UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
Form 10-K
(Mark One)
þþ
oo
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2018
OR
For the transition period from to
Commission file number 001-27038
NUANCE COMMUNICATIONS, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
1 Wayside Road
Burlington, Massachusetts
(Address of Principal Executive Offices)
94-3156479
(I.R.S. Employer
Identification No.)
01803
(Zip Code)
Registrant’s telephone number, including area code: (781) 565-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class
Common stock, $0.001 par value
Preferred share purchase rights
Name of Each Exchange on Which Registered
Nasdaq Stock Market LLC
Nasdaq Stock Market LLC
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ
No o
Indicate 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 þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ
No
o
Indicate by check mark whether the registrant has submitted electronically and every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ
No o
Indicate 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’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer þ
Non-accelerated filer o
Accelerated filer o
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o
No þ
As of March 31, 2018, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $3.5 billion based on the closing sale price as
reported on the Nasdaq Global Select Market for such date.
The number of shares of the registrant’s common stock, outstanding as of October 31, 2018 , was 287,581,197 .
Portions of the registrant’s definitive Proxy Statement to be delivered to stockholders in connection with the registrant’s 2019 Annual Meeting of Stockholders are incorporated
by reference into Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
NUANCE COMMUNICATIONS, INC.
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
PART IV
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Table of Contents
PART I
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve
risks, uncertainties and assumptions that, if they never materialize or if they prove incorrect, could cause our consolidated results to differ materially from those
expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-
looking, including statements pertaining to: our future revenue, cost of revenue, research and development expense, selling, general and administrative expenses,
amortization of intangible assets and gross margin, earnings, cash flows and liquidity; our strategy relating to our segments; the potential of future product releases;
our product development plans and investments in research and development; future acquisitions and anticipated benefits from acquisitions; international
operations and localized versions of our products; our contractual commitments; our fiscal year 2019 revenue and expense 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 such terms, 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 in Item 1A of this Annual Report under the heading “Risk
Factors.” All forward-looking statements included in this document are based on information available to us on the date hereof. The forward-looking statements do
not include the potential impact of any mergers, acquisitions, divestitures, securities offerings or business combinations that may be announced or closed after the
date hereof. We will not undertake and specifically decline any obligation to update any forward-looking statements, except to the extent required by law.
Item 1.
Business
Overview
We are a leading provider of voice recognition and natural language understanding solutions. We work with companies around the world, from banks and hospitals
to airlines, telecommunications carriers, and automotive manufacturers and suppliers, who use our solutions and technologies to create better experiences for their
customers and their users by enhancing the users' interaction and increasing productivity and customer satisfaction. We offer our customers high accuracy in
automated speech recognition ("ASR"), natural language understanding("NLU") capabilities, dialog and information management, biometric speaker
authentication, text-to-speech ("TTS"), optical character recognition ("OCR") capabilities, and domain knowledge, along with professional services and
implementation support. In addition, our solutions increasingly utilize our innovations in artificial intelligence ("AI"), including cognitive sciences and machine
learning to create smarter, more natural experiences with technology. Using advanced analytics and algorithms, our technologies create personalized experiences
and transform the way people interact with information and the technology around them. We market and sell our solutions and technologies around the world
directly through a dedicated sales force, and also through a global network of resellers, including system integrators, independent software vendors, value-added
resellers, distributors, hardware vendors, telecommunications carriers and e-commerce websites.
We are a global organization steeped in research and development. We have approximately 2,100 language scientists, developers, and engineers dedicated to
continually refining our technologies and advancing our portfolio to better meet our customers’ diverse and changing needs. We have more than 60 international
operating locations and a sales presence in more than 81 countries. Our corporate headquarters is located in Burlington, Massachusetts, with international
headquarter in Dublin, Ireland. In fiscal year 2018 , our revenue was $2.1 billion .
Our Strategy
We have large addressable vertical markets, and we focus on growth by providing industry-leading, value-add solutions for our customers and partners through a
broad set of flexible technologies, solutions, and service offerings available directly and through our channel partners. The key elements of our strategy include:
•
Focus
on
opportunities
that
leverage
our
core
strengths
in
key
vertical
markets.
During the third quarter of fiscal year 2018, we commenced a
comprehensive portfolio and business review with the goal to improve long-term shareholder return and operational efficiency. We are moving toward a
goal of a simplified and more efficient operational structure, capable of sustainable, long-term revenue and earnings growth, with resources keenly focused
on opportunities that leverage our core strengths in key vertical markets. We plan to focus our resources and R&D capabilities on our core capabilities and
shift our focus away from non-core businesses and solutions.
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• Maintain
global
leadership
in
all
of
our
major
markets
and
solutions
areas.
We have historically targeted markets where we benefit from strong
technology, sales and vertical market differentiation. Today, we are one of the leading providers of voice recognition and NLU. We invest considerable time
and resources to ensure that we maintain this position through customer satisfaction, technology leadership, deep domain experience and market
specialization.
• Maintain
depth
in
technology,
solutions,
and
intellectual
property
portfolio.
We have built a world-class portfolio of technologies, applications, solutions
and intellectual property through both internal development and acquisitions. We expect to continue to pursue opportunities to expand our assets,
geographic presence, distribution network and customer base through organic growth and strategic transactions. We continue to strengthen our core
technologies in voice and language, and expand our offerings through research and innovations in AI, including cognitive computing and machine learning.
•
•
Continue
to
expand
our
extensive
network
of
global
operations,
distribution
and
services
networks
. We market and sell our solutions and technologies
directly through a dedicated sales force and through a global network of resellers, including system integrators, independent software vendors, value-added
resellers, distributors, hardware vendors, and telecommunications carriers and e-commerce websites. In addition, we continue to expand our presence within
our markets, such as ambulatory markets in our Healthcare segment and omni-channel customer services in our Enterprise segment, and we have expanded
initiatives in geographic markets such as China, Latin America and Southeast Asia.
Continue
to
expand
hosting
and
transaction-based
offerings.
We remain focused on increasing our hosting and transaction-based offerings. We generate
hosting revenues through on-demand models that typically have multi-year terms with pricing based on volume of usage, number of transactions, number of
seats or number of devices. This pricing structure allows customers to use our products at a lower initial cost when compared to the sale of a perpetual
license. This will enable us to deliver applications that our customers use, and pay for, on a recurring basis, providing us with the opportunity to benefit
from recurring revenue streams.
• Maintain
significant
presence
and
customer
preference
in
our
markets.
We specialize in creating large, enterprise-class solutions that are used by many
of the world’s largest companies. By combining our core technology, professional services, local presence and deep domain experience, we are able to
deliver these specialized offerings for our customers and partners. We have established a trusted position in numerous markets and today work with a
majority of the Fortune 100 companies.
•
Strengthen
financial
profile
with
improvement
in
revenue,
earnings
per
share,
margin,
and
cash
flow.
We are focused on improving our financial
performance by executing upon identified strategic initiatives and further evolving our business toward recurring revenue models, which are positioning us
for increased future revenue and profitability growth. Recurring revenue represented 71.4% , 72.5% and 69.6% of total revenue in fiscal years 2018 , 2017
and 2016, respectively.
Segments
We are organized into five segments: Healthcare, Enterprise, Automotive, Imaging and Other. See Note 20 to the consolidated financial statements for additional
information about our reportable segments. We offer our solutions and technologies to our customers in a variety of ways, including via hosted cloud-based
solutions, perpetual and term software licenses, implementation and custom solution development services and maintenance and support. Our product revenues
include embedded original equipment manufacturer ("OEM") royalties, traditional perpetual licensing, term-based licensing and consumer sales. Our hosting,
royalty, term license and maintenance and support revenues are recurring in nature as our customers use our products on an ongoing basis to handle their needs in
medical transcription, medical coding and compliance, enterprise customer service and automotive connected services. Our professional services offer a continuing
revenue stream, whether it is provided in connection with our software solutions or on a standalone basis, as we have a backlog of engagements that take time to
complete.
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Healthcare
Our Healthcare segment is a leading provider in clinical speech and clinical language understanding solutions that drive smart, efficient decisions and increase
productivity across the healthcare industry. Our solutions and services improve the clinical documentation process - from capturing the complete patient record to
improving clinical documentation and quality measures for reimbursement. We support clinical documentation work flows and electronic health record ("EHR")
adoption through our flexible offerings, including transcription services, dictation software for the EHR, diagnostics work flows, and mobile applications. These
solutions increasingly leverage ASR, clinical language understanding ("CLU") and AI innovations to help physicians deliver better outcomes. In addition, we
continue to extend our strong hospital customer franchise into the automation and management of healthcare coding and billing processes in order to ensure timely
and appropriate reimbursement. These solutions are designed to help healthcare organizations derive additional value from EHR investments and are driven by
industry trends such as value-based care, Meaningful Use requirements, which is a program that awards incentives for using EHR 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 the physician in clinical
work flows from many devices. Our Healthcare segment revenues were $984.8 million , $899.3 million , and $973.3 million in fiscal years 2018 , 2017 and 2016 ,
respectively. Healthcare segment revenues represented 47.6% , 45.5% and 49.2% of total segment revenue in fiscal years 2018 , 2017 and 2016 , respectively.
Our principal solutions for the Healthcare segment include the following:
•
•
•
•
•
Dragon
Medical:
Provide dictation capabilities that empower physicians to accurately capture and document patient care in real-time from many devices
and without disrupting existing work flows. We have expanded this solution to provide clinical language understanding and cognitive intelligence that
delivers real-time queries to physicians at the point of care, producing measurable clinical, financial and compliance outcomes.
Transcription
solutions
: Enable physicians in larger and mid-sized healthcare enterprises to streamline clinical documentation with an on-demand,
enterprise-wide medical transcription platforms, and allow healthcare organizations to outsource transcription services. Our transcription solutions are
generally offered as an on-demand model.
Clinical
document
improvement
and
coding
solutions
: Ensure patient health information is properly documented, coded, and evaluated to provide more
complete and accurate clinical documentation. These services and offerings assist organizations with regulatory compliance and coding efficiency to receive
appropriate and timely reimbursement and improve quality reporting. The solutions are generally sold under a term licensing model.
Diagnostic
solutions
: Allow radiologists to easily document, collaborate, and share medical images and reports in order to optimize patient care . These
solutions are generally sold under a traditional perpetual license model, but they are transitioning rapidly to term licensing and transaction based models.
Dragon
solutions
: Provide professional and personal productivity solutions to business users and consumers with the ability to use their voice to create
content, reports and other documents, as well as control their computers and laptops without the use of a keyboard or mouse. This dictation capability is
similar to Dragon Medical and is 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 we have recently introduced an on-demand model.
The channels for distribution in the Healthcare segment utilize our direct sales force to address the market and our professional services organization to support the
implementation requirements of the healthcare industry. Direct distribution is supplemented by distributors, resellers and partnerships with a variety of healthcare
IT providers. Our Healthcare customers and partners include UPMC, Cleveland Clinic, Mayo Clinic and UK National Trust. Our partners include Cerner, Epic,
McKesson, and Siemens.
Areas of expansion and focus for our Healthcare segment include providing customers deeper integration with our clinical documentation solutions, investing in
our cloud-based offerings, operations and network security, entering new and adjacent markets such as ambulatory care, and expanding our international
capabilities.
Automotive
Our Automotive segment provides automotive manufacturers and their suppliers intuitive, personalized, branded, virtual assistants and connected services for cars
that are safer, easier, and more enjoyable. Our ASR, NLU and TTS technologies and deep domain experience, integration capabilities and independence make us a
preferred vendor to the world’s largest automotive manufacturers
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and suppliers. Our automotive solutions are generally sold as on-demand models that are typically priced on a per-unit basis for multi-year service terms. We have
a worldwide professional services team to provide custom solution development services and sell our technologies through a traditional perpetual software license
model, including a royalty-based model. Our Automotive customers include major automotive OEMs, such as Ford, Daimler, BMW, Toyota, Fiat Chrysler,
Volkswagen, and Geely.
Automotive segment revenues were $279.4 million , $252.2 million , and $214.3 million in fiscal years 2018 , 2017 and 2016 , respectively. Automotive segment
revenues represented 13.5% , 12.8% and 10.8% of total segment revenue in fiscal years 2018 , 2017 and 2016 , respectively.
On November 19, 2018, we announced our intent to spin off our Automotive business into an independent publicly-traded company through a pro rata distribution
to our common stock holders. Completion of the proposed spin-off is subject to certain conditions, including final approval by our Board of Directors. We are
targeting to compete the separation of the business by the end of fiscal year 2019.
Enterprise
Our Enterprise segment is a leading provider of automated customer solutions and services worldwide to aid enterprises with their customer service and
engagement. Differentiated by our ASR, NLU and AI technologies, and complemented by our large professional services organization, our solutions help
enterprises reduce or replace human contact center agents with conversational systems, across voice, mobile, web and messaging channels. Our intelligent self-
service solutions are highly accurate and dependable, resulting in increased customer satisfaction levels while simultaneously reducing the costs associated with
delivering customer service for the enterprise. We are continuing to evolve this business, leveraging our presence in 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 and outbound customer service and engagement, voice biometrics, and digital virtual assistant capabilities.
Enterprise segment revenues were $483.2 million , $474.3 million , and $396.0 million in fiscal years 2018 , 2017 and 2016 , respectively. Enterprise segment
revenues represented 23.3% , 24.0% and 20.0% of total segment revenue in fiscal years 2018 , 2017 and 2016 , respectively.
Our principal solutions for the Enterprise segment include the following:
•
•
On-Premise
solutions
and
services
: Provide software that is leveraged to implement automated customer service solutions that are integrated with a wide
range of on-premise third-party IVR and contact center platforms. Our products and technologies include ASR, voice biometrics, transcription, TTS, dialog
and analytics. 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 of integrated solutions. Our on-premise licensed products are primarily sold through a traditional
perpetual software license model, and our on-premise professional services are sold under project-based and multi-year managed services contracts.
On-Demand
multichannel
cloud:
Deliver a platform that provides enterprises with the ability to implement automatic customer service across inbound,
outbound, and digital customer service channels in the cloud. Our on-demand multichannel cloud leverages our ASR, voice biometrics, TTS, and virtual
assistant technologies, to implement intelligent, conversational self-service applications, including voice call steering and self-service, automated
verification, account access, virtual chat, proactive SMS, messaging and email, and customer service for mobile device customers. In addition, our
acquisition of TouchCommerce, Inc. in fiscal year 2016 allows us to provide an end-to-end engagement platform that merges intelligent self-service with
assisted service to increase customer satisfaction, strengthen customer loyalty and improve business results. Our on-demand multichannel cloud is sold
through sales models that typically have multi-year terms with pricing based on the channel provided and/or volume of usage.
The selling models in the Enterprise segment utilize both 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 customer service,
expansion of our on-demand multichannel cloud to international markets, sales and solution expansion for our voice biometrics suite, and expanding our on-
premise product and services portfolio.
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Table of Contents
Imaging
Our Imaging segment provides software solutions and expertise that help professionals and organizations gain optimal control of their document and information
processes by enabling customers to achieve measurable business and productivity benefits as they securely create, use and share documents. Our portfolio of
products and services helps business customers achieve compliance with information security policies and regulations while enabling organizations to streamline
and eliminate gaps across their document work flows.
We have built on our position in MFP OEM channels and the managed print services space by accelerating the integration of capture and print management
technologies. Our intelligent document capture and work flow solutions transform manual, disconnected processes into dynamic, streamlined, and automated work
flows. When combined with print management technologies, organizations are also able to control, manage, and monitor their entire print environment. Our
business has seen strong commitments from key OEMs, a broad number of OEM partners who embed multiple products, and strong end-user demand in key
verticals like healthcare, legal, and financial services.
Imaging segment revenues were $212.9 million , $217.7 million , and $241.6 million in fiscal years 2018 , 2017 and 2016 , respectively. Imaging segment
revenues represented 10.3% , 11.0% and 12.2% of total segment revenue in fiscal years 2018 , 2017 and 2016 , respectively.
Our principal solutions for the Imaging segment include the following:
• MFP
Scan
and
capture
automation
solutions
: Deliver scanning and document management solutions that improve productivity, drive efficiency and
assist in enhancing security.
• MFP
Print
management
and
automation
solutions
: Offer printing and document management solutions to capture and automate paper to digital work
flows to increase efficiency .
•
PDF
and
OCR
software
: Provide intuitive technologies that enable the efficient capture, creation, and management of document work flows.
The channels for distribution in the Imaging segment include a combination of a global reseller network and direct sales. Our Imaging solutions are generally sold
under a traditional perpetual software license model with a subset of our offerings sold as term licenses. Our Imaging customers and partners include Ricoh, Xerox,
HP, Canon, and Samsung.
On November 11, 2018, we entered into a definitive stock purchase agreement, pursuant to which we agreed to sell our Imaging business and associated assets for
a total cash consideration of approximately $400 million. The transaction, which is subject to regulatory review and other customary closing conditions, is
expected to close by the end of the second quarter of fiscal year 2019.
Other
Other segment includes our SRS and Devices businesses. Our SRS business provides value-added services to mobile operators in India and Brazil (“Mobile
Operator Services”) and voicemail transcription services to mobile operators in the rest of the world (“Voicemail-to-Text”). Our Devices business provides speech
recognition solutions and predictive text technologies for handset devices. Our Mobile Operator Services has experienced dramatic market disruptions during fiscal
year 2018. Our Devices revenue has been declining due to the ongoing consolidation of our handset manufacturer customer base and continued erosion of our
penetration of the remaining market. During the fourth quarter of fiscal 2018, in connection with our comprehensive portfolio and business review efforts, we
commenced a wind-down of our Devices and Mobile Operator Services businesses.
Other segment revenues were $109.1 million , $133.8 million , and 154.4 million in fiscal years 2018 , 2017 and 2016 , respectively. As a percentage of total
segment revenue, Other segment revenues represented 5.3% , 6.8% and 7.8% in fiscal years 2018 , 2017 and 2016 , respectively.
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Table of Contents
Research and Development/Intellectual Property
Over our history we have developed and acquired extensive technology assets, intellectual property, and industry expertise in ASR, NLU and imaging technologies
that provide us with a competitive advantage in our markets. Our technologies are based on complex algorithms that require extensive amounts of acoustic and
language models, and recognition and understanding techniques. A significant investment in 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. 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. As of September 30, 2018 , we held approximately 4,070 patents and 575 patent applications. Our intellectual property is critical to our success and
competitive position.
Competition
The markets in which we compete are highly competitive and are subject to rapid technology changes. There are a number of companies that develop or may
develop solutions and technologies that compete in our target markets; however, currently no company directly competes with us across all of our solutions and
technologies. While we expect competition to continue to increase both from existing competitors and new market entrants, we believe 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 professional services
organization, allows our customers and partners to place a high degree of confidence and trust in our ability to deliver results. We support our customers in
designing and building powerful innovative solutions 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
ASR and NLU solutions, which provide recognition for approximately 70 languages and dialects and natural-sounding synthesized speech in over 160
voices, and support a broad range of hardware platforms and operating systems. Our imaging technology supports more than 120 languages for OCR and
document handling, with up to 20 screen language choices, including Asian languages.
Technological
Superiority.
Our ASR, NLU and imaging technologies, applications and solutions are often recognized as the most innovative and
proficient in their respective categories. Our ASR and NLU solutions 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 and independent benchmarks have consistently indicated that our solutions and technologies rank at or above performance
levels of alternative solutions.
Broad
Distribution
Channels.
Our ability to address the needs of specific markets, such as financial, law, healthcare and government, and to introduce
new solutions and technologies quickly and effectively is provided by our direct sales force, our extensive global network of resellers, comprising system
integrators, independent software vendors, value-added resellers, hardware vendors, telecommunications carriers and distributors, and our e-commerce
website.
In our Healthcare business, we compete primarily with M*Modal, Optum, 3M and other smaller providers. In our Automotive business we compete, or may in the
future compete, with Amazon, Google, iFlyTek and Microsoft as well as with other, smaller vendors, particularly in China. In our Imaging business we compete
primarily with ABBYY and Adobe. Also, some of our partners such as Avaya, Cisco, and Genesys develop and market products that might be considered
substitutes for our Enterprise solutions. Additionally, a number of smaller companies in voice recognition, natural language understanding, text input and imaging
offer technologies or products that are competitive with our solutions.
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 prospective customers.
Some of our competitors or potential competitors, such as Adobe, Google, and 3M, have significantly greater financial, technical and marketing resources than we
do. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. They may also
devote greater resources to the development, promotion and sale of their products than we do.
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Table of Contents
Employees
As of September 30, 2018 , we had approximately 10,400 full-time employees, including approximately 1,200 in sales and marketing, approximately 2,700 in
professional services, approximately 2,100 in research and development, approximately 800 in general and administrative, and approximately 3,600 who provide
transcription and editing services. Approximately 66% of our employees are based outside of the United States, approximately 45% of whom provide transcription
and editing services and are based in India. None of our employees in the United States is represented by a labor union. Employees of certain of our foreign
subsidiaries are presented by labor unions or workers’ councils. We believe that our relationships with our employees are satisfactory.
Information About Geographic Areas
We have offices in a number of international locations including Australia, Austria, 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 general and administrative. Additionally, we maintain smaller sales, services and support offices throughout the world
to support 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 2018 , 2017 and 2016 , 72% , 70% and 71%
of revenue was generated in the United States and 28% , 30% and 29% of revenue was generated by our international customers, respectively.
Corporate Information and Website
We were incorporated under the laws of the State of Delaware in 1992. Our website is located at www.nuance.com and we trade under the ticker symbol NUAN.
We are not including the information contained in our website as part of, or incorporating it by reference into, 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, or otherwise furnish them to, the Securities and Exchange Commission
("SEC").
Item 1A.
Risk
Factors
You should carefully consider the risks and uncertainties described below when evaluating the company and when deciding whether to invest in the company. The
risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we do not currently
believe are important to an investor may also harm our business operations. If any of the events, contingencies, circumstances or conditions described below
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.
Risks Related to Our Business
The
markets
in
which
we
operate
are
highly
competitive
and
rapidly
changing
and
we
may
be
unable
to
compete
successfully.
There are a number of companies that develop or may develop products that compete in our targeted markets. The markets for our products and services are
characterized by intense competition, evolving industry and regulatory standards, emerging business and distribution models, disruptive software and hardware
technology developments, short product and service life cycles, price sensitivity on the part of customers, and frequent new product introductions, including
alternatives for certain of our products that offer limited functionality at significantly lower costs or free of charge. 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 prospective customers. Furthermore, there has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as
companies attempt to strengthen or hold their market positions.
The competition in our targeted markets could adversely affect our operating results by reducing the volume of the products and solutions we license or sell or the
prices we can charge. Some of our current or potential competitors have significantly greater financial, technical and marketing resources than we do. These
competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. They may also devote greater
resources to the development, promotion and sale of their products than we do, and in certain cases may be able to include or combine their competitive products
or technologies with other of their products or technologies in a manner whereby the competitive functionality is available at
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lower cost or free of charge within the larger offering. To the extent they do so, market acceptance and penetration of our products, and therefore our revenue and
bookings, may be adversely affected. Our success depends substantially upon our ability to enhance our products and technologies and to develop and introduce,
on a timely and cost-effective basis, new products and features that meet changing customer requirements and incorporate technological enhancements. If we are
unable to develop or acquire new products and enhance functionalities or technologies to adapt to these changes 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 materially in the past and we expect such fluctuations to continue in the future. These fluctuations may
cause our results of operations to not meet the expectations of securities analysts or investors which would likely cause the price of our stock to decline. Factors
that may contribute to fluctuations in operating results include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
volume, timing and fulfillment of customer orders and receipt of royalty reports;
fluctuating sales by our channel partners to their customers;
customers delaying their purchasing decisions in anticipation of new versions of our products;
contractual counterparties failing to meet their contractual commitments to us;
introduction of new products by us or our competitors;
cybersecurity or data breaches;
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 of goodwill or intangible assets;
the pace of the transition to an on-demand and transactional revenue model;
delayed realization of synergies resulting from our acquisitions;
accounts receivable that are not collectible and write-offs of excess or obsolete inventory;
increased expenditures incurred pursuing new product or market opportunities;
higher than anticipated costs related to fixed-price contracts with our customers;
change in costs due to regulatory or trade restrictions;
expenses incurred in litigation matters, whether initiated by us or brought by third-parties against us, and settlements or judgments we are required to pay in
connection with disputes; and
general economic trends as they affect the customer bases into which we sell.
Due to the foregoing factors, among others, our revenue, bookings and operating results are difficult to forecast. Our expense levels are based in significant part on
our expectations of future revenue, and we may not be able to reduce our expenses quickly to respond to near-term shortfalls 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,
outside
the
United
States.
Our
results
could
be
harmed
by
economic,
political,
regulatory,
foreign
currency
fluctuations
and
other
risks
associated
with
these
international
regions.
Because we operate worldwide, our business is subject to risks associated with doing business internationally. We generate most of our international revenue and
bookings in Europe and Asia, and we anticipate that revenue and bookings from international operations could increase in the future. In addition, some of our
products are developed outside the United States and we have a large number of employees in India who provide transcription and development services, and we
also have a large number of employees in Canada, Germany and the United Kingdom who provide professional services. We conduct a significant portion of the
development of our voice recognition and natural language understanding solutions in Canada and Germany, and a significant portion of our imaging research and
development in Hungary and Canada. We also have significant research and development resources in Austria, Belgium, China, Italy, and the United Kingdom.
We are exposed to fluctuating exchange rates of foreign currencies including the euro, British pound, Brazilian real, Canadian dollar, Japanese yen, Indian rupee
and Hungarian forint. Accordingly, our future results could be harmed by a variety of factors associated with international sales and operations, including:
•
•
adverse political and economic conditions, or changes to such conditions, in a specific region or country;
trade protection measures, including tariffs and import/export controls, imposed by the United States and/or by other countries or regional authorities such
as China, Canada or the European Union;
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•
•
•
•
•
•
•
•
•
•
the impact on local and global economies of the United Kingdom leaving the European Union;
changes in foreign currency exchange rates or the lack of ability to hedge certain foreign currencies;
compliance with laws and regulations in many countries and any subsequent changes in such laws and regulations;
geopolitical turmoil, including terrorism and war;
changing data privacy regulations and customer requirements to locate data centers in certain jurisdictions;
evolving restrictions on cross-border investment, including recent enhancements to the oversight by the Committee on Foreign Investment in the United
States pursuant to the Foreign Investment Risk Preview Modernization Act and substantial restrictions on investment from China;
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.
We
hired
a
new
Chief
Executive
Officer
in
April
2018.
If
we
encounter
difficulties
in
the
transition,
our
business
could
be
negatively
impacted.
Mark D. Benjamin became our Chief Executive Officer and a member of our Board of Directors in April 2018. Our future success will partly depend upon Mr.
Benjamin’s ability, along with the ability of other senior management and key employees, to effectively implement our business strategies. In addition, Mr.
Benjamin may pursue changes in our strategy or business focus. Mr. Benjamin may require transition time to fully understand all aspects of our business as would
be typical with any executive transition. If we have failures in any aspects of this transition, or new strategies implemented by our management team are not
successful, 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 productivity while any
successor obtains the necessary training and experience. Although we have arrangements with some of our executive officers designed to promote retention, our
employment relationships are generally at-will and we have had key employees leave in 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 qualified personnel, including research and development and operational personnel, but may not
be able to attract, assimilate or retain qualified personnel in the future. Any failure to attract, integrate, motivate and retain these employees could harm our
business.
We
recently
added
a
number
of
new
directors
to
our
Board
of
Directors
and
a
number
of
long-serving
directors
retired
from
our
Board
of
Directors.
If
the
transition
to
these
new
directors
is
not
effective,
our
business
could
be
harmed.
In June 2018 three long-serving directors retired from our Board and seven of the nine members of our Board of Directors have joined since December 2017,
including four in September 2018. We have also recently reconstituted the membership of Board Committees to take advantage of the experience the new members
bring to our Board of Directors. There can be no assurances that the Board of Directors or its committees will function effectively and that there will not be any
adverse effects on the business as a result of the significant changes on our Board of Directors.
We
experienced
a
significant
malware
incident
in
the
third
quarter
of
fiscal
2017,
the
residual
impact
of
which
will
continue
to
impact
our
future
results
of
operation
and
financial
condition.
On June 27, 2017, Nuance was a victim of the global NotPetya malware incident (the “2017 Malware Incident”). The NotPetya malware affected certain Nuance
systems, including systems used by our healthcare customers, primarily for transcription services, as well as systems used by our imaging division to receive and
process orders. Our revenue and our operating results for fiscal year 2017 were negatively impacted by the 2017 Malware Incident. For fiscal year 2017, we
estimate that we lost approximately $68.0 million in revenues, primarily in our Healthcare segment, due to the service disruption and the reserves we established
for customer refund credits. Additionally, we incurred incremental costs of approximately $24.0 million for fiscal year 2017 as a result of our remediation and
restoration efforts, as well as incremental amortization expenses. Although the direct effects of the 2017 Malware Incident were remediated during fiscal year
2017, the 2017 Malware Incident had a continued effect on our results of operations in fiscal year 2018. Our outlook for fiscal year 2019 reflects both the residual
effects of the incident and ongoing costs we will incur to continuously enhance information security.
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Cybersecurity
and
data
privacy
incidents
or
breaches
may
damage
client
relations
and
inhibit
our
growth.
The confidentiality and security of our information, and that of third parties, is critical to our business. Our services involve the transmission, use, and storage of
customers’ and their customer’s confidential information. We were the victim of a cybercrime in 2017, and future cybersecurity or data privacy incidents could
have a material adverse effect on our results of operations and financial condition. While we maintain a broad array of information security and privacy measures,
policies and practices, our networks may be breached through a variety of means, resulting in someone obtaining unauthorized access to our information, to
information of our customers or their customers, or to our intellectual property; disabling or degrading service; or sabotaging systems or information. In addition,
hardware, software, or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could
unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third parties with
whom we do business, through fraud or other forms of deceiving our employees, contractors, and vendors. Because the techniques used to obtain unauthorized
access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques
or to implement adequate preventative measures. We will continue to incur significant costs to continuously enhance our information security measures to defend
against the threat of cybercrime. Any cybersecurity or data privacy incident or breach may result in:
loss of revenue resulting from the operational disruption;
•
loss of revenue or increased bad debt expense due to the inability to invoice properly or to customer dissatisfaction resulting in collection issues;
•
•
loss of revenue due to loss of customers;
• material remediation costs to restore systems;
• material investments in new or enhanced systems in order to enhance our information security posture;
cost of incentives offered to customers to restore confidence and maintain business relationships;
•
reputational damage resulting in the failure to retain or attract customers;
•
costs associated with potential litigation or governmental investigations;
•
costs associated with any required notices of a data breach;
•
costs associated with the potential loss of critical business data; and
•
other consequences of which we are not currently aware but will discover through the remediation process.
•
Our
business
is
subject
to
a
variety
of
domestic
and
international
laws,
rules,
policies
and
other
obligations
including
data
protection
and
anticorruption.
We are subject to US and international laws and regulations in multiple areas, including data protection, anticorruption, labor relations, tax, foreign currency, anti-
competition, import, export and trade regulations, and we are subject to a complex array of federal, state and international laws relating to the collection, use,
retention, disclosure, security and transfer of personally identifiable information and personal health information, with additional laws applicable in some
jurisdictions where the information is collected from children. In many cases, these laws apply not only to transfers between unrelated third-parties but also to
transfers between us and our subsidiaries. Many jurisdictions have passed laws in this area, and other jurisdictions are considering imposing additional restrictions.
The European Commission adopted the European General Data Protection Regulation (the “GDPR”), which went into effect on May 25, 2018. China adopted a
new cybersecurity law as of June 2017, and there is an increase in regulation of biometric data globally, which may include voiceprints. In addition, California
adopted significant new consumer privacy laws in June 2018 that will be effective beginning in January 2020. Complying with the GDPR, the Health Insurance
Portability and Accountability Act of 1966 ("HIPPA"), the Health Information Technology for Economic and Clinical Health ("HITECH"), and other requirements
may cause us to incur substantial costs and may require us to change our business practices.
Any failure by us, our customers, suppliers or other parties with whom we do business to comply with our privacy policy or with federal, state or international
privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others. Any alleged or actual failure to
comply with applicable privacy laws and regulations may:
•
•
•
•
cause our customers to lose confidence in our solutions;
harm our reputation;
expose us to litigation, regulatory investigations and to resulting liabilities including reimbursement of customer costs, damages penalties or fines imposed
by regulatory agencies; and
require us to incur significant expenses for remediation.
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We are also subject to a variety of anticorruption laws in respect of our international operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery
Act and the Canadian Corruption of Foreign Public Officials Act, and regulations issued by the U.S. Customs and Border Protection, the U.S Bureau of Industry
and Security, the U.S Treasury Department’s Office of Foreign Assets Control, and various other foreign governmental agencies. We cannot predict the nature,
scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered
or interpreted. Actual or alleged violations of these laws and regulations could lead to enforcement actions and financial penalties that could result in substantial
costs.
Interruptions
or
delays
in
our
services
could
impair
the
delivery
of
our
services
and
harm
our
business
Because our services are complex and incorporate a variety of third-party hardware and software, our services may have errors or defects that could result in
unanticipated downtime for our customers and harm to our reputation and our business. We have from time to time, found defects in our services, and new errors in
our services may be detected in the future. Any damage to, or failure of, the systems that serve our customers in whole or in part could result in interruptions in our
service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay service-level agreement penalties, cause customers to terminate their
on-demand services, and adversely affect our renewal rates and our ability to attract new customers.
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 data center hosting facilities we directly manage and from third-party public cloud facilities. Any damage to, or failure of,
the systems that serve our customers could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or
pay service level agreement penalties, cause customers to terminate their on-demand services and adversely affect our renewal rates and our ability to attract new
customers.
We
may
be
unable
to
fully
capture
the
expected
value
from
strategic
transactions.
As part of our business strategy, we have in the past acquired, and expect to continue to acquire, other businesses and technologies. We also expect to from time to
time pursue other strategic transactions including divestitures, joint ventures, minority stakes and strategic alliances. Our acquisitions have required substantial
integration and management efforts, and we expect future acquisitions, divestitures and other strategic transactions to require similar efforts. Successfully realizing
the benefits of acquisitions, divestitures and other strategic transactions involves a number of risks, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
difficulty in transitioning and integrating the operations and personnel of the acquired businesses;
difficulty in separating the operations, personnel and systems of divested businesses:
potential disruption of our ongoing business and distraction of management;
difficulty in incorporating acquired products and technologies into our products and technologies;
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;
challenges associated with managing additional, geographically remote businesses;
impairment of relationships with partners and customers;
assumption of unknown material liabilities of acquired companies;
the accuracy of revenue and bookings projections of acquired companies;
customers delaying purchases of our products pending resolution of product integration between our existing and our newly acquired products;
entering markets or types of businesses in which we have limited experience; and
potential loss of key employees of the acquired business.
As a result of these and other risks, we may not realize the anticipated benefits from our acquisitions, divestitures, and other strategic transactions. Any failure to
achieve these benefits or failure to successfully integrate acquired businesses and technologies or disaggregate divested businesses and technologies could
seriously harm our business.
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Our
plans
to
wind
down
or
divest
certain
businesses
are
subject
to
various
risks
and
uncertainties
and
may
not
be
completed
in
accordance
with
the
expected
plans
or
anticipated
timeline,
or
at
all,
and
will
involve
significant
time
and
expense,
which
could
disrupt
or
adversely
affect
our
business.
In connection with our comprehensive business review, we have announced our intent to wind down or divest, including spin-out, certain of our businesses,
including our Imaging, Automotive, Devices and Mobile Operating Services businesses.
Winding down or divesting businesses involve risks and uncertainties, such as difficulty separating assets related to such businesses from the businesses we retain,
distracting employees, the need to obtain regulatory approvals and other third party consents, potentially disrupting customer and vendor relationships, and we may
be subject to additional tax obligations or loss of certain tax benefits. Such actions also involve significant costs and require time and attention of our management,
which may divert attention from other business operations. As a result of these challenges, as well as market conditions or other factors, the anticipated wind
downs and divestitures may take longer or be more costly than expected, and may not be completed at all. If we are unable to complete the wind downs or
divestitures or to successfully transition divested businesses, our business and financial results could be negatively impacted.
After we dispose of a business, we may retain exposure on financial guarantee leases, real estate and other contractual, employment, pension and severance
obligations, and potential liabilities that may arise under law as a result of the disposition or the subsequent failure of an acquirer. As a result, performance by the
divested businesses or other conditions outside of our control could have a material adverse impact on our results of operations.
In addition, the wind down or divestiture of any business could negatively impact our profitability as a result of losses that may result from such a sale, the loss of
sales and operating income, or a decrease in cash flows as a result of such actions and we may also experience greater dissynergies than expected.
Charges
to
earnings
as
a
result
of
our
acquisitions
may
adversely
affect
our
operating
results
in
the
foreseeable
future,
which
could
have
a
material
and
adverse
effect
on
the
market
value
of
our
common
stock.
Under accounting principles generally accepted in the United States, we record the market value of our common stock and other forms of consideration issued in
connection with an acquisition as the cost of acquiring the company or business. We allocate that cost to the individual assets acquired and liabilities assumed,
including various identifiable intangible assets such as acquired technology, acquired trade names and acquired customer relationships, based on their respective
fair values. We base our estimates of fair value upon assumptions believed to be reasonable, but which are inherently uncertain. After we complete an acquisition,
the following factors could result in material charges and may adversely affect our operating results and cash flows:
•
•
•
•
•
•
•
•
costs incurred to integrate 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 final determination of the amounts for
these contingencies or the conclusion of the measurement period (generally up to one year from the acquisition date), whichever comes first;
charges to our operating results to eliminate certain duplicative pre-merger activities, to restructure our operations or to reduce our cost structure;
charges to our operating results arising from expenses incurred to effect the acquisition; and
charges to our operating results due to the expensing of stock awards assumed in acquisitions.
Intangible assets are generally amortized over three to ten years. Goodwill is not subject to amortization but is subject to an impairment analysis, at least annually,
which may result in an impairment charge if the carrying value exceeds its implied fair value. As of September 30, 2018 , we had recorded goodwill of $3,504.5
million and intangible assets of $549.5 million , net of accumulated amortization and impairment charges. In addition, purchase accounting limits our ability to
recognize certain revenue that otherwise would have been recognized by the acquired company as an independent business. As a result, the combined company
may delay revenue recognition or recognize less revenue than we and the acquired company would have recognized as independent companies.
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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 other intangible assets, which are susceptible to valuation adjustments as a result of changes in
various factors or conditions. The most significant intangible assets are customer relationships, patents and core technologies, technologies and trademarks.
Customer relationships are amortized on an accelerated basis based upon the pattern in which the economic benefits of customer relationships are being utilized.
Other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives. We assess the potential impairment of intangible assets
on an annual basis, as well as whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that could trigger an
impairment of such assets include the following:
•
•
•
•
•
•
•
significant adjustments to our multi year operating plans, in connection of our ongoing portfolio review;
changes in our organization or management reporting structure that could result in additional reporting units, which may require alternative methods of
estimating fair values or greater disaggregation or aggregation in our analysis by reporting unit;
significant under performance 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
our market capitalization declining to below net book value.
For example, as more fully described in Note 4 to the accompanying consolidated financial statements, during the second quarter of fiscal year 2018, we
reorganized our former Mobile business into three discrete lines of business - Automotive, Dragon TV, and Devices. In connection with this reorganization, and
the review of goodwill and indefinite-lived intangible assets for impairment that was triggered by recent financial results and rapidly changing business conditions
for our Subscriber Revenue Services (“SRS”), we recorded a total of $137.9 million of goodwill impairment charge related to Devices and SRS for the second
quarter of fiscal 2018. Additionally, in connection with our comprehensive portfolio and business review efforts, management decided to commence a wind-down
of our Mobile Operator Services and Devices businesses during the fourth quarter of fiscal 2018. As a result, we recorded additional impairment charges of
goodwill and other intangible assets of approximately $33.0 million. For more information, please see Note 4 of the accompanying consolidated financial
statements. Future adverse changes in these or other unforeseeable factors could result in an impairment charge that would impact our results of operations and
financial position in the reporting period identified.
We
have
grown,
and
may
continue
to
grow,
through
acquisitions,
which
could
dilute
our
existing
stockholders
and/or
increase
our
debt
levels.
In connection with past acquisitions, we have in the past issued a substantial number of shares of our common stock as transaction consideration, including
contingent consideration, and also incurred significant debt to finance the cash consideration used for our acquisitions. We may continue to issue equity securities
for future acquisitions, which would dilute existing stockholders, perhaps significantly, depending on the terms of such acquisitions. We may also incur additional
debt in connection with future acquisitions, which, if available at all, may place additional restrictions on our ability to operate our business.
Our
strategy
to
increase
cloud
services,
term
licensing
and
transaction-based
recurring
revenue
may
adversely
affect
our
near-term
revenue
growth
and
results
of
operations.
We expect our ongoing shift from a perpetual software license model to cloud services, term licensing and transaction-based recurring revenue models to create a
recurring revenue stream that is more predictable. The transition, however, creates risks related to the timing of revenue recognition. We also incur certain
expenses associated with the infrastructures and selling efforts of our hosting offerings in advance of our ability to recognize the revenues associated with these
offerings, which may adversely affect our near-term reported revenues, results of operations and cash flows. A decline in renewals of recurring revenue offerings in
any period may 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.
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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 $159.9 million , $151.0 million and $12.5 million in fiscal years 2018 , 2017 and 2016 , respectively, and have a total accumulated deficit
of $740.8 million as of September 30, 2018 . If we are unable to return to profitability, the market price for our stock may decline, perhaps substantially. 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 achieve profitability, we may be required to raise
additional capital to maintain or grow our operations. Additional capital, if available at all, may be highly dilutive to existing investors or contain other unfavorable
terms, such as a high interest rate and restrictive covenants.
If
our
efforts
to
execute
our
formal
transformation
program
are
not
successful,
our
business
could
be
harmed.
We have been executing a formal transformation program to focus our product investments on our growth opportunities, increase our operating efficiencies, reduce
costs, and further enhance stockholder value through share buybacks. There can be no assurance that we will be successful in executing this transformation
program or be able to fully realize the anticipated benefits of this program, within the expected time frames, or at all. Additionally, if we are not successful in
strategically aligning our product portfolio, we may not be able to achieve the anticipated benefits of this program. A failure to successfully reduce and re-align our
costs could have an adverse effect on our revenue and on our expenses and profitability. As a result, our financial results may not meet our or the expectations of
securities analysts or investors in the future and our business could be harmed.
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 these jurisdictions may be
subject to significant change. If our effective tax rate increases, our operating results and cash flow could be adversely affected. Our effective income tax rate can
vary significantly between periods due to a number of complex factors including:
•
•
•
•
•
•
•
•
projected levels of taxable income;
pre-tax income being lower than anticipated in countries with lower statutory rates or higher than anticipated in countries with higher statutory rates;
increases or decreases to valuation allowances recorded against deferred tax assets;
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, the Organization
for Economic Cooperation and Development released the Final Reports for its Action Plan on Base Erosion and Profit Shifting. The implementation of one or more
of these reports in jurisdictions in which we operate, together with the 2014 enactment by Ireland, could result in an increase to our effective tax rate. In addition,
in December 2017, the United States enacted the Tax Cut and Jobs Act of 2017. We expect this to continue having a material impact on our GAAP tax financial
results. Future changes in U.S. and non-U.S. tax laws and regulations could have a material effect on our results of operations in the periods in which such laws
and regulations become effective as well as in future periods.
The
failure
to
successfully
maintain
the
adequacy
of
our
system
of
internal
control
over
financial
reporting
could
have
a
material
adverse
impact
on
our
ability
to
report
our
financial
results
in
an
accurate
and
timely
manner.
Under the Sarbanes-Oxley Act of 2002, we were required to develop and are required to maintain an effective system of disclosure controls and internal control
over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. In addition, our
management is required to assess and certify the adequacy of our controls on a quarterly basis, and our independent auditors must attest and report on the
effectiveness of our internal control over financial reporting on an annual basis. Any failure in the effectiveness of our system of internal control over financial
reporting could have a material adverse impact on our ability to report our financial statements in an accurate and timely manner. Inaccurate and/or untimely
financial statements could subject us to regulatory actions, civil or criminal penalties, stockholder litigation, or loss of customer confidence, which could result in
an adverse reaction in the financial marketplace and ultimately could negatively impact our stock price due to a loss of investor confidence in the reliability of our
financial statements.
14
Table of Contents
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 arrangements with governmental users in the U.S. and U.K., and contracts with the government in the U.S.
and the U.K., as well as various state and local governments, and their respective agencies. Government contracts are generally subject to oversight, including
audits and investigations which could identify violations of these agreements. Government contract violations could result in a range of consequences including,
but not limited to, contract price adjustments, civil and criminal penalties, contract termination, forfeiture of profit and/or suspension of payment, and suspension
or debarment from future government contracts. We could also suffer serious harm to our reputation if we were found to have violated the terms of our government
contracts.
Risks Related to Our Intellectual Property and Technology
Third
parties
have
claimed
and
may
claim
in
the
future
that
we
are
infringing
their
intellectual
property,
and
we
could
be
exposed
to
significant
litigation
or
licensing
expenses
or
be
prevented
from
selling
our
products
if
such
claims
are
successful.
From time to time, we are subject to claims and law actions alleging that we or our customers may be infringing or contributing to the infringement of the
intellectual property rights 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 or desirable, 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 of any offered licenses may not be acceptable to us, and we may not be able to resolve disputes without litigation. Any litigation regarding
intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations.
Intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us
from manufacturing or licensing certain of our products, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy
indemnification commitments with our customers including contractual provisions under various arrangements. Any of these could seriously harm our business.
Unauthorized
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 and services. We
rely on a combination of patents, copyrights, trademarks, service marks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect
our intellectual property and proprietary rights. Unauthorized parties may attempt to copy or discover aspects of our products or to obtain, license, sell or otherwise
use information that we regard as proprietary. Policing unauthorized use of our products is difficult and we may not be able to protect our technology from
unauthorized use. Additionally, our competitors may independently develop technologies that are substantially the same or superior to our technologies and that do
not infringe our rights. In these cases, we would be unable to prevent our competitors from selling or licensing these similar 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 the United States. Although the source code for our
proprietary software is protected both as a trade secret and as a copyrighted work, litigation may be necessary to enforce our intellectual property rights, to protect
our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Litigation,
regardless of the outcome, can be very expensive and can divert management efforts.
Our
software
products
may
have
bugs,
which
could
result
in
delayed
or
lost
revenue
and
bookings,
expensive
correction,
liability
to
our
customers
and
claims
against
us.
