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EX-23.1 - EX-23.1 - Nuance Communications, Inc. | b79388exv23w1.htm |
8-K - FORM 8-K - Nuance Communications, Inc. | b79388e8vk.htm |
Exhibit 99.1
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 Managements 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.
Fiscal Year Ended September 30, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Operations: |
||||||||||||||||||||
Total revenue |
$ | 950.4 | $ | 868.5 | $ | 602.0 | $ | 388.5 | $ | 232.4 | ||||||||||
Gross margin |
590.8 | 552.8 | 404.1 | 267.5 | 163.2 | |||||||||||||||
Income from operations |
57.6 | 32.6 | 39.0 | 8.4 | 2.0 | |||||||||||||||
Provision for income taxes |
40.4 | 14.6 | 22.5 | 15.1 | 6.8 | |||||||||||||||
Net loss |
$ | (19.4 | ) | $ | (37.0 | ) | $ | (14.9 | ) | $ | (22.9 | ) | $ | (5.4 | ) | |||||
Basic and Diluted Earnings Per Share Data: |
||||||||||||||||||||
Net loss |
$ | (0.08 | ) | $ | (0.18 | ) | $ | (0.08 | ) | $ | (0.14 | ) | $ | (0.05 | ) | |||||
Weighted average common shares outstanding: |
||||||||||||||||||||
Basic and diluted |
253.6 | 209.8 | 176.4 | 163.9 | 109.5 | |||||||||||||||
Financial Position: |
||||||||||||||||||||
Cash, cash equivalents and short and
long-term marketable securities |
$ | 527.0 | $ | 261.6 | $ | 187.0 | $ | 112.3 | $ | 95.8 | ||||||||||
Total assets |
3,499.5 | 2,846.0 | 2,172.6 | 1,235.1 | 757.2 | |||||||||||||||
Long-term debt, net of current portion |
848.9 | 847.3 | 846.1 | 350.0 | | |||||||||||||||
Total stockholders equity |
2,043.0 | 1,471.7 | 931.9 | 576.6 | 514.7 | |||||||||||||||
Selected Data and Ratios: |
||||||||||||||||||||
Working capital |
$ | 376.6 | $ | 133.5 | $ | 164.9 | $ | 51.3 | $ | 12.1 | ||||||||||
Depreciation of property and equipment |
18.7 | 16.4 | 12.1 | 8.4 | 5.0 | |||||||||||||||
Amortization of intangible assets |
115.4 | 82.6 | 37.7 | 30.1 | 13.1 | |||||||||||||||
Gross margin percentage |
62.2 | % | 63.7 | % | 67.1 | % | 68.8 | % | 70.2 | % |
1
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following Managements Discussion and Analysis is intended to help the reader understand
the results of operations and financial condition of our business. Managements 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.
Forward-Looking Statements
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. These
forward-looking statements include predictions regarding:
| our future revenue, cost of revenue, research and development expenses, selling, general and administrative expenses, amortization of intangible assets and gross margin; | ||
| our strategy relating to our core markets; | ||
| the potential of future product releases; | ||
| our product development plans and investments in research and development; | ||
| future acquisitions, and anticipated benefits from pending and prior acquisitions; | ||
| international operations and localized versions of our products; and | ||
| legal proceedings and litigation matters. |
You can identify these and other forward-looking statements by the use of words such as may,
will, should, expects, plans, anticipates, believes, estimates, predicts,
intends, potential, continue or the negative of such terms, or other comparable terminology.
Forward-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 for many reasons, including the risks described in Item 1A Risk
Factors and elsewhere in this Annual Report on Form 10-K.
You should not place undue reliance on these forward-looking statements, which speak only as
of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any
revisions to the forward-looking statements or reflect events or circumstances after the date of
this document.
Overview
Nuance Communications, Inc. is a leading provider of speech, imaging and keypad solutions for
businesses, organizations and consumers around the world. Our technologies, applications and
services make the user experience more compelling by transforming the way people interact with
devices and systems, and how they create, share and use documents. Our solutions are used every day
by millions of people and thousands of businesses for tasks and services such as requesting
information from a phone-based self-service solution, dictating medical records, searching the
mobile Web by voice, entering a destination into a navigation system, or working with PDF
documents. Our solutions help make these interactions, tasks and experiences more productive,
compelling and efficient.
