-current portion of long-term debt$2,118,821 $2,127,392The estimated fair value of our long-term debt approximated $2,249.1 million (face value $2,220.2 million) and $2,179.2 million (face value $2,217.4million) at September 30, 2015 and 2014, 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-termdebt will continue to vary each period based on fluctuations in market interest rates, as well as changes to our credit ratings. The Senior Notes, theConvertible Debentures, and the term loan portion of our Credit Facility are traded and the fair values of each borrowing was estimated using the averages ofthe bid and ask trading quotes at each respective reporting date. We had no outstanding balance on the revolving credit line portion of our Credit Facility atSeptember 30, 2015 and 2014.1.50% Convertible Debentures due 2035In June 2015, we issued $263.9 million in aggregate principal amount of 1.50% Senior Convertible Debentures due in 2035 (the “2035 Debentures”)in exchange for $256.2 million in aggregate principal amount of our 2.75% Senior Convertible Debentures due in 2031 (the “2031 Debentures”). Totalproceeds, net of debt issuance costs, were $253.2 million. The 2035 Debentures were issued at 97.09% of the principal amount, which resulted in a discountof $7.7 million. The 2035 Debentures bear interest at 1.50% per year, payable in cash semi-annually in arrears, beginning on November 1, 2015. In additionto ordinary interest and default additional interest, beginning with the semi-annual interest period commencing on November 1, 2021, contingent interestwill accrue during any regular semi-annual interest period where the average trading price of our 2035 Debentures for the ten trading day period immediatelypreceding the first day of such semi-annual period is greater than or equal to $1,200 per $1,000 principal amount of our 2035 Debentures, in which case,contingent interest will accrue at a rate of 0.50% per annum of such average trading price. The 2035 Debentures mature on November 1, 2035, subject to theright of the holders to require us to redeem the 2035 Debentures on November 1, 2021, 2026, or 2031. The 2035 Debentures are general senior unsecuredobligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment toany indebtedness that is contractually subordinated to the 2035 Debentures. The 2035 Debentures will be effectively subordinated to indebtedness and otherliabilities of our subsidiaries.We account separately for the liability and equity components of the 2035 Debentures in accordance with authoritative guidance for convertible debtinstruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuringthe fair value of a similar liability that does not have an associated conversion feature and record the remainder in stockholders’ equity. At issuance, weallocated $208.6 million to long-term debt, and $55.3 million has been recorded as additional paid-in capital. The aggregate debt discount of $63.0 millionis being amortized to interest expense using the effective interest rate method through November 2021. As of September 30, 2015, the ending unamortizeddeferred debt issuance costs were $2.3 million.If converted, the principal amount of the 2035 Debentures is payable in cash and any amounts payable in excess of the principal amount, will (basedon an initial conversion rate, which represents an initial conversion price of approximately $23.26 per share, subject to adjustment) be paid in cash or sharesof our common stock, at our election, only in the following circumstances and to the following extent: (i) prior to May 1, 2035, on any date during any fiscalquarter beginning after September 30, 2015 (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of thethen current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the72Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)previous fiscal quarter; (ii) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for$1,000 principal amount of the 2035 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 2035Debentures; or (iv) at the option of the holder at any time on or after May 1, 2035. Additionally, we may redeem the 2035 Debentures, in whole or in part, onor after November 5, 2021 for cash at a price equal to 100% of the principal amount of the 2035 Debentures to be purchased plus any accrued and unpaidinterest, including any additional interest to, but excluding, the repurchase date. Each holder shall have the right, at such holder’s option, to require us torepurchase all or any portion of the 2035 Debentures held by such holder on November 1, 2021, November 1, 2026, or November 1, 2031 at par plus accruedand unpaid interest. Upon repurchase, we will pay the principal amount in cash and any amounts payable in excess of the principal amount will be paid incash or shares of our common stock, at our election, with the exception that we may not elect to pay cash in lieu of more than 80% of the number of ourcommon shares we would be obligated to deliver. If we undergo a fundamental change (as described in the indenture for the 2035 Debentures) prior tomaturity, holders will have the option to require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principalamount of the 2035 Debentures to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchasedate. As of September 30, 2015, none of the conversion criteria were met for the 2035 Debentures. If the conversion criteria were met, we could be required torepay all or some of the aggregate principal amount in cash prior to the maturity date.5.375% Senior Notes due 2020On 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, 2015 and 2014 were $9.2 million and $11.1 million respectively.On 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 the indenture agreement dated August 14, 2012, relating to our existing $700 million aggregate principal amount of 5.375% SeniorNotes due in 2020. Total proceeds received, net of issuance costs, were $351.7 million.The Notes are our unsecured senior obligations and are guaranteed (the “Guarantees”) on an unsecured senior basis by substantially all of our direct andindirect wholly owned domestic subsidiaries (the “Subsidiary Guarantors”). The Notes and Guarantees rank equally in right of payment with all of our andthe Subsidiary Guarantors' existing and future unsecured senior debt and rank senior in right of payment to all of our and the Subsidiary Guarantors' futureunsecured subordinated debt. The Notes and Guarantees effectively rank junior to all secured debt of our and the Subsidiary Guarantors to the extent of thevalue of the collateral securing such debt and to all liabilities, including trade payables, of our 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.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 $690.0 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. 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.73Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)We account separately for the liability and equity components of the 2031 Debentures in accordance with authoritative guidance for convertible debtinstruments that may be settled in cash upon conversion. We initially allocated $533.6 million to long-term debt, and $156.4 million has been recorded asadditional paid-in capital.In June 2015, we entered into separate privately negotiated agreements with certain holders of our 2031 Debentures to exchange, in a privateplacement, $256.2 million in aggregate principal amount of our 2031 Debentures for approximately $263.9 million in aggregate principal amount of our new2035 Debentures. In accordance with the authoritative guidance for convertible debt instruments, a loss on extinguishment is equal to the difference betweenthe reacquisition price and the net carrying amount of the extinguished debt for our 2031 Debentures, including any unamortized debt discount or issuancecosts, and $17.7 million was recorded in other expense, net, in the accompanying consolidated statements of operations. Following the closings of theexchange, $433.8 million in aggregate principal amount of our 2031 Debentures remain outstanding. The aggregate debt discount is being amortized tointerest expense using the effective interest rate method through November 2017. As of September 30, 2015 and 2014, the ending unamortized deferred debtissuance costs were $2.3 million and $5.5 million, respectively.