Complex software products such as ours may contain errors, defects or bugs. Defects in the solutions or products that we develop and sell to our customers could
require expensive corrections and result in delayed or lost revenue and bookings, adverse customer reaction and negative publicity about us or our products and
services. Customers who are not satisfied with any of our products may also bring claims against us for damages, which, even if unsuccessful, would likely be
time-consuming to defend, and could result in costly litigation and payment of damages. Such claims could harm our reputation, financial results and competitive
position.
15
Table of Contents
Risks Related to our Corporate Structure, Organization and Common Stock
Our
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 to operate our
business, including restrictions on our ability to:
incur additional debt or issue guarantees;
create liens;
•
•
• make certain investments;
•
•
•
•
• merge or consolidate with any entity.
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
Our ability to comply with these limitations is dependent on our future performance, which will be subject to many factors, some of which are beyond our control,
including prevailing economic conditions. As a result of these limitations, our ability to respond to changes in business and economic conditions and to obtain
additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that might otherwise be beneficial to us. In
addition, our failure to comply with our debt covenants could result in a default under our debt agreements, which could permit the holders to accelerate our
obligation to repay the debt. If any of our debt is accelerated, we may not have sufficient funds available to repay the accelerated debt.
Our
significant
debt
could
adversely
affect
our
financial
health
and
prevent
us
from
fulfilling
our
obligations
under
our
credit
facility
and
our
convertible
debentures.
We have a significant amount of debt. As of September 30, 2018 , we had $2,437.0 million outstanding principal of debt, including $300.0 million of senior note
due in 2020, $300.0 million of senior note due in 2024, and $500.0 million of senior note due in 2026, $46.6 million of 2.75% 2031 Debentures redeemable in
November 2021, $263.9 million of 1.5% 2035 Debentures redeemable in November 2021, $676.5 million of 1.0% 2035 Debentures redeemable in December 2022,
and $350.0 million of 1.25% 2025 Debentures redeemable in April 2025. Investors may require us to redeem these debentures earlier than the dates indicated if the
closing sale price of our common stock is more than 130% of the then current conversion price of the respective debentures for certain specified periods. If a holder
elects to convert, we will be required to pay the principal amount in cash and any amounts payable in excess of the principal amount in cash or shares of our
common stock, at our election. For example, on November 1, 2017, holders of $331.2 million of our 2.75% 2031 Debentures exercised their rights to require us to
repurchase such debentures. We also have a $242.5 million Revolving Credit Facility under which $6.9 million was committed to backing outstanding letters of
credit issued and $235.6 million was available for borrowing at September 30, 2018 . 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 the credit 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 of assets 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 our control. We
cannot assure you that our business will generate cash flow from operations, or that additional capital will be available to us, in an amount sufficient to enable us to
meet our payment obligations under the convertible debentures and our other debt and to fund other liquidity needs. If we are not able 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 not be able to meet our payment
obligations under the convertible debentures and our other debt.
16
Table of Contents
The
market
price
of
our
common
stock
has
been
and
may
continue
to
be
subject
to
wide
fluctuations,
and
this
may
make
it
difficult
for
you
to
resell
the
common
stock
when
you
want
or
at
prices
you
find
attractive.
Our stock price historically has been, and may continue to be, volatile. Various factors contribute to the volatility of our stock price, including, for example,
quarterly variations in our financial results, new product introductions by us or our competitors and general economic and market conditions. Sales of 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 the volatility or our stock
price. While we cannot predict the individual effect that any of 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. Moreover, companies that have experienced volatility in the market price of their stock
may be
subject to securities class action litigation. Any such litigation could result in substantial costs and divert management's attention and resources.
Current
uncertainty
in
the
global
financial
markets
and
the
global
economy
may
negatively
affect
the
value
of
our
investment
portfolio.
Our investment portfolios, which include investments in money market funds, bank deposits and separately managed investment portfolios, are generally subject to
credit, liquidity, counterparty, market and interest rate risks that may be exacerbated by a global financial crisis or by uncertainty surrounding the United
Kingdom's exit from the European Union or recent changes in tariffs and trade agreements. If the banking system or the fixed income, credit or equity markets
deteriorate or remain volatile, our investment portfolio may be impacted, and the values and liquidity of our investments could be adversely affected
Future
issuances
of
our
common
stock
could
adversely
affect
the
trading
price
of
our
common
stock
and
our
ability
to
raise
funds
in
new
stock
offerings.
Future issuances of substantial amounts of our common stock, whether in the public market or through private placements, including issuances in connection with
acquisition activities, or the perception that such issuances could occur, could adversely affect prevailing trading prices of our common stock and could impair our
ability to raise capital through future offerings of equity or equity-related securities. In connection 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 of such 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 stock for future sale, will have on the trading price of our common stock.
Our
business
could
be
negatively
affected
by
the
actions
of
activist
stockholders.
In the past, certain stockholders have publicly and privately expressed concerns with our performance and with certain governance matters. Responding to actions
by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. Furthermore,
any perceived uncertainties as to our future direction could result in the loss of potential business opportunities, and may make it more difficult to attract and retain
qualified personnel and business partners. In addition, we have enacted certain changes to our bylaws in the past year that may weaken our ability to prevent an
unsolicited takeover.
Item 1B. Unresolved
Staff
Comments
None.
17
Table of Contents
Item 2.
Properties
Our corporate headquarters are located in Burlington, Massachusetts. As of September 30, 2018 , we leased approximately 1.5 million square feet of building
space, primarily in the United States, and to a lesser extent, in Asia-Pacific regions, Europe and Canada. Larger leased sites include properties located in: Montreal,
Canada; Sunnyvale, California; and Bangalore, India. In addition, we own 130,000 square feet of building space located in Melbourne, Florida.
We also include in the total square feet leased space leased in specialized data centers in Massachusetts, Washington, Texas, China and smaller facilities around 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 for the conduct
of our business.
Item 3.
Legal
Proceedings
Similar to many companies in the software industry, we are involved in a variety of claims, demands, suits, investigations and proceedings that arise from 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 evaluate the probability of adverse outcomes and, as applicable, estimate the amount of probable losses that may result from pending
matters. Probable losses that can be reasonably estimated are reflected in our consolidated financial statements. These recorded amounts are not material to our
consolidated financial statements for any of the periods presented in the accompanying consolidated financial statements. While it is not possible to predict the
outcome of these matters 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
consolidated financial statements, and we could incur judgments or enter into settlements of claims that could adversely affect our financial position, results of
operations or cash flows.
Item 4. Mine
Safety
Disclosures
Not applicable.
Item 5.
Market
for
the
Registrant's
Common
Equity,
Related
Stockholder
Matters
and
Issuer
Purchases
of
Equity
Securities
Market Information
Our common stock is traded on the Nasdaq Global Select Market under the symbol “NUAN”. The following table sets forth, for our fiscal quarters indicated, the
high and low sales prices of our common stock, in each case as reported on the Nasdaq Global Select Market.
PART II
Fiscal Year 2017:
First quarter
Second quarter
Third quarter
Fourth quarter
Fiscal Year 2018:
First quarter
Second quarter
Third quarter
Fourth quarter
Low
High
13.44 $
14.85 $
16.36 $
15.38 $
14.02 $
15.23 $
12.18 $
13.70 $
17.47
17.43
19.93
17.97
17.72
18.75
15.75
17.42
$
$
$
$
$
$
$
$
18
Table of Contents
Holders
As of October 31, 2018 , there were 605 stockholders of record of our common stock. Because many of our shares of common stock are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners represented by these record holders.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. We currently expect to retain future earnings, if any, to finance the growth and
development of our business, or to purchase common stock under our share repurchase program and do not anticipate paying any cash dividends in the foreseeable
future. Furthermore, the terms of our debt agreements place restrictions on our ability to pay dividends, except for stock dividends.
Stock Performance Graph
The following performance graph compares the Company’s cumulative total return on its common stock between September 30, 2013 and September 30, 2018 to
the cumulative total return of the Russell 2000, and to the S&P Information Technology indices assuming $100 was invested in the Company’s common stock and
each of the indices upon the closing of trading on September 30, 2013 and assuming the reinvestment of dividends, if any. The Company has have never declared
or paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future.
The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily
indicative of, nor is it intended to forecast, the potential future performance of our common stock.
* $100 invested on September 30, 2013 in stock or index, including reinvestment of dividends, for each of the fiscal years below.
9/13
9/14
9/15
9/16
9/17
9/18
Nuance Communications, Inc.
Russell 2000
S&P Information Technology
S&P Software & Services Select
100.00
100.00
100.00
100.00
82.52
103.93
129.27
103.86
87.63
105.23
132.00
114.06
77.62
121.50
162.13
136.40
84.15
146.70
208.96
162.94
92.72
169.06
274.76
226.49
19
Table of Contents
Issuer Purchases of Equity Securities
The following is a summary of our share repurchases for the three months ended September 30, 2018 :
Period
July 1, 2018 - July 31, 2018
August 1, 2018 - August 31, 2018
September 1, 2018 - September 30, 2018
Total
Total Number of
Shares Purchased
907,286 $
Average Price
Paid per Share
14.45
402,897 $
280,213 $
1,590,396
15.78
16.59
Total Number of Shares
Purchased as Part of
Publicly Announced
Program (1)
Approximate Dollar
Value of Shares that May
Yet Be Purchased Under
the Program (1)
907,286 $
402,897 $
280,213 $
1,590,396
68,324,001
561,968,153
557,318,776
(1) On April 29, 2013, our Board of Directors approved a share repurchase program for up to $500.0 million , which was increased by $500.0 million on April 29, 2015. On
August 1, 2018, our Board of Directors approved an additional $500.0 million under our share repurchase program. The program has no expiration date. As of September 30,
2018 , approximately $557.3 million remained available for future repurchases under the program.
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 the minimum statutory income
withholding tax requirements that we pay in cash to the applicable taxing authorities on behalf of our employees. We do not consider these transactions to be common stock
repurchases.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
20
Table of Contents
Item 6.
Selected
Consolidated
Financial
Data
The following selected consolidated financial data is not necessarily indicative of the results of future operations and should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included
elsewhere in this Annual Report on Form 10-K.
(In
millions,
except
per
share
amounts)
Operations:
Total revenues
Gross profit
(Loss) income from operations
(Benefit) provision for income taxes
Net loss
Net Loss Per Share Data:
Basic
Diluted
Weighted average common shares
outstanding:
Basic
Diluted
Financial Position:
Cash and cash equivalents and marketable
securities
Total assets
Long-term debt
Total deferred revenue
Total stockholders’ equity
Selected Data and Ratios:
Working capital
Depreciation of property and equipment
Amortization of intangible assets
Gross margin percentage
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2018
2017
2016
2015
2014
Fiscal Year Ended September 30,
2,051.7
1,178.1
(86.9)
(56.8)
(159.9)
$
$
$
$
$
1,939.4
1,085.6
52.0
32.0
(151.0)
$
$
$
$
$
1,948.9
1,119.4
138.5
14.2
(12.5)
$
$
$
$
$
1,931.1
1,102.6
54.9
34.5
(115.0)
$
$
$
$
$
(0.55)
(0.55)
$
$
(0.52)
(0.52)
$
$
(0.04)
(0.04)
$
$
(0.36)
(0.36)
$
$
291.3
291.3
473.5
5,302.4
2,185.4
873.0
1,717.5
164.5
62.4
148.0
$
$
$
$
$
$
$
$
289.3
289.3
874.1
5,931.9
2,617.4
790.0
1,931.4
216.4
55.7
178.7
$
$
$
$
$
$
$
$
292.1
292.1
608.1
5,661.5
2,433.2
736.2
1,931.3
347.7
60.6
170.9
$
$
$
$
$
$
$
$
317.0
317.0
568.8
5,511.9
2,103.1
668.2
2,265.3
360.2
62.4
168.3
$
$
$
$
$
$
$
$
57.4%
56.0%
57.4%
57.1%
21
1,923.5
1,080.9
(21.4)
(4.7)
(150.3)
(0.47)
(0.47)
316.9
316.9
588.2
5,738.2
2,108.4
548.1
2,582.0
466.5
51.7
170.1
56.2%
Table of Contents
Item 7.
Management's
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations
The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of our business.
The Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the
accompanying notes to the consolidated financial statements.
Overview
Business Overview
We are a pioneer and leader in conversational and cognitive artificial intelligence ("AI") innovations that bring intelligence to everyday work and life. Our
solutions and technologies can understand, analyze and respond to human language to increase productivity and amplify human intelligence. Our solutions are used
by businesses in the healthcare, automotive, financial services, telecommunication and travel industries, among others. We see several trends in our markets,
including (i) the growing adoption of cloud-based, connected services and highly interactive mobile applications, (ii) deeper integration of virtual assistant
capabilities and services, and (iii) the continued expansion of our core technology portfolio including ASR, natural NLU, semantic processing, domain-specific
reasoning, dialog management capabilities, AI, and voice biometric speaker authentication. We report our business in five segments, Healthcare, Enterprise,
Automotive, Imaging and Other.
Trends in Our Businesses
•
•
•
•
Healthcare. Customers in our healthcare segment are broadly implementing EHR systems and are working to improve clinical documentation, improve quality
of care, minimize physician burnout integrate quality measures and aid reimbursement. These trends are driving a shift towards more integrated solutions that
combine both Dragon Medical and transcription services, and increasingly use only Dragon Medical. Recently, higher demand for more integrated solutions
have offset declines in legacy, hosted transcription services. Additionally, we have been able to capitalize on healthcare providers’ shift towards hosted, or
cloud-based solutions, and away from perpetual licenses, by adding new innovations to our Dragon Medical cloud solutions including new clinical language
understanding and AI capabilities designed to increase productivity and improve clinical documentation at the point of care and within existing electronic
medical work flow.
Enterprise. Consumer demand for 24/7, multi-channel access to customer service from the businesses they interact with is driving demand for our AI-powered
omni-channel engagement solutions. We continue to enhance our technology capabilities with intelligent self-service and AI for customer service, and to
extend the market for our on-demand omni-channel enterprise solutions into international markets, expand our sales and solutions for biometrics, and expand
our core products and services portfolio.
Automotive. Demand for our embedded and cloud-based automotive solutions is being driven by the growth in personalized, automotive virtual assistants and
connected services for cars and by auto manufacturers' desire to create a branded and personalized experience, capable of intelligently integrating users' smart
phone and home device preferences and technologies.
On November 19, 2018, we announced our intent to spin off our Automotive business into an independent publicly-traded company through a pro rata
distribution to our common stock holders. Completion of the proposed spin-off is subject to certain conditions, including final approval by our Board of
Directors. We are targeting to compete the separation of the business by the end of fiscal year 2019.
Imaging. The imaging market is evolving to include more networked solutions to MFP devices, as well as more mobile access to those networked solutions,
and away from packaged software. We are investing to merge the scan and print technology platforms to improve mobile access to our solutions and
technologies, expand our distribution channels and embedded relationships, and expand our language coverage for OCR in order to drive a more
comprehensive and compelling offering to our partners.
On November 11, 2018, we entered into a definitive stock purchase agreement, pursuant to which we agreed to sell our Imaging business and associated assets
for a total cash consideration of approximately $400 million. The transaction, which is subject to regulatory review and other customary closing conditions, is
expected to close by the end of the second quarter of fiscal year 2019.
22
Table of Contents
•
Other. Our Other segment includes our Subscriber Revenue Services ("SRS") and Devices businesses. Our SRS business provides value-added services to
mobile operators in India and Brazil (“Mobile Operator Services”) and voicemail transcription services to mobile operators in the rest of the world
(“Voicemail-to-Text”). Our Devices business provides speech recognition solutions and predictive text technologies for handset devices. Our Mobile Operator
Services has experienced dramatic market disruptions during fiscal year 2018. Our Devices revenue has been declining due to the ongoing consolidation of our
handset manufacturer customer base and continued erosion of our penetration of the remaining market. During the fourth quarter of fiscal 2018, in connection
with our comprehensive portfolio and business review efforts, we commenced a wind-down of our Devices and Mobile Operator Services businesses.
Cybersecurity & Data Privacy Matters
On June 27, 2017, Nuance was a victim of the global NotPetya malware incident (the “2017 Malware Incident”), which primarily impacted our medical
transcription services. For fiscal year 2017, we estimated that our Healthcare segment lost approximately $65.0 million in revenues, primarily due to the service
disruption and the reserves we established for customer refund credits related to the incident. Additionally, we incurred incremental costs of approximately $24.0
million for fiscal year 2017 as a result of our remediation and restoration efforts, as well as incremental amortization expenses.
Also, in December 2017, an unauthorized third party illegally accessed certain reports hosted on a Nuance transcription platform. This incident was limited in
scope to records of approximately 45,000 individuals and was isolated to a single transcription platform that was promptly shutdown. Customers using that
platform were notified of the incident and were migrated to our eScription transcription platforms. We also notified law enforcement authorities and have
cooperated in their investigation into the matter. The law enforcement investigation resulted in the identification of the third party, and the accessed reports have
been recovered. This incident did not have a material effect on our financial results for fiscal year 2018 and is not expected to have a material effect on our
financial results for future periods. See “ Risk Factors - Cybersecurity and data privacy incidents or breaches may damage client relations and inhibit our growth
.”
Key Metrics
In evaluating the financial condition and operating performance of our business, management focuses on revenue, net income, gross margins, operating margins,
cash flow from operations, and changes in deferred revenue. A summary of these key financial metrics is as follows:
For the fiscal year 2018 , as compared to the fiscal year 2017 :
•
•
•
•
•
Total revenue increase d by $112.3 million from $1,939.4 million to $2,051.7 million ;
Net loss increase d by $8.9 million to $159.9 million ;
Gross margins increase d by 1.4 percentage points to 57.4% ;
Operating margins decrease d by 6.9 percentage points to (4.2)% ;
Cash provided by operating activities for the fiscal year 2018 was $ 444.4 million , an increase of $ 65.6 million from fiscal year 2017.
As of September 30, 2018 , as compared to September 30, 2017 :
•
Total deferred revenue increased by 10.5% to $873.0 million , primarily driven by the continued growth of our Automotive connected solutions and
Healthcare bundled offerings.
A summary of other key operating metrics for fiscal year 2018 , as compared to the fiscal year 2017 , is as follows:
•
Net new bookings increased by 4.9% from the prior fiscal year to $1.7 billion . The net new bookings growth benefited from strong bookings performance
primarily in our Automotive and Enterprise segments.
Bookings represent the estimated gross revenue value of transactions at the time of contract execution, except for maintenance and support offerings. For fixed
price contracts, the bookings value represents the gross total contract value. For contracts where revenue is based on transaction volume, the bookings value
represents the contract price multiplied by the estimated future transaction volume during the contract term, whether or not such transaction volumes are
guaranteed under a minimum commitment clause. Actual results could be different than our initial estimate. The maintenance and support bookings value
23
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•
•
•
represents the amount the customer is invoiced in the period. Because of the inherent estimates required to determine bookings and the fact that the actual
revenue may differ from our initial bookings estimates, we consider bookings one indicator of potential future revenue and not as an arithmetic measure of
backlog.
Net new bookings represent the estimated revenue value at the time of contract execution from new contractual arrangements or the estimated revenue value
incremental to the portion of value that will be renewed under pre-existing arrangements.
Recurring revenue represented 71.4% for fiscal year 2018 and 72.5% for fiscal year 2017. Recurring revenue represents the sum of recurring product and
licensing, hosting, and maintenance and support revenues as well as the portion of professional services revenue delivered under ongoing contracts. Recurring
product and licensing revenue comprises term-based and ratable licenses as well as revenues from royalty arrangements.
Annualized line run-rate in our on-demand healthcare solutions decreased by 4% from a year ago to approximately 2.8 billion lines per year. The annualized
line run-rate for the fourth quarter of fiscal year 2017 reflected the negative impact of the 2017 Malware Incident, whereas the annualized run-rate for the
fourth quarter of fiscal year 2018 reflected the continued erosion of our medical transcription services. The annualized line run-rate is determined using billed
equivalent line counts in a given quarter, multiplied by four.
Estimated three-year value of total on-demand contracts increased 5.0% from the prior fiscal year to approximately $2.4 billion , primarily by growth in our
Dragon Medical cloud-based solutions and automotive connected car businesses, offset by decreases in SRS and Devices as well as the continued erosion of
our medical transcription services. We determine this value as of the end of the period reported, by using our estimate of three years of anticipated future
revenue streams under signed on-demand contracts then in place, whether or not they are guaranteed through a minimum commitment clause. Our estimate is
based on assumptions used in evaluating the contracts and determining sales compensation, adjusted for changes in estimated launch dates, actual volumes
achieved, and other factors deemed relevant. For contracts with an expiration date beyond three years, we include only the value expected within three years.
For other contracts, we assume renewal consistent with historic renewal rates unless there is a known cancellation. Contracts are generally priced by volume of
usage and typically have no or low minimum commitments. Actual revenue could vary from our estimates due to factors such as cancellations, non-renewals
or volume fluctuations.
Total Revenues
RESULTS OF OPERATIONS
The following tables show total revenues by product type and revenue by geographic location, based on the location of our customers, in dollars and percentage
change (dollars in millions):
Professional services and hosting
Product and licensing
Maintenance and support
Total Revenues
United States
International
Total Revenues
Fiscal Year 2018
Fiscal Year 2017
Fiscal Year 2016
% Change 2018 vs.
2017
% Change 2017 vs.
2016
$
$
$
$
1,049.4 $
684.2
318.0
976.9 $
635.4
327.1
955.3
669.2
324.3
2,051.7 $
1,939.4 $
1,948.9
1,470.7 $
1,352.0 $
581.0
587.3
2,051.7 $
1,939.4 $
1,385.3
563.6
1,948.9
7.4 %
7.7 %
(2.8)%
5.8 %
8.8 %
(1.1)%
5.8 %
2.3 %
(5.1)%
0.9 %
(0.5)%
(2.4)%
4.2 %
(0.5)%
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
The geographic split for fiscal year 2018 was 72% of total revenue in the United States and 28% internationally, as compared to 70% of total revenue in the United
States and 30% internationally for the prior fiscal year.
Fiscal
Year
2017
Compared
with
Fiscal
Year
2016
The geographic split for fiscal years 2017 was 70% of total revenue in the United States and 30% internationally, as compared to 71% of total revenue in the
United States and 29% internationally for the prior fiscal year.
24
Table of Contents
Professional Services and Hosting Revenue
Professional services revenue primarily consists of consulting, implementation and training services for customers. Hosting revenue primarily relates to delivering
on-demand hosted services, such as medical transcription, automated customer care applications, mobile operator services, and mobile infotainment and search and
transcription, over a specified term. The following table shows professional services and hosting revenue, in dollars and as a percentage of total revenues (dollars
in millions):
Professional services revenue
Hosting revenue
Professional services and hosting revenue
As a percentage of total revenues
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
Fiscal Year
2018
Fiscal Year
2017
Fiscal Year
2016
% Change 2018
vs. 2017
% Change 2017
vs. 2016
$
$
278.3
$
243.1
$
771.1
1,049.4
$
733.8
976.9
$
225.2
730.2
955.3
14.5%
5.1%
7.4%
7.9%
0.5%
2.3%
51.2%
50.4%
49.0%
Professional services revenue increase d by $35.3 million , or 14.5% , primarily driven by a $49.4 million increase in Healthcare, offset in part by a $6.5 million
decrease in Imaging and a $4.2 million decrease in Automotive. Healthcare professional services revenue increased primarily due to higher revenue from EHR
implementation and optimization services. Imaging professional services decreased primarily due to certain nonrecurring implementation services that occurred in
fiscal year 2017. Automotive professional services revenue decreased primarily due to a shift towards connected services.
Hosting revenue increase d by $ 37.3 million , or 5.1% , primarily driven by a $41.9 million increase in Healthcare, a $14.5 million increase in Automotive, and a
$6.7 million increase in Enterprise, offset in part by a $25.8 million decrease in Other. Healthcare hosting revenue increased as the segment recovered from the
2017 Malware Incident throughout the year; also contributing to the increase was the continued market penetration and growth of our Dragon Medical cloud-based
solutions, offset by in part by the continued erosion of our transcription services. Automotive hosting revenue increased primarily due to the continued growth in
our ASR and infotainment platform services. Enterprise hosting revenue increased primarily due to the growth in our omni-channel hosting solutions. Other
segment hosting revenue decreased primarily driven by the declines in both of our SRS and Devices businesses.
As a percentage of total revenue, professional services and hosting revenue increased from 50.4% for fiscal year 2017 to 51.2% for fiscal year 2018.
Fiscal
Year
2017
Compared
with
Fiscal
Year
2016
Professional services revenue increased by $17.9 million, or 7.9%, primarily due to acquisitions in our Healthcare segment and the continued growth in voice
biometrics offerings in our Enterprise segment.
Hosting revenue increased by $3.7 million, or 0.5%, primarily driven by a $48.3 million increase in Enterprise and a $13.2 million increase in Automotive
segments, offset in part by a $57.7 million decrease in Healthcare. Enterprise hosting revenue increased primarily due to the incremental revenue from acquisitions,
growth in our omni-channel cloud offerings, and the continued strength in our on-premise and service portfolios. Automotive hosting revenue increased primarily
due to the continued growth in our ASR and infotainment platform services. Healthcare hosting revenue declined primarily due to the 2017 Malware Incident and
the continued erosion of our transcription services, offset in part by the continued market penetration and growth of our Dragon Medical cloud-based solutions.
As a percentage of total revenue, professional services and hosting revenue increased from 49.0% for fiscal year 2016 to 50.4%
for fiscal year 2017.
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Product and Licensing Revenue
Product and licensing revenue primarily consists of sales and licenses of our technology. The following table shows product and licensing revenue, in dollars and
as a percentage of total revenues (dollars in millions):
Product and licensing revenue
As a percentage of total revenues
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
Fiscal Year
2018
Fiscal Year
2017
Fiscal Year
2016
% Change 2018
vs. 2017
% Change 2017
vs. 2016
$
684.2
$
635.4
$
669.2
7.7%
(5.1)%
33.4%
32.8%
34.3%
Product and licensing revenue increase d by $48.8 million , or 7.7% , primarily driven by a $16.3 million increase in Automotive, a $14.5 million increase in
Healthcare, and a $12.8 million increase in Enterprise. Automotive product and licensing revenue increased primarily due to higher royalties from existing and new
customers. Healthcare product and licensing revenue increased primarily due to higher revenue from diagnostics solutions due to recent acquisitions. Enterprise
product and licensing revenue increased primarily due to higher contact center license revenue.
As a percentage of total revenue, product and licensing revenue increased from 32.8% for fiscal year 2017 to 33.4% for fiscal year 2018.
Fiscal
Year
2017
Compared
with
Fiscal
Year
2016
Product and licensing revenue decreased by $33.8 million, or 5.1%, primarily driven by a $25.6 million decrease in Imaging, a $16.7 million decrease in
Healthcare, and a $16.7 million decrease in Other, offset in part by a $23.0 million increase in Automotive. Imaging product and licensing revenue decreased
primarily due to lower sales of our multi-functional printer ("MFP") solutions. Healthcare product and licensing revenue decreased primarily due to the continuing
customer transition from product licenses to cloud-based solutions. Other product and licensing revenue decreased primarily driven by the ongoing consolidation
of our handset manufacturer customer base and continued erosion of our penetration of the remaining market. Automotive product and licensing revenue increased
primarily due to higher royalties from existing and new customers.
As a percentage of total revenue, product and licensing revenue decreased from 34.3% for fiscal year 2016 to 32.8% for fiscal year 2017.
Maintenance and Support Revenue
Maintenance and support revenue primarily consists of technical support and maintenance services. The following table shows maintenance and support revenue,
in dollars and as a percentage of total revenues (dollars in millions):
Maintenance and support revenue
As a percentage of total revenues
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
Fiscal Year
2018
Fiscal Year
2017
Fiscal Year
2016
% Change 2018
vs. 2017
% Change 2017
vs. 2016
$
318.0
$
327.1
$
324.3
(2.8)%
0.9%
15.5%
16.9%
16.6%
Maintenance and support revenue decrease d by $9.1 million , or 2.8% , primarily due to a $18.1 million decrease in Healthcare, offset in part by a $6.0 million
increase in Imaging and a $4.6 million increase in Enterprise. The decrease in Healthcare was primarily driven by the continuing customer transition from product
licenses to cloud-based solutions. The increase in Imaging was primarily driven by the contract renewal from existing customers. The increase in Enterprise was
primarily driven by higher volume of contact center license transactions with maintenance and support.
Fiscal
Year
2017
Compared
with
Fiscal
Year
2016
Maintenance and support revenue increased by $2.7 million, or 0.9%, primarily due to a $6.7 million increase in our Enterprise segment due to maintenance
renewals, offset in part by a $4.1 million decrease in Healthcare primarily due to the continuing customer transition from product licenses to cloud-based solutions.
26
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Cost of Professional Services and Hosting Revenue
COSTS AND EXPENSES
Cost of professional services and hosting revenue primarily consists of compensation for services personnel, outside consultants and overhead, as well as the
hardware, infrastructure and communications fees that support our hosting solutions. The following table shows the cost of professional services and hosting
revenue, in dollars and as a percentage of professional services and hosting revenue (dollars in millions):
Cost of professional services and hosting revenue
$
681.5
$
660.8
$
626.2
3.1%
5.5%
As a percentage of professional services and hosting revenue
64.9%
67.6%
65.5%
Fiscal Year
2018
Fiscal Year
2017
Fiscal Year
2016
% Change 2018
vs. 2017
% Change 2017
vs. 2016
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
The increase in cost of professional services and hosting revenue was primarily due to higher professional services costs in our Healthcare segment related to EHR
implementation and optimization services and higher hosting costs related to the growth of our automotive connected car services, offset in part by lower costs of
medical transcription services. Gross margins increase d by 2.7 percentage points as our Healthcare segment recovered from the 2017 Malware Incident throughout
the year. Also contributing to the margin improvement was a favorable shift in revenue mix towards higher margin Dragon Medical cloud-based offerings, offset in
part by margin compression in our medical transcription services and the increase in EHR implementation and optimization services which carried lower margins.
Fiscal
Year
2017
Compared
with
Fiscal
Year
2016
The increase in cost of professional services and hosting revenue was primarily driven by higher employee and infrastructure-related costs due to higher revenues
in our Enterprise segment. Gross margins decreased by 2.1 percentage points primarily due to the negative impact of the 2017 Malware Incident, the continued
erosion of our medical transcription services in Healthcare, and lower margins in Enterprise due to recent acquisitions. Partially offsetting the margin declines was
the favorable shift in revenue mix to higher margin professional services in Imagining.
Cost of Product and Licensing Revenue
Cost of product and licensing revenue primarily consists of material and fulfillment costs, manufacturing and operations costs and third-party royalty expenses.
The following table shows the cost of product and licensing revenue, in dollars and as a percentage of product and licensing revenue (dollars in millions):
Cost of product and licensing revenue
$
77.1
$
74.0
$
86.4
4.2%
(14.4)%
As a percentage of product and licensing revenue
11.3%
11.6%
12.9%
Fiscal Year
2018
Fiscal Year
2017
Fiscal Year
2016
% Change 2018
vs. 2017
% Change 2017
vs. 2016
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
The increase in cost of product and licensing revenue was due to higher costs related to our clinical documentation and diagnostic solutions. Gross margins
increase d by 0.3 percentage points, or essentially flat year-over-year.
Fiscal
Year
2017
Compared
to
Fiscal
Year
2016
The decrease in cost of product and licensing revenue was driven by lower costs related to Dragon medical and Dragon consumer perpetual licenses, as well as our
MFP solutions. Gross margins increased by 1.3 percentage points, due to a favorable shift in revenue mix towards higher margin products Healthcare and Imaging.
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Cost of Maintenance and Support Revenue
Cost of maintenance and support revenue primarily consists of compensation for product support personnel and overhead. The following table shows cost of
maintenance and support revenue, in dollars and as a percentage of maintenance and support revenue (dollars in millions):
Cost of maintenance and support revenue
$
58.1
$
54.1
$
54.1
7.4%
—%
As a percentage of maintenance and support revenue
18.3%
16.5%
16.7%
Fiscal Year
2018
Fiscal Year
2017
Fiscal Year
2016
% Change 2018
vs. 2017
% Change 2017 vs.
2016
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
Cost of maintenance and support revenue increase d by $4.0 million , or 7.4% , primarily driven by higher compensation costs in Imaging. Gross margins decrease
d by 1.8 percentage points primarily due to lower margin on Dragon Medical software maintenance and support services in Healthcare.
Fiscal
Year
2017
Compared
with
Fiscal
Year
2016
Cost and the gross margin of maintenance and support revenue remained essentially flat during fiscal year 2017.
Research and Development Expenses
Research and development ("R&D") expenses primarily consist of salaries, benefits, and overhead relating to engineering staff as well as third party engineering
costs. The following table shows research and development expense, in dollars and as a percentage of total revenues (dollars in millions):
Research and development expense
As a percentage of total revenues
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
Fiscal Year
2018
Fiscal Year
2017
Fiscal Year
2016
% Change 2018
vs. 2017
% Change 2017
vs. 2016
$
305.3
$
266.1
$
271.1
14.7%
(1.8)%
14.9%
13.7%
13.9%
R&D expense increase d by $39.2 million , primarily due to higher compensation expenses as we continue to invest in product innovation and new technologies to
support our long-term growth.
Fiscal
Year
2017
Compared
with
Fiscal
Year
2016
R&D expense decreased by $5.0 million, primarily due to our continued cost-savings initiatives to reduce headcount and move R&D activities to lower-cost
locations, offset in part by higher compensation expenses in our Enterprise segment due to acquisitions.
Sales and Marketing Expenses
Sales and marketing expenses include salaries and benefits, commissions, advertising, direct mail, public relations, tradeshow costs and other costs of marketing
programs, travel expenses associated with our sales organization and overhead. The following table shows sales and marketing expense, in dollars and as a
percentage of total revenues (dollars in millions):
Sales and marketing expense
As a percentage of total revenues
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
Fiscal Year
2018
Fiscal Year
2017
Fiscal Year
2016
% Change 2018
vs. 2017
% Change 2017
vs. 2016
$
388.3
$
398.1
$
390.9
(2.5)%
1.8%
18.9%
20.5%
20.1%
The decrease in sales and marketing expense was primarily driven by lower commission expenses due to recent changes in our commission plans.
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Fiscal
Year
2017
Compared
with
Fiscal
Year
2016
The increase in sales and marketing expense was primarily due to higher compensation and commission expenses on increased
headcount in our Enterprise segment, offset in part by lower marketing spend in our Healthcare segment.
General and Administrative Expenses
General and administrative expenses primarily consist of personnel costs for administration, finance, human resources, general management, fees for external
professional advisers including accountants and attorneys, and provisions for doubtful accounts. The following table shows general and administrative expense, in
dollars and as a percentage of total revenues (dollars in millions):
General and administrative expense
As a percentage of total revenues
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
Fiscal Year 2018
229.8
$
Fiscal Year 2017
166.7
$
Fiscal Year 2016
168.5
$
11.2%
8.6%
8.6%
% Change 2018 vs.
2017
% Change 2017 vs.
2016
37.9%
(1.1)%
General and administrative expense increase d by $63.1 million primarily due to professional services fees related to evaluating strategic alternatives for certain
businesses, establishing the Automotive business as a separate operating segment, and legal expenses related to enforcing our intellectual property rights.
Fiscal
Year
2017
Compared
with
Fiscal
Year
2016
General and administrative expense decreased by $1.8 million as the effect of higher administrative headcount was more than offset by lower stock-based
compensation and lower professional fees related to identifying and evaluating strategic initiatives.
Amortization of Intangible Assets
Amortization of acquired patents and core technology are included within cost of revenues whereas the amortization of other intangible assets, such as acquired
customer relationships, trade names and trademarks, are included within operating expenses. Customer relationships 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
2018
Fiscal Year
2017
Fiscal Year
2016
% Change 2018
vs. 2017
% Change 2017
vs. 2016
Cost of revenues
Operating expense
Total amortization expense
As a percentage of total revenues
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
$
$
56.9
91.1
148.0
$
$
64.9
$
113.9
178.7
$
62.9
108.0
170.9
(12.3)%
(20.0)%
(17.2)%
3.2%
5.5%
4.6%
7.2%
9.2%
8.8%
Amortization of intangible assets expense for fiscal year 2018 decreased by $30.8 million from $178.7 million for fiscal year 2017, as certain intangible assets
became fully amortized in fiscal years 2017 and 2018.
Fiscal
Year
2017
Compared
with
Fiscal
Year
2016
Amortization of intangible assets expense for fiscal year 2017 increased by $7.9 million from $170.9 million for fiscal year 2016. The increase was primarily due
to the amortization of customer relationship assets acquired in acquisitions.
29
Table of Contents
Acquisition-Related Costs, Net
Acquisition-related costs include costs related to business and other acquisitions, including potential acquisitions. These costs consist of (i) transition and
integration costs, including retention payments, transitional employee costs, earn-out payments, and other costs related to integration activities; (ii) professional
service fees, including financial advisory, legal, accounting, and other outside services incurred in connection with acquisition activities, and disputes and
regulatory matters related to acquired entities; and (iii) fair value adjustments to acquisition-related contingencies. A summary of the acquisition-related costs is as
follows (dollars in millions):
Transition and integration costs
Professional service fees
Acquisition-related adjustments
Total Acquisition-related costs, net
As a percentage of total revenue
Fiscal Year
2018
Fiscal Year
2017
Fiscal Year
2016
% Change 2018
vs. 2017
% Change 2017
vs. 2016
$
$
16.1
$
3.5
(3.4)
$
15.2
12.6
(0.1)
16.1
$
27.7
$
6.1
10.9
0.2
17.2
5.9 %
(72.2)%
3,300.0 %
(41.9)%
149.2 %
15.6 %
(150.0)%
61.0 %
0.8%
1.4%
0.9%
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
Acquisition-related costs, net for fiscal year 2018 decreased by $11.6 million , primarily due to reduced acquisition activities during fiscal year 2018.
Fiscal
Year
2017
Compared
with
Fiscal
Year
2016
Acquisition-related costs, net for fiscal year 2017 increased by $10.5 million primarily due to higher contingent retention payments related to acquisitions, which is
included within transition and integration costs.
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Restructuring and Other Charges, Net
While restructuring and other charges, net are excluded from our calculation of segment profit, the table below presents the restructuring and other charges, net
associated with each segment (dollars in thousands):
Fiscal Year 2018
Healthcare
Enterprise
Automotive
Imaging
Other
Corporate
Total fiscal year 2018
Fiscal Year 2017
Healthcare
Enterprise
Automotive
Imaging
Other
Corporate
Total fiscal year 2017
Fiscal Year 2016
Healthcare
Enterprise
Automotive
Imaging
Other
Corporate
Total fiscal year 2016
Fiscal
Year
2018
Personnel
Facilities
Total
Restructuring
Expenses
Other Charges
Total
$
11,563 $
25 $
11,588 $
— $
11,588
$
$
$
$
4,217
4,160
5,304
1,473
10,107
2,243
20
1,168
647
953
6,460
4,180
6,472
2,120
11,060
—
—
—
7,103
14,515
36,824 $
5,056 $
41,880 $
21,618 $
6,460
4,180
6,472
9,223
25,575
63,498
4,283 $
870 $
5,153 $
8,758 $
13,911
2,141
1,838
744
2,954
1,337
3,480
—
387
(15)
2,013
5,621
1,838
1,131
2,939
3,350
—
—
—
10,773
21,491
13,297 $
6,735 $
20,032 $
41,022 $
3,531 $
1,398 $
4,929 $
— $
1,214
1,967
284
3,870
2,267
2,782
—
478
1,557
5,391
3,996
1,967
762
5,427
7,658
—
—
—
(486)
971
5,621
1,838
1,131
13,712
24,841
61,054
4,929
3,996
1,967
762
4,941
8,629
$
13,133 $
11,606 $
24,739 $
485 $
25,224
For fiscal year 2018 , we recorded restructuring charges of $41.9 million , which included $36.8 million related to the termination of approximately 1,495
employees and $5.1 million charge related to certain excess facilities, including adjustment to sublease assumptions associated with these facilities. These actions
were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction. We expect the remaining outstanding
severance of $10.6 million to be substantially paid by the end of the first quarter of fiscal year 2019 , and the remaining of $7.6 million for the excess facilities to
be made through fiscal year 2027 , in accordance with the terms of the applicable leases.
Additionally, during fiscal year 2018, we recorded $5.7 million for costs related to the transition agreement of our former CEO, $4.8 million professional services
fees related to assessment and establishment of our corporate transformational efforts, $4.0 million related to our remediation and restoration effort after the 2017
Malware Incident, and fixed asset impairment charges of $7.1 million for SRS and Devices, as more fully described in Note 4. The cash payments associated with
the CEO transition agreement are expected to be made through fiscal year 2020.
Fiscal
Year
2017
For fiscal year 2017, we recorded restructuring charges of $20.0 million , which included $13.3 million related to the termination of approximately 807 terminated
employees and $6.7 million charge related to certain excess facilities, including adjustment to sublease assumptions associated with these facilities. These actions
were part of our initiatives to reduce costs and optimize processes.
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Additionally, during fiscal year 2017, we recorded $8.1 million for costs related to the transition agreement of our former CEO, $18.1 million of professional
services fees and $4.0 million of fixed asset and inventory write-down as a result of the Malware Incident, and an impairment charge of $10.8 million related to an
internally developed software.
Fiscal
Year
2016
For fiscal year 2016, we recorded restructuring charges of $24.7 million , which included $13.1 million related to the termination of approximately 452 employees
as part of our initiatives to reduce costs and optimize processes, and $11.6 million charge related to certain excess facility space, including adjustment to sublease
assumptions associated with these facilities.
Additionally, during fiscal year 2016, we recorded certain other charges that totaled $0.5 million for litigation contingency reserves.
Impairment of Goodwill and Other Intangible Assets
As more fully described in Note 4 of the accompanying consolidated financial statements, we recorded $170.9 million impairment charges of goodwill and other
intangible assets for Devices and SRS for fiscal year 2018.
Other Expenses, net
Other expenses, net consists primarily of interest income, interest expense, foreign exchange gains (losses), and net gain (loss) from other non-operating activities.
A summary of Other expenses, net is as follows (dollars in millions):
Interest income
Interest expense
Other expense, net
Total other expenses, net
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
Fiscal Year
2018
Fiscal Year
2017
Fiscal Year
2016
% Change 2018 vs.
2017
% Change 2017
vs. 2016
$
$
9.3 $
6.9 $
(137.3)
(1.9)
(156.9)
(21.0)
4.4
(132.7)
(8.5)
(129.8) $
(171.0) $
(136.8)
34.7 %
(12.5)%
(91.1)%
56.0%
18.2%
147.6%
Interest expense decrease d by $19.6 million primarily due to the repurchase of $331.2 million outstanding 2.75% convertible debentures in November 2017. Other
expense, net decrease d by $19.2 million primarily due to an $18.6 million loss on extinguishment of debt resulting from the repurchase of our 2020 Senior Notes
in fiscal year 2017.
Fiscal
Year
2017
Compared
with
Fiscal
Year
2016
Interest expense increased by $24.2 million primarily driven by the issuance of the 2026 Senior Notes and the 2025 Convertible Debenture, offset in part by the
repurchase of $600 million principal of our 2020 Senior Notes in fiscal year 2017. Other expense, net increased by $12.5 million primarily due to an $18.6 million
loss on extinguishment of debt resulting from the repurchase of our 2020 Senior Notes discussed above, offset in part by extinguishment losses of $4.9 million
recorded in fiscal year 2016.
Provision for Income Taxes
The following table shows the provision for income taxes and the effective income tax rate (dollars in millions):
(Benefit) Provision for income taxes
Effective income tax rate
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
Fiscal Year
2018
$
(56.8)
Fiscal Year 2017
$
32.0
$
Fiscal Year
2016
% Change 2018
vs. 2017
% Change 2017
vs. 2016
14.2
(277.6)%
125.3%
26.2%
(26.9)%
816.4%
Our effective income tax rate was 26.2% in fiscal year 2018, compared to (26.9)% in fiscal year 2017. The effective tax rate of 26.2% in fiscal year 2018 differed
from the U.S. statutory rate, primarily due to the net tax benefits resulting from the Tax Cuts and Jobs Act ("TCJA") remeasurement of deferred tax assets and
liabilities at the lower enacted rate, and our foreign earnings being subject to lower tax rates, offset by in part by additional valuation allowance related to current
period losses, the tax effect of goodwill impairment charges that are not deductible, and the provision for the deemed repatriation of foreign cash and earnings. The
effective tax rate of (26.9)% in fiscal year 2017 differed from the U.S. statutory rate, primarily due to additional valuation
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allowance related to current period losses in the United States and an increase in deferred tax liabilities related to goodwill, partially offset by our earnings in
foreign operations that are subject to significantly lower tax rates than U.S. statutory tax rate.
Provision for income taxes decreased by $88.8 million in fiscal year 2018, primarily due to the lower valuation allowance provided related to the losses incurred
for the current fiscal year, the net tax benefits resulting from the TCJA remeasurement of deferred tax assets and liabilities at the lower enacted rate, offset in part
by the tax effect of goodwill impairment charges that are not deductible, and the provision for the deemed repatriation of foreign cash and earnings.
Fiscal
Year
2017
Compared
with
Fiscal
Year
2016
Our effective income tax rate was (26.9)% in fiscal year 2017, compared to 816.4% in fiscal year 2016. The effective tax rate of (26.9)% in fiscal year 2017
differed from the U.S. statutory rate, primarily due to additional valuation allowance related to current period losses in the United States and an increase in deferred
tax liabilities related to goodwill, partially offset by our earnings in foreign operations that are subject to significantly lower tax rates than U.S. statutory tax rate.
The effective income tax rates in fiscal year 2016 differs from the U.S. federal statutory rate of 35% primarily due to additional valuation allowance related to
current period losses in the United States, an increase in the deferred tax liabilities related to goodwill, and an increase in current tax provisions due to the one-time
repatriation of foreign earnings offset by the utilization of previously unbenefited domestic loss and credit carryforwards. These were offset in part by our foreign
earnings subject to significantly lower tax rates, and a $22.1 million release of domestic valuation allowance as a result of tax benefits recorded in connection with
our acquisitions during the period for which a deferred tax liability was established in purchase accounting.
Provision for income taxes increased by $17.8 million in fiscal year 2017 as compared to fiscal year 2016, primarily due to the
additional valuation allowance provided related to the losses incurred for the current fiscal year and an increase in deferred tax
liabilities related to goodwill in fiscal year 2017, offset in part by the effect of one-time repatriated foreign earnings in fiscal year 2016.