2
Our technologies address our three core markets:
| Mobile-Enterprise. We deliver a portfolio of solutions that improve the experience of customer communications, mobile interactions and personal productivity. Combining our expertise in enterprise and mobile solutions allows us to help consumers, businesses and manufacturers more effectively utilize mobile devices for accessing an array of content, services and capabilities. Our enterprise solutions help automate a wide range of customer services and business processes in a variety of information and process-intensive vertical markets such as telecommunications, financial services, utilities, travel and entertainment, and government. Our mobile solutions add voice control and texting capabilities to mobile devices and services, allowing people to more easily dial a mobile phone, enter destination information into an automotive navigation system, dictate a text message or have emails and screen information read aloud. | ||
| Healthcare-Dictation. Our healthcare solutions comprise a portfolio of speech-driven clinical documentation and communication solutions that help healthcare provider organizations to reduce operating costs, increase reimbursement, and enhance patient care and safety. Our solutions automate the input and management of medical information and are used by many of the largest hospitals in the United States. We offer a variety of different solutions and deployment options to address the specific requirements of different healthcare provider organizations. Our Dragon NaturallySpeaking family of products help people and businesses increase productivity by using speech to create documents, streamline repetitive and complex tasks, input data, complete forms and automate manual transcription processes. Our Dragon Medical solution is a desktop application that provides front-end speech recognition for smaller groups of physicians and clinicians to create and navigate medical records. | ||
| Imaging. Our PDF and document imaging solutions reduce the time and cost associated with creating, using and sharing documents. Our solutions benefit from the widespread adoption of the PDF format and the increasing demand for networked solutions for managing electronic documents. Our solutions are used by millions of professionals and within large enterprises. |
We leverage our global professional services organization and our network of partners to
design and deploy innovative solutions for businesses and organizations around the globe. We market
and distribute our products through a global network of resellers, including system integrators,
independent software vendors, value-added resellers, hardware vendors, telecommunications carriers
and distributors, and also sell directly through a dedicated sales force and through our e-commerce
website.
Confronted by dramatic increases in electronic information, consumers, business personnel and
healthcare professionals must use a variety of resources to retrieve information, transcribe
patient records, conduct transactions and perform other job-related functions. We believe that the
power of our solutions can transform the way people use the Internet, telecommunications systems,
electronic medical records, wireless and mobile networks and related corporate infrastructure to
conduct business.
We have built a world-class portfolio of intellectual property, technologies, applications and
solutions through both internal development and acquisitions. We expect to continue to pursue
opportunities to broaden these assets and expand our customer base through acquisitions. In
evaluating the financial condition and operating performance of our business, management focuses on
revenue, earnings, gross margins, operating margins and cash flow from operations. A summary of
these key financial metrics for the fiscal year ended September 30, 2009, as compared to the fiscal
year ended September 30, 2008, is as follows:
| Total revenue increased by $81.9 million to $950.4 million; | ||
| Net loss decreased by $17.6 million to $19.4 million; | ||
| Gross margins declined by 1.5 percentage points to 62.2%; | ||
| Operating margins improved by 2.3 percentage points to 6.1%; and | ||
| Cash provided by operating activities for the year ended September 30, 2009 was $258.7 million, an increase of $62.5 million from the same period in the prior fiscal year. |
Strategy
In fiscal 2010, we will continue to focus on growth by providing market-leading, value-added
solutions for our customers and partners through a broad set of technologies, service offerings and
channel capabilities. We will also continue to focus on expense discipline and acquisition
synergies to improve gross margins and operating margins. We intend to pursue growth through the
following key elements of our strategy:
3
| Extend Technology Leadership. Our solutions are recognized as among the best in their respective categories. We intend to leverage our global research and development organization and broad portfolio of technologies, applications and intellectual property to foster technological innovation and maintain customer preference for our solutions. We also intend to invest in our engineering resources and seek new technological advancements that further expand the addressable markets for our solutions. | ||
| Broaden Expertise in Vertical Markets. Businesses are increasingly turning to Nuance for comprehensive solutions rather than for a single technology product. We intend to broaden our expertise and capabilities to deliver targeted solutions for a range of industries including mobile device manufacturers, healthcare, telecommunications, financial services and government administration. We also intend to expand our global sales and professional services capabilities to help our customers and partners design, integrate and deploy innovative solutions. | ||
| Increase Subscription and Transaction Based Recurring Revenue. We intend to increase our subscription and transaction based offerings in our core markets. The expansion of our subscription or transaction based solutions will enable us to deliver applications that our customers use on a repeat basis, and pay for on a per use basis, providing us with the opportunity to enjoy the benefits of recurring revenue streams. | ||
| Expand Global Presence. We intend to further expand our international resources to better serve our global customers and partners and to leverage opportunities in emerging markets such as Asia and Latin America. We continue to add regional executives and sales employees in different geographic regions to better address demand for speech based solutions and services. | ||
| Pursue Strategic Acquisitions. We have selectively pursued strategic acquisitions to expand our technology, solutions and resources to complement our organic growth. We have proven experience in integrating businesses and technologies and in delivering enhanced value to our customers, partners, employees and shareholders. We intend to continue to pursue acquisitions that enhance our solutions, serve specific vertical markets and strengthen our technology portfolio. |
RESULTS OF OPERATIONS
The following table presents, as a percentage of total revenue, certain selected financial
data for fiscal 2009, 2008 and 2007.