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 suchfive trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; (iii) upon theoccurrence of specified corporate transactions, as described in the indenture for the 2031 Debentures; or (iv) at the option of the holder at any time on or afterMay 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 holder shall 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 onNovember 1, 2017, November 1, 2021, and November 1, 2026 at par plus accrued and unpaid interest. If we undergo a fundamental change (as described inthe indenture for the 2031 Debentures) prior to maturity, holders will have the option to require us to repurchase all or any portion of their debentures for cashat a price equal to 100% of the principal amount of the debentures to be purchased plus any accrued and unpaid interest, including any additional interest to,but excluding, the repurchase date. As of September 30, 2015 and 2014, no conversion triggers were met. If the conversion triggers were met, we could berequired to repay all or some of the aggregate principal amount in cash prior to the maturity date.Credit FacilityAs of September 30, 2015, the amended and restated credit agreement, entered into on August 7, 2013, includes a term loan, with a principal balance of$472.5 million, and a $75.0 million revolving credit line, including letters of credit (together, the "Credit Facility"). The term loans mature on August 7, 2019and the revolving credit line matures on August 7, 2018. As of September 30, 2015, there were $6.3 million of letters of credit issued, and there were no otheroutstanding borrowings under the revolving credit line.The term loans bear interest, at our option, at a base rate determined in accordance with the amended and restated credit agreement, plus a spread of1.75%, or a LIBOR rate plus a spread of 2.75%. The revolving credit line bears 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 based onour consolidated net leverage ratio.Under terms of the Credit Facility, interest is payable periodically at a rate equal to the applicable margin plus, at our option, either (a) the base ratewhich is the corporate base rate of Morgan Stanley, the Administrative Agent, or (b) LIBOR (equal to (i) the British Bankers’ Association Interest SettlementRates for deposits in U.S. dollars divided by (ii) one minus the statutory reserves applicable to such borrowing). The applicable margin for the borrowings atSeptember 30, 2015 is as follows:Description Base Rate Margin LIBOR Margin Term 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.74Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)At September 30, 2015, the applicable margins were 2.75%, with an effective rate of 2.95%, on the remaining term loans balance of $472.5 millionmaturing in August 2019. We are required to pay a commitment fee for unutilized commitments under the revolving credit line at a rate ranging from 0.250%to 0.375% per annum, based upon our leverage ratio. As of September 30, 2015, the commitment fee rate was 0.375%.The Credit Facility contains covenants including, among other things, covenants that restrict our ability and those of our subsidiaries to incur certainadditional indebtedness or issue guarantees, create or permit liens on assets, enter into sale-leaseback transactions, make loans or investments, sell assets,make certain acquisitions, pay dividends, repurchase stock, or merge or consolidate with any entity, and enter into certain transactions with affiliates. Theagreement also contains events of default, including failure to make payments of principal or interest, failure to observe covenants, breaches ofrepresentations and warranties, defaults under certain other material indebtedness, failure to satisfy material judgments, a change of control and certaininsolvency events. As of September 30, 2015, we were in compliance with the covenants under the Credit Facility. The covenants on our other long-term debtare less restrictive, and as of September 30, 2015, we were in compliance with the requirements of our other long-term debt.We capitalized debt discount and issuance costs related to the Credit Facility and are amortizing the costs to interest expense using the effectiveinterest rate method, through August 2018 for costs associated with the revolving credit line and through August 2019 for the remainder of the balance. As ofSeptember 30, 2015 and 2014, the ending unamortized deferred debt issuance costs were $1.8 million and $2.4 million, respectively.Principal payments on the term loan of $472.5 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.At the current time, we are unable to predict the amount of the outstanding principal, if any, that may be required to be repaid in future fiscal years pursuantto the 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, Amount2016 $4,8342017 4,8342018 4,8342019 458,040Total $472,542Our 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 thenon-voting equity interests of significant first-tier foreign subsidiaries, all our material tangible and intangible assets and those of the guarantors, and anypresent and future intercompany debt. The Credit Facility also contains provisions for mandatory prepayments of outstanding term loans upon receipt of thefollowing, and subject to certain exceptions: 100% of net cash proceeds from asset sales, 100% of net cash proceeds from issuance or incurrence of debt, and100% of extraordinary receipts. We may voluntarily prepay borrowings under the Credit Facility without premium or penalty other than breakage costs, asdefined with respect to LIBOR-based loans.10.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 functional currency of our operations. We have a program that primarily utilizes foreigncurrency forward contracts to offset the risks associated with the effect of certain foreign currency exposures. Our program is designed so that increases ordecreases in our foreign currency exposures are offset75Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with our foreign currency transactions.Generally, we enter into such contracts for less than 90 days and have no cash requirements until maturity. At September 30, 2015 and 2014, we hadoutstanding contracts with a total notional value of $138.5 million and $283.1 million, respectively.We have not designated these forward contracts as hedging instruments pursuant to the authoritative guidance for derivatives and hedging, andaccordingly, we record the fair value of these contracts at the end of each reporting period in our consolidated balance sheet, with the unrealized gains andlosses recognized immediately in earnings as other expense, net in our consolidated statements of operations. The cash flows related to the settlement of thesecontracts are included in cash flows from investing activities within our consolidated statement of cash flows.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 businessacquisitions, partnering and technology acquisition activities. Some of these shares are issued subject to security price guarantees, which are accounted for asderivatives. We have determined that these instruments would not be considered equity instruments if they were freestanding. Certain of the security priceguarantees require payment from either us to a third party, or from a third party to us, based upon the difference between the price of our common stock on theissue date and an average price of our common stock approximately six months following the issue date. We have also issued minimum price guarantees thatmay require payments from us to a third party based on the average share price of our common stock approximately six months following the issue date if ourstock price falls below the minimum price guarantee. Changes in the fair value of these security price guarantees are reported in other expense, net in ourconsolidated statements of operations. We have no outstanding shares subject to security price guarantees at September 30, 2015. During the years endedSeptember 30, 2015, 2014 and 2013, we paid cash totaling $0.3 million, $5.3 million and $3.8 million, respectively, upon the settlement of the agreements.The following table provides a quantitative summary of the fair value of our derivative instruments as of September 30, 2015 and 2014 (dollars inthousands): Fair ValueDerivatives Not Designated as Hedges: Balance Sheet Classification September 30, 2015 September 30, 2014Foreign currency contracts Prepaid expenses and other current assets $260 $—Foreign currency contracts Accrued expenses and other current liabilities — (272)Security Price Guarantees Accrued expenses and other current liabilities — (135)Net asset (liability) value of non-hedged derivative instruments $260 $(407)The following tables summarize the activity of derivative instruments for the fiscal years 2015, 2014 and 2013 (dollars in thousands): Location of Gain (Loss) Recognized in Income Amount of Gain (Loss) Recognized in IncomeDerivatives Not Designated as Hedges: 2015 2014 2013Foreign currency contractsOther expense, net $(16,275) $(2,404) $2,182Security price guaranteesOther expense, net $(204) $(4,358) $(6,603)Other Financial InstrumentsFinancial instruments including cash equivalents, accounts receivable and accounts payable are carried in the consolidated financial statements atamounts that approximate their fair value based on the short maturities of those instruments. Marketable securities and derivative instruments are carried atfair value.11.