SEGMENT ANALYSIS
During the first quarter of fiscal year 2018, we commenced a review of our segment reporting structure to better align our Chief Operating Decision Maker's
("CODM") long-term strategic focus with our organizational structure. During the second quarter of fiscal year 2018, we implemented a number organizational
changes to align our segment reporting structure with our long-term strategic focuses, including (i) establishing our Automotive business as a separate operating
segment, (ii) moving our Dragon TV business from our former Mobile operating segment into our Enterprise operating segment to consolidate our
telecommunications market resources, and (iii) establishing an Other segment that includes our SRS and Devices businesses, previously reported within our former
Mobile operating segment. As a result, segment information for fiscal years 2018, 2017 and 2016 has been recast to reflect the new segment reporting structure.
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For further details of financial information about our operating segments, see Note 20 to the accompanying consolidated financial statements included in Item 8 of
this Annual Report on Form 10-K. The following table presents certain financial information about our operating segments (dollars in millions).
Fiscal Year 2018 Fiscal Year 2017 Fiscal Year 2016
% Change 2018
vs. 2017
% Change 2017
vs. 2016
Segment Revenues
Healthcare
Enterprise
Automotive
Imaging
Other
Total segment revenues
Less: acquisition related revenue adjustments (a)
$
984.8
$
899.3
$
483.2
279.4
212.9
109.1
2,069.4
(17.7)
474.3
252.2
217.7
133.8
1,977.4
(38.0)
973.3
396.0
214.3
241.6
154.4
1,979.6
(30.7)
2,051.7
$
1,939.4
$
1,948.9
9.5 %
1.9 %
10.8 %
(2.2)%
(18.5)%
4.7 %
(53.4)%
5.8 %
26.4 %
5.0 %
(7.6)%
(15.2)%
(31.6)%
6.5 %
4.5
0.9
(7.8)
(4.8)
(5.0)
0.5
(7.6)%
19.8 %
17.7 %
(9.9)%
(13.4)%
(0.1)%
23.9 %
(0.5)%
(16.4)%
4.9 %
24.3 %
(21.1)%
8.2 %
(5.9)%
(3.1)
(4.0)
2.5
(5.2)
6.2
(1.9)
$
$
331.4
$
262.1
$
142.4
109.9
67.4
28.4
135.6
118.9
79.5
41.6
$
679.5
$
637.7
$
33.6%
29.5%
39.3%
31.7%
26.1%
32.8%
29.1%
28.6%
47.1%
36.5%
31.1%
32.3%
313.5
129.3
95.7
100.8
38.4
677.6
32.2%
32.6%
44.6%
41.7%
24.9%
34.2%
Total revenues
Segment Profit
Healthcare
Enterprise
Automotive
Imaging
Other
Total segment profit
Segment Profit Margin
Healthcare
Enterprise
Automotive
Imaging
Other
Total segment profit margin
(a) Segment revenues differ from reported revenues due to certain revenue adjustments related to acquisitions that would otherwise have been recognized but for the purchase
accounting treatment of the business combinations. These revenues are included to allow for more complete comparisons to the financial results of historical operations and
in evaluating management performance.
Segment Revenues
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
•
•
•
•
•
Healthcare segment revenues increased by $85.5 million during fiscal year 2018 as the segment recovered from the 2017 Malware Incident throughout the
year, as well as the continued market penetration and growth of our Dragon Medical cloud-based solutions and higher revenue from EHR implementation and
optimization services, offset in part by the continued erosion of our transcription services.
Enterprise segment revenues increased by $8.9 million during fiscal year 2018 primarily due to higher contact center license and services revenue, offset in
part by lower revenue from our inbound and outbound on-demand solutions.
Automotive segment revenues increased by $27.2 million during fiscal year 2018 primarily due to higher royalties and revenues from our hosting solutions
driven by continued growth in our ASR and infotainment platform services.
Imaging segment revenues decreased by $4.8 million during fiscal year 2018 primarily due to lower revenue from our scanning and print management
solutions, offset in part by higher revenue from our core Imaging solutions due to new product launch.
Other segment revenue decreased by $24.7 million primarily due to the accelerated declines in both SRS and Devices businesses during fiscal year 2018. The
decline in SRS was primarily due to the recent market disruptions in India and Brazil. These markets have experienced a dramatic recent disruption as a result
of accelerated change in competition and business models for our SRS mobile operator customers, which has reduced demand for our services. The decline in
our Devices business was
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primarily due to the ongoing consolidation of our handset manufacturer customer base, as well as continued erosion of our penetration of the remaining
market.
As more fully described in Note 4 to the accompanying consolidated financial statements, during the fourth quarter of fiscal 2018, in connection with our
comprehensive portfolio and business review efforts, we commenced a wind-down of our Devices and Mobile Operator Services businesses.
Fiscal
Year
2017
Compared
with
Fiscal
Year
2016
•
•
•
•
•
Healthcare segment revenues decreased by $74.0 million during fiscal year 2017 primarily due to decreases in hosting revenue and product and licensing
revenue. Hosting revenue decreased by $58.2 million primarily due to the negative impact of the 2017 Malware Incident throughout the year, and the
continued erosion of the transcription services, offset in part by the positive effect of customers' transition to cloud-based offerings. Product and licensing
revenue decreased by $17.9 million primarily as a result of lower revenues from our licensed Dragon Medical product sales as we transition from product
licensing to subscription and cloud-based offerings. We estimated the revenue impact of the Malware Incident due to the service interruption to be
approximately $65 million for fiscal year 2017.
Enterprise segment revenues increased by $78.3 million during fiscal year 2017 primarily due to the incremental revenue from recent acquisitions, increases in
our omni-channel cloud offerings, and the continued strength in our on-premise and on-demand service portfolios.
Automotive segment revenues increased by $37.9 million during fiscal year 2017 primarily due to higher royalties and revenues from our hosting solutions
driven by continued growth in our speech recognition and infotainment platform services.
Imaging segment revenues decreased by $23.8 million during fiscal year 2017 primarily due to the lower sales from our MFP solutions.
Other segment revenues decreased by $20.7 million during fiscal year 2017 primarily due to declines in both the SRS and Devices business.
Segment Profit
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
•
•
•
•
•
Healthcare segment profit increased by $69.2 million , or 26.4% , primarily due to higher segment revenue and higher gross margin. Healthcare operating
results for fiscal year 2017 was negatively impacted by the 2017 Malware Incident. The gross margin for fiscal year 2018 reflected a favorable shift in revenue
mix towards higher margin Dragon Medical cloud-based offerings, offset in part by the increase in EHR implementation and optimization services which
carried lower margins. As a result, segment profit margin increased by 4.5 percentage points, to 33.6% for fiscal year 2018.
Enterprise segment profit increased by $6.8 million , or 5.0% , primarily due to higher segment revenue, offset in part by lower gross margin. The lower gross
margin was primarily due to higher infrastructure costs and increased headcount to support future growth. As a result, segment profit margin increased by 0.9
percentage points to 29.5% for fiscal year 2018 from 28.6% for fiscal year 2017.
Automotive segment profit decreased by $9.0 million , or 7.6% , primarily due to lower gross margin and higher R&D expenses, offset in part by higher
revenue. The lower gross margin was primarily driven by increased professional services headcount to support implementation of our connected solutions
across existing and new customer base. The higher R&D expense was primarily driven by our increased investment in new technologies. As a result, segment
profit margin decreased by 7.8 percentage points to 39.3% for fiscal year 2018 from 47.1% for fiscal year 2017.
Imaging segment profit decreased by $12.1 million , or 15.2% , primarily due to lower segment revenue, lower gross margin, and higher operating expenses.
Gross margin declined as a result of an unfavorable shift in revenue mix from higher margin software revenue to lower margin hardware revenue. Operating
expenses increased primarily due to higher sales and marketing expenses to support new products and solutions, and drive greater market penetration. As a
result, segment profit margin decreased by 4.8 percentage points to 31.7% for fiscal year 2018 from 36.5% for fiscal year 2017.
Other segment profit decreased by $13.2 million , or 31.6% , primarily due to lower revenue and the margin compression in SRS and Devices. Segment profit
margin declined primarily due to lower revenues and relatively fixed costs and expenses
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structure. As more fully described in Note 4 to the accompanying consolidated financial statements, during the fourth quarter of fiscal 2018, in connection
with our comprehensive portfolio and business review efforts, we commenced a wind-down of our Devices and Mobile Operator Services businesses.
Fiscal
Year
2017
Compared
with
Fiscal
Year
2016
•
•
•
•
•
Healthcare segment profit decreased by $51.3 million, or 16.4%, primarily due to lower segment revenue and lower gross margin as a result of the negative
impact of the 2017 Malware Incident and the continued erosion of the transcription services, offset in part by the positive effect of customers' transition to
cloud based offerings. Segment profit margin decreased by 3.1 percentage points, to 29.1% for fiscal year 2017 from 32.2% for fiscal year 2016, primarily due
to lower gross margin.
Enterprise segment profit increased by $6.4 million, or 4.9%, primarily due to higher segment revenue, offset in part by lower gross margin and higher R&D
expenses. Gross margin was lower as our recently acquired entities carried lower gross margins. R&D expenses increased as a result of increased R&D
headcount due to recent acquisitions. Segment profit margin decreased by 4.0 percentage points to 28.6% for fiscal year 2017 from 32.6% for fiscal year 2016,
primarily due to lower gross margin and higher operating expenses margin.
Automotive segment profit increased by $23.2 million, or 24.3%, primarily due to higher revenues and gross margin. The gross margin improvement was
primarily due to a favorable shift to higher margin cloud-based and licensing offerings. Segment profit margin increased by 2.5 percentage points to 47.1% for
fiscal year 2017 from 44.6% for fiscal year 2016, primarily due to higher gross margin and lower operating expense margin as the segment continued to
benefit from our costs savings and process optimization initiatives.
Imaging segment profit decreased by $21.3 million, or 21.1%, primarily due to lower segment revenue. Segment profit margin decreased by 5.2 percentage
points to 36.5% during fiscal year 2017 from 41.7% during fiscal year 2016, primarily due to relatively flat operating expenses on lower revenues.
Other segment profit increased by $3.1 million, or 8.2%, primarily due to higher gross margin, offset in part by lower revenue. Higher gross margin was
primarily driven by the timing of product and licensing revenue. Segment profit margin increased by 6.2 percentage points to 31.1% during fiscal year 2017
from 24.9% during fiscal year 2016.
Liquidity
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents and marketable securities of $473.5 million as of September 30, 2018 , a decrease of $400.6 million from $874.1 million as of
September 30, 2017 . Our working capital, as defined by total current assets less total current liabilities, was $164.5 million as of September 30, 2018 , compared to
$216.4 million as of September 30, 2017 . Additionally, we had availability of $242.5 million under our revolving credit facility as of September 30, 2018 . We
believe that our existing sources of liquidity are sufficient to support our operating needs, capital requirements and any debt service requirements for the next
twelve months.
Cash and cash equivalents and marketable securities held by our international operations totaled $112.8 million as of September 30, 2018 and $148.6 million as of
September 30, 2017 . We utilize a variety of financing strategies to ensure that our worldwide cash is available to meet our liquidity needs. We expect the cash held
overseas to be permanently invested in our international operations, and our U.S. operation to be funded through its own operating cash flows, cash and marketable
securities within the U.S., and if necessary, borrowing under our revolving credit facility.
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Corporate Transformation Program and Strategic Business Review
During the third quarter of fiscal year 2018, we commenced a strategic and operational review of our business with the goal of improving our focuses on
leveraging our core strengths in key vertical markets and sustaining our long-term growth and profitability.
In connection with the business review, we commenced a wind-down of our Mobile Operator Services and Devices businesses during the fourth quarter of fiscal
year 2018. On November 11, 2018, we entered into a definitive stock purchase agreement, pursuant to which we agreed to sell our Imaging business and associated
assets for a total cash consideration of approximately $400 million. The transaction, which is subject to regulatory review and other customary closing conditions,
is expected to close by the end of the second quarter of fiscal year 2019. Additionally, on November 19, 2018, we announced our intent to spin off our Automotive
business into an independent publicly-traded company through a pro rata distribution to our common stock holders. Completion of the proposed spin-off is subject
to certain conditions, including final approval by our Board of Directors. We are targeting to compete the separation of the business by the end of fiscal year 2019.
We expect to spend $50 million to $75 million to effect the separation and stand-up of the businesses in fiscal year 2019. In addition, as part of the transformation
initiatives, we incurred approximately $4.8 million expense related to the assessment of operational efficiency and the establishment of the program during fiscal
year 2018. We expect to incur $60 million to $70 million of restructuring related expenditures in fiscal year 2019.
Cash provided by operating activities
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
Cash provided by operating activities for fiscal year 2018 was $444.4 million , an increase of $65.6 million , or 17% , from $378.9 million for fiscal year 2017 .
The net increase was primarily due to:
•
•
An increase of $25.0 million driven by favorable changes in working capital, primarily due to the timing of billing and collections; and
An increase in cash inflows of $39.3 million from deferred revenue. Deferred revenue contributed cash inflow of $86.2 million in fiscal year 2018, as
compared to $46.9 million in fiscal year 2017, primarily driven by continued growth of our Automotive connected solutions and Healthcare bundled
offerings.
Fiscal
Year
2017
Compared
to
Fiscal
Year
2016
Cash provided by operating activities for fiscal year 2017 was $378.9 million, a decrease of $186.9 million, or 33%, from $565.8 million for fiscal year 2016. The
net decrease was primarily due to:
•
•
•
A decrease of $77.1 million in cash flows resulting from a higher net loss, exclusive of non-cash adjustment items;
A decrease of $95.0 million in cash flows resulting from unfavorable changes in working capital, excluding deferred revenue; and
A decrease in cash inflows of $14.9 million from deferred revenue. Deferred revenue contributed cash inflow of $46.9 million in fiscal year 2017, as
compared to $61.7 million in fiscal year 2016. The deferred revenue growth in fiscal year 2017 was driven primarily by our hosting solutions in automotive
connected services within our Mobile segment and bundled offerings within our Healthcare segment.
Cash used in investing activities
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
Cash used in investing activities for fiscal year 2018 was $37.3 million , a decrease of $296.9 million , or 89% , from $334.2 million for fiscal year 2017 . The net
decrease was primarily due to:
•
•
An increase of $280.3 million in net proceeds from the sale and purchase of marketable securities and other investments; and
A decrease of $13.0 million in capital expenditures.
Fiscal
Year
2017
Compared
to
Fiscal
Year
2016
Cash used in investing activities for fiscal year 2017 was $334.2 million, an increase of $71.2 million, or 27%, from $263.0 million for fiscal year 2016. The net
increase was primarily due to:
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•
•
•
An increase in cash outflows of $214.8 million for payments of marketable securities and other investments, offset in part by;
An increase in cash inflows of $91.6 million for proceeds from marketable securities and other investment; and
A decrease in cash outflows of $59.0 million for business and technology acquisitions.
Cash (used in) provided by financing activities
Fiscal
Year
2018
Compared
with
Fiscal
Year
2017
Cash used by financing activities for fiscal year 2018 was $680.3 million , an increase of $747.4 million , or 1,115% , from cash provided by financing activities of
$67.1 million for fiscal year 2017 . The net increase was primarily due to:
•
•
•
•
A decrease in cash inflows of $837.5 million from debt issuance. During fiscal year 2017, the cash inflows from debt activities includes $495.0 million net
proceeds from the issuance of 5.625% Senior Notes due 2026; and $343.6 million net proceeds from the issuance of our 1.25% 2025 Convertible
Debentures;
An increase in cash outflows of $37.0 million related to share repurchases. During fiscal year 2018 and 2017, we repurchased 9.7 million shares and 5.8
million shares for $136.1 million and $99.1 million , respectively; and
An increase in cash outflows of $24.8 million related to acquisition payments with extended payment terms, offset in part by,
A decrease in cash outflows of $152.9 million from the redemption and repayment of debt. During fiscal year 2018, holders of approximately $331.2
million in aggregate principal amount of the 2.75% 2031 Debentures exercised their right to require us to repurchase such debentures, and we repurchased
$150.0 million in aggregate principal amount of our 2020 Senior Notes. During fiscal year 2017, we repurchased $600.0 million in aggregate principal
amount of our 2020 Senior Notes and $17.8 million in aggregate principal amount of our 2031 Convertible Debentures.
Fiscal
Year
2017
Compared
to
Fiscal
Year
2016
Cash used in financing activities for fiscal year 2017 was $67.1 million, an increase of $372.2 million, or 122%, from cash used in financing activities of $305.1
million for fiscal year 2016. The net increase was primarily due to:
•
•
•
A decrease in cash outflows of $600.4 million related to share repurchases. We repurchased 5.8 million shares of our common stock for $99.1 million in
fiscal year 2017 as compared to 9.4 million shares repurchased under our share repurchase program and 26.3 million shares repurchased from the Icahn
Group for total cash outflow of $699.5 million in fiscal year 2016;
A decrease in net cash inflows of $244.1 million from debt activities. The fiscal year 2017 activity included approximately$495.0 million net proceeds from
the issuance of our 2026 Senior Notes, approximately $343.6 million net proceeds from the issuance of our 1.25% 2025 Debentures, offset by the
repurchases of $600.0 million in aggregate principal of our 2020 Senior Notes and $17.8 million in aggregate principal of our 2031 Convertible Debentures.
The fiscal year 2016 activity included proceeds of $663.8 million, net of issuance costs, from the issuance of our 1.0% 2035 Debentures offset by the
repurchase of $38.3 million in aggregate principal on our 2.75% Senior Convertible Debentures due in 2031 and repayment of $472.5 million on our term
loan under the amended and restated credit agreement; and
An increase in cash outflows of $14.5 million as a result of higher cash payments required to net share settle employee equity awards due to the increase in
the intrinsic value of shares vested during fiscal year 2017 as compared to fiscal year 2016.
Debt
For a detailed description of the terms and restrictions of the debt and revolving credit facility, see Note 9 to the accompanying consolidated financial statements.
We expect to incur cash interest payment on outstanding debt of $78.8 million in fiscal year 2019 , based on the outstanding balance as of September 30, 2018 and
the holders' right of redemption discussed above. We expect to fund our debt service requirements through existing sources of liquidity and our operating cash
flows.
Share Repurchases
On April 29, 2013, our Board of Directors approved a share repurchase program for up to $500.0 million, which was increased by $500.0 million on April 29,
2015. On August 1, 2018, our Board of Directors approved additional $500.0 million under our share repurchase program. Under the terms of the share repurchase
program, we have the ability to repurchase shares through a variety of methods, which may include open market purchases, privately negotiated transactions, block
trades, accelerated
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stock repurchase transactions, or any combination of such methods. The share repurchase program does not require us to acquire any specific number of shares and
may be modified, suspended, extended or terminated by us at any time without prior notice. The timing and the amount of any purchases will be determined by
management based on an evaluation of market conditions, capital allocation alternatives, and other factors.
We spent $136.1 million , $99.1 million and $197.5 million on share repurchases during the fiscal years 2018, 2017 and 2016 , respectively. Approximately $557.3
million remained available for share repurchases as of September 30, 2018 pursuant to our share repurchase program.
Off-Balance Sheet Arrangements, Contractual Obligations, Contingent Liabilities and Commitments
Contractual
Obligations
The following table outlines our contractual payment obligations as of September 30, 2018 (dollars in millions):
Payments Due by Fiscal Year Ended September 30,
Total
2019
2020 and 2021
2022 and 2023
Thereafter
$
Contractual Obligations
Convertible Debentures (1)
Senior Notes
Interest payable on long-term debt (2)
Letter of Credit (3)
Lease obligations and other liabilities:
Operating leases
Operating leases under restructuring (4)
Purchase commitments for inventory, property and
equipment (5)
1,337.0 $
1,100.0
458.7
6.9
165.0
60.9
32.6
Total contractual cash obligations
$
3,161.1 $
— $
— $
987.0 $
—
78.8
6.8
29.1
10.1
8.0
132.8 $
300.0
141.0
0.1
39.5
17.9
13.8
—
113.8
—
32.0
17.2
10.8
512.3 $
1,160.8 $
350.0
800.0
125.1
—
64.4
15.7
—
1,355.2
(1) Pursuant to the terms of each convertible instrument, holders have the right to redeem the debt on specific dates prior to maturity. The repayment schedule above assumes
(2)
that payment is due on the next redemption date after September 30, 2018 .
Interest per annum is due and payable semi-annually and is determined based on the outstanding principal as of September 30, 2018 , the stated interest rate of each debt
instrument and the assumed redemption dates discussed above.
(3) Letters of Credit are in place primarily to secure future operating lease payments.
(4) Obligations include contractual lease commitments related to facilities that were part of restructuring plans. As of September 30, 2018 , we have subleased certain of the
facilities with total sublease income of $42.8 million through fiscal year 2027 .
(5) These amounts include non-cancelable purchase commitments for property and equipment as well as inventory in the normal course of business to fulfill customer
backlog.
The summary above does not include unrecognized tax benefits of $30.4 million and the one-time mandatory repatriation tax of $5.8 million as of September 30,
2018 . We do not expect a significant change in the amount of unrecognized 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 to reasonably estimate the timing of payments for the remainder of the liability.
Contingent
Liabilities
and
Commitments
Certain acquisition payments to selling stockholders were contingent upon the achievement of pre-determined performance targets over a period of time after the
acquisition. Such contingent payments were recorded at estimated fair values upon the acquisition and re-measured in subsequent reporting periods. As of
September 30, 2018 , we may be required to pay the selling stockholders up to $12.4 million contingent upon achieving specified performance goals, including the
achievement of future bookings and sales targets related to the products of the acquired entities. In addition, certain deferred compensation payments to selling
stockholders contingent upon their continued employment after the acquisition were recorded as compensation expense over the requisite service period.
Additionally, as of September 30, 2018 , the remaining deferred payment obligations of $19.9 million to certain former stockholders, which are contingent upon
their continued employment, will be recognized ratably as compensation expense over the remaining requisite service periods.
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Financial
Instruments
We use financial instruments to manage our foreign exchange risk. We operate our business in countries throughout the world and transact business in various
foreign currencies. Our foreign currency exposures typically arise from transactions denominated in currencies other than the functional currency of our operations.
We have a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effect of certain foreign currency exposures.
Our program is designed so that increases or decreases in our foreign currency exposures are offset 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, 2018 and 2017 , we had outstanding contracts with a total notional value of $117.1 million and $69.0 million ,
respectively.
Defined Benefit Plans
We sponsor certain defined benefit plans that are offered primarily by certain of our foreign subsidiaries. Many of these plans were assumed through our
acquisitions or are required by local regulatory requirements. We may deposit funds for these plans with insurance companies, third party trustees, or into
government-managed accounts consistent with local regulatory requirements, as applicable. Our total defined benefit plan pension expenses were $0.3 million ,
$0.4 million and $0.1 million for fiscal years 2018 , 2017 and 2016 , respectively. The aggregate projected benefit obligation as of September 30, 2018 and
September 30, 2017 was $34.7 million and $37.2 million , respectively. The aggregate net liability of our defined benefit plans as of September 30, 2018 and
September 30, 2017 was $11.1 million and $13.2 million , respectively.
Off-Balance Sheet Arrangements
Through September 30, 2018 , we have not entered into any off-balance sheet arrangements or material transactions with unconsolidated entities or other persons.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The preparation of financial statements in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, assumptions and judgments, including
those related to revenue recognition; allowance 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 contingent consideration; accounting for stock-based
compensation; accounting for derivative instruments; accounting for income taxes and related valuation allowances; and loss contingencies. Our management
bases its 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 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 and require our most
difficult and subjective judgments.
Revenue Recognition. We derive revenue from the following sources: (1) software license agreements, including royalty and other usage-based arrangements,
(2) professional services, (3) hosting services and (4) post-contract customer support ("PCS"). Our hosting services are generally provided through 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 access to 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 take possession of the software
at the outset of the arrangement either because they have no contractual right to do so or because significant penalties preclude them from doing so. Generally, we
recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable 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 recognized in the
quarter earned so long as we have been notified by the OEM that such royalties are due, and provided that all other revenue recognition criteria are met.
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Software arrangements generally include PCS, which includes telephone support and the right to receive unspecified upgrades/enhancements on a when-and-if-
available basis, typically for one to five years. Revenue from PCS is recognized ratably on a straight-line basis over the term that the maintenance service is
provided. When PCS renews automatically, we provide a reserve based on historical experience for contracts expected to be canceled for non-payment. All known
and estimated cancellations are recorded as a reduction to revenue and accounts receivable.
For our software and software-related multiple element arrangements, where customers purchase both software related products and software related services, we
use vendor-specific objective evidence (“VSOE”) of fair value for software and software-related services to separate the elements and account for them separately.
VSOE exists when a company can support the fair value of its software and/or software-related services based on evidence of the prices charged when the same
elements are sold separately. For the undelivered elements, VSOE of fair value is required in order to separate the accounting for 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 as well 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 presentation by allocating VSOE
of fair value of the professional services as professional services and hosting revenue and the residual portion as product and licensing revenue. We generally
determine the percentage-of-completion by comparing the labor hours incurred to-date to the estimated total labor hours required to complete the project. We
consider labor hours to be the most reliable, available measure of progress on these projects. Adjustments to estimates to complete are 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 in the period identified. Significant
judgments and estimates are involved in determining the percent complete of each contract. Different assumptions could yield 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 are compensated in three
ways: (1) fees for up-front setup of the service environment, (2) fees charged on a usage or per transaction basis, and (3) fees charged for on-demand service. Our
up-front setup fees are nonrefundable. We recognize the up-front setup fees ratably over the longer of the contract lives, or the expected lives of the customer
relationships. The usage-based or per transaction fees are due and payable as each individual transaction is processed through the hosting service and is recognized
as revenue in the period the services are provided. The on-demand service fees are recognized ratably over our estimate of the useful life of devices on which the
hosting service is provided.
We enter into multiple-element arrangements that may include a combination of our various software related and non-software related products and services
offerings including software licenses, post contract support ("PCS"), professional services, and our hosting services. In such arrangements, we allocate total
arrangement consideration to software or software-related elements and any non-software element separately based on the selling price hierarchy group following
our policies. Where determined 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
Estimate of Selling Price (“ESP”) for the purposes of allocating the arrangement consideration. We determine ESP for a product or service by considering multiple
factors including, but not limited to, major project groupings, market conditions, competitive landscape, price list and discounting practices. Revenue allocated to
each element is then recognized when the basic revenue recognition criteria are met for each element.
When products are sold through distributors or resellers, title and risk of loss generally passes upon shipment, at which time the transaction is invoiced and the
payment is due. Shipments to distributors and resellers without right of return are recognized as revenue upon shipment, provided all other revenue recognition
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 future sales 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 these estimated
returns is recorded as a reduction of revenue and accounts receivable at the time that the related revenue is recorded. If actual returns differ significantly from our
estimates, such differences could have a material impact on our results of operations for the period in which the actual returns become known.
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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, the consideration 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 expenses generally
include, but are not limited to, expenses related to transportation, lodging and meals. We record shipping and handling costs billed to customers as revenue with
offsetting costs recorded as cost of revenue.
Our revenue recognition policies require management to make significant estimates. Management analyzes various factors, including a review of specific
transactions, historical experience, creditworthiness of customers and current market and economic conditions. Changes in judgments based upon these 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 and liabilities
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 to determine the fair values of assets acquired and liabilities assumed at the date of acquisition, our estimates and
assumptions are inherently uncertain and subject to refinement. As a result, within the measurement period, which is generally one year from the date of
acquisition, we record adjustments to the assets acquired and liabilities assumed against goodwill in the period the amounts are determined. Adjustments identified
subsequent to the measurement period are recorded within Acquisition-related costs, net.
Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience
and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain 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, hosting services, other customer contracts and acquired
developed technologies and patents;
expected costs to develop in-process research and development projects into commercially viable products and the estimated cash flows from the projects
when completed;
the acquired company’s brand and competitive position, as well as assumptions about the period during which the acquired brand will continue to be used 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 to customers, which are
classified as deferred revenue. The estimated fair market value of these obligations is determined and recorded as of the acquisition date.
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We may identify certain pre-acquisition contingencies. If, during the purchase price allocation period, we are able to determine the fair values of a pre-acquisition
contingencies, we will include that amount in the purchase price allocation. If we are unable to determine the fair value of a pre-acquisition contingency at the end
of the measurement period, we will evaluate whether to include an amount in the purchase price allocation based on whether it is probable a liability had been
incurred and whether an amount can be reasonably estimated. Subsequent to the end of the measurement period, any adjustment to amounts recorded for a pre-
acquisition contingency will be included within acquisition-related cost, net in the period in which the adjustment is determined.
Goodwill Impairment Analysis. Goodwill 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 assessed for impairment
at least annually or whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Goodwill is tested for
impairment annually on July 1, the first day of the fourth quarter of the fiscal year. In fiscal year 2017, we elected to early adopt ASU 2017-04, “Simplifying the
Test for Goodwill Impairment” for its annual goodwill impairment test. ASU 2017-04 removes Step 2 of the goodwill impairment test requiring a hypothetical
purchase price allocation. Goodwill impairment, if any, is determined by comparing the reporting unit's fair value to its carrying value. An impairment loss is
recognized in an amount equal to the excess of the reporting unit's carrying value over its fair value, up to the amount of goodwill allocated to the reporting unit.
There is no goodwill impairment for fiscal years 2017 and 2016. See Note 4 to the accompanying consolidated financial statements for the impairment losses
recorded in fiscal year 2018.
For the purpose of testing goodwill for impairment, all goodwill acquired in a business combination is assigned to one or more reporting units. A reporting unit
represents an operating segment or a component within an operating segment for which discrete financial information is available and is regularly reviewed by
segment management for performance assessment and resource allocation. Components of similar economic characteristics are aggregated into one reporting unit
for the purpose of goodwill impairment assessment. Reporting units are identified annually and re-assessed periodically for recent acquisitions or any changes in
segment reporting structure.
Corporate assets and liabilities are allocated to each reporting unit based on the reporting unit’s revenue, total operating expenses or operating income as a
percentage of the consolidated amounts. Corporate debt and other financial liabilities that are not directly attributable to the reporting unit's operations and would
not be transferred to hypothetical purchasers of the reporting units are excluded from a reporting unit's carrying amount.
The fair value of a reporting unit is generally determined using a combination of the income approach and the market approach. For 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 estimate the long-term growth rates based on our most recent views of the long-term outlook for each reporting
unit. Actual results may differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing model and analyzing published rates
for industries relevant to our reporting units to estimate the weighted average cost of capital. We adjust the discount rates for the risks and uncertainty inherent in
the respective businesses and in our internally developed forecasts. For the market approach, we use a valuation technique in which values are derived based on
valuation multiples of comparable publicly traded companies. We assess each valuation methodology based upon the relevance and availability of the data at the
time we perform the valuation and weight the methodologies appropriately.
Long-Lived Assets with Definite-Lives. Our long-lived assets consist principally of technology, customer relationships, internally developed software, land, and
building and equipment. Customer relationships are amortized over their estimated economic lives based on the pattern of economic benefits expected to be
generated from the use of the asset. Other definite-lived assets are amortized over their estimated economic lives using the straight-line method. The remaining
useful lives of long-lived assets are re-assessed periodically at the asset group level for any events and circumstances that may change the future cash flows
expected to be generated from the long-lived asset or asset group.
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Internally developed software consists of capitalized costs incurred during the application development stage, which include costs related design of the software
configuration and interfaces, coding, installation and testing. Costs incurred during the preliminary project stage and post-implementation stage are expensed as
incurred. Internally developed software is amortized over the estimated useful life, commencing on the date when the asset is ready for its intended use. Land,
building and equipment are stated at cost and depreciated 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 accumulated depreciation of sold or retired assets are removed from the accounts and any gain or loss is included in the results of operations for the
period.
Long-lived assets with definite lives are tested for impairment whenever events or changes in circumstances indicate the carrying value of a specific asset or asset
group may not be recoverable. We assess the recoverability of long-lived assets with definite-lives at the asset group level. Asset groups are determined based upon
the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. When the asset group is also a reporting
unit, goodwill assigned to the reporting unit is also included in the carrying amount of the asset group. For the purpose of the recoverability test, we compare the
total undiscounted future cash flows from the use and disposition of the assets with its net carrying amount. When the carrying value of the asset group exceeds the
undiscounted future cash flows, the asset group is deemed to be impaired. The amount of the impairment loss represents the excess of the asset or asset group’s
carrying value over its estimated fair value, which is generally determined based upon the present value of estimated future pre-tax cash flows that a market
participant would expect from use and disposition of the long-lived asset or asset group. See Note 4 for the impairment charges recorded in fiscal year 2018.
Accounting for Stock-Based Compensation. We recognize stock-based compensation expense over the requisite service period, based on the grant date fair value
of the awards and the number of the awards expected to be vested based upon service and performance conditions. The fair value of restricted stock units is
determined based on the number of shares granted and the quoted price of our common stock, and the fair value of stock options is estimated on the date of grant
using the Black-Scholes model. Determining the fair value of share-based awards at the grant date requires judgment, including estimating expected dividends,
share price volatility, forfeiture rates and the number of performance-based restricted stock units expected to be granted. If actual results differ significantly from
these estimates, the actual stock-based compensation expense may significantly differ from our estimates.
Income Taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax bases. This method also requires the recognition of future tax benefits such as net
operating loss carryforwards, to the extent that realization of such benefits is more likely than not after consideration of all available evidence. As the income tax
returns are not due and filed until after the completion of our annual financial reporting requirements, the amounts recorded for the current period reflect estimates
for the tax-based activity for the period. In addition, estimates are often required with respect to, among other things, the appropriate state and foreign income tax
rates to use, the potential utilization of operating loss carry-forwards and valuation allowances required, if any, for tax assets that may not be realizable in the
future. Tax laws and tax rates vary substantially in these jurisdictions, and are subject to change given the political and economic climate. We report and pay
income tax based on operational results and applicable law. Our tax provision contemplates tax rates currently in effect to determine both our current and deferred
tax provisions.
Any significant fluctuation in rates or changes in tax laws could cause our estimates of taxes we anticipate either paying or recovering in the future to change. Such
changes could lead to either increases or decreases in our effective tax rate.
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 paid or the related assets are disposed. We believe the procedures and estimates used in our accounting for income
taxes are reasonable and in accordance with established tax law. The income tax estimates used have 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 temporary differences
are expected to be recovered or settled. With respect to earnings expected to be indefinitely reinvested offshore, we do not accrue tax for the repatriation of such
foreign earnings.
We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the
reversals of existing temporary differences and tax planning strategies. In assessing the need for a valuation allowance, we consider both positive and negative
evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent
to which the evidence may be objectively verified. If positive evidence regarding projected future taxable income, exclusive of reversing taxable temporary
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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 not needed.
As of September 30, 2018 , we have $183.3 million of valuation allowances recorded against all U.S. deferred tax assets and certain foreign deferred tax assets. 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, then we may be
required to recognize these deferred tax assets through the reduction of the valuation allowance which could result in a material benefit to our results of operations
in the period in which the benefit is determined.
We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on
the largest benefit which is more likely than not to be realized upon ultimate settlement.
Loss Contingencies. We are subject to legal proceedings, lawsuits and other claims relating to labor, service and other matters arising in the ordinary course of
business, as discussed in Note 16 of Notes to our Consolidated Financial Statements. On a quarterly basis, we review the status of each significant matter and
assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated,
we accrue a liability for the estimated loss. Significant judgments are required for the determination of probability and the range of the outcomes. Due to the
inherent uncertainties, estimates are based only on the best information available at the time. Actual outcomes may differ from our estimates. As additional
information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions may
have a material impact on our results of operations and financial position.
See Note 2 to the accompanying consolidated financial statements for a description of recently adopted accounting standards.
RECENTLY ADOPTED ACCOUNTING STANDARDS
See Note 2 to the accompanying consolidated financial statements for a description of certain issued accounting standards that have not been adopted and may
impact our financial statements in future reporting periods.
ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
Item 7A.
Quantitative
and
Qualitative
Disclosures
about
Market
Risk
We 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, when appropriate, through the
use of derivative financial instruments.
Exchange Rate Sensitivity
We are exposed to changes in foreign currency exchange rates. Any foreign currency transaction, defined as a transaction denominated in a currency other 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. A change in the value of
the functional currency compared to the foreign currency of the transaction will have either a positive or negative impact on our financial position and results of
operations.
Assets 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 expense items 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 have either a positive
or negative effect on our financial position and results of operations. Historically, our primary exposure has related to transactions denominated 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 at September 30,
2018 would not have a material impact on our revenue, operating results or cash flows in the coming year.
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Periodically, we enter into forward exchange contracts to hedge against foreign currency fluctuations. These contracts may or may not be designated as cash flow
hedges for accounting purposes. We have in place a program which primarily uses forward contracts to offset the risks associated with foreign currency exposures
that arise from transactions denominated in currencies other than the functional currencies of our worldwide operations. The program is designed so that increases
or decreases in our foreign currency exposures are offset by gains or losses on the foreign currency forward contracts. The outstanding contracts are not designated
as cash flow hedges and generally are for periods less than 90 days. The notional contract amount of outstanding foreign currency exchange contracts not
designated as cash flow hedges was $117.1 million at September 30, 2018 . Based on the nature of the transactions for 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 Sensitivity
We are exposed to interest rate risk as a result of our cash and cash equivalents and marketable securities.
At September 30, 2018 , we held approximately $473.5 million of cash and cash equivalents and marketable securities consisting of cash, money-market funds,
bank deposits and a separately managed investment portfolio. Assuming a one percentage point increase in interest rates, our interest income on our investments
classified as cash and cash equivalents and marketable securities would increase by approximately $3.7 million per annum, based on the September 30, 2018
reported balances of our investment accounts.
At September 30, 2018 , we had no outstanding debt exposed to variable interest rates.
Convertible
Debentures
The fair values of our convertible debentures are dependent on the price and volatility of our common stock as well as movements in interest rates. The fair market
values of these debentures will generally increase as the market price of our common stock increases and will decrease as the market price of our common stock
decreases. The fair market values of these debentures will generally increase as interest rates fall and decrease as interest rates rise. The market value and interest
rate changes affect the fair 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 debt obligations. However, increases in the value of our common stock above the stated trigger price for each issuance for a specified period of time may
provide the holders of these debentures the right to convert each bond using a conversion ratio and payment method as defined in the debenture agreement.
The following tables summarizes the fair value and conversion value of our convertible debentures, and the estimated increase in the fair value and conversion
value with a hypothetical 10% increase in the stock price of $17.32 as of September 30, 2018 (dollars in millions):
2.75% 2031 Debentures
1.5% 2035 Debentures
1.0% 2035 Debentures
1.25 % 2025 Debentures
Item 8.
Financial
Statements
and
Supplementary
Data
Nuance Communications, Inc. Consolidated Financial Statements
46
September 30, 2018
Conversion
value
$25.0
$196.5
$430.4
$272.9
Increase to
fair value
$0.1
$9.7
$19.9
$19.1
Increase to
conversion
value
$2.5
$19.7
$43.0
$27.3
Fair value
$46.4
$267.8
$634.1
$361.0
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NUANCE COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Balance Sheets
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
47
Page
48
50
51
52
53
54
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Nuance Communications, Inc.
Burlington, Massachusetts
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Nuance Communications, Inc. (the “Company”) and subsidiaries as of September 30, 2018 and
2017 , the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period
ended September 30, 2018 , and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company and subsidiaries at September 30, 2018 and 2017 , and the results of their
operations and their cash flows for each of the three years in the period ended September 30, 2018 , 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) (“PCAOB”), the Company's internal
control over financial reporting as of September 30, 2018 , 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 20, 2018 expressed an unqualified opinion
thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB” and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2004.
Boston, Massachusetts
November 20, 2018
BDO USA, LLP
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Nuance Communications, Inc.
Burlington, Massachusetts
Opinion on Internal Control over Financial Reporting
We have audited Nuance Communication, Inc.’s (the “Company’s”) internal control over financial reporting as of September 30, 2018 , based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO
criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2018 based on
the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance
sheets of the Company as of September 30, 2018 and 2017 , the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and
cash flows for each of the three years in the period ended September 30, 2018 , and the related notes and our report dated November 20, 2018 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal 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 as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Boston, Massachusetts
November 20, 2018
BDO USA, LLP
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NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues:
Professional services and hosting
Product and licensing
Maintenance and support
Total revenues
Cost of revenues:
Professional services and hosting
Product and licensing
Maintenance and support
Amortization of intangible assets
Total cost of revenues
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Amortization of intangible assets
Acquisition-related costs, net
Restructuring and other charges, net
Impairment of goodwill and other intangible assets
Total operating expenses
(Loss) income from operations
Other income (expense):
Interest income
Interest expense
Other expense, net
(Loss) income before income taxes
(Benefit) provision for income taxes
Net loss
Net loss per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
Year Ended September 30,
2018
2017
2016
(In thousands, except per share amounts)
$
1,049,448 $
976,893 $
684,230
317,983
635,391
327,078
955,329
669,227
324,347
2,051,661
1,939,362
1,948,903
681,516
77,086
58,095
56,873
873,570
1,178,091
305,323
388,305
229,774
91,093
16,101
63,498
170,941
1,265,035
(86,944)
9,327
(137,253)
(1,865)
(216,735)
(56,807)
660,849
74,004
54,094
64,853
853,800
1,085,562
266,097
398,130
166,677
113,895
27,740
61,054
—
1,033,593
51,969
6,922
(156,889)
(21,017)
(119,015)
31,981
$
$
$
(159,928) $
(150,996) $
(0.55) $
(0.55) $
(0.52) $
(0.52) $
291,318
291,318
289,348
289,348
626,168
86,379
54,077
62,876
829,500
1,119,403
271,130
390,866
168,473
108,021
17,166
25,224
—
980,880
138,523
4,438
(132,732)
(8,490)
1,739
14,197
(12,458)
(0.04)
(0.04)
292,129
292,129
See accompanying notes.
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NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Net loss
Other comprehensive income (loss):
Foreign currency translation adjustment
Pension adjustments
Unrealized (loss) gain on marketable securities
Total other comprehensive (loss) income, net
Comprehensive loss
Year Ended September 30,
2018
2017
(In thousands)
2016
$
(159,928) $
(150,996) $
(12,458)
(23,973)
2,644
(192)
(21,521)
13,027
1,774
(9)
14,792
2,421
(1,741)
131
811
$
(181,449) $
(136,204) $
(11,647)
See accompanying notes.
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NUANCE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, less allowances for doubtful accounts of $11,724 and $14,333
ASSETS
Prepaid expenses and other current assets
Total current assets
Marketable securities
Land, building and equipment, net
Goodwill
Intangible assets, net
Other assets
Total assets
Current liabilities:
Current portion of long-term debt
Contingent and deferred acquisition payments
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable (including $416 due to a related party as of September 30, 2018, as more fully described in Note
19)
Accrued expenses and other current liabilities
Deferred revenue
Total current liabilities
Long-term debt
Deferred revenue, net of current portion
Deferred tax liabilities
Other liabilities
Total liabilities
Commitments and contingencies (Note 16)
Stockholders’ equity:
Common stock, $0.001 par value per share; 560,000 shares authorized; 291,504 and 293,938 shares issued and
287,753 and 290,187 shares outstanding, respectively
Additional paid-in capital
Treasury stock, at cost (3,751 shares)
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes.
52
September 30, 2018
September 30, 2017
(In thousands, except
per share amounts)
$
315,963 $
135,579
378,832
98,257
928,631
21,932
155,894
3,504,457
549,508
141,957
592,299
251,981
395,392
88,269
1,327,941
29,844
176,548
3,590,608
664,474
142,508
$
$
5,302,379 $
5,931,923
— $
14,211
84,516
281,644
383,793
764,164
2,185,361
489,177
49,931
96,250
376,121
28,860
94,604
245,901
366,042
1,111,528
2,241,283
423,929
131,320
92,481
3,584,883
4,000,541
291
294
2,597,693
2,629,245
(16,788)
(122,863)
(740,837)
1,717,496
$
5,302,379 $
(16,788)
(101,342)
(580,027)
1,931,382
5,931,923
Table of Contents
NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Treasury Stock
Shares Amount
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Stockholders'
Equity
Balance at September 30, 2015
313,531 $
(In thousands)
314 $2,815,244 3,751 $(16,788) $
(116,945) $ (416,573) $ 2,265,252
Issuance of common stock under employee
stock plans
Cancellation of restricted stock, and
repurchase of common stock at cost for
employee tax withholding
Stock-based compensation
Repurchase and retirement of common
stock
Net issuance of common stock in
connection with acquisitions and
collaboration agreements
Equity portion of convertible debt
issuance/retirement, net of tax effect
Net loss
Other comprehensive loss
11,131
11
16,839
—
—
—
—
16,850
(3,619)
—
(4)
—
(68,666)
162,884
—
—
—
—
(35,753)
(36)
(698,658)
—
—
—
—
—
—
—
(68,670)
162,884
—
(698,694)
6,094
6
89,785
—
—
—
—
89,791
—
—
—
—
—
—
175,564
—
—
—
—
—
—
—
—
—
—
811
—
175,564
(12,458)
(12,458)
—
811
Balance at September 30, 2016
291,384
291 2,492,992 3,751
(16,788)
(116,134)
(429,031)
1,931,330
Issuance of common stock under employee
stock plans
Cancellation of restricted stock, and
repurchase of common stock at cost for
employee tax withholding
Stock-based compensation
Repurchase and retirement of common
stock
Net issuance of common stock in
connection with acquisitions and charitable
contributions
Equity portion of convertible debt
issuance/retirement, net of tax effect
Net loss
Other comprehensive income
10,709
11
17,372
—
—
—
—
17,383
(3,377)
—
(3)
—
(55,129)
160,575
—
—
—
—
(5,797)
(6)
(99,071)
—
—
1,019
1
16,346
—
—
—
—
—
—
—
—
96,160
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(55,132)
160,575
—
(99,077)
—
16,347
—
96,160
(150,996)
(150,996)
14,792
—
14,792
Balance at September 30, 2017
293,938
294 2,629,245 3,751
(16,788)
(101,342)
(580,027)
1,931,382
Prior period adjustment related to early
adoption of ASU 2016-16
Issuance of common stock under employee
stock plans
Cancellation of restricted stock, and
repurchase of common stock at cost for
employee tax withholding
Stock-based compensation
Repurchase and retirement of common
stock
Net loss
Other comprehensive income
—
—
—
—
—
(882)
(882)
10,568
10
18,374
—
—
—
—
18,384
(3,304)
—
(3)
—
(52,333)
138,487
(9,698)
(10)
(136,080)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(52,336)
138,487
—
(136,090)
(159,928)
(159,928)
(21,521)
—
(21,521)
Balance at September 30, 2018
291,504 $
291 $2,597,693 3,751 $(16,788) $
(122,863) $ (740,837) $ 1,717,496
See accompanying notes.