2009 | 2008 | 2007 | ||||||||||
Revenue: |
||||||||||||
Product and licensing |
39.3 | % | 47.7 | % | 51.8 | % | ||||||
Professional services and hosting |
43.3 | 35.2 | 27.5 | |||||||||
Maintenance and support |
17.4 | 17.1 | 20.7 | |||||||||
Total revenue |
100.0 | 100.0 | 100.0 | |||||||||
Cost of revenue: |
||||||||||||
Cost of product and licensing |
3.9 | 5.3 | 7.2 | |||||||||
Cost of professional services and hosting |
26.8 | 24.6 | 19.0 | |||||||||
Cost of maintenance and support |
3.1 | 3.6 | 4.5 | |||||||||
Cost of revenue from amortization of intangible assets |
4.0 | 2.8 | 2.2 | |||||||||
Gross margin |
62.2 | 63.7 | 67.1 | |||||||||
Operating expenses: |
||||||||||||
Research and development |
12.6 | 13.3 | 13.3 | |||||||||
Sales and marketing |
23.1 | 26.6 | 30.7 | |||||||||
General and administrative |
11.8 | 12.2 | 12.5 | |||||||||
Amortization of intangible assets |
8.1 | 6.7 | 4.1 | |||||||||
In-process research and development |
| 0.3 | | |||||||||
Restructuring and other charges (credits), net |
0.5 | 0.8 | | |||||||||
Total operating expenses |
56.1 | 59.9 | 60.6 | |||||||||
Income from operations |
6.1 | 3.8 | 6.5 | |||||||||
Other income (expense), net |
(3.8 | ) | (6.4 | ) | (5.3 | ) | ||||||
Income (loss) before income taxes |
2.3 | (2.6 | ) | 1.2 | ||||||||
Provision for income taxes |
4.3 | 1.7 | 3.7 | |||||||||
Net loss |
(2.0 | )% | (4.3 | )% | (2.5 | )% | ||||||
4
Total Revenue
The following tables show total revenue from our three core market groups and revenue by
geographic location, based on the location of our customers, in dollars and percentage change
(dollars in millions):
% | % | |||||||||||||||||||
Change | Change | |||||||||||||||||||
Fiscal | Fiscal | Fiscal | 2009 vs | 2008 vs | ||||||||||||||||
2009 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||
Mobile-Enterprise |
$ | 462.3 | $ | 438.8 | $ | 246.8 | 5.4 | % | 77.8 | % | ||||||||||
Healthcare-Dictation |
418.4 | 349.8 | 281.3 | 19.6 | % | 24.4 | % | |||||||||||||
Imaging |
69.7 | 79.9 | 73.9 | (12.8 | )% | 8.1 | % | |||||||||||||
Total Revenue |
$ | 950.4 | $ | 868.5 | $ | 602.0 | 9.4 | % | 44.3 | % | ||||||||||
% | % | |||||||||||||||||||
Change | Change | |||||||||||||||||||
Fiscal | Fiscal | Fiscal | 2009 vs | 2008 vs | ||||||||||||||||
2009 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||
United States |
$ | 706.9 | $ | 669.3 | $ | 471.6 | 5.6 | % | 41.9 | % | ||||||||||
International |
243.5 | 199.2 | 130.4 | 22.2 | % | 52.8 | % | |||||||||||||
Total revenue |
$ | 950.4 | $ | 868.5 | $ | 602.0 | 9.4 | % | 44.3 | % | ||||||||||
Fiscal 2009 Compared to Fiscal 2008
The increase in total revenue for fiscal 2009, as compared to fiscal 2008, was driven by a
combination of organic growth and contributions from acquisitions. Mobile-Enterprise revenue
increased $23.5 million, primarily driven by contributions from our acquisition of SNAPin, as well
as growth in our hosted, on-demand solutions. Healthcare-Dictation revenue increased $68.6 million,
primarily driven by contributions from our acquisitions of eScription and PSRS, and organic growth
of our iChart transcription solution. Imaging revenue decreased $10.2 million primarily due to a
decline in Windows-based software sales and a general decline in corporate spending due to current
economic conditions.
Based on the location of our customers, the geographic split for fiscal 2009 was 74% of total
revenue in the United States and 26% internationally, as compared to 77% of total revenue in the
United States and 23% internationally for the same period last year. The increase in the proportion
of revenue generated internationally was primarily due to contributions from our acquisition of
PSRS near the end of fiscal 2008.
Fiscal 2008 Compared to Fiscal 2007
The increase in total revenue for fiscal 2008, as compared to fiscal 2007, was driven by a
combination of organic growth and contributions from acquisitions. Mobile-Enterprise revenue
increased $192.0 million, primarily driven by contributions from our acquisitions of BeVocal,
Viecore, Tegic and VoiceSignal. Healthcare-Dictation revenue increased $68.5 million, primarily due
to contributions from our acquisitions of Focus, Commissure, Vocada and eScription. Imaging revenue
increased $6.0 million.
Based on the location of our customers, the geographic split for fiscal 2008 was 77% of total
revenue in the United States and 23% internationally, as compared to 78% of total revenue in the
United States and 22% internationally for the prior year. The slight decrease in proportion of
revenue generated in the United States was primarily due to acquisitions that have a higher
proportion of their revenue derived from customers outside of the United States.