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 be76Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participantswould use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.The following summarizes the three levels of inputs required to measure fair value, of which the first two are considered observable and the third isconsidered 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 based on the best information available, including management’s estimates and assumptions.Assets and liabilities measured at fair value on a recurring basis at September 30, 2015 and 2014 consisted of (dollars in thousands): September 30, 2015 Level 1 Level 2 Level 3 TotalAssets: Money market funds(a)$334,404 $— $— $334,404US government agency securities(a)1,000 — — 1,000Time deposits(b)— 71,453 — 71,453Commercial paper, $3,491 at cost(b)— 3,493 — 3,493Corporate notes and bonds, $44,581 at cost(b)— 44,533 — 44,533Foreign currency exchange contracts(b)— 260 — 260Total assets at fair value$335,404 $119,739 $— $455,143Liabilities: Contingent earn-out(d)$— $— $(15,961) $(15,961)Total liabilities at fair value$— $— $(15,961) $(15,961) September 30, 2014 Level 1 Level 2 Level 3 TotalAssets: Money market funds(a)$407,749 $— $— $407,749US government agency securities(a)1,000 — — 1,000Time Deposits(b)— 46,604 — 46,604Total assets at fair value$408,749 $46,604 $— $455,353Liabilities: Foreign currency exchange contracts(b)$— $(272) $— $(272)Security price guarantees(c)— (135) — (135)Contingent earn-out(d)— — (6,864) (6,864)Total liabilities at fair value$— $(407) $(6,864) $(7,271)(a) Money market funds and U.S. government agency securities, included in cash and cash equivalents in the accompanying balance sheets, are valued atquoted market prices in active markets.(b) The fair values of our time deposits, commercial paper, corporate notes and bonds, and foreign currency exchange contracts are based on the mostrecent observable inputs for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active orare directly or indirectly observable. Time deposits are generally for terms of one year or less. The commercial paper and corporate notes and bondsmature within three years and have a weighted average maturity of 1.36 years.(c) The fair values of the security price guarantees are determined using a modified Black-Scholes model, derived from observable inputs such as U.S.treasury interest rates, our common stock price, and the volatility of our common stock.77Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The valuation model values both the put and call components of the guarantees simultaneously, with the net value of those components representingthe fair value of each instrument.(d) The fair value of our contingent consideration arrangements are determined based on our evaluation as to the probability and amount of any earn-outthat will be achieved based on expected future performance by the acquired entity.The following table provides a summary of changes in fair value of our Level 3 financial instruments for the years ended September 30, 2015 and 2014(dollars in thousands): AmountBalance as of September 30, 2013$450Earn-out liability established at time of acquisition7,406Settlements(1,421)Charges to acquisition-related costs, net429Balance as of September 30, 2014$6,864Earn-out liability established at time of acquisition17,299Settlements(4,403)Charges to acquisition-related costs, net(3,799)Balance as of September 30, 2015$15,961Our financial liabilities valued based upon Level 3 inputs are composed of contingent consideration arrangements relating to our acquisitions. We arecontractually obligated to pay contingent consideration to the selling shareholders upon the achievement of specified objectives, including the achievementof future bookings and sales targets related to the products of the acquired entities and therefore are recorded as contingent consideration liabilities at thetime of the acquisitions. We update our assumptions each reporting period based on new developments and record such amounts at fair value based on therevised assumptions until the consideration is paid upon the achievement of the specified objectives or eliminated upon failure to achieve the specifiedobjectives.Contingent acquisition payment liabilities are scheduled to be paid in periods through fiscal year 2016. As of September 30, 2015, we could berequired to pay up to $34.7 million for contingent consideration arrangements if the specified objectives are achieved. We have determined the fair value ofthe liabilities for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based onsignificant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingentconsideration liability associated with future payments was based on several factors, the most significant of which are the estimated cash flows projected fromfuture product sales and the risk adjusted discount rate for the fair value measurement.12.Restructuring and Other Charges, NetRestructuring and other charges, net include restructuring expenses together with other charges that are unusual in nature and are the result ofunplanned events, and arise outside of the ordinary course of continuing operations. Restructuring expenses consist of employee severance costs and mayalso include charges for excess facility space and other contract termination costs. Other charges may include gains or losses on non-controlling strategicequity interests, litigation contingency reserves and gains or losses on the sale or disposition of certain non-strategic assets or product lines.The components of restructuring and other charges, net are as follows: 2015 2014 2013Severance costs$8,471 $13,318 $15,262Costs of consolidating duplicate facilities9,576 3,203 1,641Total restructuring charges18,047 16,521 16,903 Costs related to assumed lease obligations from acquisitions— — (126)Other costs5,622 2,922 (392)Total other charges (credits)5,622 2,922 (518)Total$23,669 $19,443 $16,38578Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Fiscal Year 2015For fiscal year 2015,we recorded restructuring charges of $18.0 million. The restructuring charges included $8.5 million for severance related to thereduction of approximately 200 employees as part of our initiatives to reduce costs and optimize processes as well as the reduction of approximately 60employees that eliminated duplicative positions resulting from acquisitions in fiscal year 2014. The restructuring charges also included a $9.6 million chargefor the closure of certain excess facility space, including facilities acquired from acquisitions. We expect that the remaining severance payments of $0.6million will be substantially paid by the end of fiscal year 2016. We expect that the remaining payments of $6.2 million for the closure of excess facilityspace will be paid through fiscal year 2025, in accordance with the terms of the applicable leases.In addition, during fiscal year 2015, we have recorded certain other charges that totaled $5.6 million for the impairment of certain long-lived assets asa result of our strategic realignment of our product portfolio and litigation contingency reserves.Fiscal Year 2014For fiscal year 2014, we recorded net restructuring charges of $16.5 million, which included a $13.3 million severance charge related to the reductionof headcount by approximately 250 employees across multiple functions including the impact of eliminating duplicative positions resulting fromacquisitions, and $3.2 million primarily resulting from the restructuring of facilities that will no longer be utilized.In addition, during fiscal year 2014, we have recorded certain other charges that totaled $2.9 million primarily for litigation contingency reserves.Fiscal Year 2013For fiscal year 2013, we recorded net restructuring charges of $16.9 million, which included a $15.3 million severance charge related to the reductionof headcount by approximately 300 employees across multiple functions. In addition to the restructuring charges, we recorded a net gain of $0.5 millionprimarily related to the sale of two immaterial product lines.The following table sets forth accrual activity relating to restructuring reserves for fiscal years 2015, 2014 and 2013 (dollars in thousands): Personnel Facilities TotalBalance at September 30, 2012$1,708 $32 $1,740Restructuring charges, net15,262 1,641 16,903Non-cash adjustment(452) — (452)Cash payments(12,288) (482) (12,770)Balance at September 30, 20134,2301,1915,421Restructuring charges, net13,318 3,203 16,521Non-cash adjustment12 793 805Cash payments(14,302) (3,719) (18,021)Balance at September 30, 20143,2581,4684,726Restructuring charges, net8,471 9,576 18,047Non-cash adjustment— (2,538) (2,538)Cash payments(11,094) (2,284) (13,378)Balance at September 30, 2015$635 $6,222 $6,85779Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Restructuring and other charges, net by segment are as follows (dollars in thousands): Personnel Facilities Total Restructuring Other Charges TotalFiscal Year 2013 Healthcare$1,742 $757 $2,499 $304 $2,803Mobile and Consumer4,124 736 4,860 — 4,860Enterprise3,942 — 3,942 — 3,942Imaging1,370 55 1,425 — 1,425Corporate4,084 93 4,177 (822) 3,355Total fiscal year 2013$15,262 $1,641 $16,903 $(518) $16,385 Fiscal Year 2014 Healthcare$2,357 $11 $2,368 $(78) $2,290Mobile and Consumer1,447 622 2,069 — 2,069Enterprise5,557 — 5,557 — 5,557Imaging2,733 107 2,840 — 2,840Corporate1,224 2,463 3,687 3,000 6,687Total fiscal year 2014$13,318 $3,203 $16,521 $2,922 $19,443 Fiscal Year 2015 Healthcare$452 $636 $1,088 $— $1,088Mobile