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NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
Stock-based compensation
Non-cash interest expense
Deferred tax (benefit) provision
(Gain) loss on extinguishment of debt
Impairment of goodwill and other intangible assets
Impairment of fixed assets
Other
Changes in operating assets and liabilities, excluding effects of acquisitions:
Accounts receivable
Prepaid expenses and other assets
Accounts payable
Accrued expenses and other liabilities
Deferred revenue
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Payments for business and technology acquisitions, net of cash acquired (including cash payments of
$5,725 to a related party for fiscal 2018, see Note 19)
Purchases of marketable securities and other investments
Proceeds from sales and maturities of marketable securities and other investments
Net cash used in investing activities
Cash flows from financing activities:
Repayment and redemption of debt
Proceeds from issuance of long-term debt, net of issuance costs
Payments for repurchase of common stock
Acquisition payments with extended payment terms
Proceeds from issuance of common stock from employee stock plans
Payments for taxes related to net share settlement of equity awards
Other financing activities
Net cash (used in) provided by financing activities
Effects of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Year Ended September 30,
2018
2017
(In thousands)
2016
$
(159,928) $
(150,996) $
(12,458)
210,316
150,785
49,091
(87,217)
(348)
170,941
10,550
2,230
19,641
(20,389)
(14,315)
26,847
86,222
444,426
234,413
154,272
59,295
4,855
18,565
—
16,351
8,403
(6,349)
(14,661)
(1,207)
9,040
46,886
378,867
231,474
163,828
47,105
(12,014)
4,851
—
2,480
(3,055)
25,450
(9,645)
38,206
27,826
61,747
565,795
(48,845)
(61,835)
(54,883)
(110,170)
(201,995)
323,695
(37,315)
(481,172)
—
(136,090)
(24,842)
18,384
(55,396)
(1,232)
(680,348)
(3,099)
(276,336)
592,299
(113,769)
(332,470)
173,864
(334,210)
(634,055)
837,482
(99,077)
—
17,383
(54,099)
(583)
67,051
(1,029)
110,679
481,620
$
315,963 $
592,299 $
(172,763)
(117,640)
82,285
(263,001)
(511,844)
959,358
(699,472)
—
16,850
(68,636)
(1,371)
(305,115)
4,492
2,171
479,449
481,620
See accompanying notes.
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1. Organization and Presentation
NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nuance Communications, Inc. (“we,” “Nuance,” or “the Company”) is a leading provider of voice recognition and natural language understanding solutions. We
work with companies around the world, from banks and hospitals to airlines, telecommunications carriers, and automotive manufacturers and suppliers, who use
our solutions and technologies to create better experiences for their customers and their users by enhancing the users' experience, increasing productivity and
customer satisfaction. We offer our customers high accuracy in automated speech recognition, capabilities for natural language understanding, dialog and
information management, biometric speaker authentication, text-to-speech, optical character recognition capabilities, and domain knowledge, along with
professional services and implementation support. Using advanced analytics and algorithms, our technologies create personalized experiences and transform the
way people interact with information and the technology around them. We market and sell our solutions and technologies around the world directly through a
dedicated sales force, through our e-commerce website and also through a global network of resellers, including system integrators, independent software vendors,
value-added resellers, distributors, hardware vendors, and telecommunications carriers. We have five reportable segments: Healthcare, Enterprise, Automotive,
Imaging and Other. See Note 20 for a description of each of these segments.
2. Summary of Significant Accounting Policies
Use
of
Estimates
The consolidated financial statements are prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP"), which requires
management to make estimates and assumptions. These estimates, judgments and assumptions can affect the reported amounts in the financial statements and the
footnotes thereto. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, assumptions and judgments.
Significant estimates inherent to the preparation of financial statements include: 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 contingent consideration; accounting for stock-based compensation; accounting for derivative instruments; accounting for income taxes and related
valuation allowances; 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
Consolidation
The consolidated financial statements include our accounts and those of our wholly-owned domestic and foreign subsidiaries. Intercompany transactions and
balances have been eliminated.
Revenue
Recognition
We derive revenue from the following sources: (1) software license agreements, including royalty and other usage-based arrangements, (2) professional services,
(3) hosting services and (4) post-contract customer support ("PCS"). Our hosting services are generally provided through on-demand, usage-based or per
transaction fee arrangements. Generally, we recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee 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 to 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 take possession of the software
at the outset of the arrangement either because they have no contractual right to do so or because significant penalties preclude them from doing so.
Revenue from royalties on sales of our software products by original equipment manufacturers (“OEMs”), where no services are included, is recognized in the
quarter earned so long as we have been notified by the OEM that such royalties are due, and provided that all other revenue recognition criteria are met.
Software arrangements generally include PCS, which includes telephone support and the right to receive unspecified upgrades/enhancements on a when-and-if-
available basis, typically for one to five years. Revenue from PCS is generally recognized ratably on a straight-line basis over the term that the maintenance service
is provided. When PCS renews automatically, we provide a reserve based on historical experience for contracts expected to be canceled for non-payment. All
known and estimated cancellations are recorded as a reduction to revenue and accounts receivable.
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For our software and software-related multiple element arrangements, where customers purchase both software related products and software related services, we
use vendor-specific objective evidence (“VSOE”) of fair value for software and software-related services to separate the elements and account for them separately.
VSOE exists when a company can support the fair value of its software and/or software-related services based on evidence of the prices charged when the same
elements are sold separately. For the undelivered elements, VSOE of fair value is required in order to separate the accounting for 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 as well 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 presentation by allocating VSOE
of fair value of the professional services as professional services and hosting revenue and the residual portion as product and licensing revenue . We generally
determine the percentage-of-completion by comparing the labor hours incurred to-date to the estimated total labor hours required to complete the project. We
consider labor hours to be the most reliable, available measure of progress on these projects. Adjustments to estimates to complete are 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 in the period identified. Significant
judgments and estimates are involved in determining the percentage of completion of each contract. Different assumptions could yield materially different results.
We offer some of our products via a Software-as-a-Service ("SaaS") model also known as a hosting model. In this type of arrangement, we are compensated in
three ways: (1) fees for up-front setup of the service environment, (2) fees charged on a usage or per transaction basis, and (3) fees charged for on-demand service.
Our up-front setup fees are nonrefundable. We recognize the up-front setup fees ratably over the longer of the contract lives or the expected lives of the customer
relationships. The usage-based or per transaction fees are due and payable as each individual transaction is processed through the hosting service and is recognized
as revenue in the period the services are provided. The on-demand service fees are recognized ratably over our estimate of the useful life of devices on which the
hosting service is provided.
We enter into multiple-element arrangements that may include a combination of our various software related and non-software related products and services
offerings including software licenses, PCS, professional services, and our hosting services. In such arrangements, we allocate total arrangement consideration to
software or software-related elements and any non-software element separately based on the selling price hierarchy group following our policies. Where possible,
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 Estimate of Selling Price
(“ESP”) for the purposes of allocating the arrangement consideration. We determine ESP for a product or service by considering multiple factors including, but not
limited to, major project groupings, market conditions, competitive landscape, price list and discounting practices. Revenue allocated to each element is then
recognized when the basic revenue recognition criteria are met for each element.
When products are sold through distributors or resellers, title and risk of loss generally passes upon shipment, at which time the transaction is invoiced and the
payment is due. Shipments to distributors and resellers without right of return are recognized as revenue upon shipment, provided all other revenue recognition
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 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 these estimated
returns is recorded as a reduction of revenue and accounts receivable at the time that the related revenue is recorded. If actual returns differ significantly from our
estimates, such differences could have a material impact on our results of operations for the period in which the actual returns become known.
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, the consideration is
recorded as an operating expense.
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We record reimbursements received for out-of-pocket expenses as revenue, with offsetting costs recorded as cost of revenue. Out-of-pocket expenses generally
include, but are not limited to, expenses related to transportation, lodging and meals. We record shipping and handling costs billed to customers as revenue with
offsetting costs recorded as cost of revenue.
Business
Combinations
We determine and allocate the purchase price of an acquired company to the tangible and intangible assets acquired and liabilities assumed as of the date of
acquisition. Results of operations and cash flows of acquired companies are included in our operating results from the date of acquisition. The purchase price
allocation process requires us to use significant estimates and assumptions, which include:
•
•
•
•
•
•
estimated fair values of intangible assets;
estimated fair values of legal performance commitments to customers, assumed from the acquiree under existing contractual obligations (classified as
deferred 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 contingent consideration is then
adjusted to fair value, with any measurement-period adjustment recorded against goodwill. Adjustments identified subsequent to the measurement period are
recorded within Acquisition-related costs, net.
While we use our best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the
business combination date, our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the measurement period, which is
generally one year from the acquisition date, any adjustment to the assets acquired and liabilities assumed is recorded against goodwill in the period in which the
amount is determined. Any adjustment identified subsequent to the measurement period is included in operating results in the period in which the amount is
determined.
Goodwill
Goodwill 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 assessed for impairment at least annually or whenever
events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Goodwill is tested for impairment annually on July 1,
the first day of the fourth quarter of the fiscal year. In fiscal year 2017, we elected to early adopt ASU 2017-04, “Simplifying the Test for Goodwill Impairment”
for its annual goodwill impairment test. ASU 2017-04 removes Step 2 of the goodwill impairment test requiring a hypothetical purchase price allocation. Goodwill
impairment, if any, is determined by comparing the reporting unit's fair value to its carrying value. An impairment loss is recognized in an amount equal to the
excess of the reporting unit's carrying value over its fair value, up to the amount of goodwill allocated to the reporting unit. There is no goodwill impairment for
fiscal years 2017 and 2016. See Note 4 for the impairment charges recorded in fiscal year 2018.
For the purpose of testing goodwill for impairment, all goodwill acquired in a business combination is assigned to one or more reporting units. A reporting unit
represents an operating segment or a component within an operating segment for which discrete financial information is available and is regularly reviewed by
segment management for performance assessment and resource allocation. Components of similar economic characteristics are aggregated into one reporting unit
for the purpose of goodwill impairment assessment. Reporting units are identified annually and re-assessed periodically for recent acquisitions or any changes in
segment reporting structure.
Corporate assets and liabilities are allocated to each reporting unit based on the reporting unit’ revenue, total operating expenses or operating income as a
percentage of the consolidated amounts. Corporate debt and other financial liabilities that are not directly attributable to the reporting unit's operations and would
not be transferred to hypothetical purchasers of the reporting units are excluded from a reporting unit's carrying amount.
The fair value of a reporting unit is generally determined using a combination of the income approach and the market approach. For the income approach, fair
value is determined based on the present value of estimated future after-tax cash flows, discounted
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future after-tax cash flows and estimate the long-term growth rates based on our most
recent views of the long-term outlook for each reporting unit. Actual results may differ from those assumed in our forecasts. We derive our discount rates using a
capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the weighted average cost of capital. We adjust
the discount rates for the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. For the market approach, we use a
valuation technique in which values are derived based on valuation multiples of comparable publicly traded companies. We assess each valuation methodology
based upon the relevance and availability of the data at the time we perform the valuation and weight the methodologies appropriately.
Long-Lived
Assets
with
Definite-Lives
Our long-lived assets consist principally of technology, customer relationships, internally developed software, land, and building and equipment. Customer
relationships are amortized over their estimated economic lives based on the pattern of economic benefits expected to be generated from the use of the asset. Other
definite-lived assets are amortized over their estimated economic lives using the straight-line method. The remaining useful lives of long-lived assets are re-
assessed periodically for any events and circumstances that may change the future cash flows expected to be generated from the long-lived asset or asset group.
Internally developed software consists of capitalized costs incurred during the application development stage, which include costs related design of the software
configuration and interfaces, coding, installation and testing. Costs incurred during the preliminary project stage and post-implementation stage are expensed as
incurred. Internally developed software is amortized over the estimated useful life, commencing on the date when the asset is ready for its intended use. Land,
building and equipment are stated at cost and depreciated 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 accumulated depreciation of sold or retired assets are removed from the accounts and any gain or loss is included in the results of operations for the
period.
Long-lived assets with definite lives are tested for impairment whenever events or changes in circumstances indicate the carrying value of a specific asset or asset
group may not be recoverable. We assess the recoverability of long-lived assets with definite-lives at the asset group level. Asset groups are determined based upon
the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. When the asset group is also a reporting
unit, goodwill assigned to the reporting unit is also included in the carrying amount of the asset group. For the purpose of the recoverability test, we compare the
total undiscounted future cash flows from the use and disposition of the assets with its net carrying amount. When the carrying value of the asset group exceeds the
undiscounted future cash flows, the asset group is deemed to be impaired. The amount of the impairment loss represents the excess of the asset or asset group’s
carrying value over its estimated fair value, which is generally determined based upon the present value of estimated future pre-tax cash flows that a market
participant would expect from use and disposition of the long-lived asset or asset group. See Note 4 for the impairment charges recorded in fiscal year 2018.
Cash
and
Cash
Equivalents
Cash 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
Marketable securities consist of time deposits and high-quality corporate debt instruments with stated maturities of more than 90 days. Investments are classified as
available-for-sale and are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other
comprehensive income (loss), net of tax.
Accounts
Receivable
Allowances
Allowances for Doubtful Accounts: We record allowances for doubtful accounts for the estimated probable losses on uncollectible accounts receivable. The
allowance is based upon the credit worthiness of our customers, our historical experience, the age of the receivable and current market and economic conditions.
Receivables are written off against these allowances in the period they are determined to be uncollectible.
Allowances for Sales Returns: We record allowances for sales returns from customers for which we have the ability to estimate returns based on historical
experience. The returns allowance is recorded as a reduction to 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.
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For the years ended September 30, 2018 , 2017 and 2016 , the activity related to accounts receivable allowances was as follows (dollars in thousands):
Balance at September 30, 2015
Bad debt provision
Write-offs, net of recoveries
Revenue adjustments, net
Balance at September 30, 2016
Bad debt provisions
Write-offs, net of recoveries
Revenue adjustments, net (a)
Balance at September 30, 2017
Bad debt provisions
Write-offs, net of recoveries
Revenue adjustments, net (b)
Balance at September 30, 2018
Allowance for
Doubtful Accounts
$
9,184 $
3,103
(1,249)
—
11,038
3,792
(497)
—
14,333
2,666
(5,275)
—
$
11,724 $
Allowance
for Sales
Returns
8,172
—
—
(616)
7,556
—
—
27,750
35,306
—
—
(23,982)
11,324
(a) The increase in provisions primarily relates to accommodations made to our customers in connection with our Healthcare transcription service interruption due to the global
NotPetya malware incident (the "2017 Malware Incident")
(b) The decrease in provisions was primarily due to the resolution of the reserves related to the 2017 Malware Incident.
Inventories
Inventories 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. We regularly
review inventory quantities on hand and record a provision for excess and/or obsolete inventory primarily based on future purchase commitments with our
suppliers, and the estimated utility of our inventory as well as other factors including technological changes and new product development. Inventories are included
within Prepaid expenses and other current assets on the Consolidated balance sheets.
Inventories, net of allowances, consisted of the following (dollars in thousands):
Components and parts
Finished products
Total Inventories
Research
and
Development
Expenses
September 30,
2018
September 30,
2017
$
$
6,948 $
610
7,558 $
5,684
404
6,088
Research 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 to sell 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 is reached
shortly before the general release of our software products. Costs incurred after technological feasibility is established have not been material. We expense research
and development costs as incurred.
Acquisition-Related
Costs,
net
Acquisition-related costs include costs related to business and other acquisitions, including potential acquisitions. These costs consist of (i) transition and
integration costs, including retention payments, transitional employee costs and earn-out payments, and other costs related to integration activities; (ii) professional
service fees, including financial advisory, legal, accounting, and
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
other outside services incurred in connection with acquisition activities, and disputes and regulatory matters related to acquired entities; and (iii) fair value
adjustments to acquisition-related contingencies.
The components of acquisition-related costs, net are as follows (dollars in thousands):
Transition and integration costs
Professional service fees
Acquisition-related adjustments
Total
Advertising
Costs
2018
2017
2016
16,067 $
15,224 $
3,450
(3,416)
12,622
(106)
16,101 $
27,740 $
6,070
10,876
220
17,166
$
$
Advertising costs are expensed as incurred and recorded within sales and marketing expenses. The advertising costs capitalized as of September 30, 2018 and 2017
are de minimis. We incurred advertising costs of $ 19.5 million , $ 22.8 million and $ 27.8 million for fiscal years 2018 , 2017 and 2016 , respectively.
Convertible
Debt
We bifurcate the debt and equity (the contingently convertible feature) components of our convertible debt instruments in a manner that reflects our nonconvertible
debt borrowing rate at the time of issuance. The equity components of our convertible debt instruments are recorded within stockholders’ equity with an allocated
issuance premium or discount. The debt issuance premium or discount is amortized to interest expense in our consolidated statement of operations using the
effective interest method over the expected term of the convertible debt.
Income
Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the carrying amounts of assets and
liabilities and their respective tax bases. This method also requires the recognition of future tax benefits related to net operating loss carryforwards, to the extent
that realization of such benefits is more likely than not after consideration of all available evidence. Deferred tax assets and liabilities are measured using the
expected enacted tax rates applicable to the taxable income in the future periods in which those temporary differences are expected to be recovered or settled. We
do not accrue income taxes for foreign earnings that are expected to be indefinitely reinvested.
We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the
reversals of existing temporary differences and tax planning strategies. In assessing the need for a valuation allowance, we consider both positive and negative
evidence related to the likelihood of realization of the deferred tax assets. The weights assigned to the positive and negative evidences are commensurate with the
extent to which the evidence may be objectively verified. If positive evidence regarding projected future taxable income, exclusive of reversing taxable 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 not needed.
As of September 30, 2018 and 2017 , valuation allowances have been established for all U.S. and for certain foreign deferred tax assets which we believe do 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 a valuation
allowance has been established, then we may be required to recognize these deferred tax assets through the reduction of the valuation allowance which could result
in a material benefit to our results of operations in the period in which the benefit is determined.
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accumulated
Other
Comprehensive
Loss
The components of accumulated other comprehensive loss, reflected in the consolidated statements of stockholders’ equity, consisted of the following (dollars in
thousands):
Foreign currency translation adjustment
Unrealized (losses) gains on marketable securities
Net unrealized losses on post-retirement benefits
Accumulated other comprehensive loss
2018
2017
2016
(118,220) $
(94,247) $
(107,274)
(115)
(4,528)
77
(7,172)
(122,863) $
(101,342) $
86
(8,946)
(116,134)
$
$
No income tax provisions or benefits is recorded for foreign currency translation adjustment as the undistributed earnings in our foreign subsidiaries are expected
to be indefinitely reinvested.
Concentration
of
Risk
Financial instruments that are potentially subject to significant concentrations of credit risk principally consist of cash, cash equivalents, marketable securities 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 we maintain 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. No customer accounted for more than 10% of our net accounts receivable balance at September 30, 2018
and 2017 or 10% of our revenue for fiscal years 2018 , 2017 or 2016 .
Foreign
Currency
Translation
The functional currency of a foreign subsidiary is generally the local currency. We translate the financial statements of foreign subsidiaries to U.S. dollars using
month-end exchange rates for assets and liabilities, and average rates for the reporting period for revenues, costs, and expenses. We record translation gains and
losses in accumulated other comprehensive loss as a component of stockholders’ equity. We record net foreign exchange transaction gains and losses resulting
from the conversion of the transaction currency to the functional currency within in other expense, net . Foreign currency transaction losses for fiscal years 2018 ,
2017 and 2016 were $1.1 million , $1.4 million and $1.5 million , respectively.
Financial
Instruments
and
Hedging
Activities
We use forward currency exchange contracts to manage our exposure to fluctuations in foreign currency for certain transactions. In order for instruments to be
designated as hedges, specific criteria must be met, including (i) formal documentation must exist for both the hedging relationship and our risk management
objectives and strategies for undertaking the hedging activities, (ii) at the inception and on an ongoing basis, the hedging relationship is expected to be highly
effective in offsetting changes in fair value attributed to the hedged risk during the period that the hedge is designated, and (iii) an assessment of effectiveness is
required whenever financial statements or earnings are reported.
The effective portion of changes in the fair values of contracts designated as cash flow hedges is recorded in equity as a component of accumulated other
comprehensive income (loss) until the hedged item effects earnings. Once the underlying forecasted transaction is realized, the changes of fair vales of instruments
designated as hedges reclassified from accumulated other comprehensive loss to the statement of operations, in the appropriate income statement line items. Any
ineffective portion of the instruments designated as cash flow hedges is recognized in current earnings. We report cash flows arising from derivative financial
instruments designated as fair value or cash flow hedges consistent with the classification of the cash flows from the underlying hedged items that these derivatives
are hedging.
No forward exchange contracts are designated as hedges for fiscal year 2018 , 2017 , or 2016 . Changes in the fair values of the forward currency exchange
contracts are recorded within other expense, net . Cash flows related to investments and settlements of forward currency exchange contracts are included within
cash flows from investing activities.
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Stock-Based
Compensation
NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We recognize stock-based compensation expense over the requisite service period, based on the grant date fair value of the awards and the number of the awards
expected to be vested based upon service and performance conditions, net of forfeitures. The fair value of restricted stock units is determined based on the number
of shares granted and the quoted price of our common stock, and the fair value of stock options is estimated on the date of grant using the Black-Scholes model.
Historically, we recognized excess tax benefit within Additional Paid-in Capital to the extent that the benefit was utilized to reduce current tax payables. We record
any tax effect related to stock-based awards through the consolidated statements of operations. Excess tax benefits are recognized as deferred tax assets upon
settlement and are subject to regular review for valuation allowance.
Net
Loss
Per
Share
Basic net loss or income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share
is computed using the weighted-average number of common shares, giving effect to potentially dilutive securities outstanding during the period. Potentially
dilutive securities consist of stock options, restricted stock units, contingently issuable shares under earn-out agreements, and potential issuance of stock upon
conversion of our convertible debentures, as more fully described in Note 9 . In the event of conversion, each convertible debenture entitles the holder to receive in
cash the principal amount with any accrued interest, and in cash or common stock, at our election, any excess of conversion value over the principal amount plus
accrued interest. Therefore, only the shares of common stock potentially issuable upon conversion, if any, are considered dilutive to the weighted average common
shares calculation.
For fiscal year 2018 , 2017 and 2016 , respectively, 9.1 million , 7.8 million , and 8.8 million shares of common stock equivalent securities were excluded from the
computation of diluted net loss per share as the inclusion would be anti-dilutive due to the net loss reported for these periods.
Recently
Adopted
Accounting
Standards
In October 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-16, "Income Taxes (Topic 740): Intra-
Entity Transfers of Assets Other Than Inventory" ("ASU 2016-16"), which requires income tax consequences of inter-company transfers of assets other than
inventory to be recognized when the transfer occurs. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted.
We early adopted the guidance during the first quarter of fiscal year 2018. As a result, deferred tax liabilities of $0.9 million arising from inter-company transfers
in prior years were recognized and recorded against the beginning balance of accumulated deficit in the first quarter of fiscal year 2018. The adoption of the
guidance did not have a material impact on our consolidated financial statements for any period presented.
Issued
Accounting
Standards
Not
Yet
Adopted
From time to time, new accounting pronouncements are issued by the FASB and are adopted by us as of the specified effective dates. Unless otherwise discussed,
such pronouncements did not have or will not have a significant impact on our consolidated financial position, results of operations or cash flows, or do not apply
to our operations.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers: Topic 606" ("ASU 2014-09"), under which revenue is recognized
when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive for those goods or services.
ASU 2014-09 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 the
revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of
variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 permits two
methods of adoption: (i) retrospective to each prior reporting period presented; or (ii) retrospective with the cumulative effect of initially applying the guidance
recognized at the date of initial application. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the
Effective Date, which deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December 15, 2017, with early
adoption permitted but not earlier than the original effective date. ASU 2014-09 is effective for us beginning on October 1, 2018 and we plan to adopt ASU 2014-
09 using the cumulative catch-up transition method, with a cumulative adjustment to retained earnings as opposed to retrospectively adjusting prior periods.
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In the first quarter of fiscal 2017, we commenced a project to assess the potential impact of the new standard on our consolidated financial statements and related
disclosures. This project also included the assessment and enhancement of our internal processes, controls and systems to address the new standard.
While we are continuing to assess all potential impacts of ASU 2014-09, we currently believe the most significant impact relates to our accounting for
arrangements that include term-based software licenses bundled with other performance obligations including (i) maintenance and support and (ii) professional
services. A significant number of our Healthcare and Imaging customer contracts include term-based software licenses bundled with other performance
obligations. Under current GAAP, the revenue attributable to these software licenses is recognized ratably over the term of the arrangement because vendor-
specific objective evidence ("VSOE") does not exist for the undelivered maintenance and support element as it is not sold separately. Under ASU 2014-09, the
requirement to have VSOE for undelivered elements to enable the separation of revenue for the delivered software licenses is eliminated. Accordingly, under the
new standard we will be required to recognize term-based software revenue as control is transferred and based upon the amount proportionally allocated to the
term-based software license from the contract transaction price. We do not currently expect ASU 2014-09 to have a significant effect on the timing of revenue
related to our renewal maintenance, professional services and cloud offerings.
We currently expect to record a pre-tax cumulative adjustment to decrease deferred revenues by approximately $80 million to $110 million upon the adoption. The
adjustment primarily relates to the timing of revenue recognition, as noted above, and the allocation of the transaction price to the performance obligations on a
relative standalone selling price basis.
Additionally, the new guidance requires direct and incremental costs to acquire a contract be capitalized and amortized over the pattern of transfer of the goods and
services to which the asset relates, whereas we expense sales commissions as incurred under the existing guidance. We expect to record a pre-tax cumulative
adjustment to capitalize sales commission costs of approximately $35 million to $45 million upon the adoption, with a corresponding decrease to retained earnings.
The tax effect of the adjustments have not been reflected in the amounts. We expect to complete our analysis for the impact of the implementation by December
31, 2018.
Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases" ("ASU 2016-02"), which will become effective for fiscal years beginning after December 15, 2018
and interim periods therein, with early adoption permitted. The guidance requires lessees to recognize on the balance sheet a right-of-use asset, representing its
right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The accounting applied by the lessor is
largely unchanged from that applied under the existing lease standard. The guidance also requires qualitative and quantitative disclosures designed to assess the
amount, timing, and uncertainty of cash flows arising from leases. The guidance requires the use of a modified retrospective transition approach, which includes a
number of optional practical expedients that entities may elect to apply. We are currently evaluating the impact of the guidance on our consolidated financial
statements and related processes and internal controls. While we expect the implementation to result in the recognition of right-of-use assets and lease liabilities for
most of our operating lease commitments, we do not expect the guidance to have material impact on our consolidated statements of cash flows.
In August 2018, the FASB issued Accounting Standards Updates ("ASU") 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", which is effective for fiscal year
beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The guidance requires that implementation costs
related to a hosting arrangement that is a service contract be capitalized and amortized over the term of the hosting arrangement, starting when the module or
component of the hosting arrangement is ready for its intended use. The guidance will be applied retrospectively to each period presented. We do not expect the
implementation to have a material impact on our consolidated financial statements.
Other Accounting Pronouncements
In January 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income ("AOCI"), which is effective for fiscal years beginning after December 15, 2018 and interim periods therein, with
early adoption permitted. The guidance gives entities the option to reclassify to retained earnings the tax effects resulting from the Tax Cuts and Jobs Act ("TCJA")
related to items in AOCI. The new guidance may be applied retrospectively to each period in which the effect of the Act is recognized in the period of adoption.
We do not expect the implementation to have a material impact on our consolidated financial statements.
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-
15"), which is effective for fiscal years beginning after December 15, 2017 and the interim periods therein, with early adoption permitted. The guidance requires
cash flows with multiple characteristics to be classified using a three-step process, including (i) determining whether explicit guidance is applicable, (ii) separating
each identifiable source or use of cash flows, and (iii) determining the predominant source or use of cash flows when the source or use of cash flows cannot be
separately identifiable. The guidance will be applied retrospectively to each period presented. We do not expect the implementation to have a material impact on
our consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). ASU 2016-
01 amends the guidance on the classification and measurement of financial instruments. Although ASU 2016-01 retains many current requirements, it significantly
revises accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial
liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments and is effective
for us in the first quarter of fiscal year 2019. Based on the composition of our investment portfolio, we do not believe the adoption of ASU 2016-01 will have a
material impact on our consolidated financial statements.
3. Business Acquisitions
As part of our business strategy, we have acquired, and may acquire in the future, certain businesses and technologies primarily to expand our products and service
offerings.
Fiscal
Year
2018
Acquisitions
In fiscal year 2018, we completed several acquisitions in our Healthcare and Automotive segments for a total consideration of $129.5 million , including $114.6
million in cash, $2.0 million estimated fair value for future contingent payments, and effective settlement of preexisting relationship with the acquiree of $12.9
million . As a result, we recognized goodwill of $62.9 million , including immaterial measurement-period adjustments through September 30, 2018 , and other
intangible assets of $60.8 million , with a weighted average life of 6.0 years .
We are still finalizing the fair value estimates of assets acquired and liabilities assumed in these acquisitions. These fair value estimates are subject to change as we
obtain additional information during the measurement periods up to one year from the acquisitions. There were no significant changes to the fair value estimates
during fiscal year 2018.
We have not furnished pro forma financial information or the acquired entities' results of operations for the post-acquisition periods, as such acquisitions were not
material, individually or in the aggregate, to our consolidated financial statements.
Fiscal
Year
2017
Acquisitions
In fiscal year 2017, we acquired several businesses in our Enterprise, Healthcare and Other segments for a total consideration of $97.4 million , including $75.7
million in cash, issuance of 0.8 million shares of our common stock valued at $13.4 million , and $8.3 million estimated fair value for future contingent payments.
As a result, we recognized goodwill of $62.3 million and other intangible assets of $39.1 million , with a weighted average life of 5.9 years . The results of
operations of the acquired entities have been included within our consolidated results of operations from the acquisition dates. Such acquisitions were not
significant individually or in the aggregate to our consolidated financial statements.
Fiscal
Year
2016
Acquisitions
Acquisition
of
TouchCommerce,
Inc.
In August 2016, we acquired all of the outstanding stock of TouchCommerce. TouchCommerce is a provider of omni-channel solutions to engage their customers
on any device through online chat, guides, personalized content, and other automated tools, resulting in enhanced customer experience, increased revenue and
reduced support costs. We expected this acquisition to expand our customer care solutions with a range of new digital engagement offerings, including live chat,
customer analytics and personalization solutions within our Enterprise segment. We expected to be able to provide an end-to-end engagement platform that merges
intelligent self-service with assisted service to increase customer satisfaction, strengthen customer loyalty and improve business results. The aggregate
consideration for this transaction was $217.5 million , which included $132.5 million paid in cash and $85.0 million paid in our common stock. The acquisition
was a stock purchase and the goodwill resulting from this acquisition is not deductible for tax purposes. The results of operations of TouchCommerce was included
within our Enterprise segment from the acquisition date.
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the final allocation of the purchase consideration for our TouchCommerce acquisition is as follows (dollars in thousands):
TouchCommerce
Purchase consideration:
Cash
Common stock (a)
Deferred acquisition payment
Total purchase consideration
Allocation of the purchase consideration:
Cash
Accounts receivable (b)
Goodwill
Identifiable intangible assets (c)
Other assets
Total assets acquired
Current liabilities
Deferred tax liability
Deferred revenue
Other long-term liabilities
Total liabilities assumed
Net assets acquired
$
$
$
$
113,008
85,000
19,458
217,466
137
14,897
117,576
110,800
1,521
244,931
(4,134)
(19,913)
(2,784)
(634)
(27,465)
217,466
5,749,807 shares of our common stock valued at $14.78 per share were issued at closing.
Accounts receivable have been recorded at their estimated fair values and the fair value reserve was not material.
(a)
(b)
(c) The following are the identifiable intangible assets acquired and their respective weighted average useful lives, as determined based on preliminary
valuations (dollars in thousands):
Core and completed technology
Customer relationships
Trade names
Total
TouchCommerce
Weighted
Average
Life
(Years)
6.0
10.0
5.0
Amount
26,000
81,600
3,200
110,800
$
$
Other
Fiscal
Year
2016
Acquisitions
During fiscal year 2016, we acquired several businesses in our Healthcare segment for a total consideration of $50.4 million , including an estimated fair value for
future contingent payments. The results of operations of these acquisitions have been included in our financial results since their respective acquisition dates. Such
acquisitions were not significant individually or in the aggregate to our consolidated financial statements.
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4. Goodwill and Intangible Assets
NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The changes in the carrying amount of goodwill for our reportable segments for fiscal years 2018 and 2017 were as follows (in thousands):
Healthcare
Enterprise
Imaging
Balance as of September 30, 2016
$
1,381,076 $
653,368 $
257,038 $
Acquisitions
Purchase accounting adjustments
Effect of foreign currency translation
32,985
14,415
(49)
4,322
(463)
6,152
—
—
754
Mobile
1,217,397 $
13,660
—
9,953
Balance as of September 30, 2017
1,418,334
673,472
257,792
1,241,010
Acquisitions
Purchase accounting adjustments
Effect of foreign currency translation
Reorganization (Note 19)
Impairment charge (a)
14,936
(705)
(2,240)
—
—
—
—
(2,116)
11,991
—
—
—
(440)
—
—
—
2,697
5,344
Automotive
Other
— $
— $
—
—
—
—
50,193
(3,275)
(7,424)
—
—
—
—
—
—
(1,340)
Total
3,508,879
61,060
(512)
21,181
3,590,608
65,129
(1,283)
(8,216)
—
(1,249,051)
1,080,453
156,607
—
—
(141,781)
(141,781)
Balance as of September 30, 2018
$
1,430,325 $
683,347 $
257,352 $
— $
1,119,947 $
13,486 $
3,504,457
(a) Represents accumulated impairment charge as of September 30, 2018 .
Intangible assets consist of the following as of September 30, 2018 and 2017 , which includes licensed technology with a net book value of $47.6 million and $67.3
million , respectively (dollars in thousands):
September 30, 2018
Customer relationships
Technology and patents
Trade names, trademarks, and other
Total
$
$
765,571 $
327,695
57,809
(372,121) $
(189,344)
(40,102)
1,151,075 $
(601,567) $
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying Amount
393,450
(a)
138,351
17,707
549,508
Weighted Average
Remaining Life
(Years)
6.3
3.8
2.2
(a) As more fully described below, the balance as of September 30, 2018 reflected impairment charges of $29.2 million related to Mobile Operator Services and Devices
intangible assets that we recorded during the fourth quarter of fiscal year 2018.
September 30, 2017
Customer relationships
Technology and patents
Trade names, trademarks, and other
Total
$
$
790,846 $
447,119
58,923
(338,511) $
(264,562)
(29,341)
1,296,888 $
(632,414) $
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying Amount
452,335
182,557
29,582
664,474
Weighted Average
Remaining Life
(Years)
7.2
4.6
2.9
6.3
Amortization expense for acquired technology and patents is included in the cost of revenue in the accompanying statements of operations and was $56.9 million ,
$64.9 million and $62.9 million in fiscal 2018 , 2017 and 2016 , respectively. Amortization expense for customer relationships, trade names, trademarks, and other,
and non-competition agreements is included in operating expenses and was $91.1 million , $113.9 million and $108.0 million in fiscal 2018 , 2017 and 2016 ,
respectively.
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Estimated amortization expense for each of the five succeeding years as of September 30, 2018 , is as follows (in thousands):
Year Ending September 30,
2019
2020
2021
2022
2023
Thereafter
Total
Interim Impairment Analysis
Cost of Revenue
Other Operating
Expenses
Total
$
41,444 $
82,384 $
36,303
27,960
19,466
10,131
3,047
74,500
68,156
61,854
48,701
75,562
123,828
110,803
96,116
81,320
58,832
78,609
$
138,351 $
411,157 $
549,508
Effective in the second quarter of fiscal year 2018, our Automotive business, which was previously included within our former Mobile segment, became a
standalone operating segment. In addition, we moved our Dragon TV business from our former Mobile operating segment into our Enterprise operating segment.
As a result of the reorganization, the original Mobile reporting unit was separated into three discrete lines of business - Automotive, Dragon TV, and Devices. We
assigned $1,080.5 million , $12.0 million , and $36.0 million of goodwill to Automotive, Dragon TV and Devices, respectively, based on their relative fair values
as of March 31, 2018, and assessed the assigned goodwill for impairment by comparing each component’s fair value to its carrying amount. The fair values of
Automotive and Dragon TV significantly exceeded their carrying amounts. However, the carrying value of Devices exceeded its fair value by $35.1 million due to
the standalone multi-year operating plan reflecting the ongoing consolidation of our handset manufacturer customer base and continued erosion of our penetration
of the remaining market. As a result, we recorded a $35.1 million goodwill impairment for the second quarter of fiscal 2018. After the impairment charge, the
goodwill assigned to Devices as of March 31, 2018 was immaterial. The reorganization did not result in any impairment charge of other intangible assets.
Also during the second quarter of fiscal 2018, our Subscriber Revenue Services ("SRS") reporting unit, originally included within our former Mobile operating
segment, recorded significantly lower revenue and profitability due to market disruptions in certain markets that we serve. Our SRS business provides value-added
services to mobile operators in emerging markets, primarily in India and Brazil. These markets had experienced dramatic disruption as a result of accelerated
change in competition and business models for our mobile operator customers. Specifically, the rapid shift away from a model where voice, data and text are
offered separately toward unlimited bundled services at considerably lower costs has significantly reduced mobile operators’ demand for our services. This reduced
demand materially impacted our future expectations for SRS revenues. As a result, executive management performed an updated strategic assessment and reduced
the long-term growth rates and profitability contemplated in SRS's multi-year operating plan. We concluded that these financial results coupled with the rapid
market shifts being experienced in the industry were factors that represented impairment indicators, triggering a review of goodwill and indefinite-lived intangible
assets for impairment during the second quarter of fiscal 2018. Based on the result of the impairment assessment, the carrying value of SRS exceeded its fair value
by $94.3 million . In addition, we recorded an $8.5 million deferred tax benefit related to SRS’s goodwill, which is amortized over time for tax purposes, and
therefore increased the impairment charge by the same amount. As a result, we recorded a goodwill impairment charge of $102.8 million related to SRS for the
second quarter of fiscal 2018. After the impairment charge, goodwill assigned to SRS was $17.8 million as of March 31, 2018. The assessment did not result in any
impairment charge of other intangible assets.
The fair value of a reporting unit is generally determined using a combination of the income approach and the market approach, where the income approach is
weighted 50% and the market approach 50%. The fair values of Devices and Dragon TV, however, were determined solely based upon the income approach due to
the lack of comparable public companies or comparable acquisitions.
Wind-down of Devices and Mobile Operator Services and Annual Goodwill Impairment Analysis
During the fourth quarter of fiscal 2018, in connection with our strategic business review announced in our earnings release issued on May 9, 2018, we restructured
our SRS business by separating the voicemail transcription services business (“Voice-to-Text”), which will continue to operate as part of the Other Segment, and
commenced a wind-down of the SRS Mobile Operator Services in India and Brazil, and our Devices businesses. As a result, we revised our multi-year operating
plans of Mobile Operator Services and Devices, as part of our fiscal 2019 budgeting process, to reflect a significant decline in revenue and operating income. The
wind-down decision has resulted in significantly lower estimated future cash flows over a considerably shorter time horizon, which triggered a review of goodwill
and long-lived asset groups for impairment.
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We first assessed the long-lived asset groups within the businesses for impairment, and then compared a reporting unit’s carrying amount after the long-lived asset
group impairment, if any, with its estimated fair value. Mobile Operator Services and Voicemail-to-Text, which were included within the former SRS reporting
unit, were assessed for the impairment of goodwill and long-lived asset groups separately. For the purpose of the goodwill impairment assessment, total goodwill
of the former SRS reporting unit was assigned to Mobile Operator Services and Voice-to-text services based on their relative fair values as of July 1, 2018. As a
result, $3.4 million of goodwill was assigned to Mobile Operator Services and $13.5 million goodwill was assigned to Voicemail-to-Text.
As a result of the impairment review, we recorded $15.0 million impairment charge for Devices for the fourth quarter of fiscal year 2018, including $7.6 million
related to acquired trade names and customer relationships, $0.8 million related to acquired technology assets, $6.2 million related to fixed assets, and $0.4 million
related to its remaining goodwill; additionally, we recorded $25.1 million impairment charge for our Mobile Operator Services for the fourth quarter of fiscal year
2018, including $12.9 million related to acquired trade names and customer relationships, $7.9 million related to acquired technology assets, $0.9 million related to
fixed assets, and $3.4 million related to goodwill.
For the annual goodwill impairment analysis, the estimated fair value of each of Healthcare, Enterprise, Automotive, Imaging and Voice-to-Text significantly
exceeded their carrying amounts. The fair value of a reporting unit is generally determined using a combination of the income approach and the market approach,
where the income approach is weighted 50% and the market approach 50%.
Determining the fair value of a long-lived asset group or a reporting unit requires the use of significant estimates and assumptions, all of which we believe are
reasonable but nevertheless inherently uncertain. These estimates and assumptions include revenue growth rates and operating margins used to estimate future cash
flows, risk-adjusted discount rates, future economic and market conditions, and the use of market comparables. Also, if we experience lower-than-expected growth
or fail to sustain our profitability due to changing market dynamics, competition or technological obsolescence, it could adversely impact the long-term
assumptions used in our impairment analysis. Such changes in assumptions and estimates may result in additional impairment of our goodwill and/or other long-
lived assets, which could materially impact our future results of operations and financial conditions. Additionally, as we continue our product portfolio review and
implement organizational changes to better align with our long-term strategies, decisions from such efforts may trigger additional impairment reviews of goodwill
and other long-lived assets, which may result in additional impairment charges in the future periods.
5. Accounts Receivable
Accounts receivable, net consisted of the following (in thousands):
Trade accounts receivable
Unbilled accounts receivable under long-term contracts
Gross accounts receivable
Less: allowance for doubtful accounts
Less: allowance for sales returns
Accounts receivable, net
68
September 30, 2018
$
$
368,467 $
33,413
401,880
(11,724)
(11,324)
378,832 $
September 30, 2017
417,516
27,515
445,031
(14,333)
(35,306)
395,392
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. Land, Building and Equipment, Net
Land, building and equipment, net consisted of the following (dollars in thousands):
Land
Building
Machinery and equipment
Computers, software and equipment
Leasehold improvements
Furniture and fixtures
Construction in progress
Subtotal
Less: accumulated depreciation
Land, building and equipment, net
Useful Life (In
Years)
September 30, 2018
— $
30
3-5
3-5
2-15
5-7
—
2,400 $
5,409
164,089
183,904
37,393
18,322
2,088
413,605
(257,711)
$
155,894 $
September 30, 2017
2,400
5,456
144,130
187,732
34,478
19,171
9,121
402,488
(225,940)
176,548
As of September 30, 2018 and 2017 , the net book value of capitalized internal-use software costs was $14.5 million and $27.0 million , respectively, which are
included within computers, software and equipment and construction in progress.
Depreciation expense for fiscal years 2018 , 2017 and 2016 was $62.4 million , $55.7 million and $60.6 million , respectively, which included amortization
expense of $11.0 million , $11.9 million and $12.7 million , respectively, for internally developed software costs.
7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
Compensation
Accrued interest payable
Cost of revenue related liabilities
Consulting and professional fees
Facilities related liabilities
Sales and marketing incentives
Sales and other taxes payable
Other
Total
September 30, 2018
$
181,992 $
September 30, 2017
159,951
21,326
32,667
21,441
5,340
2,904
6,602
9,372
$
281,644 $
26,285
20,124
12,649
7,158
3,655
3,125
12,954
245,901
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8. Deferred Revenue
NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred maintenance revenue consists of prepaid fees received for post-contract customer support for our products, including telephone support and the right to
receive unspecified upgrades/updates on a when-and-if-available basis. Unearned revenue includes fees for up-front set-up of the service environment; fees
charged for on-demand service; 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 consisted of the following (dollars in thousands):
Current Liabilities:
Deferred maintenance revenue
Unearned revenue
Total current deferred revenue
Long-term Liabilities:
Deferred maintenance revenue
Unearned revenue
Total long-term deferred revenue
9. Debt
At September 30, 2018 and 2017 , we had the following borrowing obligations (dollars in thousands):
5.625% Senior Notes due 2026, net of deferred issuance costs of $5.1 million and $5.7 million, respectively.
Effective interest rate 5.625%.
5.375% Senior Notes due 2020, net of deferred issuance costs of $1.2 million and $2.3 million, respectively, and
unamortized premium of $- and $1.0 million, respectively. Effective interest rate 5.375%.
6.000% Senior Notes due 2024, net of deferred issuance costs of $1.8 million and $2.1 million, respectively.
Effective interest rate 6.000%.
1.00% Convertible Debentures due 2035, net of unamortized discount of $116.9 million and $140.9 million,
respectively, and deferred issuance costs of $5.6 million and $6.9 million, respectively. Effective interest rate
5.622%.
September 30,
2018
September 30,
2017
$
$
$
$
160,146 $
223,647
383,793 $
59,800 $
429,377
489,177 $
162,958
203,084
366,042
60,298
363,631
423,929
September 30, 2018
494,915
$
September 30, 2017
494,298
$
298,759
298,220
553,973
448,630
297,910
528,690
376,121
253,054
2.75% Convertible Debentures due 2031, net of unamortized discount of $1.5 million and deferred issuance costs
46,568
of $0.1 million as of September 30, 2017. Effective interest rate 7.432%.
1.25% Convertible Debentures due 2025, net of unamortized discount of $82.4 million and $92.7 million,
263,863
respectively, and deferred issuance costs of $3.7 million and $4.3 million, respectively. Effective interest rate
5.578%.
1.50% Convertible Debentures due 2035, net of unamortized discount of $32.8 million and $42.5 million,
229,906
219,875
respectively, and deferred issuance costs of $1.1 million and $1.5 million, respectively. Effective interest rate
5.394%.
Deferred issuance costs related to our Revolving Credit Facility
Total debt
Less: current portion
Total long-term debt
(843)
2,185,361
—
$
2,185,361 $
(1,174)
2,617,404
376,121
2,241,283
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the maturities of our borrowing obligations as of September 30, 2018 (dollars in thousands):
Fiscal Year
2019
2020
2021
2022
2023
Thereafter
Total before unamortized discount
Less: unamortized discount and issuance costs
Total long-term debt
$
Convertible
Debentures (1)
Senior Notes
Total
— $
—
—
310,463
676,488
350,000
1,336,951
(242,641)
— $
300,000
—
—
—
800,000
1,100,000
(8,949)
—
300,000
—
310,463
676,488
1,150,000
2,436,951
(251,590)
$
1,094,310 $
1,091,051
$
2,185,361
(1) Pursuant to the terms of each convertible instrument, holders have the right to redeem the debt on specific dates prior to maturity. The repayment schedule above assumes
that payment is due on the next redemption date after September 30, 2018 .