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
revenue (dollars in millions):
% | % | |||||||||||||||||||
Change | Change | |||||||||||||||||||
Fiscal | Fiscal | Fiscal | 2009 vs | 2008 vs | ||||||||||||||||
2009 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||
Product and licensing revenue |
$ | 373.4 | $ | 414.4 | $ | 311.8 | (9.9 | )% | 32.9 | % | ||||||||||
As a percentage of total revenue |
39.3 | % | 47.7 | % | 51.8 | % | ||||||||||||||
5
Fiscal 2009 Compared to Fiscal 2008
The decrease in product and licensing revenue for fiscal 2009, as compared to fiscal 2008,
consisted of a $27.8 million decrease in Mobile-Enterprise revenue primarily due to customers
migrating to our on-demand services solutions and an $11.3 million decrease in Imaging revenue
primarily due to a decline in Windows-based software sales and a general decline in corporate
spending due to current economic conditions. Healthcare-Dictation product and licensing revenue
decreased slightly primarily due to decreased consumer spending in our non-medical sales of Dragon
NaturallySpeaking, as well as, customers continued migration to our on-demand service solutions,
this decrease was partially offset by the positive revenue impact of our acquisition of PSRS in
September 2008. As a percentage of total revenue, product and licensing revenue decreased
8.4 percentage points primarily due to changes in revenue mix attributable to the accelerated
growth in professional services and hosting revenue relative to product and licensing revenue.
Fiscal 2008 Compared to Fiscal 2007
The increase in product and licensing revenue for fiscal 2008, as compared to fiscal 2007,
consisted of a $90.7 million increase in Mobile-Enterprise revenue primarily due to contributions
from our acquisitions of VoiceSignal and Tegic, and a $5.5 million increase in Imaging revenue.
Healthcare-Dictation revenue increased by $6.4 million, including contributions from the
acquisition of Commissure, and the release of Dragon NaturallySpeaking Version 10 in the fourth
fiscal quarter of 2008, but partially offset by a decline in healthcare product and licensing
revenue as customers migrated to our iChart hosted services solution. As a percentage of total
revenue, product and licensing revenue decreased 4.1 percentage points primarily due to changes in
revenue mix attributable to the accelerated growth in professional services and hosting revenue
relative to product and licensing revenue.
Professional Services and Hosting Revenue
Professional services revenue primarily consists of consulting, implementation and training
services for speech customers. Hosting revenue primarily relates to delivering hosted transcription
and dictation services over a specified term, as well as self-service, on-demand offerings to
carriers and enterprises. The following table shows professional services and hosting revenue, in
dollars and as a percentage of total revenue (dollars in millions):
% | % | |||||||||||||||||||
Change | Change | |||||||||||||||||||
Fiscal | Fiscal | Fiscal | 2009 vs | 2008 vs | ||||||||||||||||
2009 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||
Professional services and hosting revenue |
$ | 411.4 | $ | 305.5 | $ | 165.5 | 34.7 | % | 84.6 | % | ||||||||||
As a percentage of total revenue |
43.3 | % | 35.2 | % | 27.5 | % | ||||||||||||||
Fiscal 2009 Compared to Fiscal 2008
The increase in professional services and hosting revenue for fiscal 2009, as compared to
fiscal 2008, consisted of a $61.8 million increase in Healthcare-Dictation revenue, including
contributions from our acquisition of eScription and organic growth of our iChart transcription
solution. Additionally, there was a $44.1 million increase in Mobile-Enterprise revenue, primarily
due to contributions from our acquisition of SNAPin, and growth in our hosted, on-demand solutions.
The growth in these organic and acquired revenue streams outpaced the relative growth of our other
revenue types, resulting in an 8.1 percentage point increase in professional services and hosting
revenue as a percentage of total revenue.
Fiscal 2008 Compared to Fiscal 2007
The increase in professional services and hosting revenue for fiscal 2008, as compared fiscal
2007, consisted of an $88.3 million increase in Mobile-Enterprise revenue, including contributions
from our acquisitions of BeVocal and Viecore. Additionally, there was a $51.8 million increase in
Healthcare-Dictation revenue, primarily due to contributions from our acquisitions of Focus, Vocada
and eScription, and to the growth of our iChart transcription solution. The growth in these organic
and acquired revenue streams outpaced the relative growth of our other revenue types, resulting in
a 7.7 percentage point increase in professional services and hosting revenue as a percentage of
total revenue.
6
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 revenue (dollars in millions):
% | % | |||||||||||||||||||
Change | Change | |||||||||||||||||||
Fiscal | Fiscal | Fiscal | 2009 vs | 2008 vs | ||||||||||||||||
2009 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||
Maintenance and support revenue |
$ | 165.6 | $ | 148.6 | $ | 124.6 | 11.4 | % | 19.3 | % | ||||||||||
As a percentage of total revenue |
17.4 | % | 17.1 | % | 20.7 | % | ||||||||||||||
Fiscal 2009 Compared to Fiscal 2008
The increase in maintenance and support revenue for fiscal 2009, as compared to fiscal 2008,
consisted primarily of an $8.7 million increase related to the expansion of our current installed
base of Healthcare-Dictation solutions, and a $7.2 million increase in Mobile-Enterprise
maintenance and support revenue, driven by organic growth.