and Consumer2,960 2,863 5,823 3,322 9,145Enterprise1,144 95 1,239 — 1,239Imaging2,047 1,814 3,861 — 3,861Corporate1,868 4,168 6,036 2,300 8,336Total fiscal year 2015$8,471 $9,576 $18,047 $5,622 $23,66913.Supplemental Cash Flow InformationCash paid for Interest and Income Taxes: Year Ended September 30, 2015 2014 2013 (Dollars in thousands)Interest paid$92,375 $96,743 $95,727Income taxes paid$15,454 $15,591 $18,329Non 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 Notes 2 and 10.14.Stockholders' EquityStock RepurchasesOn April 29, 2013, our Board of Directors approved a share repurchase program for up to $500.0 million of our outstanding shares of common stock. OnApril 29, 2015, our Board of Directors approved an additional $500.0 million under our share repurchase program. We repurchased 19.8 million shares, 1.6million shares and 9.8 million shares for $299.2 million, $26.480Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)million and $184.4 million during the fiscal years ended September 30, 2015, 2014, and 2013, respectively, under the program. These shares were retiredupon repurchase. Since the commencement of the program, we have repurchased 31.2 million shares for $510.0 million. Approximately $490.0 millionremained available for stock repurchases as of September 30, 2015 pursuant to our stock repurchase program. Under the terms of the share 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 one rightper share of common stock. The rights will become exercisable only following the acquisition by a person or group, without the prior consent of the Board ofDirectors, 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% or more. OnAugust 19, 2015 the plan expired without further action.Stock IssuancesDuring the year ended September 30, 2015, we issued 288,148 shares of our common stock as a settlement for a contingent earn-out obligation, which isdiscussed in Notes 2 and 10. During the years ended September 30, 2014 and 2013, we issued 234,375 and 1,145,783 shares, respectively, of our commonstock as consideration under our collaboration agreements. During the year ended September 30, 2013, we also issued 234,009 shares of our common stock tothe Nuance Foundation, an unconsolidated related-party established to provide grants to educational institutions and other non-profit organizations toadvance charitable, scientific, literary and educational purposes.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 aggregateper share 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 allmatters submitted 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 theright to certain liquidation preferences over our Common Stock. The Series A Preferred Stock ranks junior to all other series of the Preferred Stock as to thepayment of 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. The Series B Preferred Stock is convertible into shares ofcommon stock on a one-for-one basis and has a liquidation preference of $1.30 per share plus all declared but unpaid dividends. The holders of Series BPreferred Stock are entitled to non-cumulative dividends 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 the Board of Directors. Holders of Series B Preferred Stock have no voting rights, except those rights providedunder Delaware law. As of September 30, 2015, there are no outstanding shares of Series B Preferred Stock.81Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)15.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): 2015 2014 2013Cost of product and licensing$516 $724 $769Cost of professional services and hosting30,968 32,063 17,924Cost of maintenance and support3,989 3,426 3,537Research and development39,038 44,139 32,085Selling and marketing50,310 53,448 57,958General and administrative51,955 59,164 47,052Total$176,776 $192,964 $159,325Stock OptionsWe have share-based award plans under which employees, officers and directors may be granted stock options to purchase our common stock, generallyat 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. Options granted underour plans become exercisable over various periods, typically 2 to 4 years and have a maximum term of 10 years. We have also assumed options and optionplans in connection with certain of our acquisitions. These stock options are governed by the plans and agreements that they were originally issued under butare now exercisable for shares of our common stock.82Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The table below summarizes activity relating to stock options for the years ended September 30, 2015, 2014 and 2013: Number ofShares WeightedAverageExercisePrice WeightedAverageRemainingContractualTerm AggregateIntrinsicValue(1)Outstanding at September 30, 20126,139,280 $11.24 Granted— $— 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 Granted100,000 $15.19 Exercised(444,594) $9.41 Forfeited(1,764) $19.36 Expired(114,458) $16.62 Outstanding at September 30, 20143,723,342 $13.46 Granted— $— Exercised(765,408) $11.09 Forfeited(892) $20.04 Expired(33,053) $19.34 Outstanding at September 30, 20152,923,989 $14.01 1.4 years $7.1 millionExercisable at September 30, 20152,923,298 $14.01 1.4 years $7.1 millionExercisable at September 30, 20143,715,258 Exercisable at September 30, 20134,158,145 _______________________________________(1) The aggregate intrinsic value on this table was calculated based on the positive difference, if any, between the closing market value of our commonstock on September 30, 2015 ($16.37) and the exercise price of the underlying options.As of September 30, 2015, there was no unamortized fair value of stock options. A summary of weighted-average grant-date (including assumedoptions) fair value and intrinsic value of stock options exercised is as follows: 2015 2014 2013Weighted-average grant-date fair value per shareN/A $5.71 N/ATotal intrinsic value of stock options exercised (in millions)$4.4 $3.3 $24.9We 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 years 2015 and 2013. For fiscal year 2014, the fair value of the stock optionsgranted and unvested options assumed from acquisitions were calculated using the following weighted-average assumptions: 2015 2014 2013Dividend yieldN/A 0.0% N/AExpected volatilityN/A 38.2% N/AAverage risk-free interest rateN/A 1.1% N/AExpected term (in years)N/A 4.1 N/AThe 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 historicalimplied volatility 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 rateduring the period, which approximates the rate in83Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)effect at the time of grant, commensurate with the expected life of the instrument. We estimate the expected term of options granted based on historicalexercise 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 measured basedupon 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. The RestrictedAwards generally are subject to vesting over a period of two to four years. We also issued certain Restricted Awards with vesting solely dependent on theachievement of specified performance targets. The fair value of the Restricted Awards is amortized to expense over the awards’ applicable requisite serviceperiods using the straight-line method. In the event that the employees’ employment with us terminates, or in the case of awards with only performance goals,if those goals are not met, any unvested shares are forfeited and revert to us.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, 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 9,095,424Granted3,005,069 7,084,572Earned/released(790,189) (6,404,777)Forfeited(2,075,676) (1,426,112)Outstanding at September 30, 20145,726,385 8,349,107Granted1,985,374 7,741,805Earned/released(2,000,408) (8,123,159)Forfeited(1,011,141) (959,914)Outstanding at September 30, 20154,700,210 7,007,839Weighted average remaining recognition period of outstanding Restricted Units1.2 years 1.7 yearsUnearned stock-based compensation expense of outstanding Restricted Units$45.8 million $78.4 millionAggregate intrinsic value of outstanding Restricted Units(1)$76.9 million $114.8 million(1) The aggregate intrinsic value on this table was calculated based on the positive difference between the closing market value of our common stock onSeptember 30, 2015 ($16.37) 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 vestedis as follows: 2015 2014 2013Weighted-average grant-date fair value per share$15.47 $15.46 $21.51Total intrinsic value of shares vested (in millions)$154.2 $110.3 $158.684Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Restricted Stock is included in the issued and outstanding common stock in these financial statements at the date of grant. The table below summarizesactivity relating to Restricted Stock: Number ofSharesUnderlyingRestricted Stock WeightedAverage GrantDate FairValueOutstanding at September 30, 2012750,000 $25.80Granted750,000 $22.32Vested(500,000) $24.06Outstanding at September 30, 20131,000,000 $24.06Granted250,000 $15.71Vested(500,000) $24.06Outstanding at September 30, 2014750,000 $21.28Granted— $—Vested(500,000) $24.06Outstanding at September 30, 2015250,000 $15.71Weighted average remaining