5.625%
Senior
Notes
due
2026
In December 2016, we issued $500.0 million aggregate principal amount of 5.625% Senior Notes due on December 15, 2026 (the "2026 Senior Notes") in a private
placement. The proceeds from the 2026 Senior Notes were approximately $493.8 million , net of issuance costs, and we used the proceeds to repurchase a portion
of our 2020 Senior Notes. The 2026 Senior Notes bear interest at 5.625% per year, payable in cash semi-annually in arrears.
The 2026 Senior Notes are unsecured senior obligations and are guaranteed on an unsecured senior basis by certain of our domestic subsidiaries ("Subsidiary
Guarantors"). The 2026 Senior Notes and the guarantees rank equally in right of payment with all of our and the Subsidiary Guarantors’ existing and future
unsecured senior debt and rank senior in right of payment to all of our and the Subsidiary Guarantors’ future unsecured subordinated debt. The 2026 Senior Notes
and guarantees effectively rank junior to all our secured debt and that of the Subsidiary Guarantors to the extent of the value of the collateral securing such debt
and to all liabilities, including trade payables, of our subsidiaries that have not guaranteed the 2026 Senior Notes.
At any time before December 15, 2021, we may redeem all or a portion of the 2026 Senior Notes at a redemption price equal to 100% of the aggregate principal
amount of the 2026 Senior 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 after December 15, 2021, we may redeem all or a portion of the 2026 Senior Notes at certain redemption prices expressed as percentages of the principal
amount, plus accrued and unpaid interest to, but excluding, the redemption date. At any time and from time to time before December 15, 2021, we may redeem up
to 35% of the aggregate outstanding principal amount of the 2026 Senior Notes with the net cash proceeds received by us from certain equity offerings at a price
equal to 105.625% of the aggregate principal amount, plus accrued and unpaid interest to, but excluding, the redemption date, provided that the redemption occurs
no later than 120 days after the closing of the related equity offering, and at least 50% of the original aggregate principal amount of the 2026 Senior Notes remains
outstanding immediately thereafter.
Upon the occurrence of certain asset sales or a change in control, we must offer to repurchase the 2026 Senior Notes at a price equal to 100% in the case of an asset
sale, 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.
5.375%
Senior
Notes
due
2020
On August 14, 2012 , we issued $700.0 million aggregate principal amount of 5.375% Senior Notes due on August 15, 2020 in a private placement. The net
proceeds were approximately $689.1 million , net of issuance costs, and bear interest at 5.375% per year, payable in cash semi-annually in arrears. On October 22,
2012, we issued, in a private placement, an additional $350.0 million aggregate principal amount of our 5.375% Senior Notes due 2020 (collectively the "Notes").
The Notes were issued pursuant to the indenture agreement dated August 14, 2012. 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 Subsidiary
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Guarantors. The Notes and Guarantees rank equally in right of payment with all of our and the Subsidiary Guarantors' existing and future unsecured senior debt
and rank senior in right of payment to all of our and the Subsidiary Guarantors' future unsecured subordinated debt. The Notes and Guarantees effectively rank
junior to all secured debt of our and the Subsidiary Guarantors to the extent of the value 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, we may redeem all or a portion of the Notes at certain redemption prices expressed as percentages of the principal amount, plus accrued and unpaid
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 asset sale, 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.
In January 2017, we repurchased $600.0 million in aggregate principal amount of our 2020 Senior Notes using cash and cash equivalents and the net proceeds from
our 2026 Senior Notes issued in December 2016. As a result, we recorded an extinguishment loss of $18.6 million in fiscal year 2017.
In September 2018, we repurchased $150.0 million in aggregate principal amount of our 2020 Senior Notes at par. As a result, we wrote off the remaining
unamortized premium and deferred issuance costs related to the repayment and recorded an extinguishment gain of $0.3 million in fiscal year 2018. Following this
activity, $300.0 million in aggregate principal amount of our 2020 Senior Notes remains outstanding as of September 30, 2018 .
6.0%
Senior
Notes
due
2024
In June 2016 , we issued $300.0 million aggregate principal amount of 6.0% Senior Notes due on July 1, 2024 (the "2024 Senior Notes") in a private placement.
The proceeds from the 2024 Senior Notes were approximately $297.5 million , net of issuance costs. The 2024 Senior Notes bear interest at 6.0% per year, payable
in cash semi-annually in arrears.
The 2024 Senior Notes are unsecured senior obligations and are guaranteed on an unsecured senior basis by our Subsidiary Guarantors. The 2024 Senior Notes and
the guarantees rank equally in right of payment with all of our and the Subsidiary Guarantors’ existing and future unsecured senior debt, including our obligations
and those of each such Subsidiary Guarantor under our senior credit facility, and rank senior in right of payment to all of our and the Subsidiary Guarantors’ future
unsecured subordinated debt. The 2024 Senior Notes and guarantees effectively rank junior to all our secured debt and that of the Subsidiary Guarantors to the
extent of the value of the collateral securing such debt and to all liabilities, including trade payables, of our subsidiaries that have not guaranteed the 2024 Senior
Notes.
At any time before July 1, 2019 , we may redeem all or a portion of the 2024 Senior Notes at a redemption price equal to 100% of the aggregate principal amount
of the 2024 Senior 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
after July 1, 2019 , we may redeem all or a portion of the 2024 Senior Notes at certain redemption prices expressed as percentages of the principal amount, plus
accrued and unpaid interest to, but excluding, the redemption date. At any time and from time to time before July 1, 2019 , we may redeem up to 35% of the
aggregate outstanding principal amount of the 2024 Senior Notes with the net cash proceeds received by us from certain equity offerings at a price equal to 106%
of the aggregate principal amount, plus accrued and unpaid interest to, but excluding, the redemption date, provided that the redemption occurs no later than 120
days after the closing of the related equity offering, and at least 50% of the original aggregate principal amount of the 2024 Senior Notes remains outstanding
immediately thereafter.
Upon the occurrence of certain asset sales or a change in control, we must offer to repurchase the 2024 Senior Notes at a price equal to 100% in the case of an asset
sale, 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.
1.0%
Convertible
Debentures
due
2035
In December 2015, we issued $676.5 million in aggregate principal amount of 1.0% Senior Convertible Debentures due in 2035 (the “1.0% 2035 Debentures”).
Total proceeds were $663.8 million , net of issuance costs, and we used a portion to repurchase $38.3 million in aggregate principal on our 2.75% Senior
Convertible Debentures due in 2031 (the “2031 Debentures”) and to repay the aggregate principal balance of $472.5 million on our term loan under the amended
and restated credit agreement. The 1.0% 2035 Debentures bear interest at 1.0% per year, payable in cash semi-annually in arrears. In addition to ordinary interest
and default additional interest, beginning with the semi-annual interest period commencing on December 15, 2022, contingent interest will accrue during any
regular semi-annual interest period where the average trading price of our 1.0% 2035 Debentures
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
for the ten trading day period immediately preceding the first day of such semi-annual period is greater than or equal to $1,200 per $1,000 principal amount of our
1.0% 2035 Debentures, in which case, contingent interest will accrue at a rate of 0.50% per annum of such average trading price. The 1.0% 2035 Debentures
mature on December 15, 2035 , subject to the right of the holders to require us to redeem the 1.0% 2035 Debentures on December 15, 2022, 2027, or 2032 . The
1.0% 2035 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 1.0% 2035 Debentures. The 1.0% 2035 Debentures will be
effectively subordinated to indebtedness and other liabilities of our subsidiaries.
We account separately for the liability and equity components of the 1.0% 2035 Debentures in accordance with authoritative guidance for convertible debt
instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the
fair value of a similar liability that does not have an associated conversion feature and record the remainder in stockholders’ equity. At issuance, we allocated
$495.4 million to long-term debt, and $181.1 million has been recorded as additional paid-in capital, which is being amortized to interest expense using the
effective interest rate method through December 2022.
If converted, the principal amount of the 1.0% 2035 Debentures is payable in cash and any amounts payable in excess of the principal amount will (based on an
initial conversion rate, which represents an initial conversion price of approximately $27.22 per share, subject to adjustment) be paid in cash or shares of our
common stock, at our election, only in the following circumstances and to the following extent: (i) prior to June 15, 2035, on any date during any fiscal quarter
(and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the then current conversion price for at least 20 trading
days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) during the five consecutive business-day
period following any five consecutive trading-day period in which the trading price for $1,000 principal amount of the 1.0% 2035 Debentures for each day during
such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; (iii) upon the
occurrence of specified corporate transactions, as described in the indenture for the 1.0% 2035 Debentures; or (iv) at the option of the holder at any time on or after
June 15, 2035. Additionally, we may redeem the 1.0% 2035 Debentures, in whole or in part, on or after December 20, 2022 for cash at a price equal to 100% of the
principal amount of the 1.0% 2035 Debentures to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the
repurchase date. Each holder shall have the right, at such holder’s option, to require us to repurchase all or any portion of the 1.0% 2035 Debentures held by such
holder on December 15, 2022, December 15, 2027, or December 15, 2032 at par plus accrued and unpaid interest. If we undergo a fundamental change or non-
stock change of control (as described in the indenture for the 1.0% 2035 Debentures) prior to maturity, holders will have the option to require us to repurchase all
or any portion of their debentures for cash at a price equal to 100% of the principal amount of the 1.0% 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, 2018 , none of the conversion criteria were met for the
1.0% 2035 Debentures. 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.
2.75%
Convertible
Debentures
due
2031
On October 24, 2011 , we sold $690.0 million of 2.75% Convertible Debentures due in 2031 in a private placement. Total proceeds, net of issuance costs, were
$676.1 million . The 2031 Debentures bear interest at 2.75% per year, payable in cash semi-annually in arrears. The 2031 Debentures mature on November 1,
2031 , subject to the right of the holders to require us to redeem the 2031 Debentures on November 1, 2017, 2021, and 2026 . 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 2031 Debentures 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 debt instruments
that may be settled in cash upon conversion. At issuance, we allocated $533.6 million to long-term debt, and $156.4 million has been recorded as additional paid-in
capital, which was amortized to interest expense using the effective interest rate method through November 2017.
In June 2015, we entered into separate privately negotiated agreements with certain holders of our 2031 Debentures to exchange, in a private placement, $256.2
million in aggregate principal amount of our 2031 Debentures for approximately $263.9 million in aggregate principal amount of our 1.5% 2035 Debentures. Upon
repurchase we recorded an extinguishment loss of $17.7 million in other expense, net , in the accompanying consolidated statements of operations. In December
2015, we entered into separate privately negotiated agreements with certain holders of our 2031 Debentures to repurchase $38.3 million in aggregate principal with
proceeds received from the issuance of our 1.0% 2035 Debentures. Upon repurchase we recorded an extinguishment
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
loss of $2.4 million in other expense, net , in the accompanying consolidated statements of operations. In accordance with the authoritative guidance for
convertible debt instruments, a loss on extinguishment 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. Following this activity, $395.5 million in aggregate principal amount of
our 2031 Debentures remain outstanding. The aggregate debt discount was amortized to interest expense using the effective interest rate method through November
2017 .
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 on an initial
conversion rate, which represents an initial conversion price of approximately $32.30 per share, subject to adjustment) be paid in cash or shares of our common
stock, at our election, only in the following circumstances and to the following extent: (i) on any date during any fiscal quarter (and only during such 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 the period of the 30
consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) during the five consecutive business-day period following any five
consecutive trading-day period in which the trading price for $1,000 principal amount of the 2031 Debentures for each day during such five trading-day period was
less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; (iii) upon the occurrence 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 after May 1, 2031 . Additionally, we may
redeem the 2031 Debentures, in whole or in part, 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 on November 1, 2021 and November 1, 2026 at par plus accrued and unpaid interest. If
we undergo a fundamental change (as described in the indenture for the 2031 Debentures) prior to maturity, holders will have the option to require us to repurchase
all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the debentures to be purchased plus any accrued and unpaid
interest, including any additional interest to, but excluding, the repurchase date. As of September 30, 2018 , no conversion triggers were met. If the conversion
triggers were met, we could be required to repay all or some of the aggregate principal amount in cash prior to the maturity date.
In November 2017, holders of approximately $331.2 million in aggregate principal amount of the outstanding 2031 Debentures exercised their right to require us to
repurchase such debentures. Following the repurchase, $46.6 million in aggregate principal amount of the 2031 Debentures remains outstanding. On or after
November 6, 2017, we have the right to call for redemption of some or all of the remaining outstanding 2031 Debentures.
1.25%
Convertible
Debentures
due
2025
In March 2017, we issued $350.0 million in aggregate principal amount of 1.25% Senior Convertible Debentures due in 2025 (the “1.25% 2025 Debentures”) in a
private placement. The proceeds were approximately $343.6 million , net of issuance costs. We used a portion of the proceeds to repurchase 5.8 million shares of
our common stock for $99.1 million and $17.8 million in aggregate principal on our 2031 Debentures. The 1.25% 2025 Debentures bear interest at 1.25% per year,
payable in cash semi-annually in arrears, beginning on October 1, 2017. The 1.25% 2025 Debentures mature on April 1, 2025. The 1.25% 2025 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 1.25% 2025 Debentures. The 1.25% 2025 Debentures will be effectively
subordinated to indebtedness and other liabilities of our subsidiaries.
We account separately for the liability and equity components of the 1.25% 2025 Debentures in accordance with authoritative guidance for convertible debt
instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the
fair value of a similar liability that does not have an associated conversion feature and record the remainder in stockholders’ equity. At issuance, we allocated
$252.1 million to long-term debt, and $97.9 million has been recorded as additional paid-in capital, which is being amortized to interest expense using the effective
interest rate method through April 1, 2025.
If converted, the principal amount of the 1.25% 2025 Debentures is payable in cash and any amounts payable in excess of the principal amount will (based on an
initial conversion rate, which represents an initial conversion price of approximately $22.22 per share, subject to adjustment under certain circumstances) be paid
in cash or shares of our common stock, at our election, only in the following circumstances and to the following extent: (i) prior to October 1, 2024, on any date
during any fiscal quarter (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the then current conversion
price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) at any time on or
after October 1, 2024, (iii) during the five consecutive business-day period immediately following any five consecutive trading-day period in which the trading
price for $1,000 principal amount of the 1.25% 2025 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our
common stock
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
multiplied by the then current conversion rate; or (iv) upon the occurrence of specified corporate transactions, as described in the indenture for the 1.25% 2025
Debentures. We may not redeem the 1.25% 2025 Debentures prior to the maturity date. If we undergo a fundamental change or non-stock change of control (as
described in the indenture for the 1.25% 2025 Debentures) prior to maturity, holders will have the option to require us to repurchase all or any portion of their
debentures for cash at a price equal to 100% of the principal amount of the 1.25% 2025 Debentures to be purchased plus any accrued and unpaid interest, including
any additional interest to, but excluding, the repurchase date. As of September 30, 2018 , none of the conversion criteria were met for the 1.25% 2025 Debentures.
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.
1.50%
Convertible
Debentures
due
2035
In June 2015, we issued $263.9 million in aggregate principal amount of 1.50% Senior Convertible Debentures due in 2035 (the “1.5% 2035 Debentures”) in
exchange for $256.2 million in aggregate principal amount of our 2031 Debentures. Total proceeds, net of issuance costs, were $253.2 million . The 1.5% 2035
Debentures were issued at 97.09% of the principal amount, which resulted in a discount of $7.7 million . The 1.5% 2035 Debentures bear interest at 1.50% per
year, payable in cash semi-annually in arrears. In addition to ordinary interest and default additional interest, beginning with the semi-annual interest period
commencing on November 1, 2021, contingent interest will accrue during any regular semi-annual interest period where the average trading price of our 1.5%
2035 Debentures for the ten trading day period immediately preceding the first day of such semi-annual period is greater than or equal to $1,200 per $1,000
principal amount of our 1.5% 2035 Debentures, in which case, contingent interest will accrue at a rate of 0.50% per annum of such average trading price. The 1.5%
2035 Debentures mature on November 1, 2035, subject to the right of the holders to require us to redeem the 1.5% 2035 Debentures on November 1, 2021, 2026,
or 2031. The 1.5% 2035 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 1.5% 2035 Debentures. The 1.5% 2035
Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries.
We account separately for the liability and equity components of the 1.5% 2035 Debentures in accordance with authoritative guidance for convertible debt
instruments that may be settled in cash upon conversion. At issuance, we allocated $208.6 million to long-term debt, and $55.3 million has been recorded as
additional paid-in capital, which is being amortized to interest expense using the effective interest rate method through November 2021.
If converted, the principal amount of the 1.5% 2035 Debentures is payable in cash and any amounts payable in excess of the principal amount, will (based on an
initial conversion rate, which represents an initial conversion price of approximately $23.26 per share, subject to adjustment) be paid in cash or shares of 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 fiscal quarter
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 the then current
conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) during
the five consecutive business-day period following any five consecutive trading-day period in which the trading price for $1,000 principal amount of the 1.5%
2035 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current
conversion rate; (iii) upon the occurrence of specified corporate transactions, as described in the indenture for the 1.5% 2035 Debentures; or (iv) at the option of
the holder at any time on or after May 1, 2035. Additionally, we may redeem the 1.5% 2035 Debentures, in whole or in part, on or after November 5, 2021 for cash
at a price equal to 100% of the principal amount of the 1.5% 2035 Debentures to be purchased plus any accrued and unpaid interest, including any additional
interest to, but excluding, the repurchase date. Each holder shall have the right, at such holder’s option, to require us to repurchase all or any portion of the 1.5%
2035 Debentures held by such holder on November 1, 2021, November 1, 2026, or November 1, 2031 at par plus accrued and 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 in cash 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 our common shares we would be obligated to deliver. If
we undergo a fundamental change (as described in the indenture for the 1.5% 2035 Debentures) prior to maturity, holders will have the option to require us to
repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the 1.5% 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, 2018 , none of the conversion criteria
were met for the 1.5% 2035 Debentures. 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.
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Revolving
Credit
Facility
NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our revolving credit agreement (the “Revolving Credit Facility”), which expires on April 15, 2021, provides for aggregate borrowing commitments of $242.5
million , including the revolving facility loans, the swingline loans and issuance of letters of credit. As of September 30, 2018 , after taking into account the
outstanding letters of credit of $6.9 million , we had $235.6 million available for additional borrowing under the Revolving Credit Facility. The borrowing
outstanding under the Revolving Credit Facility bears interest at either (i) LIBOR plus an applicable margin of 1.50% or 1.75% , or (ii) the alternative base rate
plus an applicable margin of 0.50% or 0.75% . The Revolving Credit Facility is secured by substantially all our assets. The Revolving Credit Facility contains
customary affirmative and negative covenants and conditions to borrowing, as well as customary events of default. As of September 30, 2018 , we are in
compliance with all the debt covenants.
10. Financial Instruments and Hedging Activities
Derivatives
not
Designated
as
Hedges
Forward Currency Contracts
We have operations in a number of international locations, including certain developing markets where currency exchange rates can be volatile. We utilize foreign
currency forward contracts to mitigate the risks associated with changes in foreign currency exchange rates so that our exposure to foreign currencies will be
mitigated or offset by the gains or losses on the foreign currency forward contracts. Generally, we enter into such contracts for less than 90 days and have no cash
requirements until maturity. As of September 30, 2018 and 2017 , we had outstanding contracts with a total notional value of $117.1 million and $69.0 million ,
respectively.
We did not designate any forward contracts as hedging instruments for fiscal years 2018, 2017 and 2016. Therefore, changes in fair value of foreign currency
forward contracts were recognized within other expense, net in our condensed consolidated statements of operations. The cash flows related to the settlement of
forward contracts not designated as hedging instruments are included in cash flows from investing activities within our condensed consolidated statement of cash
flows.
A summary of our derivative instruments is as follows (dollars in thousands):
Derivatives Not Designated as Hedges:
Balance Sheet Classification
Foreign currency contracts
Foreign currency contracts
Prepaid expenses and other current assets
Accrued expenses and other liabilities
September 30, 2018
143
$
September 30, 2017
220
$
(1,192)
(373)
A summary of gains (losses) recognized from the derivative instruments is as follows (dollars in thousands):
Derivatives Not Designated as Hedges:
Foreign currency contracts
11. Fair Value Measures
Income Statement Classification Income
(loss) recognized
2018
2017
2016
Other expense, net
$
(3,616) $
6,811 $
2,021
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the
measurement date. Valuation techniques must maximize the use of observable inputs and minimize the use of unobservable inputs. When determining the fair
value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would
transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of
nonperformance.
The determination of the applicable level within the hierarchy of a particular financial asset or liability depends on the lowest level of inputs that are significant to
the fair value measurement as of the measurement date as follows:
•
•
Level 1: Quoted prices for identical assets or liabilities in active markets.
Level 2: Observable inputs other than those described as Level 1.
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
•
Level 3: Unobservable inputs that are supportable by little or no market activities and are based on significant assumptions and estimates.
Assets and liabilities measured at fair value on a recurring basis at September 30, 2018 and 2017 consisted of (in thousands):
Assets:
Money market funds (a)
Time deposits (b)
Commercial paper, $27,194 at cost (b)
Corporate notes and bonds, $57,563 at cost (b)
Foreign currency exchange contracts (b)
Total assets at fair value
Liabilities:
Foreign currency exchange contracts (b)
Contingent acquisition payments (c)
Total liabilities at fair value
Assets:
Money market funds (a)
Time deposits (b)
Commercial paper, $41,805 at cost (b)
Corporate notes and bonds, $74,150 at cost (b)
Foreign currency exchange contracts (b)
Total assets at fair value
Liabilities:
Foreign currency exchange contracts (b)
Contingent acquisition payments (c)
Total liabilities at fair value
Level 1
Level 2
Level 3
Total
September 30, 2018
200,004 $
— $
— $
200,004
—
—
—
—
88,158
27,363
57,417
143
—
—
—
—
88,158
27,363
57,417
143
200,004 $
173,081 $
— $
373,085
— $
—
— $
(1,192) $
—
(1,192) $
— $
(4,000)
(4,000) $
(1,192)
(4,000)
(5,192)
Level 1
Level 2
Level 3
Total
September 30, 2017
381,899 $
— $
— $
381,899
—
—
—
—
85,570
41,968
74,067
220
—
—
—
—
85,570
41,968
74,067
220
381,899 $
201,825 $
— $
583,724
— $
—
— $
(373) $
—
(373) $
— $
(8,648)
(8,648) $
(373)
(8,648)
(9,021)
$
$
$
$
$
$
$
$
(a) Money market funds and time deposits with original maturity of 90 days or less are included within cash and cash equivalents in the consolidated balance sheets and are
valued at quoted market prices in active markets.
(b) Time deposits, commercial paper, corporate notes and bonds, and foreign currency exchange contracts are recorded at fair market values, which are determined based on the
most recent observable inputs for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or
indirectly observable. Time deposits are generally for terms of one year or less. Commercial paper and corporate notes and bonds generally mature within three years and
had a weighted average maturity of 0.61 years as of September 30, 2018 .
(c) The fair values of our contingent consideration arrangements were determined using either the option pricing model with Monte Carlo simulation or the probability-weighted
discounted cash flow method.
As of September 30, 2017 , $80.2 million of debt securities included within marketable securities were designated as held-to-maturity investments, which had a
weighted average maturity of 0.27 years and an estimated fair value of $80.4 million based on Level 2 measurements. No debt instruments were designated as
held-to-maturity investments as of September 30, 2018 .
The estimated fair value of our long-term debt approximated $2,423.6 million (face value $2,437.0 million ) as of September 30, 2018 and $2,930.9 million (face
value $2,918.1 million ) as of September 30, 2017 , based on Level 2 measurements. The fair value of each borrowing was estimated using the average of the bid
and ask trading quotes at the end of the reporting periods. There was no balance outstanding under our revolving credit agreement as of September 30, 2018 and
September 30, 2017 .
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additionally, contingent acquisition payments are recorded at fair values upon the acquisition, and remeasured in subsequent reporting periods with the changes in
fair values recorded within acquisition-related costs, net. Such payments are contingent upon the achievement of specified performance targets and are valued
using the option pricing model with Monte Carlo simulation or the probability-weighted discounted cash flow model (Level 3 measurement).
The following table provides a summary of changes in fair value of our Level 3 financial instruments for the years ended September 30, 2018 and 2017 (dollars in
thousands):
Balance as of September 30, 2016
Earn-out liability established at time of acquisition
Payments and foreign currency translation
Adjustments to fair value included in acquisition-related costs, net
Balance as of September 30, 2017
Earn-out liability established at time of acquisition
Payments and foreign currency translation
Adjustments to fair value included in acquisition-related costs, net
Balance as of September 30, 2018
Amount
8,240
8,253
(7,830)
(15)
8,648
2,000
(8,188)
1,540
4,000
$
$
Contingent acquisition payment liabilities are scheduled to be paid in periods through fiscal year 2021 . As of September 30, 2018 , we could be required to pay up
to $12.4 million if the specified performance targets are achieved.
12. Restructuring and Other Charges, Net
Restructuring and other charges, net include restructuring expenses as well as other charges that are unusual in nature, are the result of unplanned events, and arise
outside the ordinary course of our business. Restructuring expenses consist of employee severance costs, charges for the closure of excess facilities and other
contract termination costs. Other charges include litigation contingency reserves, costs related to the transition agreement of our former CEO, asset impairment
charges, expenses associated with the 2017 Malware Incident 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:
Severance costs
Costs of consolidating duplicate facilities
Total restructuring charges
Other charges
Total restructuring and other charges, net
2018
2017
2016
36,824 $
13,297 $
5,056
41,880
21,618
6,735
20,032
41,022
63,498 $
61,054 $
13,133
11,606
24,739
485
25,224
$
$
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth accrual activity relating to restructuring reserves for fiscal years 2018 , 2017 and 2016 (in thousands):
Balance at September 30, 2015
Restructuring charges, net
Non-cash adjustment
Cash payments
Balance at September 30, 2016
Restructuring charges, net
Non-cash adjustment
Cash payments
Balance at September 30, 2017
Restructuring charges, net
Non-cash adjustment
Cash payments
Balance at September 30, 2018
Restructuring and other charges, net by segment are as follows (dollars in thousands):
Personnel
Facilities
Total
$
635 $
6,222 $
13,133
(57)
(11,050)
2,661
13,297
—
(14,412)
1,546
36,824
—
$
(27,778)
10,592 $
11,606
164
(6,860)
11,132
6,735
(1,374)
(7,334)
9,159
5,056
(998)
(5,599)
7,618 $
6,857
24,739
107
(17,910)
13,793
20,032
(1,374)
(21,746)
10,705
41,880
(998)
(33,377)
18,210
Fiscal Year 2018
Healthcare
Enterprise
Automotive
Imaging
Other
Corporate
Total fiscal year 2018
Fiscal Year 2017
Healthcare
Enterprise
Automotive
Imaging
Other
Corporate
Total fiscal year 2017
Fiscal Year 2016
Healthcare
Enterprise
Automotive
Imaging
Other
Corporate
Total fiscal year 2016
Fiscal
Year
2018
Personnel
Facilities
Total Restructuring
Other Charges
Total
$
11,563 $
25 $
11,588 $
— $
11,588
4,217
4,160
5,304
1,473
10,107
36,824 $
4,283 $
2,141
1,838
744
2,954
1,337
13,297 $
3,531 $
1,214
1,967
284
3,870
2,267
2,243
20
1,168
647
953
5,056 $
870 $
3,480
—
387
(15)
2,013
6,735 $
1,398 $
2,782
—
478
1,557
5,391
6,460
4,180
6,472
2,120
11,060
41,880 $
—
—
—
7,103
14,515
21,618 $
5,153 $
8,758 $
5,621
1,838
1,131
2,939
3,350
—
—
—
10,773
21,491
20,032 $
41,022 $
4,929 $
— $
3,996
1,967
762
5,427
7,658
—
—
—
(486)
971
6,460
4,180
6,472
9,223
25,575
63,498
13,911
5,621
1,838
1,131
13,712
24,841
61,054
4,929
3,996
1,967
762
4,941
8,629
13,133 $
11,606 $
24,739 $
485 $
25,224
$
$
$
$
$
For fiscal year 2018 , we recorded restructuring charges of $41.9 million , which included $36.8 million related to the termination of approximately 1,495
employees and $5.1 million charge related to certain excess facilities, including adjustment to sublease assumptions associated with these facilities. These actions
were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction. We expect the remaining outstanding
severance of $10.6 million to be
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
substantially paid by the end of the first quarter of fiscal year 2019 , and the remaining of $7.6 million for the excess facilities to be made through fiscal year 2027 ,
in accordance with the terms of the applicable leases.
Additionally, during fiscal year 2018, we recorded $5.7 million for costs related to the transition agreement of our former CEO, $4.8 million professional services
fees related to assessment and establishment of our corporate transformational efforts, $4.0 million related to our remediation and restoration effort after the 2017
Malware Incident, and fixed asset impairment charges of $7.1 million for SRS and Devices, as more fully described in Note 4. The cash payments associated with
the CEO transition agreement are expected to be made through fiscal year 2020.
Fiscal
Year
2017
For fiscal year 2017, we recorded restructuring charges of $20.0 million , which included $13.3 million related to the termination of approximately 807 terminated
employees and $6.7 million charge related to certain excess facilities, including adjustment to sublease assumptions associated with these facilities. These actions
were part of our initiatives to reduce costs and optimize processes.
Additionally, during fiscal year 2017, we recorded $8.1 million for costs related to the transition agreement of our former CEO, $18.1 million of professional
services fees and $4.0 million of fixed asset and inventory write-down as a result of the 2017 Malware Incident, and an impairment charge of $10.8 million related
to an internally developed software.
Fiscal
Year
2016
For fiscal year 2016, we recorded restructuring charges of $24.7 million , which included $13.1 million related to the termination of approximately 452 employees
as part of our initiatives to reduce costs and optimize processes, and $11.6 million charge related to certain excess facility space, including adjustment to sublease
assumptions associated with these facilities.
Additionally, during fiscal year 2016, we recorded certain other charges that totaled $0.5 million for litigation contingency reserves.
13. Supplemental Cash Flow Information
Cash
paid
for
Interest
and
Income
Taxes:
Interest paid
Income taxes paid
Non-Cash
Investing
and
Financing
Activities:
Year Ended September 30,
2018
2017
2016
(Dollars in thousands)
$
$
93,121 $
20,802 $
91,718 $
24,359 $
77,010
21,068
From time to time, we issue shares of our common stock in connection with our business and asset acquisitions, including shares issued as payment for
acquisitions, shares initially held in escrow, and shares issued as payment for contingent consideration, which is discussed in Notes 2 and 3 . In addition, in
connection with certain collaboration agreements, we issued shares of our common stock to our partners in satisfaction of our payment obligations under the terms
of the agreements, as discussed in Note 2 .
14. Stockholders' Equity
Share
Repurchases
On April 29, 2013 , our Board of Directors approved a share repurchase program for up to $500.0 million , which was increased by $500.0 million on April 29,
2015. On August 1, 2018 , our Board of Directors approved an additional $500.0 million under our share repurchase program. Under the terms of the share
repurchase program, we have the ability to repurchase shares from time to time through a variety of methods, which may include open market purchases, privately
negotiated transactions, block trades, accelerated share repurchase transactions, or any combination of such methods. The share repurchase program does not
require us to acquire any specific number of shares and may be modified, suspended, extended or terminated by us at any time without prior notice. The timing and
the amount of any purchases will be determined by management based on an evaluation of market conditions, capital allocation alternatives, and other factors.
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We repurchased 9.7 million shares, 5.8 million shares and 9.4 million shares for $136.1 million , $99.1 million and $197.5 million during the fiscal years ended
September 30, 2018 , 2017 and 2016 , respectively, under the program. The amount paid in excess of par value is recognized in additional paid in capital and these
shares were retired upon repurchase. Since the commencement of the program, we have repurchased 56.2 million shares for $942.7 million , including 1.0 million
shares repurchased from our Chief Executive Officer in fiscal year 2016. Approximately $557.3 million remained available for share repurchases as of
September 30, 2018 pursuant to our share repurchase program.
Related
Party
Share
Repurchases
In December 2015, as part of our share repurchase program, we repurchased 1.0 million shares from our former CEO, composed of 649,649 outstanding shares and
800,000 vested stock options with a net share equivalent of 350,351 shares, for an aggregate purchase price of $21.4 million , which approximated the fair value of
our common stock on the day of the repurchase.
In March 2016, our Board of Directors approved a repurchase agreement with the Icahn Group to repurchase 26.3 million shares of our common stock at a price of
$19.00 per share, which approximated the fair value of our common stock on the day of the repurchase, for a total purchase price of $500.0 million (the
"Repurchase"). At the closing of the Repurchase, we paid $375.0 million in cash and issued a promissory note in the amount of $125.0 million . The promissory
note bore interest at a rate per annum equal to approximately 2.64% and had a maturity date of June 13, 2016. On April 15, 2016, we fully repaid the promissory
note. Immediately prior to the Repurchase, the Icahn Group owned approximately 60.8 million shares, or approximately 20% , of our outstanding common stock.
In connection with the Repurchase, David Schechter and Brett Icahn, the Icahn Group representatives on our Board of Directors, resigned from our Board of
Directors.
Stock
Issuances
During the year ended September 30, 2017, we issued 844,108 shares of our common stock valued at $13.4 million in connection with a business acquisition and
175,000 shares of our common stock valued at $2.9 million associated with charitable contributions. During fiscal year 2016, we issued 403,325 shares of our
common stock valued at $6.5 million to our partner in a healthcare collaboration agreement as settlement for a buy-out option and 5,749,807 shares of our common
stock valued at $85.0 million as consideration for our acquisition of TouchCommerce, which are discussed in Notes 2 and 3.
Preferred
Stock
We 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 have rights,
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. There were no outstanding shares of preferred stock as of September 30, 2018 or
September 30, 2017 .
Series A Preferred Stock
We have designated 1,000,000 shares as Series A Preferred Stock, par value $0.001 per share. The Series A Preferred Stock is entitled to receive dividends equal to
the greater of $1.00 and 1,000 times the aggregate per 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 all matters 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 the right 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 the payment of dividends and the distribution of assets. There were no outstanding shares of preferred stock as of
September 30, 2018 or September 30, 2017.
Series B Preferred Stock
We 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 of common
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 B Preferred 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 provided under Delaware law. There
were no outstanding shares of preferred stock as of September 30, 2018 or September 30, 2017.
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15. Stock-Based Compensation
NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On February 28, 2018, our stockholders approved amendments to the Company’s amended and restated 2000 Stock Plan (the “Amended and Restated 2000 Stock
Plan”). The Amended and Restated 2000 Stock Plan (i) increases the number of shares issuable by 6,400,000 to 82,250,000 shares; (ii) prohibits the payment of
dividends relating to unvested awards unless and until such awards become vested; and (iii) prohibits shares that are withheld for taxes or to pay the exercise price
of options or stock appreciation rights, or that are reacquired on the open market or otherwise using cash from option exercises, from becoming available for future
grant under the Amended and Restated 2000 Stock Plan.
As of September 30, 2018 , we had 13.4 million shares available for future grants under the Amended and Restated 2000 Stock Plan. We recognize stock-based
compensation expenses over the requisite service periods. Our share-based awards are classified within equity. The amounts included in the condensed
consolidated statements of operations related to stock-based compensation are as follows (in thousands):
Cost of professional services and hosting
Cost of product and licensing
Cost of maintenance and support
Research and development
Sales and marketing
General and administrative
Total
Stock
Options
2018
2017
2016
31,299 $
28,962 $
816
5,126
40,087
39,656
33,801
348
3,767
33,061
45,813
42,321
31,054
376
4,138
35,671
49,064
43,525
150,785 $
154,272 $
163,828
$
$
We have share-based award plans under which employees, officers and directors may be granted stock options to purchase our common stock, generally at the fair
market value of the grant date. 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
under our plans generally become exercisable over a period of two to four years and have a maximum term of ten years. We have also assumed options and option
plans in connection with certain of our acquisitions. These stock options are governed by the plans and agreements that they were originally issued under but are
now exercisable for shares of our common stock.
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below summarizes activities related to stock options for the years ended September 30, 2018 , 2017 and 2016 :
Outstanding at September 30, 2015
Granted
Exercised
Forfeited
Expired
Outstanding at September 30, 2016
Granted
Exercised/Repurchased (b)
Forfeited
Expired
Outstanding at September 30, 2017
Granted
Exercised
Forfeited
Expired
Outstanding at September 30, 2018
Exercisable at September 30, 2018
Exercisable at September 30, 2017
Exercisable at September 30, 2016
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value (a)
14.01
—
11.96
—
10.42
15.01
—
14.98
—
20.01
15.39
—
2.61
—
15.99
17.31
17.31
3.1 years $
3.1 years $
0.1 million
0.1 million
Number of
Shares
2,923,989 $
— $
(955,060) $
— $
(3,103) $
1,965,826 $
— $
(1,932,286) $
— $
(9,733) $
23,807 $
— $
(2,963) $
— $
(1,700) $
19,144 $
19,144 $
23,798
1,965,817
(a) The aggregate intrinsic value represents any excess of the closing price of our common stock of $17.32 on September 30, 2018 over the exercise price of the underlying
options.
(b) We repurchased 1.0 million shares owned directly or indirectly by our Chief Executive Officer, including 649,649 outstanding shares and 800,000 vested stock options with
a net share equivalent of 350,351 shares, for an aggregate purchase price of $21.4 million .
As of September 30, 2018 , there was no unamortized fair value of stock options. A summary of intrinsic value of stock options exercised is as follows:
Total intrinsic value of stock options exercised (in millions)
$
0.04 $
3.59 $
8.63
2018
2017
2016
Restricted
Awards
We are authorized to issue equity incentive awards in the form of Restricted Awards, including Restricted Units and Restricted Stock, which are individually
discussed below. Unvested Restricted Awards may not be sold, transferred or assigned. The fair value of the Restricted Awards is measured based upon the market
price of the underlying common stock as of the date of grant, reduced by the purchase price of $0.001 per share of the awards. Restricted Awards generally vest
over a period of two to four years. We also issued certain Restricted Awards with vesting solely dependent on the achievement of specified performance targets.
The fair value of the Restricted Awards is amortized to expense over the awards’ applicable requisite service periods using the straight-line method. In the event
that the employees’ employment with 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.
In order to satisfy our employees’ withholding tax liability as a result of the vesting of Restricted Awards, we have historically repurchased shares upon the
employees’ vesting. In fiscal year 2018 , we withheld payroll taxes totaling $52.3 million related to 3.3 million shares of common stock that were repurchased or
canceled.
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Restricted Units
NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted Units are not included in issued and outstanding common stock until the shares are vested and released. The table below summarizes activity relating to
Restricted Units:
Outstanding at September 30, 2015
Granted
Earned/released
Forfeited
Outstanding at September 30, 2016
Granted
Earned/released
Forfeited
Outstanding at September 30, 2017
Granted
Earned/released
Forfeited
Outstanding at September 30, 2018
Weighted average remaining recognition period of outstanding Restricted Units
Unrecognized stock-based compensation expense of outstanding Restricted Units
Aggregate intrinsic value of outstanding Restricted Units (1)
Number of Shares
Underlying
Restricted Units —
Contingent Awards
Number of Shares
Underlying
Restricted Units —
Time-Based
Awards
4,700,210
2,533,389
(2,254,445)
(754,666)
4,224,488
3,224,696
(1,790,514)
(614,739)
5,043,931
2,175,537
(2,092,862)
(2,087,038)
3,039,568
1.0 year
7,007,839
7,146,415
(7,243,615)
(1,026,616)
5,884,023
8,457,761
(7,150,783)
(713,837)
6,477,164
8,876,712
(7,156,468)
(1,325,321)
6,872,087
2.2 years
$33.1 million
$52.6 million
$82.3 million
$119.1 million
(1) The aggregate intrinsic value represents any excess of the closing price of our common stock of $17.32 on September 30, 2018 over the exercise price of the underlying
Restricted Units.
A summary of the weighted-average grant-date fair value of Restricted Units granted, and the aggregate intrinsic value of Restricted Units vested for each fiscal
year is as follows:
Weighted-average grant-date fair value per share
Total intrinsic value of shares vested (in millions)
2018
2017
2016
$
$
15.47 $
146.5 $
16.31 $
146.0 $
18.93
179.7
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Restricted Stock Awards
NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted stock awards ("Restricted Stock") are included within the issued and outstanding common stock at the date of the grant. The table below summarizes
activities related to Restricted Stock:
Outstanding at September 30, 2015
Granted
Vested
Outstanding at September 30, 2016
Granted
Vested
Outstanding at September 30, 2017
Granted
Vested
Outstanding at September 30, 2018
Number of
Shares
Underlying
Restricted Stock
Weighted
Average Grant
Date Fair
Value
250,000 $
— $
(250,000) $
— $
250,000 $
(250,000) $
— $
— $
— $
— $
15.71
—
15.71
—
15.55
15.55
—
—
—
—
A summary of the weighted-average grant-date fair value of Restricted Stock granted, and the aggregate intrinsic value of Restricted Stock vested for each fiscal
year is as follows:
Weighted-average grant-date fair value per share
Total intrinsic value of shares vested (in millions)
1995
Employee
Stock
Purchase
Plan
2018
2017
2016
— $
15.55 $
— $
3.9 $
—
4.3
$
$
Our 1995 Employee Stock Purchase Plan (the "Plan”), as amended and restated on January 27, 2015 , authorizes the issuance of a maximum of 20,000,000 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 offering commencement date or
85% of the closing price on the applicable offering termination date. Stock-based compensation expense for the employee stock purchase plan is recognized for the
fair value benefit accorded to participating employees. At September 30, 2018 , we have reserved 5,099,834 shares for future issuance. A summary of the
weighted-average grant-date fair value, shares issued and total stock-based compensation expense recognized related to the Plan are as follows:
Weighted-average grant-date fair value per share
Total shares issued (in millions)
Total stock-based compensation expense (in millions)
2018
2017
2016
$
$
4.00 $
1.3
5.2 $
3.84 $
1.3
4.9 $
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 uses the
following weighted-average assumptions, which were derived in a manner similar to those discussed above relative to stock options:
Dividend yield
Expected volatility
Average risk-free interest rate
Expected term (in years)
2018
2017
2016
0.0%
32.1%
2.0%
0.5
0.0%
29.3%
0.9%
0.5
85
3.97
1.2
4.8
0.0%
34.0%
0.5%
0.5
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16. Commitments and Contingencies
Operating
Leases
NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We have various operating leases for office space around the world. In connection with many of our acquisitions, we assumed facility lease obligations. Among
these assumed obligations are lease payments related to office locations that were vacated by certain of the acquired companies prior to the acquisition 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, 2018 (dollars in thousands):
Year Ending September 30,
2019
2020
2021
2022
2023
Thereafter
Total
Operating Leases
Operating leases under
restructuring
Total
$
29,119 $
10,128 $
21,299
18,216
16,449
15,572
64,310
$
164,965 $
9,359
8,536
8,456
8,734
15,663
60,876 $
39,247
30,658
26,752
24,905
24,306
79,973
225,841
As of September 30, 2018 , we have subleased certain office space that is included in the above table to third parties. As of September 30, 2018 , the aggregate
sublease income to be recognized during the remaining lease terms for restructured facilities is $42.8 million , with approximately $5.9 million annually for each of
the next five fiscal years and approximately $13.3 million thereafter.
Total rent expense, including rent expense for our data centers, was approximately $45.7 million , $ 38.5 million and $ 38.3 million for the years ended
September 30, 2018 , 2017 and 2016 , respectively.
Litigation
and
Other
Claims
Similar to many companies in the software industry, we are involved in a variety of claims, demands, suits, investigations and proceedings that arise from 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. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a
liability for the estimated loss. Significant judgments are required for the determination of probability and the range of the outcomes. Due to the inherent
uncertainties, estimates are based only on the best information available at the time. Actual outcomes may differ from our estimates. As additional information
becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions may have a material
impact on our results of operations and financial position. As of September 30, 2018 and 2017 , accrued losses were not material to our consolidated financial
statements, and we do not expect any pending matter to have a material impact on our consolidated financial statements.
Guarantees
and
Other
We include indemnification provisions in the contracts we enter into with customers and business partners. Generally, these provisions require us to defend claims
arising out of our products’ infringement of third-party intellectual property rights, breach of contractual obligations and/or unlawful or otherwise culpable
conduct. The indemnity obligations generally cover damages, costs and attorneys’ fees arising out of such claims. In most, but not all cases, our total liability under
such provisions is limited to either the value of the contract or a specified, agreed upon amount. In some cases, our total liability under such provisions is
unlimited. In many, but not all cases, the term of the indemnity provision is perpetual. While the maximum potential amount of future payments we could be
required to make under all the indemnification provisions is unlimited, we believe the estimated fair value of these provisions is minimal due to the low frequency
with which these provisions have been triggered.
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We indemnify our directors and officers to the fullest extent permitted by Delaware law, which provides among other things, indemnification to directors and
officers for expenses, judgments, fines, penalties and settlement amounts incurred by such persons in their capacity as a director or officer of the company,
regardless of whether the individual is serving in any such capacity at the time the liability or expense is incurred. Additionally, in connection with certain
acquisitions, we agreed to indemnify the former officers and members of the boards of directors of those companies, on similar terms as described above, for a
period of six years from the acquisition date. In certain cases, we purchase director and officer insurance policies related to these obligations, 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 any contractual indemnification, and such
directors and officers do not have coverage under separate insurance policies, we would be required to pay for costs incurred, if any, as described above.
17. Pension and Other Post-Retirement Benefits
Defined
Contribution
Plans
We have established a retirement savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers substantially all of
our U.S. employees who meet minimum age and service requirements, and allows participants to defer a portion of their annual compensation on a pre-tax basis.
We match 50% of employee contributions up to 4% of eligible salary. Employer's contributions vest one-third annually over a three -year period. Our contributions
to the 401(k) Plan that covers substantially all of our U.S. employees who meet the minimum requirements totaled $6.7 million , $6.7 million and $6.6 million for
fiscal years 2018 , 2017 and 2016 , respectively. We make contributions to various other plans in certain of our foreign operations; total contributions to these plans
are not material.
Defined
Benefit
Plans
We sponsor certain defined benefit plans that are offered primarily by our foreign subsidiaries. Many of these plans were assumed through our acquisitions or are
required by local regulatory requirements. We may deposit funds for these plans with insurance companies, third party trustees, or into government-managed
accounts consistent with local regulatory requirements, as applicable. Our total defined benefit pension expenses were $0.3 million , $0.4 million and $0.1 million
for fiscal years 2018 , 2017 and 2016 , respectively. The aggregate projected benefit obligation as of September 30, 2018 and September 30, 2017 was $34.7
million and $37.2 million , respectively. The aggregate net liability of our defined benefit plans as of September 30, 2018 and September 30, 2017 was $11.1
million and $13.2 million , respectively.