Fiscal 2008 Compared to Fiscal 2007
The increase in maintenance and support revenue for fiscal 2008, as compared to fiscal 2007,
consisted primarily of a $13.2 million increase in Mobile-Enterprise maintenance and support
revenue, driven by a combination of organic growth and growth from our acquisition of Viecore, and
a $10.4 million increase related to the expansion of our current installed base of
Healthcare-Dictation solutions. As a percentage of total revenue, maintenance and support revenue
decreased by 3.6 percentage points, primarily due to changes in revenue mix attributable to the
accelerated growth in professional services and hosting revenue relative to maintenance and support
revenue.
COSTS AND EXPENSES
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 cost
of product and licensing revenue, in dollars and as a percentage of product and licensing revenue
(dollars in millions):
% | % | |||||||||||||||||||
Change | Change | |||||||||||||||||||
Fiscal | Fiscal | Fiscal | 2009 vs | 2008 vs | ||||||||||||||||
2009 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||
Cost of product and licensing revenue |
$ | 37.3 | $ | 45.7 | $ | 43.2 | (18.4 | )% | 5.8 | % | ||||||||||
As a percentage of product and licensing revenue |
10.0 | % | 11.0 | % | 13.8 | % | ||||||||||||||
Fiscal 2009 Compared to Fiscal 2008
The decrease in cost of product and licensing revenue for fiscal 2009, as compared to fiscal
2008, was primarily due to a $4.7 million decrease in Healthcare-Dictation costs, a $2.7 million
decrease in Imaging costs and a $1.0 million decrease in Mobile-Enterprise costs as a result of
customer migration to hosted, on-demand solutions and declining Windows-based license revenues. The
cost of product and licensing revenue decreased as a percentage of revenue due to a change in the
revenue mix towards products with higher margins.
Fiscal 2008 Compared to Fiscal 2007
Cost of product and licensing revenue increased $2.5 million for fiscal 2008, as compared to
fiscal 2007, primarily due to increased royalty expense associated with our Imaging product and
partially offset by reduced Healthcare-Dictation costs. Cost of product and licensing revenue
decreased as a percentage of product and licensing revenue primarily due to increased product and
licensing revenue related to recent acquisitions that do not carry significant related costs, and,
to a lesser extent, to a change in the revenue mix towards products with higher margins.
7
Cost of Professional Services and Hosting Revenue
Cost of professional services and hosting revenue primarily consists of compensation for
consulting personnel, outside consultants and overhead, as well as the hardware and communications
fees that support our subscription and hosted, on-demand solutions. The following table shows cost
of professional services and hosting revenue, in dollars and as a percentage of professional
services and hosting revenue (dollars in millions):
% | % | |||||||||||||||||||
Change | Change | |||||||||||||||||||
Fiscal | Fiscal | Fiscal | 2009 vs | 2008 vs | ||||||||||||||||
2009 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||
Cost of professional services and hosting revenue |
$ | 254.8 | $ | 214.0 | $ | 114.2 | 19.1 | % | 87.4 | % | ||||||||||
As a percentage of professional services and hosting revenue |
61.9 | % | 70.0 | % | 69.0 | % | ||||||||||||||
Fiscal 2009 Compared to Fiscal 2008
The increase in cost of professional services and hosting revenue for fiscal 2009, as compared
to fiscal 2008, was primarily due to a $36.2 million increase in Mobile-Enterprise costs driven by
our acquisition of SNAPin and a $4.5 million increase in Healthcare-Dictation professional services
and hosting costs driven by a full year impact of our acquisitions of eScription and PSRS in late
fiscal 2008. As a percentage of revenue, cost of professional services and hosting revenue
decreased due to faster growth in our higher margin hosted, on-demand solutions.
Fiscal 2008 Compared to Fiscal 2007
The increase in the cost of professional services and hosting revenue for fiscal 2008, as
compared to fiscal 2007, was primarily driven by the Mobile-Enterprise acquisition of Viecore, the
full year impact of the fiscal 2007 Healthcare-Dictation acquisition of Focus, as well as organic
growth in the core business. The cost of professional services and hosting revenue increased
modestly in fiscal 2008, as a percentage of the related revenue, as we increased spending to
support our current and future growth, particularly in our hosted, on-demand solutions. These
solutions require infrastructure spending in advance of the revenue.
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):
% | % | |||||||||||||||||||
Change | Change | |||||||||||||||||||
Fiscal | Fiscal | Fiscal | 2009 vs | 2008 vs | ||||||||||||||||
2009 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||
Cost of maintenance and support revenue |
$ | 29.1 | $ | 31.5 | $ | 27.5 | (7.6 | )% | 14.5 | % | ||||||||||
As a percentage of maintenance and support revenue |
17.6 | % | 21.2 | % | 22.0 | % | ||||||||||||||
Fiscal 2009 Compared to Fiscal 2008
The decrease in cost of maintenance and support revenue for fiscal 2009, as compared to fiscal
2008, was primarily due to a $1.7 million decrease in Healthcare-Dictation costs as a result of
effective cost containment actions, offset by an increase in costs associated with our acquisitions
of eScription and PSRS. As a percentage of revenue, cost of maintenance and support revenue
decreased due to effective cost controls in our core business and changes in the overall revenue
mix.