recognition period of outstanding Restricted Stock0.1 years Unearned stock-based compensation expense of outstanding Restricted Stock$0.2 million Aggregate intrinsic value of outstanding Restricted Stock(1)$4.1 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, 2015 ($16.37) and the exercise price of the underlying Restricted Units.A summary of weighted-average grant-date fair value, including those assumed in respective periods, and the intrinsic value of all Restricted Stockvested is as follows: 2015 2014 2013Weighted-average grant-date fair value per share$— $15.71 $22.32Total intrinsic value of shares vested (in millions)$7.9 $7.8 $10.0In 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 year 2015, we withheld payroll taxes totaling $59.9 million relating to 3.9 million shares of common stock that wererepurchased or canceled. Based on our estimate of the Restricted Awards that will vest or be released in fiscal year 2016, and further assuming that one-thirdof these Restricted Awards would be repurchased or canceled to satisfy the employee’s withholding tax liability (such amount approximating the tax rate ofour employees), we would have an obligation to pay cash relating to approximately 2.1 million shares during fiscal year 2016.1995 Employee Stock Purchase PlanOur 1995 Employee Stock Purchase Plan (“the Plan”), as amended and restated on January 27, 2015, authorizes the issuance of a maximum of20,000,000 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, 2015, we have reserved 8,953,554 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: 2015 2014 2013Weighted-average grant-date fair value per share$3.61 $3.98 $4.79Total shares issued (in millions)1.4 1.4 1.0Total stock-based compensation expense (in millions)$4.7 $5.6 $5.185Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The 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: 2015 2014 2013Dividend yield0.0% 0.0% 0.0%Expected volatility27.9% 35.9% 36.9%Average risk-free interest rate0.1% 0.1% 0.1%Expected term (in years)0.5 0.5 0.516.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 theacquisition date. Additionally, certain of our lease obligations have been included in various restructuring charges (Note 12).The following table outlines our gross future minimum payments under all non-cancelable operating leases as of September 30, 2015 (dollars inthousands):Year Ending September 30, Operating Leases Operating leases underrestructuring Total2016 $36,744 $5,733 $42,4772017 32,283 4,378 36,6612018 24,724 4,405 29,1292019 16,669 4,448 21,1172020 14,864 4,490 19,354Thereafter 97,537 24,127 121,664Total $222,821 $47,581 $270,402At September 30, 2015, we have subleased certain office space that is included in the above table to third parties. Total sublease income undercontractual terms for restructured facilities is $53.4 million, and ranges from approximately $4.7 million to $6.0 million on an annual basis through August2025. Sublease income related to other operating facilities is minimal.Total rent expense, including rent expense for our data centers, was approximately $47.2 million, $48.1 million and $39.9 million for the years endedSeptember 30, 2015, 2014 and 2013, respectively.Litigation and Other ClaimsSimilar to many companies in the software industry, we are involved in a variety of claims, demands, suits, investigations and proceedings that arisefrom time to time relating to matters incidental to the ordinary course of our business, including actions with respect to contracts, intellectual property,employment, benefits and securities matters. We have estimated the amount of probable losses that may result from all currently pending matters, and suchamounts are reflected in our consolidated financial statements. These recorded amounts are not material to our consolidated financial position nor results ofoperations and no additional material losses related to these pending matters are reasonably possible. While it is not possible to predict the outcome of thesematters with certainty, we do not expect the results of any of these actions to have a material adverse effect on our results of operations or financial position.However, each of these matters is subject to uncertainties, the actual losses may prove to be larger or smaller than the accruals reflected in our consolidatedfinancial statements, and we could incur judgments or enter into settlements of claims that could adversely affect our financial position, results of operationsor cash flows.86Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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 totalliability under such provisions is unlimited. In many, but not all cases, the term of the indemnity provision is perpetual. While the maximum potentialamount of future payments we could be required to make under all the indemnification provisions is unlimited, we believe the estimated fair value of theseprovisions is minimal due to the low frequency with which these provisions have been triggered.We indemnify our directors and officers to the fullest extent permitted by Delaware law, which provides among other things, indemnification todirectors and officers for expenses, judgments, fines, penalties and settlement amounts incurred by such persons in their capacity as a director or officer of thecompany, regardless of whether the individual is serving in any such capacity at the time the liability or expense is incurred. Additionally, in connectionwith certain acquisitions we have agreed to indemnify the former officers and members of the boards of directors of those companies, on similar terms asdescribed above, for a period of six years from the acquisition date. In certain cases we purchase director and officer insurance policies related to theseobligations, which fully cover the six year period. To the extent that we do not purchase a director and officer insurance policy for the full period of anycontractual indemnification, and such directors and officers do not have coverage under separate insurance policies, we would be required to pay for costsincurred, if any, as described above.17.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, a company match of employee’s contributions was established. We match 50% of employeecontributions up to 4% of eligible salary. Employer's contributions vest one-third annually over a three-year period. Our contributions to the 401(k) Plantotaled $7.0 million, $7.0 million and $6.1 million for fiscal years 2015, 2014 and 2013, respectively. We make contributions to various other plans incertain of our 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 $0.3million, $0.2 million and $1.3 million for fiscal years 2015, 2014 and 2013, respectively. The aggregate projected benefit obligation and aggregate netliability of our defined benefit plans as of September 30, 2015 was $35.5 million and $7.3 million, respectively, and as of September 30, 2014 was $34.9million and $5.0 million, respectively. In fiscal year 2013, we settled the obligations under our Canadian defined benefit pension plan through a purchase ofannuities. The loss on settlement was 1.5 million, and is included in restructuring and other, net, in fiscal year 2013.18.Income TaxesThe components of loss before income taxes are as follows (dollars in thousands): Year Ended September 30, 2015 2014 2013Domestic$(196,925) $(224,968) $(208,592)Foreign116,453 69,948 111,912Loss before income taxes$(80,472) $(155,020) $(96,680)87Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The components of the provision (benefit) for income taxes are as follows (dollars in thousands): Year Ended September 30, 2015 2014 2013Current: Federal$82 $(301) $—State982 729 1,293Foreign16,784 17,067 19,737 17,848 17,495 21,030Deferred: Federal15,694 (16,147) 2,759State3,278 (720) 176Foreign(2,282) (5,305) (5,407) 16,690 (22,172) (2,472)Provision (benefit) for income taxes$34,538 $(4,677) $18,558Effective income tax rate(42.9)% 3.0% (19.2)%The provision (benefit) for income taxes differed from the amount computed by applying the federal statutory rate to our loss before income taxes asfollows (dollars in thousands): 2015 2014 2013Federal tax benefit at statutory rate$(28,165) $(54,129) $(33,838)State tax provision (benefit), net of federal benefit3,278 416 (3,900)Foreign tax rate and other foreign related tax items(30,765) (14,811) 1,086Stock-based compensation10,734 11,254 8,816Non-deductible expenditures(162) 1,630 1,723Change in U.S. and foreign valuation allowance71,238 46,273 35,958Executive compensation3,873 1,886 3,517Other4,507 2,804 5,196Provision (benefit) for income taxes$34,538 $(4,677) $18,558The 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; the majority of our income beforeprovision for income taxes from foreign operations has been earned by subsidiaries in Ireland. Our effective tax rate may be adversely affected by earningsbeing lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated in countries where we have higher statutory taxrates.The effective income tax rate in fiscal year 2015 differs from the U.S. federal statutory rate of 35% primarily due to current period losses in