18. Income Taxes
Recent
Tax
Legislation
On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was signed into law. The TCJA significantly revises the U.S. corporate income tax by, among other
things, lowering corporate income tax rates, implementing a hybrid territorial tax system, and imposing a mandatory one-time repatriation tax on foreign cash and
earnings.
As a result of the TCJA, we remeasured certain deferred tax assets and liabilities at the lower rates and recorded approximately $92.9 million of tax benefits for
fiscal year 2018. Additionally, as of September 30, 2018 , we recorded a $5.8 million provision for the deemed repatriation of foreign cash and earnings, which is
estimated based upon estimated foreign earnings and foreign income taxes. We are in the process of finalizing our assessment, which will be completed in
December 2018.
Provision
for
Income
Taxes
The components of (loss) income before income taxes are as follows (in thousands):
Domestic
Foreign
(Loss) income before income taxes
Year Ended September 30,
2018
2017
2016
$
$
(187,616) $
(228,406) $
(29,119)
109,391
(216,735) $
(119,015) $
(118,410)
120,149
1,739
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of the (benefit) provision for income taxes are as follows (in thousands):
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
(Benefit) provision for income taxes
Effective income tax rate
Year Ended September 30,
2018
2017
2016
$
4,189
$
— $
598
25,623
30,410
(83,319)
2,303
(6,201)
(87,217)
2,185
24,941
27,126
7,291
1,133
(3,569)
4,855
$
(56,807)
$
31,981
$
—
3,230
22,981
26,211
(7,235)
(1,962)
(2,817)
(12,014)
14,197
26.2%
(26.9)%
816.4%
The (benefit) provision for income taxes differed from the amount computed by applying the federal statutory rate to our (loss) income before income taxes as
follows (in thousands):
Year Ended September 30,
2018
2017
2016
Federal tax benefit at statutory rate
State tax provision, net of federal benefit
Foreign tax rate and other foreign related tax items
Repatriated earnings, net of foreign tax credits
Stock-based compensation
Non-deductible expenditures
Change in U.S. and foreign valuation allowance
TCJA impact
Goodwill impairment
Executive compensation
Other
$
(53,165) $
(41,655) $
1,698
(13,539)
—
3,290
2,546
56,557
(87,057)
28,640
503
3,720
2,560
(20,415)
—
6,934
3,247
72,318
—
—
5,492
3,500
(Benefit) provision for income taxes
$
(56,807) $
31,981 $
609
137
(25,976)
71,343
6,154
3,235
(53,079)
—
—
4,749
7,025
14,197
The effective income tax rate is based upon the income for the year, the composition of the income in different countries, changes relating to valuation allowances
for certain countries if and as necessary, and adjustments, if any, for the potential tax consequences, benefits or resolutions of audits or other tax contingencies. Our
aggregate income tax rate in foreign jurisdictions is lower than our income tax rate in the United States; the majority of our income before provision for income
taxes from foreign operations has been earned by subsidiaries in Ireland. Our effective tax rate may be adversely affected by earnings being lower than anticipated
in countries where we have lower statutory tax rates and higher than anticipated in countries where we have higher statutory tax rates.
The effective income tax rate in fiscal year 2018 differs from the U.S. federal statutory rate of 24.5% primarily due to the net tax benefits resulting from the TCJA
remeasurement of deferred tax assets and liabilities at the lower enacted rate, and our foreign earnings subject to lower tax rates, offset in part by additional
valuation allowance related to current period losses, the tax effect of goodwill impairment charges that are not deductible, and the provision for the deemed
repatriation of foreign cash and earnings.
The effective income tax rate in fiscal year 2017 differs from the U.S. federal statutory rate of 35% primarily due to additional valuation allowance related to
current period losses in the United States, and an increase in deferred tax liabilities related to goodwill, partially offset by our earnings in foreign operations that
are subject to significantly lower tax rates than U.S. statutory tax rate.
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The effective income tax rates in fiscal year 2016 differs from the U.S. federal statutory rate of 35% primarily due to additional valuation allowance related to
current period losses in the United States, an increase in the deferred tax liabilities related to goodwill, and an increase in current tax provisions due to the one-time
repatriation of foreign earnings offset by the utilization of previously unbenefited domestic loss and credit carryforwards. These were offset in part by our foreign
earnings subject to significantly lower tax rates, and a $22.1 million release of domestic valuation allowance as a result of tax benefits recorded in connection with
our acquisitions during the period for which a deferred tax liability was established in purchase accounting.
As of September 30, 2018 , we have not provided taxes on $310.5 million of undistributed earnings of our foreign subsidiaries, which may be subject to foreign
withholding taxes upon repatriation, as we consider these earnings indefinitely reinvested. Our indefinite reinvestment determination is based on the future
operational and capital requirements of our domestic and foreign operations. We expect our international cash and cash equivalents and marketable securities of
$112.8 million will continue to be used for our foreign operations and therefore do not anticipate repatriating these funds. As of September 30, 2018 , it is not
practical to calculate the unrecognized deferred tax liability on these earnings due to the complexities of the utilization of foreign tax credits and other tax assets.
Deferred tax assets (liabilities) consist of the following as of September 30, 2018 and 2017 (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Federal and state credit carryforwards
Accrued expenses and other reserves
Difference in timing of revenue related items
Deferred compensation
Other
Total deferred tax assets
Valuation allowance for deferred tax assets
Net deferred tax assets
Deferred tax liabilities:
Depreciation
Convertible debt
Acquired intangibles
Unremitted earnings of foreign subsidiaries
Net deferred tax liabilities
Reported as:
Other assets
Long-term deferred tax liabilities
Net deferred tax liabilities
2018
2017
$
192,017 $
46,721
41,371
81,647
19,315
13,802
394,873
(183,295)
211,578
(15,729)
(92,452)
(131,959)
—
(28,562) $
21,369 $
(49,931)
(28,562) $
$
$
$
269,495
58,803
53,795
100,971
30,528
20,424
534,016
(229,449)
304,567
(36,016)
(136,609)
(221,707)
(20,850)
(110,615)
20,705
(131,320)
(110,615)
Deferred tax assets are reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not that some
portion or all the deferred tax assets will not be realized. During fiscal year 2018 , the valuation allowance for deferred tax assets decreased by $46.2 million . This
decrease mainly relates to the remeasurement of deferred tax assets and liabilities at the TCJA lower federal tax rate of 21% and the reduction of foreign tax credit
carryforwards utilized and the TCJA mandatory repatriation of foreign earnings tax. The decrease was partially offset by reduction of deferred tax liabilities due to
intangible asset impairments, establishment of valuation allowance related to current period losses, and reversal of deferred tax liabilities on foreign earnings. As of
September 30, 2018 , we have $142.8 million and $40.5 million in valuation allowance against our net domestic and foreign deferred tax assets, respectively. As of
September 30, 2017 , we had $202.3 million and $27.1 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 acquired losses. 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 our current projection of
future taxable income in the entities for which these losses relate. Based on our analysis, we have concluded that it is not more likely than not that the majority of
our deferred tax assets can
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
be realized and therefore a valuation allowance has been assigned to these deferred tax assets. If we are subsequently able to utilize all or a portion of the deferred
tax assets for which a valuation allowance has been established, then we may be required to recognize these deferred tax assets through the reduction of the
valuation allowance which could result in a material benefit to our results of operations in the period in which the benefit is determined.
At September 30, 2018 and 2017 , we had U.S. federal net operating loss carryforwards of $692.9 million and $642.0 million , respectively. At September 30, 2018
and 2017 , we had state net operating loss carryforwards of $259.1 million and $262.7 million , respectively. The net operating loss and credit carryforwards are
subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state tax provisions. As of
September 30, 2018 and 2017 , we had foreign net operating loss carryforwards of $164.9 million and $168.8 million , respectively. These carryforwards will
expire at various dates beginning in 2018 and extending up to an unlimited period.
As of September 30, 2018 and 2017 , we had federal research and development carryforwards and foreign tax credit carryforwards of $30.2 million and $43.5
million , respectively. As of September 30, 2018 and 2017 , we had state research and development credit and investment tax credit carryforwards of $5.3 million
and $6.2 million , respectively. As of September 30, 2018 and 2017 , we had foreign investment tax credit carryforwards of $14.7 million and $14.8 million ,
respectively.
Uncertain
Tax
Positions
We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on
the largest benefit which is more likely than not to be realized upon ultimate settlement. We recognize interest and penalties related to uncertain tax positions in our
provision for income taxes line of our consolidated statements of operations.
The aggregate changes in the balance of our gross unrecognized tax benefits were as follows (in thousands):
Balance at the beginning of the year
Increases related to tax positions from prior fiscal years
Decreases related to tax positions from prior fiscal years
Increases for tax positions taken during current period
Decreases for tax settlements and lapse in statutes
Cumulative translation adjustments
Balance at the end of the year
September 30,
2018
2017
$
34,058 $
31,955
1,720
(2,281)
1,709
(4,083)
(724)
$
30,399 $
2,745
(602)
1,676
(1,083)
(633)
34,058
As of September 30, 2018 , $30.4 million of the unrecognized tax benefits, if recognized, would impact our effective tax rate. We do not expect a significant
change in the amount of unrecognized tax benefits within the next 12 months . We recognized interest and penalties related to uncertain tax positions in our
provision for income taxes of $1.4 million , $2.1 million , and $2.2 million during fiscal years 2018, 2017, and 2016, respectively. We recorded interest and
penalties of $10.8 million and $9.9 million as of September 30, 2018 and 2017, respectively.
We are subject to U.S. federal income tax, various state and local taxes, and international income taxes in numerous jurisdictions. The federal tax returns for 1999
through 2014 remain subject to examination for the purpose of determining the amount of remaining tax NOL and other carryforwards. Additionally, the federal
tax returns for 2015 through 2018 years remain open for all purposes of examination by the IRS and other taxing authorities in material jurisdictions.
19. Related Party Transaction
In January 2018, we entered into a software and license agreement (the "License Agreement") with Magnet Systems, Inc. ("Magnet") which was pre-approved by
our Board of Directors. A member of the Magnet board of directors also served on our board of directors at the time of the transaction. Pursuant to the License
Agreement, Magnet granted us a perpetual software license to certain technology for a one-time payment of $5.0 million in cash, with $3.5 million paid
immediately upon the effective date of the License Agreement and $1.5 million payable upon the earlier of (i) the 120-day period following the effective date of
the License Agreement or (ii) signature of a statement of work for the engineering services described below.
90
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additionally, we entered into a service agreement (the "Service Agreement") with Magnet, pursuant to which, Magnet will provide engineering services to assist in
integrating the licensed technology into certain of our Enterprise solutions. Based upon the statement of work signed on April 19, 2018, total fees under the Service
Agreement should not exceed $2.0 million and are payable within thirty days after receipt of each invoice for services performed and accepted in accordance with
the terms of the Service Agreement.
For fiscal year 2018, we made a total payment of $5.7 million to Magnet, with $5.0 million related to the license and $0.7 million related to the integration
services. As of September 30, 2018, $0.4 million was included within Accounts payable.
20. Segment and Geographic Information
During the first quarter of fiscal year 2018, we commenced a review of our segment reporting structure to better align our Chief Operating Decision Maker's
("CODM") long-term strategic focus with our organizational structure. During the second quarter of fiscal year 2018, we implemented a number organizational
changes to align our segment reporting structure with our long-term strategic focuses, including (i) establishing our Automotive business as a separate operating
segment, (ii) moving our Dragon TV business from our former Mobile operating segment into our Enterprise operating segment to consolidate our
telecommunications market resources, and (iii) establishing an Other segment that includes our SRS and Devices businesses, previously reported within our former
Mobile operating segment. As a result, segment information for fiscal years 2018, 2017 and 2016 has been recast to reflect the new segment reporting structure.
Our CODM regularly reviews segment revenues and segment profits for performance evaluation and resources allocation. Segment revenues include certain
acquisition-related adjustments for revenues that would otherwise have been recognized without the acquisition. Segment profits reflect controllable costs directly
related to each segment and the allocation of certain corporate expenses such as, corporate sales and marketing expenses and research and development project
costs that benefit multiple segments. Certain items such as stock-based compensation, amortization of intangible assets, acquisition-related costs, net, restructuring
and other charges, net, other expenses, net and certain unallocated corporate expenses are excluded from segment profits, which allow for more meaningful
comparisons to the financial results of the historical operations for performance evaluation and resources allocation by our CODM.
•
•
•
•
•
The Healthcare segment is primarily engaged in providing clinical speech and clinical language understanding solutions that improve the clinical
documentation process, from capturing the complete patient record to improving clinical documentation and quality measures for reimbursement.
The Enterprise segment is primarily engaged in using speech, natural language understanding, and artificial intelligence to provide automated customer
solutions and services for voice, mobile, web and messaging channels.
The Automotive segment is primarily engaged in providing automotive manufacturers and their suppliers branded and personalized virtual assistants and
connected car services built on our voice recognition and natural language understanding technologies.
The Imaging segment is primarily engaged in software solutions and expertise that help professionals and organizations to gain optimal control of their
document and information processes through scanning and print management.
Other segment includes our SRS and Devices businesses. Our SRS business provides value-added services to mobile operators in India and Brazil (“Mobile
Operator Services”) and voicemail transcription services to mobile operators in the rest of the world (“Voicemail-to-Text”). Our Devices business provides
speech recognition solutions and predictive text technologies for handset devices.
91
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As we do not track our assets by operating segment, we do not include total assets or depreciation expenses by operating segment. The following table presents
segment results along with a reconciliation of segment profits to (loss) income before income taxes (in thousands):
Segment revenues:
Healthcare
Enterprise
Automotive
Imaging
Other
Total segment revenues
Acquisition related revenue adjustments (a)
Total consolidated revenue
Segment profit:
Healthcare
Enterprise
Automotive
Imaging
Other
Total segment profit
Corporate expenses and other, net
Acquisition-related revenues and costs of revenues adjustment
Stock-based compensation
Amortization of intangible assets
Acquisition-related costs, net
Restructuring and other charges, net
Impairment of goodwill and other intangible assets
Costs associated with IP collaboration agreements (b)
Other expenses, net
(Loss) income before income taxes
Year Ended September 30,
2018
2017
2016
$
984,819 $
899,341 $
483,194
279,402
212,903
109,064
2,069,382
(17,721)
2,051,661
331,382
142,422
109,867
67,391
28,417
679,479
(199,411)
(17,721)
(150,785)
(147,966)
(16,101)
(63,498)
(170,941)
—
474,317
252,218
217,749
133,766
1,977,391
(38,029)
1,939,362
262,149
135,638
118,869
79,512
41,568
637,736
(125,924)
(38,029)
(154,272)
(178,748)
(27,740)
(61,054)
—
—
(129,791)
(170,984)
$
(216,735) $
(119,015) $
973,297
396,026
214,267
241,569
154,434
1,979,593
(30,690)
1,948,903
313,466
129,259
95,660
100,823
38,434
677,642
(128,239)
(29,765)
(163,828)
(170,897)
(17,166)
(25,224)
—
(4,000)
(136,784)
1,739
(a) Segment revenues differ from reported revenues due to certain revenue adjustments related to acquisitions that would otherwise have been recognized but for the purchase
accounting treatment of the business combinations. These revenues are included to allow for more complete comparisons to the financial results of historical operations and
in evaluating management performance.
(b) We entered into certain collaboration agreements in order to gain access to a third party’s extensive speech recognition technology, natural language technology, and
semantic processing technology. Pursuant to these agreements, we had sole rights to commercialize such intellectual property for periods ranging between two to six years.
For fiscal year 2016, we recognized $4.0 million as sales and marketing expense for the exclusive commercialization rights related to one of these collaboration agreements
in our consolidated statements of operations. No expenses were recognized for fiscal years 2018 and 2017.
No country outside of the United States provided greater than 10% of our total revenue. Revenue, classified by the major geographic areas in which our customers
are located, was as follows (dollars in thousands):
United States
International
Total
2018
1,470,669 $
580,992
2017
1,352,039 $
587,323
2,051,661 $
1,939,362 $
2016
1,385,265
563,638
1,948,903
$
$
92
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NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
No country outside of the United States held greater than 10% of our long-lived or total assets. Our long-lived assets, including intangible assets and goodwill,
were located as follows (dollars in thousands):
United States
International
Total
21. Subsequent Event
September 30,
2018
3,378,698 $
995,050
4,373,748 $
$
$
September 30,
2017
3,604,140
999,842
4,603,982
During the third quarter of fiscal year 2018, we commenced a strategic and operational review of our business with the goal of improving our focuses on
leveraging our core strengths in key vertical markets and sustaining our long-term growth and profitability.
In connection with our strategic business review, our Board of Directors approved the divestiture of our Imaging business on November 7, 2018. On November 11,
2018, we entered into a definitive stock purchase agreement, pursuant to which we agreed to sell our Imaging business and associated assets for a total cash
consideration of approximately $400 million. The transaction, which is subject to regulatory review and other customary closing conditions, is expected to close by
the end of the second quarter of fiscal year 2019.
Additionally, on November 19, 2018, we announced our intent to spin off our Automotive business into an independent publicly-traded company through a pro rata
distribution to our common stock holders. Completion of the proposed spin-off is subject to certain conditions, including final approval by our Board of Directors.
We are targeting to compete the separation of the business by the end of fiscal year 2019.
22. Quarterly Data (Unaudited)
The following information has been derived from unaudited consolidated financial statements that, in the opinion of management, include all recurring adjustments
necessary for a fair statement of such information (dollars in thousands, except per share amounts):
2018
Total revenue
Gross profit
Net income (loss)
Net income (loss) per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
2017
Total revenue
Gross profit
Net loss
Net loss per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
$
$
$
$
$
$
$
$
$
$
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal Year
501,645 $
280,451 $
514,224 $
285,236 $
53,228 $
(164,053) $
502,887 $
289,449 $
(14,037) $
532,905 $
322,955 $
(35,066) $
2,051,661
1,178,091
(159,928)
0.18 $
0.18 $
(0.56) $
(0.56) $
(0.05) $
(0.05) $
(0.12) $
(0.12) $
(0.55)
(0.55)
291,367
295,995
294,103
294,103
292,663
292,663
287,052
287,052
291,318
291,318
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal Year
487,658 $
275,248 $
(23,929) $
499,573 $
286,155 $
(33,808) $
486,221 $
270,008 $
(27,836) $
465,910 $
254,151 $
(65,423) $
1,939,362
1,085,562
(150,996)
(0.08) $
(0.08) $
(0.12) $
(0.12) $
(0.10) $
(0.10) $
(0.23) $
(0.23) $
(0.52)
(0.52)
288,953
288,953
291,021
291,021
287,856
287,856
288,718
288,718
289,348
289,348
93
Table of Contents
Item 9.
Changes
in
and
Disagreements
with
Accountants
on
Accounting
and
Financial
Disclosure
Not applicable.
Item 9A.
Controls
and
Procedures
Disclosure
Controls
and
Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and
procedures. Our disclosure controls and procedures are designed (i) to ensure that information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed and summarized and reported within the time periods
specified in the SEC’s rules and forms and (ii) to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2018 , our disclosure
controls and procedures were effective.
Management
Report
on
Internal
Control
Over
Financial
Reporting
Management 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 Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in accordance with generally accepted 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 generally accepted
accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and,
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree of compliance with
the policies or procedures may deteriorate.
Management has assessed the effectiveness of our internal control over financial reporting as of September 30, 2018 , utilizing the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in the 2013 Internal Control-Integrated Framework. Based on the results of this
assessment, management (including our Chief Executive Officer and our Chief Financial Officer) has concluded that, as of September 30, 2018 , 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, 2018 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
Reporting
There have been no changes in our internal controls over financial reporting during the fourth quarter of fiscal 2018 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
94
Table of Contents
Item 9B. Other
Information
On November 19, 2018, the Compensation Committee of the Board of Directors approved the payment of a $1 million transaction bonus to Alvaro Monserrat, the
Executive Vice President and General Manager of the Imaging business, upon and subject to the occurrence of the closing of the sale of the Imaging business, in
recognition of Mr. Monserrat’s integral role in the transaction. The Committee also approved the payment of a bonus under the Company’s annual incentive plan,
upon and subject to the closing of the transaction, to Mr. Monserrat in the amount of 100% of target in the event that the closing occurs on or before March 31,
2019, and in an amount based on the Company’s projected fiscal year forecast in the event the closing occurs after March 31, 2019, in each case pro-rated for the
portion of the fiscal year that runs to and including the closing date. Each such bonus may be paid to Mr. Monserrat in cash or equity, at the Company’s option.
The Committee also approved the acceleration and vesting of all of Mr. Monserrat’s outstanding performance stock units, at target, and restricted stock units,
scheduled to vest through November 30, 2019, such acceleration and vesting to occur upon and subject to the closing of the transaction. Mr. Monserrat must
remain continuously employed with the Company and work diligently and in good faith through the closing of the transaction in order to be eligible for the bonuses
and accelerated vesting summarized above.
PART III
Certain 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 our next
Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the “Proxy Statement”), within 120 days of the
end of the fiscal year covered by this report, and certain information to be included in the Proxy Statement is incorporated herein by reference.
Item 10. Directors,
Executive
Officers
and
Corporate
Governance
The information required by this item concerning our directors is incorporated by reference to the information set forth in the section titled “Election of Directors”
in our Proxy Statement. Information required by this item concerning our executive officers is incorporated by reference to the information set forth in the section
entitled “Executive Compensation, Management and Other Information” in our Proxy Statement. Information regarding Section 16 reporting compliance is
incorporated by reference to the information set forth in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” 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 September 15, 2015. Our Code of
Business Conduct and Ethics can be found at our website: www.nuance.com. We will provide to any person without charge, upon request, a copy of our Code of
Business Conduct and Ethics. Such a request should be made in writing and addressed to Investor Relations, Nuance Communications, Inc., 1 Wayside 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 of Business
Conduct and Ethics on our website at www.nuance.com.
Item 11. Executive
Compensation
The 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
Matters
The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference to the information
set forth in the sections titled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our Proxy
Statement.
95
Table of Contents
Item 13. Certain
Relationships
and
Related
Transactions,
and
Director
Independence
It 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 Audit Committee of
the Board. In furtherance of relevant Nasdaq rules and our commitment to corporate governance, the charter of the Audit Committee provides that the Audit
Committee shall review and approve any proposed related party transactions including, transactions required to be reported pursuant to Item 404 of Regulation S-K
for potential conflict of interest situations. The Audit Committee reviews the material facts of all transactions that require the committee’s approval and either
approves or disapproves of the transaction. In determining whether to approve a transaction, the Audit Committee will take into account, among other factors it
deems appropriate, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third-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 the information 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
Services
The information required by this section is incorporated by reference from the information in the section entitled “Ratification of Appointment of Independent
Registered Public Accounting Firm” in our Proxy Statement.
Item 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.
PART IV
(2) Financial Statement Schedules — All schedules have been omitted as the requested information is inapplicable or the information is presented 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.
EXHIBIT INDEX
Incorporated by Reference
Exhibit
Index #
3.1
Exhibit Description
Amended and Restated Certificate of Incorporation of the
Registrant.
Form
File No.
10-Q
0-27038
Exhibit
3.2
3.2
3.3
3.4
3.5
3.6
Certificate of Amendment of the Amended and Restated Certificate
of Incorporation of the Registrant.
10-Q
0-27038
Certificate of Ownership and Merger.
Amended and Restated Bylaws of the Registrant.
Certificate of Amendment of the Amended and Restated Certificate
of Incorporation of the Registrant, as amended.
8-K
8-K
S-3
0-27038
0-27038
333-142182
Certificate of Elimination of the Series A Participating Preferred
Stock.
8-K
0-27038
3.1
3.1
3.1
3.3
3.1
Filing Date
Filed Herewith
5/11/2001
8/9/2004
10/19/2005
11/9/2018
4/18/2007
8/20/2013
X
96
Table of Contents
Exhibit
Index #
3.7
Exhibit Description
Certificate of Designation of Rights, Preferences and Privileges of
Series A Participating Preferred Stock.
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
Specimen Common Stock Certificate.
Indenture, dated as of October 24, 2011, by and between Nuance
Communications, Inc. and U.S. Bank National Association as
Trustee relating to 2.75% Convertible Debentures due 2031.
Indenture, dated August 14, 2012, among Nuance Communications,
Inc., the guarantors party thereto and U.S. Bank National
Association, relating to 5.375% Senior Notes due 2020.
Preferred Shares Rights Agreement, dated as of August 19, 2013,
by and between Nuance Communications, Inc. and American Stock
Transfer & Trust Company, LLC, as rights agent.
First Amendment to Preferred Shares Rights Agreement, dated as
of August 18, 2014, by and between Nuance Communications, Inc.
and American Stock Transfer & Trust Company, LLC, as rights
agent.
Indenture, dated June 16, 2015, between Nuance Communications,
Inc., and U.S. Bank National Association as Trustee, relating to
1.50% Convertible Debentures due 2035.
Indenture, dated December 7, 2015, between Nuance
Communications, Inc., and U.S. Bank National Association as
Trustee, relating to 1.00% Senior Convertible Debentures Due
2035.
Indenture, dated as of June 21, 2016, among Nuance
Communications, Inc., the guarantors party thereto and U.S. Bank
National Association as Trustee relating to 6% Senior Notes due
2024.
Incorporated by Reference
Form
File No.
8-K
0-27038
Exhibit
3.2
Filing Date
Filed Herewith
8/20/2013
8-A
8-K
0-27038
0-27038
4.1
4.1
12/6/1995
10/24/2011
8-K
0-27038
4.1
8/14/2012
8-K
0-27038
4.1
8/20/2013
8-K
001-36056
4.2
8/18/2014
8-K
001-36056
4.1
6/22/2015
8-K
001-36056
4.1
12/7/2015
8-K
001-36056
4.1
6/22/2016
10.1 Form of Indemnification Agreement.
10.2 Amended and Restated 1995 Employee Stock Purchase Plan.
10.3
10.4
10.5
10.6
Nuance Communications, Inc. 2000 Stock Plan (as amended
January 27, 2016)
Form of Restricted Stock Purchase Agreement for use under
Nuance Communications, Inc. 2000 Stock Plan.*
Form of Restricted Stock Unit Purchase Agreement for use under
Nuance Communications, Inc. 2000 Stock Plan.*
Form of Stock Option Agreement for use under Nuance
Communications, Inc. 2000 Stock Plan.*
10.7 Amended and Restated 1995 Directors Stock Plan.
10.8
Amended & Restated Employment Agreement dated November 17,
2016 between the Registrant and Paul Ricci.*
10.9 Form of Executive Officer Employment Offer Letter*
10.10
Form of Change of Control and Severance Agreement for
Executive Officers.*
S-8
S-8
8-K
333-108767
001-36056
001-36056
5/10/2018
2/6/2015
3/6/2018
4.2
10.1
10-K/A
0-27038
10.17
12/15/2006
10-K/A
0-27038
10.18
12/15/2006
10-K/A
0-27038
10.19
12/15/2006
10-Q
001-36056
8-K
0-27038
10-K
001-36056
10-Q
001-36056
10.3
10.1
10.9
10.2
8/9/2018
11/17/2016
11/22/2016
8/9/2018
97
Table of Contents
Exhibit
Index #
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
Exhibit Description
Purchase Agreement, dated as of December 1, 2015 by and between
Nuance Communications, Inc. and Barclays Capital Inc. and
Morgan Stanley & Co. LLC as representatives of the several initial
purchasers listed on Schedule I thereto.
Revolving Credit Agreement, dated April 15, 2016, among Nuance
Communications, Inc., the lenders party thereto and Barclays Bank
PLC as Administrative Agent.
Guarantee and Collateral Agreement, dated April 15, 2016 among
Nuance Communications, Inc., certain Nuance subsidiaries and
Barclays Bank PLC as Administrative Agent.
Purchase Agreement, dated as of June 14, 2016, by and among
Nuance Communications, Inc., the subsidiary guarantors party
thereto and Morgan Stanley & Co. LLC and Barclays Capital Inc.,
as representatives of the several initial purchasers named therein.
Transition and Severance Agreement between Nuance
Communications, Inc. and Earl H. Devanny III dated August 31,
2016.
Incorporated by Reference
Form
File No.
8-K
001-36056
Exhibit
10.1
Filing Date
Filed Herewith
12/2/2015
8-K
001-36056
10.1
4/19/2016
8-K
001-36056
10.2
4/19/2016
8-K
001-36056
10.1
6/17/2016
8-K
001-36056
10.1
9/7/2016
Change of Control and Severance Agreement between Nuance
Communications, Inc. and Daniel Tempesta dated August 8, 2018.
Employment Agreement between Nuance Communications, Inc.
and Mark D. Benjamin dated March 19, 2018.
Sale Agreement by and between Nuance Communications, Inc. and
Project Leopard AcquireCo Limited dated November 11, 2018
8-K
8-K
001-36056
10.1
3/22/2018
001-36056
2.1
11/14/2018
X
X
X
X
X
X
X
X
14.1 Registrant’s Code of Business Conduct and Ethics
21.1 Subsidiaries of the Registrant.
23.1 Consent of BDO USA, LLP.
24.1 Power of Attorney. (See Signature Page).
31.1
31.2
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
or 15d-14(a).
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
or 15d-14(a).
32.1 Certification Pursuant to 18 U.S.C. Section 1350.
101
The following materials from Nuance Communications, Inc.’s
Annual Report on Form 10-K for the fiscal year ended September
30, 2018, formatted in XBRL (Extensible Business Reporting
Language): (i) the Consolidated Statements of Operations, (ii) the
Consolidated Statements of Comprehensive Loss, (iii) the
Consolidated Balance Sheets, (iv) the Consolidated Statements of
Cash Flows, and (v) Notes to Unaudited Condensed Consolidated
Financial Statements.
*
Denotes management compensation plan or arrangement
98
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
NUANCE COMMUNICATIONS, INC.
By:
/s/ Mark Benjamin
Mark Benjamin
Chief Executive Officer
Table of Contents
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Mark Benjamin and Daniel D.
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 and resubstitution,
for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the
same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and
purposes as he or she might or could do in person, and hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney may be executed in counterparts.
Pursuant 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 the capacities
and on the dates indicated.
Table of Contents
Date: 11/20/2018
Date: 11/20/2018
Date: 11/20/2018
Date: 11/20/2018
Date: 11/20/2018
Date: 11/20/2018
Date: 11/20/2018
Date: 11/20/2018
Date: 11/20/2018
Date: 11/20/2018
Date: 11/20/2018
/s/ Mark Benjamin
Mark Benjamin, Chief Executive Officer
(Principal Executive Officer)
/s/ Daniel D. Tempesta
Daniel D. Tempesta
Executive Vice President and Chief Financial Officer (Principal Financial
Officer)
/s/ Arthur Giterman
Arthur Giterman
Senior Vice President, Chief Accounting Officer and Corporate Controller
(Principal Accounting Officer)
/s/ Daniel J. Brennan
Daniel J. Brennan, Director
/s/ Laura S. Kaiser
Laura S. Kaiser, Director
/s/ Lloyd A. Carney
Lloyd A. Carney, Chairman of the Board
/s/ Mark R. Laret
Mark R. Laret, Director
/s/ Michal Katz
Michal Katz, Director
/s/ Robert J, Finocchio, Jr
Robert J, Finocchio, Jr., Director
/s/ Sanjay N. Vaswani
Sanjay N. Vaswani, Director
/s/ Thomas D. Ebling
Thomas D. Ebling, Director
Table of Contents
Item 16. Form
10-K
Summary
Not applicable.
Exhibit 3.4
BYLAWS
OF
NUANCE COMMUNICATIONS, INC.
(As Amended & Restated November 7, 2018)
TABLE OF CONTENTS
ARTICLE I OFFICES
ARTICLE II MEETINGS OF STOCKHOLDERS
ARTICLE III DIRECTORS
MEETINGS OF THE BOARD OF DIRECTORS
COMMITTEES OF DIRECTORS
COMPENSATION OF DIRECTORS
REMOVAL OF DIRECTORS
ARTICLE IV NOTICES
ARTICLE V OFFICERS
THE CHAIRMAN OF THE BOARD
THE CHIEF EXECUTIVE OFFICER, PRESIDENT AND VICE-
PRESIDENTS
THE SECRETARY AND ASSISTANT SECRETARY
THE TREASURER AND ASSISTANT TREASURERS
ARTICLE VI CERTIFICATE OF STOCK
LOST CERTIFICATES
TRANSFER OF STOCK
FIXING RECORD DATE
REGISTERED STOCKHOLDERS
ARTICLE VII GENERAL PROVISIONS
DIVIDENDS
CHECKS
FISCAL YEAR
SEAL
INDEMNIFICATION
PROHIBITION ON TOXICS
ARTICLE VIII AMENDMENTS
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ARTICLE I
OFFICES
Section 1 . The registered office shall be in the City of Dover, County of Kent, State of Delaware.
Section 2 . The corporation may also have offices at such other places both within and without the State of Delaware as the
Board of Directors may from time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1 . All meetings of the stockholders for the election of directors shall be held at such place as may be fixed from time
to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from
time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may
be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
Section 2 .
(a) Annual meetings of stockholders shall be held at such date and time as shall be designated from time to time by the
Board of Directors and stated in the notice of the meeting, at which they shall elect a board of directors, and transact such other
business as may properly be brought before the meeting.
(b) A nominee for director shall be elected to the board of directors if the votes cast for such nominee’s election exceed the
votes against and withheld from such nominee’s election; provided, however, that directors shall be elected by a plurality of the
votes cast by the holders of the shares present in person or represented by proxy and entitled to vote on the election of directors at
any meeting of stockholders where the number of director nominees exceeds the number of directors to be elected at such meeting
and for which (i) the secretary has received a notice that a stockholder intends to nominate a person for election to the board of
directors in compliance with the notice requirements set forth in Article II, Section 11 or Section 15 of these bylaws, as applicable;
and (ii) such nomination has not been withdrawn by such stockholder on or before the fourteenth (14th) day preceding the date that
the corporation first files its definitive proxy statement for such meeting (regardless of whether or not such proxy statement is
thereafter revised or supplemented) with the Securities and Exchange Commission. If directors are to be elected by a plurality of the
votes cast, stockholders shall not be permitted to vote against a nominee. With respect to the election of directors only, “abstentions”
and “broker non-votes,” although counted for quorum purposes, shall not be included in the total number of votes cast or be counted
as votes “for” or “against” any nominee’s election.
(c) The Nominating & Governance Committee has established procedures under which any director nominated for
reelection shall tender his or her contingent resignation to the Board of Directors. If a nominee for director fails to receive the
required number of votes for reelection, the Nominating & Governance Committee will make a recommendation to the Board of
Directors on whether to accept or reject the resignation, or whether other action should be taken. The Board of Directors will act on
the Nominating & Governance Committee’s recommendation and publicly disclose its decision and the rationale behind it within
ninety (90) days from the date of the certification of the election results.
Section 3 . Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting.
Section 4 . The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days
before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder
who is present.
Section 5 .
(a) Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the
certificate of incorporation, may be called by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the
Secretary, acting pursuant to a resolution duly adopted by a majority of the Whole Board (as defined below). Subject to the
satisfaction of the requirements of these bylaws, a special meeting of the stockholders shall be called by the Chairman of the Board,
the Chief Executive Officer or the Secretary upon the written request of holders of an aggregate of at least twenty percent 20% of all
of the votes entitled to be cast on any issue to be considered at the proposed special meeting (such a meeting, a “Stockholder
Requested Special Meeting”). The term “Whole Board” shall mean the total number of authorized directors of the corporation
whether or not there exist any vacancies in previously authorized directorships.
(b) Any request for a Stockholder Requested Special Meeting shall (i) be signed and dated by each stockholder (or their
duly authorized agents) and delivered to the Secretary at the principal executive offices of the corporation, (ii) set forth a statement
of the specific purpose or purposes of the proposed meeting and the matters proposed to be acted on at such meeting, and
(iii) include the information required by Article II, Section 11(c) of these bylaws with respect to the stockholders requesting the
Stockholder Requested Special Meeting, and any business proposed to be conducted and any nominations proposed to be presented
at such meeting. In addition, the stockholder and any duly authorized agent shall promptly provide any other information reasonably
requested by the corporation. A stockholder providing a request for business proposed to be brought before a Stockholder Requested
Special Meeting shall update and supplement such request, if necessary, so that the information provided or required to be provided
in such request pursuant to this Section 5(c) shall be true and correct and such update or supplement shall be delivered to, and
received by, the Secretary at the principal executive offices of the corporation.
(c) Any Stockholder Requested Special Meeting shall be held at such date, time and place within or without the State of
Delaware as may be fixed by the Board of Directors; provided, however , that the date of any Stockholder Requested Special
Meeting shall be not more than sixty (60) days after the record date for such meeting, which shall be fixed in accordance with Article
VI, Section V of these bylaws.
(d) Notwithstanding the foregoing, the Chairman of the Board, the Chief Executive Officer or the Secretary shall not be
required to call a Stockholder Requested Special Meeting if (i) the Board of Directors has called or calls an annual meeting of
stockholders to be held not later than ninety (90) days
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after the Delivery Date where the Board of Directors determines in good faith that the business of such annual meeting (among any
other matters properly brought before the annual meeting) includes the business specified in the stockholders’ request; (ii) an annual
or special meeting that included the business specified in the request (as determined by the Board of Directors in good faith) was
held not more than ninety (90) days before the Delivery Date; (iii) the request relates to an item of business that is not a proper
subject for action by the stockholders of the corporation under applicable law; or (iv) was made in a manner that involved a violation
of applicable law.
(e) A stockholder may revoke a request for a Stockholder Requested Special Meeting at any time by written revocation
delivered to the Secretary, and if, following such revocation there are un-revoked requests from stockholders holding in the
aggregate less than the requisite number of shares entitling the stockholders to request the calling of a Stockholder Requested
Special Meeting, the Board of Directors, in its discretion, may cancel the Stockholder Requested Special Meeting. If none of the
stockholders who submitted the request for a Stockholder Requested Special Meeting appears or sends a qualified representative to
present the nominations proposed to be presented or other business proposed to be conducted at such meeting, the corporation need
not present such nominations or other business for a vote at such meeting. Section 6 . Written notice of a special meeting stating the
place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not fewer than ten
(10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting.
Section 7 . Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.
Business transacted at a Stockholder Requested Special Meeting shall be limited to the purposes described in the special meeting
requested; provided, however , that nothing herein shall prohibit the corporation from submitting matters to a vote of the
stockholders at any Stockholder Requested Special Meeting.
Section 8 . The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum, at all meetings of the stockholders for the transaction of business except as
otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have the
power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted
that might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty (30) days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 9 . When a quorum is present at any meeting, except as provided in Article II, Section 2(b) of these bylaws for the
election of directors, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy
shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or
of the certificate of incorporation or of the applicable rules of any stock exchange or automatic quotation system upon which the
corporation’s shares are traded, a different vote is required, in which case such express provision shall govern and control the
decision of such question.
Section 10 . Unless otherwise provided in the certificate of incorporation each stockholder shall at every meeting of the
stockholders be entitled to one vote in person or by proxy for each share of the
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capital stock having voting power held by such stockholder, but no proxy shall be voted on after three (3) years from its date, unless
the proxy provides for a longer period.
Section 11 .
(a) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders (A) pursuant to the corporation’s notice with respect to such
meeting, (B) by or at the direction of the Board of Directors, or (C) by any stockholder of record of the corporation who was a
stockholder of record at the time of the giving of the notice provided for in these bylaws, who is entitled to vote at the meeting and
who has complied with the notice procedures set forth in this Section 11.
(b) For nominations or other proposals of business to be properly brought before an annual meeting by a stockholder
pursuant to clause (C) of the preceding paragraph, (i) the stockholder must have given timely notice thereof in writing to the
Secretary of the corporation (as provided in the third paragraph below of this Section 11), (ii) such business must be a proper matter
for stockholder action under the General Corporation Law of Delaware, (iii) if the stockholder, or the beneficial owner on whose
behalf any such proposal or nomination is made, has (1) provided the corporation with a Solicitation Notice (as defined below), then
(2) such stockholder or beneficial owner must, in the case of a proposal, have delivered a proxy statement and form of proxy to
holders of at least the percentage of the corporation’s voting shares required under these bylaws and applicable law to carry any such
proposal, or, in the case of a nomination(s), have delivered a proxy statement and form of proxy to holders of a percentage of the
corporation’s voting shares sufficient to elect the nominee(s) proposed to be nominated by such stockholder, and must, in either case,
have included in such materials the Solicitation Notice, and (iv) if no Solicitation Notice relating thereto has been timely provided
pursuant to this Section 11, the stockholder or beneficial owner proposing such business or nomination must not have solicited a
number of proxies sufficient to have required the delivery of such a Solicitation Notice under this Section 11.
(c) To be timely, a stockholder’s notice relating to nominations or other proposals of business to be properly brought before
an annual meeting shall be delivered to the Secretary at the principal executive offices of the corporation (a) not later than the close
of business on the ninetieth (90th) calendar day, nor earlier than the close of business on the one hundred and twentieth (120th)
calendar day, prior to the first anniversary of the preceding year’s annual meeting, or (b) not later than the close of business on the
forty-fifth (45th) calendar day, nor earlier than the close of business on the seventy-fifth (75th) calendar day, prior to the first
anniversary (the “Anniversary”) of the date on which the corporation first mailed its proxy materials for the preceding year’s annual
meeting, whichever period described in clause (a) or (b) of this sentence occurs first; provided, however, that if the date of the
annual meeting is advanced more than thirty (30) calendar days prior to, or delayed by more than sixty (60) calendar days after, the
anniversary of the preceding year’s annual meeting. Such stockholder’s notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a director, (i) all information relating to such person as would be
required to be disclosed in solicitations of proxies for the election of such nominee(s) as directors pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended or any successor thereto (the “Exchange Act”), (ii) a description of all
arrangements or understandings between or among the stockholder and, each nominee and/or any other person or persons (naming
such person or persons) pursuant to which the nominations are to be made by the stockholder or pertaining to the nominee’s service
on the Board of Directors and (iii) such nominee’s written consent to be named in the proxy statement as a nominee and to serve as a
director for the term for which such nominee is standing for election if elected, as well as a written statement executed by such
person acknowledging that as a director of the corporation, such person will owe a fiduciary duty under the General Corporation
Law of Delaware exclusively to the corporation and its stockholders, (b) as to
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any other business that the stockholder proposes to bring before the meeting, a brief description of such business, the reasons for
conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if
any, on whose behalf the proposal is made, and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation’s books,
and of such beneficial owner, (ii) the class and number of shares of the corporation that are owned beneficially and of record by such
stockholder and such beneficial owner, and (iii) whether either such stockholder or beneficial owner intends to deliver a proxy
statement and form of proxy to holders of, in the case of a proposal, at least the percentage of the corporation’s voting shares
required under applicable law to carry the proposal or, in the case of a nomination(s), a sufficient number of holders of the
corporation’s voting shares to elect such nominee(s) (an affirmative statement of such intent, a “Solicitation Notice”).
(d) Notwithstanding anything in the first sentence of the third paragraph of this Section 11 to the contrary, in the event that
the number of directors to be elected to the Board of Directors is increased and there is no Public Announcement naming all of the
nominee(s) for director or specifying the size of the increased Board of Directors made by the corporation at least fifty-five
(55) calendar days prior to the Anniversary, a stockholder’s notice required by this bylaw shall also be considered timely, but only
with respect to nominee(s) for any new positions created by such increase, if it shall be delivered to the Secretary at the principal
executive offices of the corporation not later than the close of business on the tenth (10th) calendar day following the day on which
such Public Announcement is first made by the corporation.
(e) Only such persons nominated in accordance with the procedures set forth in this Section 11 or Section 15 of this Article
II shall be eligible to serve as directors and only such business shall be conducted at an annual meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in this Section 11. The Chairman of the meeting shall
have the power and the duty to determine whether a nomination or any business proposed to be brought before the meeting has been
made in accordance with the procedures set forth in these bylaws and, if any proposed nomination or business is not in compliance
with these bylaws, to declare that such defective proposed business or nomination shall not be presented for stockholder action at the
annual meeting and shall be disregarded.
(f) Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at
which directors are to be elected pursuant to the corporation’s notice (as provided in Section 6 above) of meeting (a) by or at the
direction of the Board of Directors, or (b) by any stockholder of record of the corporation who is a stockholder of record at the time
of giving of notice provided for in this paragraph, who shall be entitled to vote at the meeting and who complies with the notice
procedures set forth in this Section 11. Nominations by stockholders of persons for election to the Board of Directors, where
permitted, may be made at such a special meeting of stockholders if the Solicitation Notice required by paragraph (c) of this
Section 11 shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the close of
business on the one hundred and twentieth (120th) calendar day prior to the special meeting and not later than the close of business
on the later of (ib) the ninetieth (90th) calendar day prior to such special meeting, and (ii) the tenth (10th) calendar day following the
day on which Public Announcement is first made of the date of the special meeting and of the nominee(s) proposed by the Board of
Directors to be elected at such meeting.
(g) For purposes of this Section 11, “Public Announcement” shall mean disclosure in a press release reported by the Dow
Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the corporation with
the Securities and Exchange Commission (the
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“Commission”) pursuant to Section 13, 14 or 15(d) of the Exchange Act. In no event shall the Public Announcement of an
adjournment of stockholders meeting commence a new time period for the giving of stockholder’s notice as described above.
(h) Notwithstanding the foregoing provisions of this Section 11, a stockholder shall also comply with all applicable
requirements of the Exchange Act and the rules and regulations thereunder with respect to matters set forth in this Section 11.
Nothing in this Section 11 shall be deemed to contravene any express rights of stockholders to request inclusion of proposals in the
corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 12 . The stockholders of the corporation may not take action by written consent without a meeting but must take any
such actions at a duly called annual or special meeting.
Section 13 . With respect to any meeting of stockholders, the Board of Directors may appoint an inspector or inspectors of
election to act at the meeting or its adjournment. If no inspector of election is so appointed, then the Chairman of the meeting may
appoint an inspector or inspectors of election to act at the meeting. If any person appointed as inspector fails to appear or fails or
refuses to act, then the Chairman of the meeting may appoint a person to fill that vacancy. Such inspectors may, at the direction of
the Board of Directors or the Chairman of the meeting, be directed to do any or all of the following: (a) determine the number of
shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the
authenticity, validity, and effect of proxies; (b) receive votes, ballots or consents; (c) hear and determine challenges and questions in
any way arising in connection with the right to vote; (d) count and tabulate all votes; (e) determine when the polls shall close;
(f) determine the result; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all stockholders.
Section 14 . The Chief Executive Officer, or in the absence of the Chief Executive Officer, the Chairman of the Board, or, in
the absence of the Chief Executive Officer and the Chairman of the Board, the President or one of the corporation’s Vice-Presidents,
or, in the absence of any of the foregoing such other person as shall be appointed by the Board of Directors, shall call all meetings of
stockholders to order and shall act as Chairman of the meeting. The Chairman of any meeting of stockholders shall determine the
order of business and the procedures at the meeting, including such matters as the regulation of the manner of voting and the conduct
of business.