Fiscal 2008 Compared to Fiscal 2007
The increase in cost of maintenance and support revenue for fiscal 2008, as compared to fiscal
2007, was primarily due to a $2.2 million increase in Mobile-Enterprise related to the acquisition
of Viecore and $1.1 million increase in Healthcare-Dictation related to the acquisitions of Vocada
and Commissure. The cost of maintenance and support revenue as a percentage of the related revenue
decreased by 0.8 percentage points.
8
Research and Development Expense
Research and development expense primarily consists of salaries, benefits and overhead
relating to engineering staff. The following table shows research and development expense, in
dollars and as a percentage of total revenue (dollars in millions):
% | % | |||||||||||||||||||
Change | Change | |||||||||||||||||||
Fiscal | Fiscal | Fiscal | 2009 vs | 2008 vs | ||||||||||||||||
2009 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||
Research and development expense |
$ | 119.4 | $ | 115.0 | $ | 80.0 | 3.8 | % | 43.8 | % | ||||||||||
As a percentage of total revenue |
12.6 | % | 13.2 | % | 13.3 | % | ||||||||||||||
Fiscal 2009 Compared to Fiscal 2008
The increase in research and development expense for fiscal 2009, as compared to fiscal 2008,
primarily consisted of a $5.7 million increase in infrastructure investment to support ongoing
research and development projects, as well as a $2.5 million increase in compensation expense
attributable to the additional headcount from our acquisitions during the period. This increase is
partially offset by a reduction of $3.0 million related to temporary employees and professional
services. To date, we have not capitalized any internal software development costs as costs
incurred after technological feasibility, but before release of our licensed software products, and
development work related to our on-demand solutions have not been significant.
Fiscal 2008 Compared to Fiscal 2007
The increase in research and development expense for fiscal 2008, as compared to fiscal 2007,
primarily consisted of a $28.9 million in compensation expense attributable to the additional
headcount from our acquisitions during the period, and a $3.6 million increase in temporary
employees and professional services to support ongoing research and development projects. The
remaining increase is related to infrastructure investment.
Sales and Marketing Expense
Sales and marketing expense includes 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 revenue (dollars in millions):
% | % | |||||||||||||||||||
Change | Change | |||||||||||||||||||
Fiscal | Fiscal | Fiscal | 2009 vs | 2008 vs | ||||||||||||||||
2009 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||
Sales and marketing expense |
$ | 219.2 | $ | 231.2 | $ | 184.9 | (5.2 | )% | 25.0 | % | ||||||||||
As a percentage of total revenue |
23.1 | % | 26.6 | % | 30.7 | % | ||||||||||||||
Fiscal 2009 Compared to Fiscal 2008
The decrease in sales and marketing expenses for fiscal 2009, as compared to fiscal 2008, was
primarily attributable to a $4.9 million decrease in compensation and other variable costs, such as
commissions and travel expenses, a $4.6 million decrease in marketing program spending and a $1.3
million decrease in temporary employees and professional services. Sales and marketing expense as a
percentage of total revenue decreased by 3.5 percentage points, as a result of increased cost
efficiencies of our sales and marketing expenditures.
Fiscal 2008 Compared to Fiscal 2007
The increase in sales and marketing expenses for fiscal 2008, as compared to fiscal 2007, was
primarily attributable to a $39.9 million increase in compensation and other variable costs, such
as commissions, stock-based compensation and travel expenses related to increased headcount from
our acquisitions during the period, and a $5.0 million increase in marketing program spending.
Sales and marketing expense as a percentage of total revenue decreased by 4.1 percentage points, as
a result of increased cost efficiencies of our sales and marketing expenditures and a reduction of
the share-based compensation relative to the increase in revenue.
9
General and Administrative Expense
General and administrative expense primarily consists of personnel costs for administration,
finance, human resources, information systems, facilities and general management, fees for external
professional advisors including accountants and attorneys, insurance, and provisions for doubtful
accounts. The following table shows general and administrative expense, in dollars and as a
percentage of total revenue (dollars in millions):
% | % | |||||||||||||||||||
Change | Change | |||||||||||||||||||
Fiscal | Fiscal | Fiscal | 2009 vs | 2008 vs | ||||||||||||||||
2008 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||
General and administrative expense |
$ | 112.1 | $ | 105.9 | $ | 75.6 | 5.9 | % | 40.1 | % | ||||||||||
As a percentage of total revenue |
11.8 | % | 12.2 | % | 12.6 | % | ||||||||||||||
Fiscal 2009 Compared to Fiscal 2008
The increase in general and administrative expense for fiscal 2009, as compared to fiscal
2008, was primarily attributable to increased legal costs of $11.4 million associated with
acquisition and integration activities. This increase is partially offset by a reduction of $2.4
million in bad debt expense resulting from improved collection and a $2.6 million decrease in
expenses related to temporary employees and professional services as a result of cost containment
efforts and acquisition related synergies.