the UnitedStates that require an additional valuation allowance that provide no benefit to the provision and an increase to indefinite lived deferred tax liabilities,partially offset by our earnings in foreign operations that are subject to a significantly lower tax rate than the U.S. statutory tax rate, driven primarily by oursubsidiaries in Ireland.The effective income tax rate in fiscal 2014 differs from the U.S. federal statutory rate of 35% primarily due to a $31.2 million release of domesticvaluation allowance as a result of tax benefits recorded in connection with our acquisitions during the period for which a deferred tax liability wasestablished in purchase accounting. In addition, the effective income tax rate in fiscal 2014 was impacted by our foreign operations which are subject to asignificantly lower tax rate than the U.S. statutory tax rate, driven primarily by our subsidiaries in Ireland.Included in the fiscal year 2013 provision for income taxes is the establishment of a valuation allowance against our net domestic deferred tax assets.During the third quarter of fiscal year 2013, we determined that we had new negative evidence related to our domestic deferred tax asset recoverabilityassessment. This new evidence, resulting from two consecutive quarterly reductions88Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)in our earnings forecast during fiscal year 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. This valuation allowance was offset by the tax benefits from our currentyear domestic losses and credits. We also recorded a $10.4 million tax provision representing the establishment of the valuation allowance related to our netdomestic deferred tax assets at the beginning of the year.The effective income tax rate in fiscal year 2013 was also impacted by our foreign operations which are subject to a significantly lower tax rate than theU.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 thetransfer of intangible property between certain of our foreign subsidiaries with significantly different local statutory tax rates. Although the transfer ofintangible property between consolidated entities did not result in any gain in the consolidated results of operations, we generated a taxable gain in certainjurisdictions. The future tax deductions associated with the amortization of the transferred intangibles will be generated in a jurisdiction that will notgenerate an offsetting tax benefit in future periods. The impact of these additional foreign taxes totaled $27.1 million, and is included in the reported foreigntax rate and other foreign related tax items in our effective tax rate reconciliation table above. Excluding the effect of the transfer of intangible propertybetween consolidated entities, the foreign tax rate and other foreign related tax items in the above effective tax rate reconciliation would have been a benefitof $26.0 million.As of September 30, 2015, the cumulative amount of undistributed earnings of our foreign subsidiaries amounted to $496.9 million. We have notprovided taxes on the undistributed earnings of our foreign subsidiaries that we consider indefinitely reinvested. Our indefinite reinvestment determination isbased on the future operational and capital requirements of our domestic and foreign operations. We expect the cash held by our foreign subsidiaries of$164.2 million will continue to be used for our foreign operations and therefore do not anticipate repatriating these funds. As of September 30, 2015, it is notpractical to calculate the unrecognized deferred tax liability on these earnings due to the complexities of the utilization of foreign tax credits and other taxassets.Deferred tax assets (liabilities) consist of the following at September 30, 2015 and 2014 (dollars in thousands): 2015 2014Deferred tax assets: Net operating loss carryforwards$279,624 $287,228Federal and state credit carryforwards34,942 31,614Accrued expenses and other reserves50,202 51,949Difference in timing of revenue related items33,489 —Deferred compensation38,832 45,284Capitalized research and development costs3,529 3,415Other13,582 7,341Total deferred tax assets454,200 426,831Valuation allowance for deferred tax assets(241,782) (192,929)Net deferred tax assets212,418 233,902Deferred tax liabilities: Difference in timing of revenue related items— (130)Depreciation(31,621) (22,528)Convertible debt(39,935) (35,729)Acquired intangibles(228,799) (256,227)Net deferred tax liabilities$(87,937) $(80,712)Reported as: Short-term deferred tax assets$57,309 $55,990Other assets17,230 19,533Long-term deferred tax liabilities(162,476) (156,235)Net deferred tax liabilities$(87,937) $(80,712)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 notthat some portion or all of the deferred tax assets will not be realized. During fiscal year 2015, the valuation89Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)allowance for net deferred tax assets increased by $48.9 million. This increase mainly relates to the establishment of valuation allowance against our netdomestic deferred tax assets in connection with net operating losses generated in fiscal year 2015. As of September 30, 2015, we have $192.5 million and$49.3 million in valuation allowance against our net domestic and foreign deferred tax assets, respectively. As of September 30, 2014, we had $140.1 millionand $52.8 million in valuation allowance against our net domestic and foreign deferred tax assets, respectively.The majority of deferred tax assets relate to net operating losses, the use of which may not be available as a result of limitations on the use of acquiredlosses. With respect to these operating losses, there is no assurance that they will be used given the current assessment of the limitations on their use or ourcurrent 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 deferred tax assets can be realized and therefore a valuation allowance has been assigned to these deferred tax assets. If weare subsequently able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been established, then we may be required torecognize these deferred tax assets through the reduction of the valuation allowance which could result in a material benefit to our results of operations in theperiod in which the benefit is determined.At September 30, 2015 and 2014, we had U.S. federal net operating loss carryforwards of $872.1 million and $843.5 million, respectively, of which$186.4 million at both September 30, 2015 and September 30, 2014, relate to tax deductions from stock-based compensation which will be recorded asadditional paid-in-capital when realized. At September 30, 2015 and 2014, we had state net operating loss carryforwards of $303.4 million and $345.7million, respectively. The net operating loss and credit carryforwards are subject to an annual limitation due to the ownership change limitations provided bythe Internal Revenue Code of 1986 and similar state tax provisions. At September 30, 2015 and 2014, we had foreign net operating loss carryforwards of$222.6 million and $251.1 million, respectively. These carryforwards will expire at various dates beginning in 2016 and extending through 2036, if notutilized.At September 30, 2015 and 2014, we had federal research and development carryforwards of $34.5 million and $34.2 million, respectively. AtSeptember 30, 2015 and 2014, we had state research and development credit carryforwards of $6.2 million and $0.7 million, respectively.Uncertain Tax PositionsWe establish reserves for tax uncertainties that reflect the use of the comprehensive model for the recognition and measurement of uncertain taxpositions. Under the comprehensive model, reserves are established when we have determined that it is more likely than not that a tax position will or will notbe 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, 2015 2014Balance at beginning of year$21,234 $19,617Increases for tax positions taken during current period2,935 1,137Increases for interest and penalty charges574 913Decreases for tax settlements and lapse in statutes(2,559) (433)Balance at end of year$22,184 $21,234As of September 30, 2015, $22.2 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 taxpositions in our provision for income taxes and had accrued $6.1 million of such interest and penalties as of September 30, 2015.