Section 15 .
(a) Subject to the terms of this Section 15, the corporation shall include in its proxy statement and form of proxy card
(together, “Proxy Materials”) for an annual meeting of stockholders the name, together with the Required Information (as defined
below), of any person nominated for election (a “Stockholder Nominee”) to the Board of Directors by a stockholder that satisfies, or
by a group of no more than twenty (20) stockholders that satisfy, the requirements of this Section 15 (such stockholder or group of
stockholders, including each member thereof to the extent the context so requires, an “Eligible Stockholder”), and that expressly
elects at the time of providing the notice required by this Section 15 (the “Nomination Notice”) to have its nominee included in the
Proxy Materials pursuant to this Section 15. In the event that an Eligible Stockholder consists of a group of stockholders, any and all
requirements and obligations for an individual Eligible Stockholder that are set forth in these bylaws shall apply to each member of
such group, except that the Required Shares (as defined below) shall apply to the ownership of the group in the aggregate.
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(b) In order to validly submit a Nomination Notice, an Eligible Stockholder must have owned continuously for at least
three (3) years that number of shares of common stock of the corporation as shall constitute three percent (3%) or more of the
outstanding common stock of the corporation (the “Required Shares”) as of both (i) a date within seven (7) calendar days prior to the
date of the Nomination Notice and (ii) the record date for determining stockholders entitled to vote at the annual meeting of
stockholders. In addition, such Eligible Stockholder must continue to hold the Required Shares through the date of the annual
meeting of stockholders or any adjournment or postponement thereof. For purposes of satisfying the foregoing ownership
requirement under this Section 15: (A) the shares of the common stock of the corporation owned by one or more stockholders, or by
the person or persons who own shares of the common stock of the corporation and on whose behalf any stockholder is acting, may
be aggregated, but the number of stockholders and other persons whose ownership of shares of common stock of the corporation is
aggregated for such purpose shall not exceed twenty (20); (B) two (2) or more funds that are (1) under common management and
investment control, (2) under common management and funded primarily by the same employer, or (3) a “group of investment
companies,” as such term is defined in Section 12(d)(1)(G)(ii) of the Investment Company Act of 1940, as amended, shall be treated
as one stockholder or beneficial owner, provided that such funds otherwise meet the requirements under this Section 15 and,
provided, further, that such funds provide to the Secretary documentation reasonably satisfactory to the Board of Directors that
demonstrates that the funds satisfy this Section 15; and (C) no stockholder or person may be a member of more than one group of
persons constituting an Eligible Stockholder under this Section 15. For avoidance of doubt, a stockholder may withdraw from a
group of stockholders at any time prior to the annual meeting of stockholders or any adjournment or postponement thereof. If, as a
result of such withdrawal, the Eligible Stockholder no longer owns the Required Shares, then all nominations by such Eligible
Stockholder shall be disregarded. For purposes of this Section 15, an Eligible Stockholder shall be deemed to “own” only those
outstanding shares of common stock of the corporation as to which the stockholder possesses both (i) the full voting and investment
rights pertaining to the shares and (ii) the full economic interest in (including the opportunity for profit and risk of loss on) such
shares. The number of shares calculated in accordance with clauses (i) and (ii) of the previous sentence shall not include any shares
(a) sold by such stockholder or any of its affiliates in any transaction that has not been settled or closed; (b) borrowed by such
stockholder or any of its affiliates for any purposes or purchased by such stockholder or any of its affiliates pursuant to an agreement
to resell; or (c) subject to any option, warrant, forward contract, swap, contract of sale, or other derivative or similar agreement
entered into by such stockholder or any of its affiliates, whether any such instrument or agreement is to be settled with shares or with
cash based on the notional amount or value of shares of outstanding common stock of the corporation, in any such case which
instrument or agreement has, or is intended to have, the purpose or effect of either or both of (x) reducing in any manner, to any
extent or at any time in the future, such stockholder’s or its affiliates’ full right to vote or direct the voting of any such shares; or (y)
hedging, offsetting or altering to any degree gain or loss arising from the full economic ownership of such shares by such
stockholder or affiliate. For purposes of this Section 15, a stockholder shall “own” shares held in the name of a nominee or other
intermediary so long as the stockholder retains the right to instruct how the shares are voted with respect to the election of directors
and possesses the full economic interest in the shares. For purposes of this Section 15, a person’s ownership of shares of common
stock of the corporation shall be deemed to continue during any period in which the person has loaned such shares so long as the
person has the power to recall such loaned shares on five (5) business days’ notice, and has recalled the loaned shares by the record
date of the relevant annual meeting and the person holds the recalled shares through the date of the annual meeting of stockholders
or any adjournment or postponement thereof. For purposes of this Section 15, a person’s ownership of shares of common stock of
the corporation shall be deemed to continue during any period in which the person has delegated any voting power by means of a
proxy, power of attorney, or other instrument or arrangement that is revocable at any time by the person without condition. The
terms “owned,” “owning” and other
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variations of the word “own” shall have correlative meanings. Whether outstanding shares of common stock of the corporation are
“owned” for these purposes shall be determined by the Board of Directors in good faith, and such determination shall be conclusive
and binding on the corporation and its stockholders.
(c) For purposes of this Section 15, the “Required Information” that the corporation will include in its proxy statement is:
(i) the information concerning the Stockholder Nominee and the Eligible Stockholder that is required to be disclosed in the
corporation’s proxy statement by the regulations promulgated under the Exchange Act; and (ii) if the Eligible Stockholder so elects,
a written statement, not to exceed 500 words, in support of the Stockholder Nominee’s candidacy (the “Statement”).
Notwithstanding anything to the contrary contained in this Section 15, the corporation may omit from the Proxy Materials any
information or Statement (or portion thereof) that it, in good faith, believes would violate any applicable law or regulation. Nothing
in this Section 15 shall limit the corporation’s ability to solicit against and include in its Proxy Materials its own statements relating
to any Eligible Stockholder or Stockholder Nominee.
(d) To be timely, a Nomination Notice and the Required Information must be delivered to or mailed and received by the
Secretary at the principal executive offices of the corporation not later than the close of business on the 120th day and not earlier
than the close of business on the 150th day prior to the anniversary of the date (as stated in the corporation’s Proxy Materials) the
definitive proxy statement with respect to the preceding year’s annual meeting was first sent to stockholders; provided, however, that
in the event that the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after the anniversary
of the preceding year’s annual meeting, notice by the stockholder to be timely must be so received not earlier than the ninetieth (90 th
) day prior to such annual meeting and not later than the close of business on the later of (i) the sixtieth (60 th ) day prior to such
annual meeting or (ii) the tenth (10 th ) day following the day on which Public Announcement of the date of such meeting is first
made by the corporation. In no event shall the Public Announcement of an adjournment or postponement of an annual meeting
commence a new time period (or extend any time period) for the delivery or receipt of a Nomination Notice and Required
Information as described above.
(e) The Nomination Notice shall set forth the following information: (i) one or more written statements from the record
holder(s) of the shares (and from each intermediary through which the shares are or have been held during the requisite three (3) year
holding period) verifying that, as of a date within seven (7) calendar days prior to the date of the Nomination Notice, the Eligible
Stockholder (including each member of any group of stockholders that together is an Eligible Stockholder) owns, and has owned
continuously for the preceding three (3) years, the Required Shares; (ii) the Eligible Stockholder’s agreement to provide, within five
(5) business days after the record date for the annual meeting of stockholders, written statements from the record holder and
intermediaries verifying the continuous ownership by such Eligible Stockholder (including each member of any group of
stockholders that together is an Eligible Stockholder) of the Required Shares through the record date; (iii) the information (including
with respect to the Stockholder Nominees of such Eligible Stockholder) that would be required to be set forth in a stockholder’s
notice of a nomination pursuant to Section 11; (iv) the written consent of each Stockholder Nominee to being named in the
corporation’s proxy statement as a nominee and to serving as a director if elected; (v) a copy of the Schedule 14N that has been filed
with the Securities and Exchange Commission as required by Rule 14a-18 under the Exchange Act, as such rule may be amended;
(vi) in the case of a nomination by a group of stockholders that together is such an Eligible Stockholder, the designation by all group
members of one group member that is authorized to act on behalf of all members of the nominating stockholder group with respect
to the nomination and matters related thereto, including withdrawal of the nomination; (vii) a representation that the Eligible
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Stockholder (including each member of any group of stockholders that together is an Eligible Stockholder) (A) acquired the
Required Shares in the ordinary course of business and not with the intent to change or influence control at the corporation, and does
not presently have such intent; (B) has not nominated and will not nominate for election to the Board of Directors at the annual
meeting of stockholders any person other than the Stockholder Nominee(s) being nominated pursuant to this Section 15; (C) has not
engaged and will not engage in, and has not and will not be a “participant” in another person’s, “solicitation” within the meaning of
Rule 14a-1(l) under the Exchange Act in support of the election of any individual as a director at the annual meeting of stockholders
other than its Stockholder Nominee or a nominee of the Board of Directors; (D) will not distribute to any stockholder any form of
proxy for the annual meeting other than the form distributed by the corporation; and (E) intends to own the Required Shares through
the date of the annual meeting of stockholders; and (viii) an undertaking that the Eligible Stockholder (including each member of
any group of stockholders that together is an Eligible Stockholder) agrees to (A) assume all liability stemming from any legal or
regulatory violation arising out of the Eligible Stockholder’s communications with the stockholders of the corporation or out of the
information that the Eligible Stockholder provided to the corporation; (B) comply with all other laws and regulations applicable to
any solicitation in connection with the annual meeting of stockholders; and (C) provide to the corporation prior to the annual
meeting of stockholders such additional information as necessary with respect thereto.
(f) Within the time period specified in this Section 15 for delivering the Nomination Notice, a Stockholder Nominee must
deliver to the Secretary a written representation that the Stockholder Nominee: (i) is not and will not become a party to any
agreement, arrangement, or understanding with, and has not given any commitment or assurance to, any person or entity as to how
such Stockholder Nominee, if elected as a director, will act or vote on any issue or question, which such agreement, arrangement, or
understanding has not been disclosed to the corporation; (ii) is not and will not become a party to any agreement, arrangement, or
understanding with any person with respect to any direct or indirect compensation, reimbursement, or indemnification in connection
with service or action as a Stockholder Nominee that has not been disclosed to the corporation, and is not and will not become a
party to any agreement, arrangement, or understanding with any person other than the corporation with respect to any direct or
indirect compensation, reimbursement, or indemnification in connection with service or action as a director which has not been
disclosed to the corporation; and (iii) if elected as a director, will comply with all of the corporation’s corporate governance, conflict
of interest, confidentiality, and stock ownership and trading policies and guidelines, and any other corporation policies and
guidelines applicable to directors, as well as any applicable law, rule or regulation or listing requirement. At the request of the
corporation, the Stockholder Nominee must promptly, but in any event within five (5) business days after such request, submit to the
Secretary all completed and signed questionnaires required of the corporation’s directors and officers and provide the corporation
with such other information as it shall reasonably request. The corporation may request such additional information as is necessary
to permit the Board of Directors to determine if each Stockholder Nominee is independent under the listing standards of the principal
U.S. exchange upon which the corporation’s common stock is listed, any applicable rules of the Securities and Exchange
Commission and any publicly disclosed standards used by the Board of Directors in determining and disclosing the independence of
the corporation’s directors (the “Applicable Independence Standards”).
(g) If any information or communications provided by the Eligible Stockholder or the Stockholder Nominee to the
corporation or its stockholders ceases to be true and correct in all material respects or omits a material fact necessary to make the
statements made, in light of the circumstances under which they were made, not misleading, then each Eligible Stockholder or
Stockholder Nominee, as
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the case may be, shall promptly notify the Secretary of any defect in such previously provided information and of the information
that is required to correct any such defect.
(h) The Eligible Stockholder (including any person who owns shares of common stock of the corporation that constitute
part of the Eligible Stockholder’s ownership for purposes of satisfying the requirements of this Section 15) shall file with the
Securities and Exchange Commission any solicitation or other communication with the corporation’s stockholders relating to the
meeting at which the Stockholder Nominee will be nominated, regardless of whether any such filing is required under Regulation
14A of the Exchange Act or whether any exemption from filing is available for such solicitation or other communication under
Regulation 14A of the Exchange Act.
(i) The corporation shall not be required to include, pursuant to this Section 15, any Stockholder Nominees in the Proxy
Materials for any annual meeting of stockholders: (i) for which the Secretary receives a notice that any stockholder has nominated a
person for election to the Board of Directors pursuant to the advance notice requirements for stockholder nominees for director set
forth in Section 11 and has not elected to have such nominee included in the Proxy Materials pursuant to this Section 15; (ii) if the
Eligible Stockholder who has nominated such Stockholder Nominee has engaged in or is currently engaged in a, or has been or is a
“participant” in another person’s, “solicitation” within the meaning of Rule 14a-1(l) under the Exchange Act in support of the
election of any individual as a director at the annual meeting of stockholders other than its Stockholder Nominee(s) or a nominee of
the Board of Directors; (iii) who is not independent under the Applicable Independence Standards, as determined by the Board of
Directors; (iv) whose election as a member of the Board of Directors would cause the corporation to be in violation of these bylaws,
its certificate of incorporation, the listing standards of the principal exchange upon which the corporation’s common stock is traded,
or any applicable law, rule or regulation; (v) who is or has been, within the past three (3) years, an officer or director of, or is
presently a nominee for director (or comparable position) at, a competitor, as defined in Section 8 of the Clayton Antitrust Act of
1914; (vi) who is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses) or has
been convicted in such a criminal proceeding; (vii) who is subject to any order of the type specified in Rule 506(d) of Regulation D
promulgated under the Securities Act of 1933, as amended; (viii) if such Stockholder Nominee or the applicable Eligible
Stockholder shall have provided information to the corporation in respect to such nomination that was untrue in any material respect
or omitted to state a material fact necessary in order to make the statement made, in light of the circumstances under which it was
made, not misleading, as determined in good faith by the Board of Directors; or (ix) if such Stockholder Nominee or the applicable
Eligible Stockholder otherwise contravenes any of the agreements or representations made by such Stockholder Nominee or Eligible
Stockholder or fails to comply with its obligations pursuant to this Section 15. Notwithstanding anything to the contrary set forth
herein, the Board of Directors or the Chairman presiding at the applicable annual meeting of stockholders shall declare a nomination
by an Eligible Stockholder to be invalid, and such nomination shall be disregarded notwithstanding that proxies in respect of such
vote may have been received by the corporation, if (x) the Stockholder Nominee(s), the applicable Eligible Stockholder or both shall
have breached its or their obligations, agreements or representations under this Section 15, as determined in good faith by the Board
of Directors or the Chairman presiding at the annual meeting of stockholders; or (y) the Eligible Stockholder (or a qualified
representative thereof) does not appear at the annual meeting of stockholders to present any nomination pursuant to this Section 15.
(j) The number of Stockholder Nominees appearing in the Proxy Materials with respect to an annual meeting of
stockholders shall not exceed 20% of the number of directors in office as of the last day on which a Nomination Notice may be
delivered pursuant to this Section 15 or, if such amount is not a whole number, the closest whole number below 20%. In the event
that (i) one or more vacancies for any
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reason occurs on the Board of Directors after the last day on which notice of a nomination in accordance with the procedures set
forth in this Section 15 may be delivered pursuant to this Section 15 but before the date of the annual meeting of stockholders and
(ii) the Board of Directors resolves to reduce the size of the Board of Directors in connection therewith, then the maximum number
of Stockholder Nominees included in the Proxy Materials shall be calculated based on the number of directors in office as so
reduced. The following persons shall be considered Stockholder Nominees for purposes of determining when the maximum number
of Stockholder Nominees provided for in this Section 15 has been reached: (i) any Stockholder Nominee whom the Board of
Directors decides to nominate as a Board of Directors nominee; and (2) any Stockholder Nominee who is subsequently withdrawn.
In the event that the number of Stockholder Nominees submitted by Eligible Stockholders pursuant to this Section 15 exceeds the
maximum number of Stockholder Nominees that the corporation must include in the Proxy Materials, then each Eligible Stockholder
will select one Stockholder Nominee for inclusion in the Proxy Materials until the maximum number is reached, going in order of
the amount (largest to smallest) of shares of the common stock of the corporation that each Eligible Stockholder disclosed as owned
in its respective Nomination Notice. If the maximum number is not reached after each Eligible Stockholder has selected one
Stockholder Nominee, this selection process will continue as many times as necessary, following the same order each time, until the
maximum number is reached. Following such determination, if any Stockholder Nominee who satisfies the eligibility requirements
in this Section 15 (i) thereafter withdraws from the election (or his or her nomination is withdrawn by the applicable Eligible
Stockholder) or (ii) thereafter is not submitted for Director election for any reason (including the Eligible Stockholder’s or
Stockholder Nominee’s failure to comply with this Section 15), no other nominee or nominees shall be included in the Proxy
Materials or otherwise submitted for director election pursuant to this Section 15.
(k) The Board of Directors (or a duly authorized committee thereof) shall have the exclusive power and authority to
interpret the provisions of this Section 15 and make all determinations deemed necessary or advisable in connection with Section 15.
All such actions, interpretations and determinations that are done or made by the Board of Directors (or a duly authorized committee
thereof) shall be final, conclusive and binding on the corporation, the stockholders and all other parties. For the avoidance of doubt,
this Section 15 shall not prevent any stockholder from nominating any person to the Board of Directors pursuant to and in
accordance with Section 11 of these bylaws. However, this Section 15 is the exclusive method for stockholders to include nominees
for director in the Proxy Materials.
ARTICLE III
DIRECTORS
Section 1 . The number of directors of this corporation that shall constitute the whole board shall be determined by resolution
of the Board of Directors or by the stockholders at the annual meeting of the stockholders; provided, however, that no decrease in the
number of directors shall have the effect of shortening the term of an incumbent director. Except as provided in Section 2 of this
Article, the directors shall be elected at the annual meeting of the stockholders, in accordance with the certificate of incorporation,
and each director elected shall hold office until his/her successor is elected and qualified, unless he/she shall resign, become
disqualified, disabled or otherwise removed. Directors need not be stockholders.
Section 2. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may
be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so
chosen shall hold office until the next annual election and until their successors are duly elected and qualified or until his earlier
resignation or removal. If there are no directors in office, then an election of directors may be held in the manner provided by statute.
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Section 3 . The business of the corporation shall be managed by or under the direction of the Board of Directors, which may
exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of
incorporation or by these bylaws directed or required to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4 . The Board of Directors of the corporation may hold meetings, both regular and special, either within or without
the State of Delaware.
Section 5 . The first meeting of each newly elected Board of Directors shall be held at the same place as the annual meeting
immediately following such meeting or as otherwise determined by such newly elected Board of Directors and no notice of such
meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be
present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected Board of
Directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such
time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as
shall be specified in a written waiver signed by all of the directors.
Section 6 . Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall
from time to time be determined by the Board of Directors.
Section 7 .
(a) Special meetings of the Board of Directors for any purpose(s) may be called at any time by the Chairman of the Board,
the Chief Executive Officer or a majority of the members of the Board of Directors then in office. The person(s) authorized to call
special meetings of the Board of Directors may fix the place and time of the meetings.
(b) The Secretary shall give notice of any special meeting to each director personally or by telephone, facsimile
transmission or electronic mail, or sent by first-class mail, overnight mail, or courier service, postage or charges prepaid, addressed
to each director at that director’s address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited
in the United States mail at least four (4) calendar days before the time of the holding of the meeting. If the notice is delivered by
overnight mail or courier, it shall be deemed adequately delivered when the notice is delivered to the overnight mail or courier
service company at least forty-eight (48) hours before such meeting. If by facsimile transmission or electronic mail, such notice shall
be deemed adequately delivered when the notice is transmitted at least twelve (12) hours before such meeting. If by telephone or
hand delivery the notice shall be given at least twelve (12) hours prior to the time set for the meeting. Any oral notice given
personally or by telephone may be communicated either to the director or to a person at the office of the director who the person
giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the
place of the meeting, if the meeting is to be held at the principal executive office of the corporation.
Section 8 . At all meetings of the Board of Directors, a majority of the directors shall constitute a quorum for the transaction
of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board
of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not
be present at any meeting
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of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 9 . Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to
be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the
Board of Directors or committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or
writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 10 . Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board of
Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any
committee, by means of conference telephone or similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11 .
(a) The Board of Directors may, by resolution passed by a majority of the Whole Board, designate one (1) or more
committees, each committee to consist of one (1) or more of the directors of the corporation. The board may designate one (1) or
more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the
committee.
(b) In the absence of disqualification of a member of a committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or disqualified member.
(c) Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all
the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may
authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending
to the stockholders the sale, lease or exchange of all or substantially all of the corporation’s property and assets, recommending to
the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to
declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
Section 12 . Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when
required.
COMPENSATION OF DIRECTORS
Section 13 . Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as
director. No such
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payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor.
Members of special or standing committees may be allowed like compensation for attending committee meetings.
REMOVAL OF DIRECTORS
Section 14 . Unless otherwise restricted by the certificate of incorporation, any director or the entire Board of Directors may
be removed, with or without cause, by the holders of a majority of shares entitled to vote at an election of directors.
ARTICLE IV
NOTICES
Section 1 . Whenever, under the provisions of the statutes or of the certificate of incorporation or of these bylaws, notice is
required to be given to any director or stockholder, it shall not be construed to mean personal notice (except as provided in Section 7
of Article III of these Bylaws), but such notice may be given in writing, by mail, addressed to such director or stockholder, at his
address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at
the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telephone, electronic
mail, or facsimile or other means specified in Section 7 of Article III of these Bylaws.
Section 2 . Whenever any notice is required to be given under the provisions of the statutes or of the certificate of
incorporation or of these bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before
or after the time stated therein, shall be deemed equivalent thereto.
ARTICLE V
OFFICERS
Section 1 . The officers of the corporation shall be chosen by the Board of Directors and shall be a Chief Executive Officer,
President, Treasurer and a Secretary. The Board of Directors may elect from among its members a Chairman of the Board and a Vice
Chairman of the Board. The Board of Directors may also choose one or more Vice-Presidents, Assistant Secretaries and Assistant
Treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these bylaws otherwise
provide.
Section 2 . The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a Chief
Executive Officer, a President, a Treasurer, and a Secretary, and may choose Vice Presidents, Assistant Secretaries and Assistant
Treasurers.
Section 3 . The Board of Directors may appoint such other officers and agents as it shall deem necessary, who shall hold their
offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board.
Section 4 . The salaries of all officers of the corporation shall be fixed by the Board of Directors. The salaries of agents of the
corporation shall, unless fixed by the Board of Directors, be fixed by the Chief Executive Officer, President or any Vice-President of
the corporation.
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Section 5 . The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected
or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors.
Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6 . The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders
at which he shall be present. He/she shall have and may exercise such powers as are, from time to time, assigned to him by the Board
of Directors and as may be provided by law.
Section 7 . In the absence of the Chairman of the Board, the Vice Chairman of the Board, if any, shall preside at all meetings
of the Board of Directors and of the stockholders at which he shall be present. He shall have and may exercise such powers as are,
from time to time, assigned to him by the Board of Directors and as may be provided by law.
THE CHIEF EXECUTIVE OFFICER, PRESIDENT AND VICE-PRESIDENTS
Section 8 . Subject to such supervisory powers, if any, as the Board of Directors may give to the Chairman of the Board, the
Chief Executive Officer, if any, shall, subject to the control of the Board of Directors, have general supervision, direction, and
control of the business and affairs of the corporation and shall report directly to the Board of Directors. All other officers, officials,
employees and agents shall report directly or indirectly to the Chief Executive Officer. The Chief Executive Officer shall see that all
orders and resolutions of the Board of Directors are carried into effect. The Chief Executive Officer shall serve as chairperson of and
preside at all meetings of the stockholders. In the absence of a Chairman of the Board or Vice Chairman of the Board, the Chief
Executive Officer shall preside at all meetings of the Board of Directors.
Section 9 . In the absence of the Chief Executive Officer or in the event of his inability or refusal to act, the President shall
perform the duties of the Chief Executive Officer, and when so acting, shall have all the powers of and be subject to all the
restrictions upon the Chief Executive Officer. The President shall perform such other duties and have such other powers as the Board
of Directors or the Chief Executive Officer may from time to time prescribe.
Section 10 . The Chief Executive Officer, President or any Vice President shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed
and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or
agent of the corporation.
Section 11 . In the absence of the President or in the event of his inability or refusal to act, the Vice-President, if any, (or in
the event there be more than one Vice-President, the Vice-Presidents in the order designated by the directors, or in the absence of
any designation, then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the President. The Vice- Presidents shall perform such other duties and have
such other powers as the Board of Directors or the Chief Executive Officer may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 12 . The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record
all the proceedings of the meetings of the corporation and of the Board of
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Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He/she shall
give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or Chief Executive Officer, under whose supervision
he/she shall be. He/she shall have custody of the corporate seal of the corporation and he/she, or an Assistant Secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature
of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the
corporation and to attest the affixing by his signature.
Section 13 . The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the
Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the Secretary or
in the event of his inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors or the Chief Executive Officer may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 14 . The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects
in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors.
Section 15 . He/she shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the Chief Executive Officer and the Board of Directors, at its regular meetings,
or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the
corporation.
Section 16 . If required by the Board of Directors, he/she shall give the corporation a bond (which shall be renewed every six
(6) years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance
of the duties of his/her office and for the restoration to the corporation, in case of his/her death, resignation, retirement or removal
from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his/her control
belonging to the corporation.
Section 17 . The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by
the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the Treasurer
or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such
other duties and have such other powers as the Board of Directors or the Chief Executive Officer may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1 .
(a) Certificates for the shares of stock of the corporation shall be issued only to the extent as may be required by applicable
law or as otherwise authorized by the Secretary or an Assistant Secretary, and if so issued shall be in such form as is consistent with
the certificate of incorporation and applicable
16
law. Any such certificate shall be signed by, or in the name of the corporation by, the Chairman of the Board or Vice-Chairman of
the Board, or the Secretary or an Assistant Secretary. Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if
he or she were such officer, transfer agent or registrar at the date of issue.
(b) Certificates may be issued for partly paid shares and in such case upon the face or back of the certificates issued to
represent any such partly paid shares, the total amount of the consideration to be paid therefor, and the amount paid thereon shall be
specified.
(c) If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the
powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof
and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate that the corporation shall issue to represent such class or series of stock, provided that, except as otherwise
provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth
on the face or back of the certificate that the corporation shall issue to represent such class or series of stock, a statement that the
corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights.
Section 2 . Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who
has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he/she were such officer,
transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3 . The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new
certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require
the owner of such lost, stolen or destroyed certificate or certificates, or his/her legal representative, to advertise the same in such
manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may
be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 4 . Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue
a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.
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FIXING RECORD DATE
Section 5 . In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive
payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record
date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty
(60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
REGISTERED STOCKHOLDERS
Section 6 . The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its
books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1 . Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if
any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in
property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation.
Section 2 . Before payment of any dividend, there may be set aside out of any funds of the corporation available for
dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to
meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such
reserve in the manner in which it was created.
Section 3 . All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such
other person or persons as the Board of Directors may from time to time designate.
CHECKS
Section 4 . The fiscal year of the corporation shall be fixed by resolution of the Board of Directors.
FISCAL YEAR
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SEAL
Section 5 . The Board of Directors may adopt a corporate seal having inscribed thereon the name of the corporation, the year
of its organization and the words “Corporate Seal, Delaware.” The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
Section 6 .
INDEMNIFICATION
(a) The corporation shall, to the fullest extent authorized under the laws of the State of Delaware, as those laws may be
amended and supplemented from time to time, indemnify any director or officer made, or threatened to be made, a party to an action
or proceeding, whether criminal, civil, administrative or investigative, by reason of being a director or officer of the corporation or a
predecessor corporation or, at the corporation’s request, a director, officer, employee or agent of another corporation, provided,
however, that the corporation shall indemnify any such agent in connection with a proceeding initiated by such agent only if such
proceeding was authorized by the Board of Directors of the corporation. The indemnification provided for in this Section 6 shall:
(i) not be deemed exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement or vote of
stockholders or disinterested directors or otherwise, both as to action in their official capacities and as to action in another capacity
while holding such office, (ii) continue as to a person who has ceased to be a director or officer, and (iii) inure to the benefit of the
heirs, executors and administrators of such a person. The corporation’s obligation to provide indemnification under this Section 6
shall be offset to the extent of any payment received under any other source of indemnification or any otherwise applicable insurance
coverage under a policy maintained by the corporation or any other person.
(b) Expenses incurred by a director or officer of the corporation in defending a civil or criminal action, suit or proceeding
by reason of the fact that he is or was a director of the corporation (or was serving at the corporation’s request as a director or officer
of another corporation) shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized by relevant sections of the General Corporation Law of Delaware.
Notwithstanding the foregoing, the corporation shall not be required to advance such expenses to an agent who is a party to an
action, suit or proceeding brought by the corporation and approved by a majority of the Board of Directors of the corporation which
alleges willful misappropriation of corporate assets by such agent, disclosure of confidential information in violation of such agent’s
fiduciary or contractual obligations to the corporation or any other willful and deliberate breach in bad faith of such agent’s duty to
the corporation or its stockholders.
(c) The foregoing provisions of this Section 6 shall be deemed to be a contract between the corporation and each director
who serves in such capacity at any time while this bylaw is in effect, and any repeal or modification thereof shall not affect any
rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding
theretofore or thereafter brought based in whole or in part upon any such state of facts.
(d) The Board of Directors in its discretion shall have power on behalf of the corporation to indemnify any employee or
agent made a party to any action, suit or proceeding by reason of the fact that he, his testator or intestate, is or was an employee or
agent of the corporation.
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(e) To assure indemnification under this Section 6 of all directors, officers and employees who are determined by the
corporation or otherwise to be or to have been “fiduciaries” of any employee benefit plan of the corporation which may exist from
time to time, Section 145 of the General Corporation Law of Delaware shall, for the purposes of this Section 6, be interpreted as
follows: an “other enterprise” shall be deemed to include such an employee benefit plan, including without limitation, any plan of
the corporation which is governed by the Act of Congress entitled “Employee Retirement Income Security Act of 1974,” as amended
from time to time; the corporation shall be deemed to have requested a person to serve an employee benefit plan where the
performance by such person of his duties to the corporation also imposes duties on, or otherwise involves services by, such person to
the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan
pursuant to such Act of Congress shall be deemed “fines.”
PROHIBITION ON TOXICS
Section 7 .
(a) Unless approved by the holders of a majority of the shares present and entitled to vote at a duly convened meeting of
stockholders, the corporation shall not:
(i) grant any stock option, including stock appreciation right, with an exercise price that is less than 100% of the fair
market value of the underlying stock on the date of grant;
(ii) reduce the exercise price of any stock option, including stock appreciation right, outstanding or to be granted in the
future; cancel and re-grant options at a lower exercise price (including entering into any “6 month and 1 day” cancellation and re-
grant scheme), whether or not the cancelled options are put back into the available pool for grant; replace underwater options with
restricted stock in an exchange, buy-back or other scheme; or replace any options with new options having a lower exercise price or
accelerated vesting schedule in an exchange, buy-back or other scheme;
(ii) sell or issue any security of the corporation convertible, exercisable or exchangeable into shares of common stock of
the corporation, having a conversion, exercise or exchange price per share which is subject to downward adjustment based on the
market price of the common stock at the time of conversion, exercise or exchange of such security into common stock (except for
appropriate adjustments made to give effect to any stock splits or stock dividends); or
(iv) enter into (A) any equity line or similar agreement or arrangement; or (B) any agreement to sell common stock of the
corporation (or any security convertible, exercisable or exchangeable into shares of common stock (“Common Stock Equivalent”))
at a per share price (or, with respect to a Common Stock Equivalent, at a conversion, exercise or exchange price, as the case may be
(“Equivalent Price”)) that is fixed after the execution date of the agreement, whether or not based on any predetermined price-setting
formula or calculation method. Notwithstanding the foregoing, however, a price protection clause shall be permitted in an agreement
for sale of common stock or Common Stock Equivalent, if such clause provides for an adjustment to the price per share of common
stock or, with respect to a Common Stock Equivalent, to the Equivalent Price (provided that such price or Equivalent Price is fixed
on or before the execution date of the agreement) (the “Fixed Price”) in the event that the corporation, during the period beginning
on the date of the agreement and ending no later than 90 days after the closing date of the transaction, sells shares of common stock
or Common Stock Equivalent to another investor at a price or Equivalent Price, as the case may be, below the Fixed Price.
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(b) This Section 7 of Article VII may not be further amended or repealed without the affirmative vote of the holders of a
majority of the shares present and entitled to vote at a duly convened meeting of stockholders.
ARTICLE VIII
AMENDMENTS
Section 1 . Except for Section 7 of Article VII, these bylaws may be altered, amended or repealed or new bylaws may be
adopted by the stockholders or by the Board of Directors, when such power is conferred upon the Board of Directors by the
certificate of incorporation, at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new bylaws be contained in
the notice of such special meeting. If the power to adopt, amend or repeal bylaws is conferred upon the Board of Directors by the
certificate or incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal bylaws.
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CERTIFICATE OF ADOPTION BY THE SECRETARY OF NUANCE COMMUNICATIONS, INC.
The undersigned, Wendy Cassity, hereby certifies that he is the duly elected and acting Secretary of Nuance Communications,
Inc., a Delaware corporation (the “Corporation”), and that the Bylaws attached hereto constitute the Bylaws of said Corporation as
duly amended and restated by the Board of Directors on November 7, 2018.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed her name this 7 th day of November, 2018.
/s/ Wendy Cassity
Secretary
NUANCE COMMUNICATIONS, INC.
CHANGE OF CONTROL AND SEVERANCE AGREEMENT
Exhibit 10.16
This Change of Control and Severance Agreement (the “ Agreement
”) is made and entered into by and between Daniel
Tempesta (“ Executive
”) and Nuance Communications, Inc., a Delaware corporation (the “ Company
”), effective as of the later
date on the signature page of this Agreement (the “ Effective
Date
”).
RECITALS
1. The Compensation Committee (the “ Committee
”) of the Board of Directors of the Company (the “ Board
”) has
determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued
dedication and objectivity of Executive, notwithstanding the possibility, threat, or occurrence of a Change of Control.
2. The Committee believes that it is imperative to provide Executive with severance benefits upon Executive’s termination
of employment under certain circumstances to provide Executive with enhanced financial security, incentive and encouragement to
remain with the Company.
3. Certain capitalized terms used in the Agreement are defined in Section 7 below.
AGREEMENT
NOW, THEREFORE, in consideration of Executive’s continued employment and the mutual covenants contained herein, the
parties hereto agree as follows:
1.
Term of Agreement . This Agreement will have an initial term commencing on the Effective Date and ending
September 30, 2021 (the “ Initial
Term
”). At the end of the Initial Term, this Agreement will renew automatically for additional
three (3) year terms (each an “ Additional
Term
”), unless either party provides the other party with written notice of non-renewal at
least sixty (60) days prior to the date of automatic renewal. Notwithstanding the foregoing provisions of this paragraph, if a Change
of Control occurs when there are fewer than twelve (12) months remaining during the Initial Term or an Additional Term, the term
of this Agreement will extend automatically through the date that is twelve (12) months following the effective date of the Change of
Control. If Executive becomes entitled to benefits under Section 3 during the term of this Agreement, the Agreement will not
terminate until all of the obligations of the parties hereto with respect to this Agreement have been satisfied. For avoidance of doubt,
Executive will not be entitled to severance benefits under Section 3 due solely to notice of non-renewal or termination of the
Agreement due to non-renewal.
2. At-Will Employment . The Company and Executive acknowledge that Executive’s employment is and will continue to
be at-will, as defined under applicable law, except as otherwise
1
specifically provided under the terms of a written employment agreement between the Company and Executive.
3. Severance Benefits .
(a) Termination Other than During Change of Control Period . If Executive’s employment with the Company and its
subsidiaries is terminated (i) by the Company other than for Cause and for a reason other than Death or Disability, (ii) as a result of
Executive’s resignation for Good Reason and such termination occurs outside the Change of Control Period, then, subject to Section
4 and the other provisions of this Agreement, Executive will receive from the Company:
(i) Base Salary Severance . A lump sum severance payment equal to one hundred percent (100%) of Executive’s annual
base salary as in effect immediately prior to the termination date.
(ii) Target Bonus Severance . A lump sum severance payment equal to a prorated percentage of Executive’s target bonus
as in effect for the fiscal year that includes the termination date. The prorated percentage will be determined by dividing the number
of days during the fiscal year for which Executive remained an employee of the Company, by 365. If Executive’s target bonus for
the fiscal year including the termination date has not been set as of the termination date, Executive instead will receive a prorated
percentage of the target bonus for the immediately preceding fiscal year.
(iii) Equity Awards .
(1) Termination on or Before December 31, 2019 . Executive’s outstanding and unvested time-vesting equity awards
covering shares of the Company’s common stock that were scheduled to vest on or before December 31, 2019 will become vested in
full as of the date of termination, and Executive’s outstanding and unvested equity awards covering shares of the Company’s
common stock the vesting of which was subject to performance goals to be measured at any time on or before December 31, 2019
will become vested in full as of the date of termination as if the performance goals had been achieved at 100% of targeted
performance.
(2) Termination on or after January 1, 2020 . Vesting of a prorated percentage of each (if any) of Executive’s outstanding
and unvested time-vesting equity awards (excluding any awards vesting based on performance) covering shares of the Company’s
common stock that are scheduled to vest in the year that includes the termination date. The prorated percentage will be determined
by on a grant-by-grant basis by dividing (A) the number of days during the fiscal year for which Executive remained an employee of
the Company, by (B) the number of days from the first day of the fiscal year through the scheduled vesting date during the year of
termination. The number of shares vesting (if any) will be rounded to the nearest whole share. As an example only, if Executive
remains an employee for the first 30 days of the year that includes the termination date, and 100 shares of a time-based RSU were
scheduled to vest on the 90 th day of that fiscal year, Executive would receive vesting of thirty-three of the shares that were scheduled
to vest on the 90 th day. For the avoidance of doubt, the vesting provided in this Section 3(a)(iii)(2) applies only to the portion of an
award that is scheduled to vest in the year of termination. No vesting will be provided under
2
this Section 3(a)(iii)(2) with respect to any shares that are scheduled to vest after the year of Executive’s termination.
(iv) Continued Employee Benefits . Continuation coverage under the terms of the Company medical benefit plan pursuant
to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA
”) for Executive and/or Executive’s
eligible dependents, subject to Executive timely electing COBRA coverage. For one year from the date of Executive’s termination
the Company will pay directly on Executive’s behalf the COBRA premiums (at the coverage levels in effect immediately prior to
Executive’s termination). Notwithstanding the preceding sentence, if the Company determines in its sole discretion that it cannot
provide the foregoing benefit without potentially violating, or being subject to an excise tax under, applicable law (including,
without limitation, Section 2716 of the Public Health Service Act), the Company will in lieu thereof provide to Executive a taxable
lump sum cash payment in an amount equal to the product of (x) twelve (12), multiplied by (y) the monthly COBRA premium that
Executive otherwise would be required to pay to continue the group health coverage for Executive and Executive’s eligible
dependents, as applicable, as in effect on the date of Executive’s termination of employment (which amount will be based on the
premium for the first month of COBRA coverage), which payment will be made regardless of whether Executive elects COBRA
continuation coverage. For the avoidance of doubt, the taxable payment in lieu of COBRA reimbursements may be used for any
purpose, including, but not limited to continuation coverage under COBRA, and will be subject to all applicable tax withholdings.
(b) Termination Following a Change of Control . If during the Change of Control Period (i) Executive’s employment with
the Company and its subsidiaries is terminated by the Company other than for Cause and for a reason other than death or Disability
or (ii) Executive resigns for Good Reason, then, subject to Section 4 and the other provisions of this Agreement, Executive will
receive from the Company:
(i) Severance . A lump sum severance payment equal to one hundred percent (100%) of Executive’s annual base salary as
in effect immediately prior to the termination date (or, if greater, as in effect immediately prior to the Change of Control).
(ii) Target Bonus . A lump sum severance payment equal to one hundred percent (100%) of the greater of (1) Executive’s
target bonus for the year in which Executive’s termination occurs, or (2) Executive’s target bonus in effect immediately prior to the
Change of Control.
(iii) Continued Employee Benefits . Continuation coverage under the terms of the Company medical benefit plan pursuant
to COBRA for Executive and/or Executive’s eligible dependents, subject to Executive timely electing COBRA coverage. For one
year from the date of Executive’s termination the Company will pay directly on Executive’s behalf the COBRA premiums (at the
coverage levels in effect immediately prior to Executive’s termination). Notwithstanding the preceding sentence, if the Company
determines in its sole discretion that it cannot provide the foregoing benefit without potentially violating, or being subject to an
excise tax under, applicable law (including, without limitation, Section 2716 of the Public Health Service Act), the Company will in
lieu thereof provide to Executive a taxable lump sum cash payment in an amount equal to
3
the product of (x) twelve (12), multiplied by (y) the monthly COBRA premium that Executive otherwise would be required to pay to
continue the group health coverage for Executive and Executive’s eligible dependents, as applicable, as in effect on the date of
Executive’s termination of employment (which amount will be based on the premium for the first month of COBRA coverage),
which payment will be made regardless of whether Executive elects COBRA continuation coverage. For the avoidance of doubt, the
taxable payment in lieu of COBRA reimbursements may be used for any purpose, including, but not limited to continuation
coverage under COBRA, and will be subject to all applicable tax withholdings.
(iv) Vesting of Time-Based Equity Awards . One hundred percent (100%) of Executive’s outstanding and unvested time-
vesting equity awards (excluding any awards vesting based on performance) covering shares of the Company’s common stock will
become vested in full.
(c) Vesting of Performance-Based Equity Awards .
(i) Upon a Change of Control, a number of Executive’s then-outstanding performance-based restricted stock units granted
under the Company’s 2000 Stock Plan or any successor thereto (the “ Plan
”) that are subject to performance goals for the fiscal year
in which the Change of Control occurs will become eligible for time-based vesting as if the performance goals had been achieved at
100% of targeted performance (the “ Eligible
Shares
”). Following the Change of Control, the original time-based vesting schedule
for the Eligible Shares will cease to apply and the Eligible Shares will instead vest on the last day of the performance period in
which the Change of Control occurs, subject to Executive’s remaining a Service Provider (as defined in the Plan) through such date,
or, if earlier, upon Executive’s termination by the Company or its successor other than for Cause or upon Executive’s resignation for
Good Reason. Upon a Change of Control, Executive’s then-outstanding performance-based restricted stock units granted under the
Plan that are subject to performance goals for fiscal years after the fiscal year in which the Change of Control occurs will remain
subject to the terms of the Plan and the applicable award agreement except that, if during the Change of Control Period, Executive’s
employment is terminated by the Company or its successor other than for Cause or by Executive for Good Reason, 50% of the
performance-based restricted stock units that would have vested at 100% of targeted performance will vest.
(ii) Upon a Change of Control, Executive’s then-outstanding performance-based restricted stock units granted under the
Plan (or any successor thereto) that are subject to relative total shareholder return performance goals will become eligible for time-
based vesting based on the number of shares that would vest based on actual performance determined as of the Change of Control
(the “ Eligible
TSR
Shares
”). Following the Change of Control, the Eligible TSR Shares shall vest on the last day of the
performance period, subject to Executive’s remaining a Service Provider (as defined in the Plan) through such date, or, if earlier,
upon Executive’s termination by the Company or its successor other than for Cause or upon Executive’s resignation for Good
Reason.
(iii) Except as provided in this Section 3(c), all performance-based restricted stock units described in this Section 3(c)
remain subject to the terms of the Plan and the applicable award agreement.
4
(d) Voluntary Resignation; Termination for Cause . If Executive’s employment with the Company and its subsidiaries
terminates in a voluntary resignation (other than for Good Reason during the Change of Control Period), or if the Executive is
terminated for Cause, then Executive shall not be entitled to receive severance or other benefits except as otherwise provided by
applicable law or those (if any) as may be available under the Company’s severance and benefit plans and policies in effect at the
time of such termination.
(e) Termination for Death or Disability . If Executive’s employment with the Company and its subsidiaries terminates on
account of Executive’s death or absence from work due to a disability for a period in excess of ninety (90) days in any twelve-month
period that qualifies for benefits under the Company’s long-term disability program (“ Disability
”), Executive will receive from the
Company:
(i) Continuation coverage under the terms of the Company medical benefit plan pursuant to COBRA for Executive and/or
Executive’s eligible dependents, subject to Executive or his dependents timely electing COBRA coverage. For one year from the
date of Executive’s termination the Company will pay directly on Executive’s behalf the COBRA premiums (at the coverage levels
in effect immediately prior to Executive’s termination). Notwithstanding the preceding sentence, if the Company determines in its
sole discretion that it cannot provide the foregoing benefit without potentially violating, or being subject to an excise tax under,
applicable law (including, without limitation, Section 2716 of the Public Health Service Act), the Company will in lieu thereof
provide to Executive a taxable lump sum cash payment in an amount equal to the product of (x) twelve (12), multiplied by (y) the
monthly COBRA premium that Executive otherwise would be required to pay to continue the group health coverage for Executive
and Executive’s eligible dependents, as applicable, as in effect on the date of Executive’s termination of employment (which amount
will be based on the premium for the first month of COBRA coverage), which payment will be made regardless of whether
Executive elects COBRA continuation coverage. For the avoidance of doubt, the taxable payment in lieu of COBRA
reimbursements may be used for any purpose, including, but not limited to continuation coverage under COBRA, and will be subject
to all applicable tax withholdings.
(ii) One hundred percent (100%) of Executive’s outstanding and unvested time-vesting equity awards (excluding any
awards vesting based on performance) covering shares of the Company’s common stock will become vested. In the case of a
termination for Disability, vesting under this Section 3(e) will be subject to Executive’s compliance with Section 4 and the other
provisions of this Agreement.
(f) Accrued Amounts . Without regard to the reason for, or the timing of, Executive’s termination of employment, the
Company shall pay Executive: (i) any unpaid base salary due for periods prior to the date of termination, (ii) accrued and unused
vacation, as required under the applicable Company policy; and (iii) all expenses incurred by Executive in connection with the
business of the Company prior to the date of termination in accordance with the Company’s business expense reimbursement policy.
These payments shall be made promptly upon termination and within the period of time mandated by law.