Fiscal 2008 Compared to Fiscal 2007
The increase in general and administrative expense for fiscal 2008 compared to fiscal 2007 was
primarily attributable to increased compensation and stock-based compensation of $20.9 million
associated with our 2008 acquisitions. An additional $5.1 million increase in general and
administrative expenses related to temporary employees and professional services in order to
support the incremental requirements resulting from our growth from acquisitions, and $3.6 million
related to increased third-party legal fees.
Amortization of Intangible Assets
Amortization of acquired patents and core and completed technology are included in cost of
revenue and the amortization of acquired customer and contractual relationships, non-compete
agreements, acquired tradenames and trademarks, and other intangibles are included in operating
expenses. Customer relationships are amortized on an accelerated basis based upon the pattern in
which the economic benefit of 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):
% | % | |||||||||||||||||||
Change | Change | |||||||||||||||||||
Fiscal | Fiscal | Fiscal | 2009 vs | 2008 vs | ||||||||||||||||
2009 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||
Cost of revenue |
$ | 38.4 | $ | 24.4 | $ | 13.1 | 57.4 | % | 86.3 | % | ||||||||||
Operating expense |
77.0 | 58.2 | 24.6 | 32.3 | % | 136.6 | % | |||||||||||||
Total amortization expense |
$ | 115.4 | $ | 82.6 | $ | 37.7 | 39.7 | % | 119.1 | % | ||||||||||
As a percentage of total revenue |
12.1 | % | 9.5 | % | 6.3 | % | ||||||||||||||
Fiscal 2009 Compared to Fiscal 2008
The increase in amortization of intangible assets for fiscal 2009, compared to fiscal 2008,
was primarily attributable to the amortization of acquired customer relationship and core
technology intangible assets from our acquisitions of eScription in May 2008, PSRS in September
2008, SNAPin in October 2008, and our acquisitions during the third quarter of fiscal 2009. Fiscal
2009 amortization expense also increased over fiscal 2008 due to our acquisition and licensing of
certain technology from other third-parties during 2009.
Fiscal 2008 Compared to Fiscal 2007
The increase in amortization of intangible assets for fiscal 2008, compared to fiscal 2007,
was primarily attributable to the amortization of acquired customer relationships and core
technology from our acquisitions in fiscal 2008 and 2007, as well as new technology licensed in
fiscal 2008. The amortization expense in fiscal 2008 included $3.6 million representing impairment
charges recorded from our review of our ability to realize future cash flows relating to certain of
our intangible assets. We did not record any impairment charges in fiscal 2007.
10
Based on our balance of amortizable intangible assets as of September 30, 2009, and assuming
no impairment or reduction in expected lives, we expect amortization of intangible assets for
fiscal 2010 to be $126.2 million
In-Process Research and Development
In fiscal 2008, we recorded in-process research and development charges of $2.6 million in
connection with our acquisition of PSRS. We did not have any in-process research and development
charges for any other acquisitions completed in fiscal 2009, 2008 or 2007. The value assigned to
in-process research and development was determined using an income approach by estimating the costs
to develop the acquired technologies into commercially viable products, estimating the resulting
net cash flows from the projects and discounting the net cash flows to their present values. At the
date of acquisition, the development of these projects had not yet reached technological
feasibility, and the research and development in progress had no alternative future uses. The rates
utilized to discount the net cash flows to their present value were based on a number of factors,
including our estimated costs of capital. Due to the nature of the forecasts and the risks
associated with the projected growth and profitability of these projects, discount rates of 25% to
35% were considered appropriate.
Restructuring and Other Charges (Credits), Net
For fiscal 2009, we recorded restructuring and other charges of $5.4 million, composed
primarily of $5.3 million related to the elimination of approximately 220 personnel across multiple
functions within our company.
For fiscal 2008, we recorded restructuring and other charges of $7.0 million, of which $4.2
million related to the elimination of approximately 155 personnel across multiple functions, $1.4
million related to a non-recurring, adverse ruling arising from a vendors claims of underpayment
of historical royalties for technology discontinued in 2005 and $1.4 million related to the
consolidation or elimination of excess facilities.