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 various tax years through 2015.19.Segment and Geographic Information and Significant CustomersWe operate in, and report financial information for, the following four reportable segments: Healthcare, Mobile and Consumer, Enterprise, andImaging. Segment profit is an important measure used for evaluating performance and for decision-90Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)making purposes and reflects the direct controllable costs of each segment together with an allocation of sales and corporate marketing expenses, and certainresearch and development project costs that benefit multiple product offerings. Segment profit represents income (loss) from operations excluding stock-based compensation, amortization of intangible assets, acquisition-related costs, net, restructuring and other charges, net, costs associated with intellectualproperty collaboration agreements, other expense, net and certain unallocated corporate expenses. We believe that these adjustments allow for more completecomparisons to the financial results of the historical operations.The Healthcare segment is primarily engaged in clinical speech and clinical language understanding solutions that improve the clinical documentationprocess - from capturing the complete patient record to improving clinical documentation and quality measures for reimbursement. The Mobile andConsumer segment is primarily engaged in providing a broad portfolio of specialized virtual assistants and connected services built on voice recognition,text-to-speech, natural language understanding, dialog, and text input technologies. Our Enterprise segment is primarily engaged in using speech, naturallanguage understanding, and artificial intelligence to provide automated customer solutions and services for voice, mobile, web and messaging channels.The Imaging segment is primarily engaged in software solutions and expertise that help professionals and organizations to gain optimal control of theirdocument and information processes through scanning and print management.In October 2014, we realigned our product portfolio which resulted in a change in the composition of our Mobile and Enterprise reporting units.Accordingly, the segment results in prior periods have been reclassified to conform to the current period segment reporting presentation.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 before income taxes (dollars in thousands): Year Ended September 30, 2015 2014 2013Segment revenues(a): Healthcare$937,599 $942,658 $911,611Mobile and Consumer454,402 441,006 461,511Enterprise349,347 367,149 341,136Imaging237,721 236,272 243,372Total segment revenues1,979,069 1,987,085 1,957,630Acquisition related revenue adjustments(47,933) (63,634) (102,351)Total consolidated revenue1,931,136 1,923,451 1,855,279Segment profit: Healthcare333,628 340,091 352,157Mobile and Consumer115,147 75,826 131,681Enterprise92,403 88,135 90,254Imaging89,286 89,052 98,187Total segment profit630,464 593,104 672,279Corporate expenses and other, net(136,792) (128,563) (135,300)Acquisition-related revenues and costs of revenue adjustment(45,163) (59,479) (93,679)Non-cash stock-based compensation(176,776) (192,964) (159,325)Amortization of intangible assets(168,276) (170,052) (168,841)Acquisition-related costs, net(14,379) (24,218) (29,685)Restructuring and other charges, net(23,669) (19,443) (16,385)Costs associated with IP collaboration agreements(10,500) (19,748) (20,582)Other expense, net(135,381) (133,657) (145,162)Loss before income taxes$(80,472) $(155,020) $(96,680)91Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(a) Segment revenues differ from reported revenues due to certain revenue adjustments related to acquisitions that would otherwise have been recognizedbut for the purchase accounting treatment of the business combinations. Segment revenues also include revenue that the business would haveotherwise recognized had we not acquired intellectual property and other assets from the same customer. These revenues are included to allow for morecomplete comparisons to the financial results of historical operations and in evaluating management performance.No country outside of the United States provided greater than 10% of our total revenue. Revenue, classified by the major geographic areas in which ourcustomers are located, was as follows (dollars in thousands): 2015 2014 2013United States$1,407,266 $1,408,227 $1,339,733International523,870 515,224 515,546Total$1,931,136 $1,923,451 $1,855,279No 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, 2015 September 30, 2014United States$3,798,488 $3,900,052International742,923 755,732Total$4,541,411 $4,655,78420.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 Year2015 Total revenue$474,019 $475,059 $477,939 $504,119 $1,931,136Gross profit$263,634 $271,760 $273,248 $292,615 $1,101,257Net loss$(50,495) $(14,098) $(39,390) $(11,027) $(115,010)Net loss per share: Basic$(0.16) $(0.04) $(0.13) $(0.04) $(0.36)Diluted$(0.16) $(0.04) $(0.13) $(0.04) $(0.36)Weighted average common shares outstanding: Basic321,751 322,879 312,680 309,281 317,028Diluted321,751 322,879 312,680 309,281 317,02892Table of ContentsNUANCE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Year2014 Total revenue$469,980 $475,653 $475,504 $502,314 $1,923,451Gross profit$262,160 $265,289 $259,411 $292,251 $1,079,111Net loss$(55,413) $(39,227) $(54,247) $(1,456) $(150,343)Net loss per share: Basic$(0.18) $(0.12) $(0.17) $(0.00) $(0.47)Diluted$(0.18) $(0.12) $(0.17) $(0.00) $(0.47)Weighted average common shares outstanding: Basic314,818 316,593 317,610 318,725 316,936Diluted314,818 316,593 317,610 318,725 316,93693Table 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 thatwe file or submit under the Exchange Act is recorded, processed and summarized and reported within the time periods specified in the SEC’s rules and formsand (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, 2015, 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 generallyaccepted accounting 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 managementand directors; 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 anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degreeof compliance with the policies or procedures may deteriorate.Management has assessed the effectiveness of our internal control over financial reporting as of September 30, 2015, utilizing the criteria set forth bythe Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in the 2013 Internal Control-Integrated Framework ("2013 framework").Based on the results of this assessment, management (including our Chief Executive Officer and our Chief Financial Officer) has concluded that, as ofSeptember 30, 2015, our internal control over financial reporting was effective.The attestation report concerning the effectiveness of our internal control over financial reporting as of September 30, 2015 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 2015 that have materially affected, or arereasonably likely to materially affect, our internal controls over financial reporting.Item 9B.Other InformationNone.94Table 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 byreference.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 setforth in the section entitled “Executive Compensation, Management and Other Information” in our Proxy Statement. Information regarding Section 16reporting compliance is incorporated by reference to the information set forth in the section entitled “Section 16(a) Beneficial Ownership ReportingCompliance” in our Proxy 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. Our Codeof 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 of ourCode 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 PlanInformation” 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 toItem 404 of Regulation S-K for potential conflict of interest situations. The Audit Committee reviews the material facts of all transactions that require thecommittee’s approval and either approves or disapproves of the transaction. In determining whether to approve a transaction, the Audit Committee will takeinto account, among other factors it deems appropriate, whether the transaction is on terms no less favorable than terms generally available to an unaffiliatedthird-party under 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.95Table 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.96Table 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 and DanielD. Tempesta, and each of them acting individually, as his or her true and lawful attorneys-in-fact and agents, each with full power of substitution andresubstitution, 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 on Form10-K and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting untosaid 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 to bedone, 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 executedin counterparts. /s/ Paul A. RicciDate: November 18, 2015 Paul A. Ricci, Chief Executive Officer andChairman of the Board(Principal Executive Officer) /s/ Daniel D. TempestaDate: November 18, 2015 Daniel D. TempestaExecutive Vice President and Chief Financial Officer /s/ Robert J. Finocchio, Jr.Date: November 18, 2015 Robert J, Finocchio, Jr., Director /s/ Robert J. FrankenbergDate: November 18, 2015 Robert J. Frankenberg, Director Table of Contents /s/ Brett IcahnDate: November 18, 2015 Brett Icahn, Director /s/ William H. JanewayDate: November 18, 2015 William H. Janeway, Director /s/ Mark R. LaretDate: November 18, 2015 Mark R. Laret, Director /s/ Katharine A. MartinDate: November 18, 2015 Katharine A. Martin, Director /s/ Mark MyersDate: November 18, 2015 Mark Myers, Director /s/ Philip QuigleyDate: November 18, 2015 Philip Quigley, Director /s/ David SchechterDate: November 18, 2015 David Schechter, DirectorTable of ContentsEXHIBIT INDEX Incorporated by ReferenceExhibitIndex Exhibit Description Form File No. Exhibit Filing Date FiledHerewith2.8 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 4.1 Specimen Common Stock Certificate. 