5
(g) Exclusive Remedy . In the event of termination of Executive’s employment as set forth in Section 3 of this Agreement,
the provisions of Section 3 are intended to be and are exclusive and in lieu of any other rights or remedies to which Executive or the
Company may otherwise be entitled, whether at law, tort or contract, in equity, or under this Agreement (other than the payment of
accrued but unpaid wages, as required by law, or any unreimbursed reimbursable expenses). During the term of this Agreement,
Executive will be entitled to no benefits, compensation or other payments or rights upon termination of employment, including under
any offer letter or other agreement with the Company, other than those benefits expressly set forth in Section 3 of this Agreement.
(h) Transfer between Company and any Subsidiary . For purposes of this Section 3, if Executive’s employment
relationship with the Company or any parent or subsidiary of the Company ceases, Executive will not, solely by virtue thereof, be
determined to have been terminated without Cause for purposes of this Agreement if Executive continues to remain employed by the
Company or any subsidiary of the Company immediately thereafter (e.g., upon transfer of Executive’s employment from the
Company to a Company subsidiary).
4. Conditions to Receipt of Severance
(a) Release of Claims Agreement . The receipt of any severance payments or benefits in Section 3 pursuant to this
Agreement is subject to Executive signing and not revoking a separation agreement and release of claims in substantially the form
attached to this Agreement as Exhibit A (the “ Release
”), which must become effective and irrevocable no later than the sixtieth
(60th) day following Executive’s termination of employment (the “ Release
Deadline
”). If the Release does not become effective
and irrevocable by the Release Deadline, Executive will forfeit any right to severance payments or benefits under this Agreement.
Any severance payments or benefits otherwise payable to Executive between the termination date and the Release Deadline will be
paid on or within fifteen (15) days following the Release Deadline, or, if later, such time as required by Section 5(a), except that
acceleration of vesting of equity awards not subject to Section 409A will become effective on the date the Release becomes
effective. In no event will severance payments or benefits be paid or provided until the Release actually becomes effective and
irrevocable.
(b) Proprietary Information and Non-Competition Agreement . Executive’s receipt of any severance payments or benefits
under Section 3 will be subject to Executive continuing to comply with the terms of any agreements between Executive and the
Company concerning inventions, confidentiality, or restrictive covenants (the “ Confidentiality
Agreement
”).
5. Section 409A .
(a) Notwithstanding anything to the contrary in this Agreement, no Deferred Payments will be paid or otherwise provided
until Executive has a “separation from service” within the meaning of Section 409A. Similarly, no severance payable to Executive, if
any, pursuant to this Agreement that otherwise would be exempt from Section 409A pursuant to Treasury Regulation
Section 1.409A‑1(b)(9) will be payable until Executive has a “separation from service” within the meaning of Section 409A. In
addition, if Executive is a “specified employee” within the meaning of Section 409A at the time of Executive’s separation from
service (other than due to death), then
6
the Deferred Payments, if any, that are payable within the first six (6) months following Executive’s separation from service, will
become payable on the first payroll date that occurs on or after the date six (6) months and one (1) day following the date of
Executive’s separation from service. All subsequent Deferred Payments, if any, will be payable in accordance with the payment
schedule applicable to each payment or benefit. Notwithstanding anything herein to the contrary, if Executive dies following
Executive’s separation from service, but before the six (6) month anniversary of the separation from service, then any payments
delayed in accordance with this paragraph will be payable in a lump sum as soon as administratively practicable after the date of
Executive’s death and all other Deferred Payments will be payable in accordance with the payment schedule applicable to each
payment or benefit. Each payment and benefit payable under this Agreement is intended to constitute a separate payment under
Section 1.409A-2(b)(2) of the Treasury Regulations.
(b) Any amount paid under this Agreement that satisfies the requirements of the “short-term deferral” rule set forth in
Section 1.409A-1(b)(4) of the Treasury Regulations will not constitute Deferred Payments for purposes of this Agreement.
(c) Any amount paid under this Agreement that qualifies as a payment made as a result of an involuntary separation from
service pursuant to Section 1.409A-1(b)(9)(iii) of the Treasury Regulations that does not exceed the Section 409A Limit (as defined
below) will not constitute Deferred Payments for purposes of this Agreement.
(d) The foregoing provisions are intended to comply with, or be exempt from, the requirements of Section 409A so that
none of the severance payments and benefits to be provided hereunder will be subject to the additional tax imposed under Section
409A, and any ambiguities or ambiguous terms herein will be interpreted to so comply. Specifically, the payments hereunder are
intended to be exempt from the Requirements of Section 409A under the “short-term” deferral rule set forth in Section 1.409A-1(b)
(4) of the Treasury Regulations. The Company and Executive agree to work together in good faith to consider amendments to this
Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional
tax or income recognition before actual payment to Executive under Section 409A. In no event will the Company reimburse
Executive for any taxes or other costs that may be imposed on Executive as a result of Section 409A or any other law.
6. Limitation on Payments . In the event that the severance and other benefits provided for in this Agreement or otherwise
payable to Executive (i) constitute “parachute payments” within the meaning of Section 280G of the Code, and (ii) would be subject
to the excise tax imposed by Section 4999 of the Code (the “ Excise
Tax
”), then Executive’s benefits under this Agreement shall be
either:
(a) delivered in full, or
(b) delivered as to such lesser extent which would result in no portion of such benefits being subject to the Excise Tax,
whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax,
results in the receipt by Executive on an after-tax basis, of the
7
greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the
Code. If a reduction in severance and other benefits constituting “parachute payments” is necessary so that benefits are delivered to a
lesser extent, reduction will occur in the following order: (1) reduction of cash payments, (2) cancellation of equity awards granted
within the twelve-month period prior to a “change of control” (as determined under Code Section 280G) that are deemed to have
been granted contingent upon the change of control (as determined under Code Section 280G), (3) cancellation of accelerated
vesting of equity awards and (4) reduction of continued employee benefits. In the event that accelerated vesting of equity awards is
to be cancelled, such vesting acceleration will be cancelled in the reverse chronological order of the award grant dates.
Unless the Company and Executive otherwise agree in writing, any determination required under this Section shall be made
in writing by the Company’s independent public accountants (the “ Accountants
”), whose determination shall be conclusive and
binding upon Executive and the Company for all purposes. For purposes of making the calculations required by this Section, the
Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good
faith interpretations concerning the application of Section 280G and 4999 of the Code. The Company and Executive shall furnish to
the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under
this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations
contemplated by this Section.
7. Definition of Terms . The following terms referred to in this Agreement will have the following meanings:
(a) Cause . “ Cause
” will mean (i) any act of dishonesty or fraud taken by Executive in connection with his or her
responsibilities as an employee other than immaterial, inadvertent acts that are promptly remedied by Executive following notice by
the Company, (ii) Executive’s breach of the fiduciary duty or duty of loyalty owed to the Company, or material breach of the duty to
protect the Company’s confidential and proprietary information, (iii) Executive’s conviction or plea of nolo contendere to a felony or
to a crime involving fraud, embezzlement, misappropriation of funds or any other act of moral turpitude, (iv) Executive’s gross
negligence or willful misconduct in the performance of his or her duties, (v) Executive’s material breach of this Agreement or a
written policy of the Company; (vi) Executive’s engagement in conduct or activities that result, or are reasonably likely to result, in
negative publicity or public disrespect, contempt or ridicule of the Company; (vii) Executive’s failure to abide by the lawful and
reasonable directives of the Company; or (viii) Executive’s repeated failure to materially perform the primary duties of Executive’s
position provided, however, that: a termination of the Executive’s employment pursuant to clause (vii) or clause (viii) of this Section
shall not be deemed a termination for “Cause” unless the Company notifies Executive in writing of the alleged failure or breach that
the Company claims constitutes Cause, and Executive fails to substantially cure such failure or breach within thirty (30) days of such
notice; and provided further, however, that clauses (vii) and (viii) of this Section shall not apply during the pendency of a Change of
Control Period and therefore no termination for Cause may be made under such clauses during any such period.
8
(b) Change of Control . “ Change
of
Control
” will mean the occurrence of any of the following events:
(i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the
“beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company
representing more than 50% of the total voting power represented by the Company's then outstanding voting securities;
(ii) the consummation by the Company of a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation (in substantially the same proportions relative to each
other as immediately prior to the transaction); or
(iii) the consummation of the sale or disposition by the Company of all or substantially all of the
Company's assets (it being understood that the sale or spinoff of one or more (but not all material) divisions of the Company shall
not constitute the sale or disposition of all or substantially all of the Company’s assets).
Further and for the avoidance of doubt, a transaction will not constitute a Change of Control if: (i) its sole purpose is
to change the state of the Company’s incorporation, or (ii) its sole purpose is to create a holding company that will be owned in
substantially the same proportions by the persons who held the Company’s securities immediately before such transaction.
(c) Change of Control Period . “ Change
of
Control
Period
” means the period beginning on a Change of Control and
ending on the one-year anniversary of the Change of Control.
(d) Code . “ Code
” means the Internal Revenue Code of 1986, as amended.
(e) Deferred Payments . “ Deferred
Payments
” means any severance pay or benefits to be paid or provided to Executive,
if any, pursuant to this Agreement that, in each case, are or when considered together with any other severance payments or
separation benefits are, considered deferred compensation under Section 409A.
(f) Exchange Act . “ Exchange
Act
” means the Securities Exchange Act of 1934, as amended.
(g) Good Reason . “ Good
Reason
” means Executive’s termination of employment within thirty (30) days following the
expiration of any cure period (discussed below) following the occurrence of one or more of the following, without Executive’s
express written consent: (i) a material reduction in Executive’s duties, authority or responsibilities; (ii) a material reduction by the
Company in the annual base compensation or target bonus opportunity (as a percentage of base salary) of the Executive as in effect
immediately prior to such reduction provided, however, that
9
one or more reductions in base compensation or target bonus opportunity applicable to all executives generally that, cumulatively,
total ten percent (10%) or less in base compensation and/or ten (10) percentage points or less in target bonus opportunity will not
constitute a material reduction for purposes of this clause (ii); (iii) the relocation of the Executive to a facility or a location more than
fifty (50) miles from the Executive’s then present location; (iv) the failure of the Company to obtain the assumption of this
agreement by any successors contemplated in Section 8 below; or (v) a material breach by the Company of this Agreement or any
equity award agreement between Company and the Executive. In order for an event to qualify as Good Reason, Executive must not
terminate employment with the Company without first providing the Company with written notice of the acts or omissions
constituting the grounds for “Good Reason” within ninety (90) days of the initial existence of the grounds for “Good Reason” and
the Company shall have failed to cure during a period of thirty (30) days following the date of such notice.
(h) Section 409A . “ Section
409A
” means Section 409A of the Code and the final Treasury Regulations and any official
Internal Revenue Service guidance promulgated thereunder.
(i) Section 409A Limit . “ Section
409A
Limit
” means two (2) times the lesser of: (i) Executive’s annualized
compensation based upon the annual rate of pay paid to Executive during the Executive’s taxable year preceding the Executive’s
taxable year of Executive’s termination of employment as determined under, and with such adjustments as are set forth in, Treasury
Regulation 1.409A-1(b)(9)(iii)(A)(1) and any Internal Revenue Service guidance issued with respect thereto; or (ii) the maximum
amount that may be taken into account under a qualified plan pursuant to Section 401(a)(17) of the Code for the year in which
Executive’s employment is terminated.
8. Successors .
(a) The Company’s Successors . Any successor to the Company (whether direct or indirect and whether by purchase,
merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets will assume the
obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the
same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under
this Agreement, the term “Company” will include any successor to the Company’s business and/or assets which executes and
delivers the assumption agreement described in this Section 8(a) or which becomes bound by the terms of this Agreement by
operation of law.
(b) Executive’s Successors . The terms of this Agreement and all rights of Executive hereunder will inure to the benefit of,
and be enforceable by, Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.
9. Notice .
(a) General . Notices and all other communications contemplated by this Agreement will be in writing and will be deemed
to have been duly given when personally delivered, when mailed by U.S. registered or certified mail, return receipt requested and
postage prepaid, or when
10
delivered by private courier service such as UPS or Federal Express that has tracking capability. In the case of Executive, mailed
notices will be addressed to him or her at the home address which he or she most recently communicated to the Company in writing.
In the case of the Company, mailed notices will be addressed to its corporate headquarters, and all notices will be directed to the
Chief Executive Officer and General Counsel of the Company.
(b) Notice of Termination . Any termination by the Company for Cause or by Executive for Good Reason will be
communicated by a notice of termination to the other party hereto given in accordance with Section 9(a) of this Agreement. Such
notice will indicate the specific termination provision in this Agreement relied upon, will set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination under the provision so indicated, and will specify the termination date
(which will be not more than thirty (30) days after the giving of such notice or any shorter period required herein).
10. Resignation . Upon the termination of Executive’s employment for any reason, Executive will be deemed to have
resigned from all officer and/or director positions held at the Company and its affiliates voluntarily, without any further required
action by Executive, as of the end of Executive’s employment and Executive, at the Board’s request, will execute any documents
reasonably necessary to reflect Executive’s resignation.
11. Miscellaneous Provisions .
(a) No Duty to Mitigate . Executive will not be required to mitigate the amount of any payment contemplated by this
Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings
that Executive may receive from any other source.
(b) Waiver . No waiver by either party of any breach of, or of compliance with, any condition or provision of this
Agreement by the other party will be considered a waiver of any other condition or provision or of the same condition or provision at
another time.
(c) Headings . All captions and section headings used in this Agreement are for convenient reference only and do not form
a part of this Agreement.
(d) Entire Agreement . This Agreement and the Confidentiality Agreement constitute the entire agreement of the parties
hereto with respect to the subject matter hereof and thereof. This Agreement supersedes, replaces in their entirety and terminates any
prior representations, understandings, undertakings or agreements between the Company and the Executive, whether written or oral
and whether expressed or implied, that provided any benefits to Executive upon termination of Executive’s employment for any
reason. No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in writing and signed
by duly authorized representatives of the parties hereto and which specifically mention this Agreement. For the avoidance of doubt,
it is the intention of the parties that the provisions of this Agreement providing for acceleration or other modification of the vesting
provisions of equity awards are intended to supersede the vesting provisions of any equity awards that may outstanding during the
term of this Agreement.
11
(e) Governing Law . If Executive is resident in California, this Agreement shall be governed by the internal substantive
laws, but not the choice of law rules, of the State of California, and the Company and the Executive each consent to personal and
exclusive jurisdiction and venue in the State of California. If Executive is resident in any state or other jurisdiction other than
California, this Agreement shall be governed by the internal substantive laws, but not the choice of law rules, of the Commonwealth
of Massachusetts, and the Company and the Executive each consent to personal and exclusive jurisdiction and venue in the
Commonwealth of Massachusetts.
(f) Severability . The invalidity or unenforceability of any provision or provisions of this Agreement will not affect the
validity or enforceability of any other provision hereof, which will remain in full force and effect.
(g) Withholding . All payments made pursuant to this Agreement will be subject to withholding of applicable income,
employment and other taxes.
(h) Counterparts . This Agreement may be executed in counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Change of Control and Severance Agreement, in the case of
the Company by its duly authorized officer, as of the day and year set forth below.
COMPANY NUANCE COMMUNICATIONS, INC.
EXECUTIVE
By:
Title:
Date:
Daniel Tempesta
Date:
12
EXHIBIT A
FORM OF SEPARATION & RELEASE AGREEMENT
This Separation & Release Agreement (the “ Agreement
”) is made by and between Nuance Communications, Inc., a
Delaware corporation (the “ Company
”) and _______________ (“ Executive
”). The Company and Executive are sometimes
referred to collectively as the “ Parties
” and individually as a “ Party
.”
WHEREAS, Executive has agreed to enter this Agreement whereby Executive will release any and all claims Executive may
have against the Company and other released parties upon certain events specified in the Change of Control and Severance
Agreement by and between Company and Executive (the “ Severance
Agreement
”).
NOW THEREFORE, in consideration of the mutual promises made herein, the Parties hereby agree as follows:
1.
Date
”).
Termination . Executive’s employment from the Company terminated on ________________ (the “ Termination
2. Confidential Information . Subject to Section 13, Executive shall continue to maintain the confidentiality of all
confidential and proprietary information of the Company and shall continue to comply with the terms and conditions of the
Proprietary Information, Inventions and Non-Competition Agreement (the “ Confidentiality
Agreement
”) between Executive and
the Company. Executive agrees that the above reaffirmation and agreement with the Confidentiality Agreement shall constitute a
new and separately enforceable agreement to abide by the terms of the Confidentiality Agreement, entered and effective as of the
Effective Date. Executive specifically acknowledges and agrees that any violation of the restrictive covenants in the Confidentiality
Agreement shall constitute a material breach of this Agreement. Executive shall return all the Company property and confidential
and proprietary information in Executive’s possession to the Company on the Effective Date of this Agreement.
3. Payment of Salary and Receipt of All Benefits . Executive acknowledges and represents that, other than the severance
and benefits to be paid as set forth in the Severance Agreement, the Company has paid or provided all salary, wages, bonuses,
accrued vacation, premiums, leaves, relocation costs, interest, fees, reimbursable expenses, commissions, stock, stock options,
vesting, and any and all other benefits and compensation due to Executive.
4. Non-Solicitation . In exchange for the severance pay and other consideration under the Severance Agreement to which
Executive would not otherwise be entitled, Executive agrees that for a period of one (1) year after the Termination Date, Executive
will not, without the express written consent of the Company, in its sole discretion, [(a) solicit any business that is competitive with
the Company’s business from any client or customer of the Company or (b) either in Executive’s individual capacity or on behalf of
or through any other entity, either directly or indirectly, hire, engage, recruit or participate in any way in the hiring, engagement or
recruitment of, or participate in any effort to hire or solicit, any current or future employees of the Company or any subsidiary
thereof.] [Delete bracketed text for employees in California and substitute the following: “directly
or indirectly solicit any of the employees of the Company or any subsidiary thereof to leave their employment with the Company or
any subsidiary thereof.”]
5. Non-disparagement . In exchange for the severance pay and other consideration under the Severance Agreement to
which Executive would not otherwise be entitled, Executive agrees not to disparage the Company, the Company’s officers, directors,
employees, shareholders and agents, in any manner likely to be harmful to them or the Company’s business, business reputation or
personal reputation. Nothing in this Agreement shall prevent either Executive or the Company employees who are aware of the
existence of this Agreement from responding accurately and fully to any question, inquiry or request for information when required
by legal process, nor prevent Executive from engaging in Protected Activities (as defined below).
6. [Non-Compete . In exchange for the severance pay and other consideration under the Severance Agreement to which
Executive would not otherwise be entitled, Executive agrees that for a period of one (1) year after the Termination Date, Executive
will not, without the express written consent of the Company, in its sole discretion, enter, engage in, participate in, or assist, either as
an individual on your own or as a partner, joint venturer, employee, agent, consultant, officer, trustee, director, owner, part-owner,
shareholder, or in any other capacity, in the United States of America, directly or indirectly, any other business organization whose
activities or products are competitive with the activities or products of the Company then existing or under development. Nothing in
this Agreement shall prohibit Executive from working for an employer that is engaged in activities or offers products that are
competitive with the activities and products of the Company so long as Executive does not work for or with the department, division,
or group in that employer’s organization that is engaging in such activities or developing such products. Executive recognizes that
these restrictions on competition are reasonable because of the Company’s investment in goodwill, its customer lists, and other
proprietary information and Executive’s knowledge of the Company’s business and business plans. If any period of time or
geographical area should be judged unreasonable in any judicial proceeding, then the period of time or geographical area shall be
reduced to such extent as may be deemed required so as to be reasonable and enforceable. Nothing in this Agreement shall preclude
Executive from making passive investments of not more than two percent (2%) of a class of securities of any business enterprise
registered under the Securities Exchange Act of 1934, as amended.][Delete paragraph for employees located in California.]
7. Release of Claims . Executive agrees that the consideration to be paid in accordance with the terms of the Severance
Agreement represents settlement in full of all outstanding obligations owed to Executive by the Company. Executive, on behalf of
himself, and his respective heirs, family members, executors and assigns, hereby fully and forever releases the Company and its past,
present and future officers, agents, directors, employees, investors, shareholders, administrators, affiliates, divisions, subsidiaries,
parents, predecessor and successor corporations, and assigns, from, and agrees not to sue or otherwise institute or cause to be
instituted any legal or administrative proceedings concerning any claim, duty, obligation or cause of action relating to any matters of
any kind, whether presently known or unknown, suspected or unsuspected, that Executive may possess arising from any omissions,
acts or facts that have occurred up until and including the Effective Date of this Agreement including, without limitation,
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(a) any and all claims relating to or arising from Executive’s employment relationship with the Company and the
termination of that relationship;
(b) any and all claims relating to, or arising from, Executive’s right to purchase, or actual purchase of shares of
stock of the Company, including, without limitation, any claims for fraud, misrepresentation, breach of fiduciary duty, breach of
duty under applicable state corporate law, and securities fraud under any state or federal law;
(c) any and all claims for wrongful discharge of employment; termination in violation of public policy;
discrimination; breach of contract, both express and implied; breach of a covenant of good faith and fair dealing, both express and
implied; promissory estoppel; negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation;
negligent or intentional interference with contract or prospective economic advantage; unfair business practices; defamation; libel;
slander; negligence; personal injury; assault; battery; invasion of privacy; false imprisonment; and conversion;
(d) any and all claims for violation of any federal, state or municipal statute, including, but not limited to, Title VII
of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans
with Disabilities Act of 1990, the Fair Labor Standards Act, the Employee Retirement Income Security Act of 1974, The Worker
Adjustment and Retraining Notification Act, the California Family Rights Act; the California Labor Code, the California Workers’
Compensation Act, the California Fair Employment and Housing Act, Massachusetts Law Prohibiting Unlawful Discrimination, as
amended, Mass. Gen. Laws ch. 151B, § 1 et seq., Massachusetts Discriminatory Wage Rates Penalized Law (Massachusetts Equal
Pay Law), as amended, Mass. Gen. Laws ch. 149, § 105A et seq., Massachusetts Right to be Free from Sexual Harassment Law,
Mass. Gen. Laws ch. 214, § 1C, Massachusetts Discrimination Against Certain Persons on Account of Age Law, Mass. Gen. Laws
ch. 149, § 24A et seq., Massachusetts Equal Rights Law, Mass. Gen. Laws ch. 93, § 102 et seq., Massachusetts Violation of
Constitutional Rights Law, Mass. Gen. Laws ch. 12, § 11I, Massachusetts Family and Medical Leave Law, Mass. Gen. Laws ch.
149, § 52D; and the Massachusetts Wage Act, Mass. Gen. Laws ch. 149, § 148, et seq.;
(e) any and all claims for violation of the federal, or any state, constitution;
(f) any and all claims arising out of any other laws and regulations relating to employment or employment
discrimination; and
(g) any and all claims for attorneys’ fees and costs.
Executive agrees that the release set forth in this section shall be and remain in effect in all respects as a complete general
release as to the matters released. This release does not extend to any severance obligations due Executive under the Severance
Agreement and does not release claims that cannot be released as a matter of law. Nothing in this Agreement waives Executive’s
rights to indemnification or any payments under any insurance policy, if any, provided by any act or agreement of the Company,
state or federal law or policy of insurance.
-3-
8. Acknowledgment of Waiver of Claims under ADEA . Executive acknowledges that Executive is waiving and releasing
any rights he or she may have under the Age Discrimination in Employment Act of 1967 (“ADEA”) and that this waiver and release
is knowing and voluntary. Executive and the Company agree that this waiver and release does not apply to any rights or claims that
may arise under the ADEA after the Effective Date of this Agreement. Executive acknowledges that the consideration given for this
waiver and release Agreement is in addition to anything of value to which Executive was already entitled. Executive further
acknowledges that Executive has been advised by this writing that (a) Executive should consult with an attorney prior to executing
this Agreement; (b) Executive has at least twenty-one (21) days within which to consider this Agreement; (c) Executive has seven
(7) days following the execution of this Agreement by the parties to revoke the Agreement; (d) this Agreement shall not be effective
until the revocation period has expired; and (e) nothing in this Agreement prevents or precludes Executive from challenging or
seeking a determination in good faith of the validity of this waiver under the ADEA, nor does it impose any condition precedent,
penalties or costs for doing so, unless specifically authorized by federal law. Any revocation should be in writing and delivered to
the General Counsel at the Company by close of business on the seventh day from the date that Executive signs this Agreement. In
the event Executive signs this Agreement and returns it to the Company in less than the 21-day period identified above, Executive
hereby acknowledges that he/she has freely and voluntarily chosen to waive the time period allotted for considering this Agreement.
The parties agree that changes, whether material or immaterial, do not restart the running of the 21-day period.
9. California Civil Code Section 1542 . Executive acknowledges that Executive has been advised to consult with legal
counsel and is familiar with the provisions of California Civil Code Section 1542, a statute that otherwise prohibits the release of
unknown claims, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN
BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.
Executive, being aware of said code section, agrees to expressly waive any rights Executive may have thereunder, as well as
under any other statute or common law principles of similar effect.
10. No Pending or Future Lawsuits . Executive represents that he or she has no lawsuits, claims, or actions pending in her
name, or on behalf of any other person or entity, against the Company or any other person or entity referred to herein. Executive also
represents that Executive does not intend to bring any claims on his/her own behalf or on behalf of any other person or entity against
the Company or any other person or entity referred to herein.
11. No Cooperation . Subject to Section 13, Executive agrees that he or she will not counsel or assist any attorneys or their
clients in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints by any third party
against the Company and/or any officer, director, employee, agent, representative, shareholder or attorney of the Company, unless
under a subpoena or other court order to do so or as related directly to the ADEA waiver in this Agreement.
-4-
12. No Admission of Liability . Executive understands and acknowledges that this Agreement constitutes a compromise
and settlement of disputed claims. No action taken by the Company, either previously or in connection with this Agreement shall be
deemed or construed to be (a) an admission of the truth or falsity of any claims heretofore made or (b) an acknowledgment or
admission by the Company of any fault or liability whatsoever to the Executive or to any third party.
13. Protected Activity . Executive understands that nothing in this Agreement or in the Confidentiality Agreement shall in
any way limit or prohibit Executive from engaging for a lawful purpose in any Protected Activity. For purposes of this Agreement, “
Protected
Activity
” shall mean filing a charge, complaint or report with, or otherwise communicating with, cooperating with or
participating in any investigation or proceeding that may be conducted by any federal, state or local government agency or
commission, including the Securities and Exchange Commission, the Equal Employment Opportunity Commission, the
Occupational Safety and Health Administration, and the National Labor Relations Board (“ Government
Agencies
”). Executive
understands that in connection with such Protected Activity, Executive is permitted to disclose documents or other information as
permitted by law, and without giving notice to, or receiving authorization from, the Company. Executive agrees to take all
reasonable precautions to prevent any unauthorized use or disclosure of any information that may constitute Company Proprietary
Information under this Agreement or the Confidentiality Agreement to any parties other than the relevant Government Agencies.
Executive further understands that Protected Activity does not include the disclosure of any Company attorney-client privileged
communications
14. Miscellaneous .
(a) Costs . The Parties shall each bear their own costs, expert fees, attorneys’ fees and other fees incurred in
connection with this Agreement.
(b) Authority . Executive represents and warrants that Executive has the capacity to act on his or her own behalf
and on behalf of all who might claim through Executive to bind them to the terms and conditions of this Agreement.
(c) No Representations . Executive represents that Executive has had the opportunity to consult with an attorney,
and has carefully read and understands the scope and effect of the provisions of this Agreement. Neither Party has relied upon any
representations or statements made by the other Party hereto which are not specifically set forth in this Agreement.
(d) Severability . In the event that any provision hereof becomes or is declared by a court of competent jurisdiction
to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision.
(e) Attorneys’ Fees . Except with regard to a legal action challenging or seeking a determination in good faith of
the validity of the waiver herein under the ADEA, in the event that either Party brings an action to enforce or effect its rights under
this Agreement, the prevailing Party shall be entitled to recover its costs and expenses, including the costs of mediation, arbitration,
litigation, court fees, and reasonable attorneys’ fees incurred in connection with such an action.
-5-
(f) Entire Agreement . This Agreement, along with the Severance Agreement and the Confidentiality Agreement,
represents the entire agreement and understanding between the Company and Executive concerning Executive’s separation from the
Company.
(g) No Oral Modification . This Agreement may only be amended in writing signed by Executive and the Chief
Executive Officer of the Company.
(h) Governing Law . [FOR MA RESIDENTS:] [This Agreement shall be governed by the internal substantive
laws, but not the choice of law rules, of the Commonwealth of Massachusetts, and the Company and the Executive each consent to
personal and exclusive jurisdiction and venue in the Commonwealth of Massachusetts.] [FOR CA RESIDENTS:] [This Agreement
shall be governed by the internal substantive laws, but not the choice of law rules, of the State of California, and the Company and
the Executive each consent to personal and exclusive jurisdiction and venue in the State of California.]
(i) Effective Date . This Agreement is effective eight (8) days after it has been signed by both Executive, so long as
it has been signed by the Parties and has not been revoked by either Party before that date (the “ Effective
Date
”).
(j) Counterparts . This Agreement may be executed in counterparts, and each counterpart shall have the same force
and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned.
(k) Voluntary Execution of Agreement . Executive understands and agrees that Executive is executing this
Agreement voluntarily and without any duress or undue influence on the part or behalf of the Company or any third party, with the
full intent of releasing all of Executive’s claims against the Company and other persons referenced herein. Executive acknowledge
that:
(i) Executive has read this Agreement;
legal counsel of Executive’s own choice or has voluntarily declined to seek such counsel;
(ii) Executive has been represented in the preparation, negotiation, and execution of this Agreement by
(iii) Executive understand the terms and consequences of this Agreement and of the releases it contains;
and
below.
(iv) Executive is fully aware of the legal and binding effect of this Agreement.
Signature Page Follows
IN WITNESS WHEREOF, the Parties have executed this Separation & Release Agreement on the respective dates set forth
COMPANY: NUANCE COMMUNICATIONS, INC.
By:
Title:
Date:
Date:
EXECUTIVE:
-6-
Nuance Communications, Inc.
Code of Business Conduct and Ethics
(Effective September 15, 2015, modified June 7, 2017)
Exhibit 14.1
Policy
The Board of Directors of Nuance Communications, Inc. (the "Company") has adopted this Code of Business Conduct and Ethics (this "Code") for its directors,
officers and employees (collectively, "Employees"). All Employees are expected to read and understand this Code, uphold these standards in day-to-day activities,
comply with all applicable policies and procedures.
This Code has been reasonably designed to deter wrongdoing and to promote:
•
•
•
•
•
•
•
Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
Avoidance of conflicts of interest, including disclosure to an appropriate person or persons identified in this Code of any transaction or relationship that
reasonably could be expected to give rise to such a conflict;
Full, fair, accurate, timely, and understandable disclosure in reports and documents that the Company files with, or submits to, the United States
Securities and Exchange Commission (the "SEC") and in other public communications made by the Company;
Compliance with applicable governmental laws, rules and regulations;
Adherence to all Nuance policies, including but not limited to Foreign Corrupt Trade Practices and Insider Trading policies;
The prompt internal reporting to an appropriate person or persons identified in this Code of violations of this Code; and
Accountability for adherence to this Code.
1. Honest and ethical conduct
Employees are expected to act and perform their Company duties ethically and honestly and with the utmost integrity. Honest conduct is considered to be conduct
that is free from fraud or deception. Ethical conduct is considered to be conduct conforming to accepted professional standards of conduct. Ethical conduct
includes the ethical handling of actual or apparent conflicts of interest between personal and professional relationships as discussed below.
2. Conflicts of interests
Employees should seek to avoid any action or interest that conflicts with the Company's interests. A conflict of interest exists where the interests or benefits of one
person or entity conflict or appear to conflict with the interests or benefits of the Company. While it is not possible to describe every situation in which a conflict of
interest may arise, Employees must never use or attempt to use their position with the Company to obtain improper personal benefits.
Any Employee who is aware of a conflict of interest, or is concerned that a conflict might develop, is required to discuss the matter with a higher level of
management or the General Counsel promptly, and obtain approval from the General Counsel before proceeding with any transaction or action that could
reasonably be expected
to give rise to a conflict of interest. Senior financial officers may, in addition to speaking with the General Counsel, also discuss the matter with the Chairperson of
the Audit Committee.
3. Disclosure
The Company is required to file periodic and other reports with the SEC and to make other public communications. The Company's reports and documents filed
with or submitted to the SEC and its other public communications shall include full, fair, accurate, timely and understandable disclosure to the extent required by
applicable law. Any Employee who becomes aware of or suspects any improper transaction, accounting or auditing practice within the Company, or believes that
the Company's internal accounting and disclosure controls are deficient or the Company is not providing full, fair, accurate, timely and understandable disclosures
in its filings with the SEC or in other public communications, is required to report the matter immediately to the Company's General Counsel or the Chairperson of
the Audit Committee or as set forth herein. The General Counsel has primary authority and responsibility for receiving, collecting, reviewing, processing and
resolving concerns and reports by Employees and others involving the Company's accounting, auditing and internal controls and disclosure policies, subject to the
supervision of the Audit Committee. The General Counsel shall maintain appropriate records of all complaints, tracking their receipt, investigation and resolution
and shall prepare a periodic summary report thereof for the Audit Committee.
4. Compliance
It is the Company's policy to comply with all applicable laws, rules and regulations. It is the personal responsibility of each Employee in executing his or her
Company duties to adhere to the standards and restrictions imposed by those laws, rules and regulations, and in particular, those relating to accounting and auditing
matters. Any Employee who is unsure whether a situation violates any applicable law, rule, regulation or Company policy should discuss the situation with the
General Counsel.
5. Accountability, Reporting and Disciplinary Actions
The matters covered in this Code are of the utmost importance to the Company, its stockholders and its business partners, and are essential to the Company's ability
to conduct its business in accordance with this Code and the Company’s policies. The Company expects all Employees to adhere to this Code and all of the
Company’s policies in carrying out their responsibilities for the Company.
Situations that may involve a violation of this Code may not always be obvious and may require difficult judgments to be made. Employees should report any
concerns or questions about violations of laws, rules, regulations or this Code to the Company's General Counsel or as set forth herein.
Any concerns about violations of laws, rules, regulations or this Code by the Chief Executive Officer, any senior financial officer, any executive officer or director
should be reported promptly to the Chairperson of the Audit Committee as set forth herein. Reporting to the Audit Committee may be accomplished by filing a
report to www.ethicspoint.com . If appropriate, the Chairperson of the Audit Committee will notify the Board of Directors. Reporting of such violations may
also be done anonymously by filing a report at www.ethicspoint.com . An anonymous report should provide enough information about the incident or situation
to allow the Company to investigate properly. If concerns or complaints require confidentiality, including keeping an identity anonymous, the Company will
endeavor to protect this confidentiality, subject to applicable laws, regulations or legal proceedings.
The Company encourages all Employees to report any suspected violations promptly and intends to investigate thoroughly any good faith reports of violations. The
Company will not tolerate any kind of retaliation for
reports or complaints regarding misconduct that were made in good faith. Employees are required to cooperate in internal investigations of misconduct and
unethical behavior.
The General Counsel will have primary authority and responsibility for the enforcement of this Code, subject to the supervision of the Audit Committee. The
Company will devote the necessary resources to enable the General Counsel or a designee thereof acting under the auspices of the General Counsel to establish
such procedures as may be reasonably necessary to create a culture of accountability and facilitate compliance with this Code, and will also maintain appropriate
records of all complaints, tracking their receipt, investigation and resolution and shall prepare a periodic summary report thereof for the Audit Committee. The
Company will take appropriate action against any Employee whose actions are found to violate these policies or any other policies of the Company. Disciplinary
actions may include immediate termination of employment or business relationship at the Company's sole discretion. Where the Company has suffered a loss, it
may pursue its remedies against the individuals or entities responsible. Where laws have been violated, the Company will report violators to, and cooperate with,
the appropriate authorities.
Where violation of this Code is disputed by an Employee, such alleged violation will be investigated by the General Counsel or a designee thereof acting under the
auspices of the General Counsel, who shall make a determination following such investigation as to whether or not such a violation has occurred. Where a
violation of this Code is disputed by an executive officer or director, such alleged violation will be investigated by the Board of Directors or a designee thereof,
which shall make a determination following such investigation as to whether or not such a violation has occurred. Such a determination by the Company will be
final.
6. Waivers and Amendments of the Code
The Company is committed to continuously reviewing and updating our policies and procedures. Therefore, this Code is subject to modification. Any waiver of
any provision of this Code for a member of the Board of Directors or an executive officer must be approved in writing by the Board of Directors and promptly
disclosed pursuant to applicable laws and regulations. Any waiver of any provision of this Code with respect to any other employee must be approved in writing by
the General Counsel. Amendments to this Code will be disclosed as required by the applicable SEC and securities rules and regulations.
7. Violations
If you know or suspect a violation of the Code or applicable laws and regulations or any Company policy, it is your responsibly to promptly report it, and the
Company will not tolerate any kind of retaliation for reports or complaints regarding possible violations that were made in good faith. Reports may be made in any
of the following ways:
•
•
•
Contact the General Counsel by telephone (781-565-5000) or by e-mail
( GeneralCounsel@nuance.com) .
Contact the Audit Committee of the Company Board of Directors via Ethicspoint
Contact Ethicspoint by Internet ( www.ethicspoint.com) or by telephone (1-866-ethicsp (384-4277))
Owner
General Counsel
Contact us
If you have any questions or comments about this Policy, please contact Nuance’s Legal Department generalcounsel@nuance.com .
Disclaimer
Nothing herein is intended to constitute a contract between Nuance and any employee and Nuance reserves the right to revise or terminate this Policy at any time.
All Nuance employees are expected to comply with all Company policies and the failure to do so may result in remedial action by Nuance as permitted by
applicable agreements and law.
Nothing in this Policy should be construed to limit employees’ rights to engage in protected whistleblower activity or concerted activity under Section 7 of the U.S.
National Labor Relations Act.
Subsidiary Name
Agnitio Corp.
ART Advanced Recognition Technologies, Inc.
Caere Corporation
Cognition Technologies, Inc.
Consolidated Enterprise Corporation
Consolidated Healthcare Corporation
Consolidated Imaging Corporation
Consolidated Mobile Corporation
Dictaphone Corporation
Ditech Networks, Inc.
Ditech Networks International, Inc.
eCopy, LLC
iScribes Inc.
eScription, Inc.
Language and Computing, Inc.
Montage Healthcare Solutions, Inc.
Notable Solutions, Inc.
Nuance Diagnostics Holding, Inc.
Nuance Transcription Services, Inc.
PerSay, Inc.
Phonetic Systems, Inc.
Primordial Design, Inc.
Quadramed Quantim Corporation
Ruetli Holding Corporation
SNAPin Software, LLC
SVOX USA, Inc.
TouchCommerce, Inc.
Viecore Federal Systems Division, Inc.
Viecore, LLC
VirtuOz, Inc.
Vlingo Corporation
VoiceBox Technologies Corporation
Voice Signal Technologies, Inc.
Zi Holding Corporation
Nuance Document Imaging, Inc. f/k/a
Equitrac Corporation
J.A. Thomas and Associates, Inc.
Nuance Healthcare Diagnostics Solutions, Inc.
Winscribe USA Inc.
AMS Solutions Corp.
New England Medical Transcription, Inc.
Accentus U.S., Inc. f/k/a Zylomed Inc.
Medical Transcription Education Center, Inc.
Physician Technology Partners, LLC
Swype, Inc.
Tegic Communications, Inc.
Nuance Enterprise Solutions & Services Corporation f/k/a Varolii
Corporation
Exhibit 21.1
Jurisdiction
Type
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Florida
Georgia
Georgia
Delaware
Massachusetts
Illinois
Nevada
Ohio
Ohio
Washington
Washington
Washington
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Domestic
Subsidiary Name
Jurisdiction
Type
Information Technologies Australia Pty Ltd.
ITA Services Pty Ltd.
Nuance Communications Australia Pty. Ltd.
OTE Pty Limited
VoiceBox Technologies Australia Pty. Ltd.
Winscribe Australasia Pty. Ltd.
Nuance Communications Austria GmbH
Nuance Communications Services Austria GmbH
SpeechMagic Holding GmbH
Language and Computing N.V.
Nuance Communications Belgium Limited
Nuance Communications International BVBA
Nuance Bermuda Automotive, Ltd.
Nuance Bermuda Enterprise, Ltd.
Nuance Bermuda Healthcare, Ltd.
Nuance Bermuda Imaging, Ltd.
Nuance Communications Ltda.
Novitech Technologia e Servicos Ltda.
BlueStar Options Inc.
BlueStar Resources Ltd.
SpeechWorks BVI Ltd.
845162 Alberta Ltd.
Accentus Inc. f/k/a/ 2350111 Ontario Inc.
Ditech Networks Canada, Inc.
Nuance Acquisition ULC
Nuance Communications Auto, Inc.
Nuance Communications Canada, Inc.
Nuance Document Imaging, ULC f/k/a Equitrac Canada ULC
Zi Corporation
Zi Corporation of Canada, Inc.
Foxtrot Acquisition Limited
Foxtrot Acquisition II Limited
Huayu Zi Software Technology (Beijing) Co., Ltd.
Nuance Software Technology (Beijing) Co., Ltd.
Nuance Communications Technology Shanghai Ltd
Nuance Communications Denmark ApS
Nuance Communications Finland OY
Voice Signal Technologies Europe OY
Nuance Communications France Sarl
VirtuOz S.A.
VoiceBox Technologies France SAS
Communology GmbH
HFN Medien GmbH
Nuance Communications Deutschland GmbH f/k/a Dictaphone
Deutschland GmbH
Nuance Communications Germany GmbH
Nuance Communications Healthcare Germany GmbH
Australia
Australia
Australia
Australia
Australia
Australia
Austria
Austria
Austria
Belgium
Belgium
Belgium
Bermuda
Bermuda
Bermuda
Bermuda
Brazil
Brazil
British Virgin Islands
British Virgin Islands
British Virgin Islands
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Cayman Islands
Cayman Islands
China
China
China
Denmark
Finland
Finland
France
France
France
Germany
Germany
Germany
Germany
Germany
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
Subsidiary Name
NSi Europe GmbH
SVOX Deutschland GmbH
Asia Translation & Telecommunications Limited
Huayu Zi Software Technology Limited
Nuance Communications Hong Kong Limited
Telecom Technology Corporation Limited
Zi Corporation (H.K.) Limited
Zi Corporation of Hong Kong Limited
Nuance Recognita Corp.
Ditech Communications India Pvt. Ltd.
Nuance India Pvt. Ltd.
Nuance Transcription Services India Private Limited f/k/a/ FocusMT India
Private Limited
ServTech Systems India Pvt. Ltd.
Transcend India Private Limited
Transcend MT Services Private Ltd.
Nuance Communications Services (India) LLP
mCarbon Tech Innovation PVT Ltd.
Terra Firma Services Private LTD
Nuance Communications International Holdings ULC
Nuance Communications Ireland Limited
Nuance Communications Services Ireland Ltd.
Diamond Auto Technologies Ireland Ltd.
Diamond Auto Technologies Services Ireland Ltd.
Nuance Communications Healthcare International Ltd formally Voice
Signal Ireland Ltd.
Nuance Communications Israel, Ltd. f/k/a ART-Advanced Recognition
Technologies Limited
PerSay Ltd.
Phonetic Systems Ltd.
Loquendo S.p.a.
Nuance Communications Italy Srl
Nuance Communications Japan K.K.
VoiceSignal Japan K.K.
Caere Corporation Branch Mexico
Nuance Communications Netherlands B.V.
X-Solutions Group B.V.
Winscribe Inc Ltd.
VoiceBox Technologies Europe B.V.
Heartland Asia (Mauritius) Ltd.
Nuance Communications Asia Pacific Pte. Ltd.
Nuance Communications Korea Ltd.
Nuance Communications Iberica SA
Agnitio S.L.
Nuance Communications Sweden, A.B.
Nuance Communications Switzerland AG
SVOX AG
Winscribe GmbH
Jurisdiction
Type
Germany
Germany
Hong Kong SAR
Hong Kong SAR
Hong Kong SAR
Hong Kong SAR
Hong Kong SAR
Hong Kong SAR
Hungary
India
India
India
India
India
India
India
India
India
Ireland
Ireland
Ireland
Ireland
Ireland
Ireland
Israel
Israel
Israel
Italy
Italy
Japan
Japan
Mexico
Netherlands
Netherlands
New Zealand
Netherlands
Republic of Mauritius
Singapore
South Korea
Spain
Sweden
Switzerland
Switzerland
Switzerland
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
Subsidiary Name
Jurisdiction
Type
Nuance Communications Taiwan
Nuance Communications Illetism Ltd. Sirketi
Nuance Turkey Iletisim Hizmetleri Ltd. Sirketi
Nuance Communications UK Limited
SpinVox Limited
Winscribe Europe Ltd.
TouchCommerce UK Ltd.
Mcarbon Tech Innovation Middle East -FX- LLC
Taiwan
Turkey
Turkey
United Kingdom
United Kingdom
United Kingdom
United Kingdom
UAE
International
International
International
International
International
International
International
International
Nuance Communications, Inc.
Burlington, Massachusetts
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in Registration Statements on Form S-3 (Nos. 333-142182, 333-147715, 333-142182, 333-128397,
and 333-61862) and Form S-8 (Nos.333-224825, 333-215966, 333-211272, 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 20, 2018 relating to the consolidated financial statements and the effectiveness of Nuance Communications, Inc.’s internal control over
financial reporting, which appear in this Form 10-K.
EXHIBIT 23.1
/s/ BDO USA, LLP
Boston, Massachusetts
November 20, 2018
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
SECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002
I, Mark Benjamin, 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 the
statements 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 the
financial 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 in Exchange
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)) for the registrant
and have:
a.
b.
c.
d.
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
b.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over
financial reporting.
November 20, 2018
By:
/s/ Mark Benjamin
Mark Benjamin
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
SECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002
I, 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 the
statements 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 the
financial 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 in Exchange
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)) for the registrant
and have:
a.
b.
c.
d.
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
b.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over
financial reporting.
November 20, 2018
By:
/s/Daniel D. Tempesta
Daniel D. Tempesta
Executive Vice President and Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark Benjamin, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of Nuance Communications, Inc. on Form 10-K for the period ended September 30, 2018 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial
condition and results of operations of Nuance Communications, Inc.
Exhibit 32.1
November 20, 2018
By:
/s/ Mark Benjamin
Mark Benjamin
Chief Executive Officer
I, 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 the Annual
Report of Nuance Communications, Inc. on Form 10-K for the period ended September 30, 2018 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial
condition and results of operations of Nuance Communications, Inc.
November 20, 2018
By:
/s/Daniel D. Tempesta
Daniel D. Tempesta
Executive Vice President and Chief Financial Officer