8-A 0-27038 4.1 12/6/1995 4.2 Indenture, dated as of August 13, 2007, between NuanceCommunications, Inc. and U.S. Bank National Association, as Trustee(including form of 2.75% Convertible Subordinated Debentures due2027). 8-K 0-27038 4.1 8/17/2007 4.3 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 4.4 Indenture, dated August 14, 2012, among Nuance Communications,Inc., the guarantors party thereto and U.S. Bank National Association,relating to the 5.375% Senior Notes due 2020. 8-K 0-27038 4.1 8/14/2012 4.5 Preferred Shares Rights Agreement, dated as of August 19, 2013, by andbetween Nuance Communications, Inc. and American Stock Transfer &Trust Company, LLC, as rights agent 8-K 0-27038 4.1 8/20/2013 Table of Contents Incorporated by ReferenceExhibitIndex Exhibit Description Form File No. Exhibit Filing Date FiledHerewith4.6 First Amendment to Preferred Shares Rights Agreement, dated as ofAugust 18, 2014, by and between Nuance Communications, Inc. andAmerican Stock Transfer & Trust Company, LLC, as rights agent. 8-K 001-36056 4.2 8/18/2014 4.7 Indenture, dated June 16, 2015 (including form of 1.50% ConvertibleDebentures due 2035). 8-K 001-36056 4.1 6/22/2015 10.1 Form of Indemnification Agreement. S-8 333-108767 10.1 9/12/2003 10.2 1995 Employee Stock Purchase Plan, as amended and restated onDecember 1, 2009.* 14A 0-27038 AnnexB 12/18/2009 10.3 2000 NonStatutory Stock Option Plan, as amended.* S-8 333-108767 4.1 9/12/2003 10.4 ScanSoft 2003 Stock Plan.* S-8 333-108767 4.3 9/12/2003 10.5 Nuance Communications, Inc. 2001 Nonstatutory Stock Option Plan.* S-8 333-128396 4.1 9/16/2005 10.6 Nuance Communications, Inc. 2000 Stock Plan.* S-8 333-128396 4.2 9/16/2005 10.7 Mobeus Corporation 2006 Share Incentive Plan* S-8 0-23038 4.1 6/29/2012 10.8 Form of Restricted Stock Purchase Agreement.* 10-K/A 0-27038 10.17 12/15/2006 10.9 Form of Restricted Stock Unit Purchase Agreement.* 10-K/A 0-27038 10.18 12/15/2006 10.10 Form of Stock Option Agreement.* 10-K/A 0-27038 10.19 12/15/2006 10.11 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 10.12 Letter, dated June 3, 2008, from the Registrant to Thomas L. Beaudoinregarding certain employment matters. 10-K 0-27038 10.39 12/1/2008 10.13 Letter, dated September 9, 2010, to Bruce Bowden regarding certainemployment matters.* 10-Q 0-27038 10.1 2/9/2011 10.14 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 10.15 Employment Agreement dated November 11, 2011 between theRegistrant and Paul Ricci.* 10-Q 0-27038 10.2 2/9/2012 10.16 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 10.17 Purchase Agreement dated October 15, 2012, by and among NuanceCommunications, Inc., the guarantors party thereto and Morgan Stanley& Co. LLC 8-K 0-27038 10.1 10/16/2012 10.18 Amended and Restated 2000 Stock Plan* S-8 333-128396 4.1 5/7/2013 10.19 Amendment Agreement to Credit Agreement and Guarantee andCollateral Agreement 8-K 0-27038 10.1 8/12/2013 10.20 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 FiledHerewith10.21 Nomination and Standstill Agreement Dated October 7, 2013 by andbetween Nuance Communications, Inc., High River LimitedPartnership, Hopper Investments LLC, Barberry Corp., Icahn PartnersLP, Icahn Partners Master Fund LP, Icahn Partners Master Fund II LP,Icahn Partners Master Fund III LP, Icahn Enterprises G.P. Inc., IcahnEnterprises Holdings L.P., IPH GP LLC, Icahn Capital LP, IcahnOnshore LP, Icahn Offshore LP, and Beckton Corp. 8-K 001-36056 99.1 10/8/2013 10.22 Amendment No. 1 to Employment Agreement, dated November 12,2013 by and between Nuance Communications, Inc. and Paul A.Ricci.* 10-Q 001-36056 10.3 2/10/2014 10.23 Form of Change of Control and Severance Agreement for ExecutiveOfficers.* 10-Q 001-36056 10.5 2/10/2014 10.24 1995 Directors’ Stock Option Plan, as amended and restated onNovember 13, 2013.* 10-Q 001-36056 10.6 2/10/2014 10.25 Amendment No. 2 to Employment Agreement, dated June 18, 2015 byand between Nuance Communications, Inc. and Paul A. Ricci. 8-K 001-36056 6/24/2015 10.26 Amended and Restated 2000 Stock Plan. S-8 001-36056 4.1 2/6/2015 10.27 Amended and Restated 1995 Employee Stock Purchase Plan. S-8 001-36056 4.2 2/6/2015 10.28 Amended and Restated 1995 Directors Stock Plan. S-8 001-36056 4.3 2/6/2015 14.1 Registrant’s Code of Business Conduct and Ethics X21.1 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, 2015,formatted in XBRL (Extensible Business Reporting Language): (i) theConsolidated Statements of Operations, (ii) the Consolidated BalanceSheets, (iii) the Consolidated Statements of Stockholders’ Equity andComprehensive Loss, (iv) the Consolidated Statements of Cash Flows,and (v) Notes to Consolidated Financial Statements. X* Denotes management compensatory plan or arrangementExhibit 21.1 Subsidiary Name Jurisdiction Type ART Advanced Recognition Technologies, Inc. Delaware Domestic Caere Corporation Delaware Domestic Cognition Technologies, Inc. Delaware Domestic Consolidated Enterprise Corporation Delaware Domestic Consolidated Healthcare Corporation Delaware Domestic Consolidated Imaging Corporation Delaware Domestic Consolidated Mobile Corporation 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 Notable Solutions, Inc. Delaware Domestic PerSay, Inc. Delaware Domestic Phonetic Systems Inc. Delaware Domestic Quadramed Quantim Corporation Delaware Domestic Ruetli Holding Corporation Delaware Domestic SNAPin Software LLC Delaware Domestic SVOX U.S.A., Inc. Delaware Domestic Telluride Inc. Delaware Domestic Nuance Transcription Services, Inc. f/k/aTranscend Services, 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 Neurostar Solutions, Inc. d/b/a Accelarad Georgia Domestic AMS Solutions Corp. Massachusetts Domestic Accentus U.S., Inc. f/k/a Zylomed Inc. Nevada Domestic Medical Transcription Education Center, Inc. Ohio Domestic Swype, Inc. Washington Domestic Tegic Communications, Inc. Washington Domestic Nuance Enterprise Solutions & Services Corporation f/k/a VaroliiCorporation 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 Subsidiary Name Jurisdiction Type Language and Computing N.V. Belgium International Nuance Communications Belgium Limited Belgium International Nuance Communications International BVBA Belgium International Nuance Communications Ltda. Brazil International Novitech Technologia e Servicos Ltda. Brazil International BlueStar Options Inc. British Virgin Islands International BlueStar Resources Limited British Virgin Islands International 1448451 Ontario Inc. Canada International Accentus Inc. f/k/a/ 2350111 Ontario Inc. Canada International 845162 Alberta Ltd. Canada International Ditech Networks Canada, Inc. Canada International Nuance Document Imaging, ULC f/k/a Equitrac Canada ULC Canada International Nuance Acquisition ULC Canada International Nuance Communications Canada, Inc. 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 NSi Europe 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 Subsidiary Name Jurisdiction Type 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 Voice Signal Ireland Limited 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 VoiceSignal Japan K.K. Japan International Nuance Communications Netherlands B.V. Netherlands International X-Solutions Group B.V. Netherlands International Heartland Asia (Mauritius) Ltd. 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 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. 333-201933, 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 18, 2015relating to the consolidated financial statements and the effectiveness of Nuance Communications, Inc.’s internal control over financial reporting, whichappear in this Form 10-K./s/ BDO USA, LLPBoston, MassachusettsNovember 18, 2015Exhibit 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 recentfiscal quarter (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 18, 2015Exhibit 31.2CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TOSECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002I, Daniel D. Tempesta, 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 recentfiscal quarter (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/Daniel D. Tempesta Daniel D. Tempesta Executive Vice President and Chief Financial OfficerNovember 18, 2015Exhibit 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, 2015 fully complies with the requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects thefinancial condition and results of operations of Nuance Communications, Inc. By: /s/ Paul A. Ricci Paul A. Ricci Chief Executive Officer and Chairman of the BoardNovember 18, 2015I, Daniel D. Tempesta, 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, 2015 fully complies with the requirements ofSection 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in allmaterial respects the financial condition and results of operations of Nuance Communications, Inc. By: /s/Daniel D. Tempesta Daniel D. Tempesta Executive Vice President and Chief Financial OfficerNovember 18, 2015

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