The following table sets forth the activity relating to the restructuring accruals in fiscal
2009, 2008 and 2007 (in millions):
Personnel | Facilities | |||||||||||||||
Related | Costs | Other | Total | |||||||||||||
Balance at October 1, 2006 |
$ | 0.4 | $ | 0.5 | $ | | $ | 0.9 | ||||||||
Restructuring and other charges (credits), net |
(0.1 | ) | | | (0.1 | ) | ||||||||||
Cash payments |
| (0.5 | ) | | (0.5 | ) | ||||||||||
Balance at September 30, 2007 |
0.3 | | | 0.3 | ||||||||||||
Restructuring and other charges (credits), net |
4.2 | 1.4 | 1.4 | 7.0 | ||||||||||||
Cash payments |
(4.2 | ) | (0.6 | ) | | (4.8 | ) | |||||||||
Balance at September 30, 2008 |
0.3 | 0.8 | 1.4 | 2.5 | ||||||||||||
Restructuring and other charges (credits), net |
5.3 | 0.1 | | 5.4 | ||||||||||||
Cash payments |
(5.0 | ) | (0.6 | ) | (1.4 | ) | (7.0 | ) | ||||||||
Balance at September 30, 2009 |
$ | 0.6 | $ | 0.3 | $ | | $ | 0.9 | ||||||||
Other Income (Expense), Net
The following table shows other income (expense), net in dollars and as a percentage of total
revenue (dollars in millions):
% | % | |||||||||||||||||||
Change | Change | |||||||||||||||||||
Fiscal | Fiscal | Fiscal | 2009 vs | 2008 vs | ||||||||||||||||
2009 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||
Interest income |
$ | 3.6 | $ | 8.0 | $ | 6.0 | (55.0 | )% | 33.3 | % | ||||||||||
Interest expense |
(47.3 | ) | (62.1 | ) | (37.3 | ) | (23.8 | )% | 66.5 | % | ||||||||||
Other income (expense), net |
7.2 | (1.0 | ) | | 820 | % | | |||||||||||||
Total other income (expense), net |
$ | (36.5 | ) | $ | (55.1 | ) | $ | (31.3 | ) | |||||||||||
As a percentage of total revenue |
(3.8 | )% | (6.4 | )% | (5.3 | )% | ||||||||||||||
11
Fiscal 2009 Compared to Fiscal 2008
The change in other income (expense), net for fiscal 2009, as compared to fiscal 2008, was
primarily driven by gains on foreign currency forward contracts. During the three months ended
December 31, 2008, we entered into foreign currency forward contracts to manage exposure on our
Euro-denominated deferred acquisition payment obligation of 44.3 million related to our
acquisition of PSRS. The deferred acquisition payment was paid on October 22, 2009. These foreign
currency contracts were not designated as hedges and changes in fair value of these contracts were
reported in net earnings as other income (expense). For fiscal 2009, we recorded a net $8.0 million
gain as other income related to these contracts and the related Euro-denominated obligation. In
addition, gains on other derivative instruments of $2.3 million were partially offset by a $1.2
million impairment charge taken on our cost method investment in a non-public company during the
period. Interest income was lower in fiscal 2009 due to lower prevailing market interest rates.
Interest expense was similarly lower during fiscal 2009 driven by a decrease in the prevailing
average interest rates during the year related to our variable-interest rate borrowings. Included
in interest expense was $8.3 million in fiscal 2009 and $8.0 million in fiscal 2008 of non-cash
interest expense related to amortization of debt discount and debt issuance costs.
Fiscal 2008 Compared to Fiscal 2007
The increase in interest income for fiscal 2008 compared to fiscal 2007 was primarily due to
higher cash balances, partially offset by lower interest rates during fiscal 2008 compared to
fiscal 2007. The increase in interest expense was mainly due to the increase in our term loan
borrowings and the $250.0 million convertible debentures that we issued in August 2007. Included in
interest expense was $12.1 million in fiscal 2008 and $5.0 million in fiscal 2007 of non-cash
interest expense, of which $8.0 million and $1.0 million, respectively, related to the amortization
of debt issuance costs and discount associated with our long-term debt. Other income (expense), net
principally consisted of foreign exchange gains (losses) as a result of the changes in foreign
exchange rates on certain of our foreign subsidiaries who have transactions denominated in
currencies other than their functional currencies, as well as the remeasurement of certain of our
intercompany balances.
Provision for Income Taxes
The following table shows the provision for income taxes and the effective income tax rate (in
thousands of dollars, except percentages):
% | % | |||||||||||||||||||
Change | Change | |||||||||||||||||||
Fiscal | Fiscal | Fiscal | 2009 vs | 2008 vs | ||||||||||||||||
2009 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||
Income tax provision |
$ | 40.4 | $ | 14.6 | $ | 22.5 | 176.7 | % | (35.1 | )% | ||||||||||
Effective income tax rate |
143.3 | % | (93.8 | )% | 265.1 | % | ||||||||||||||
Fiscal 2009 Compared to Fiscal 2008
Our effective income tax rate was 143.3% and (93.8)% for fiscal 2009 and 2008, respectively.
The increase in the rate was due primarily to the increase in our valuation allowance with respect
to certain deferred tax assets. This was partially offset by an $8.0 million charge recorded in the
first quarter of fiscal 2009 upon our election to treat the eScription acquisition as an asset
purchase. This charge in fiscal 2009 represented the reversal of tax benefits associated with a
Massachusetts state tax law enactment recorded in the fourth quarter of fiscal 2008 when the
eScription acquisition was treated as a stock purchase
Fiscal 2008 Compared to Fiscal 2007
The effective income tax rate was (93.8)% and 265.1% for fiscal 2008 and 2007, respectively.
The decrease in the effective tax rate was due primarily to the $20.4 million tax benefit
associated with the enactment of the Massachusetts state tax law enactment, which impacted the tax
rate applied to certain deferred tax liabilities associated with intangible assets and results in
these liabilities being taxed at a lower effective tax rate when reversed in future periods. This
benefit was partially offset by changes in the valuation allowance with respect to certain deferred
tax assets.
Our utilization of deferred tax assets that were acquired in a business combination (primarily
net operating loss carryforwards) will reduce goodwill, intangible assets, and to the extent
remaining, the provision for income taxes, until our adoption of the business combination
accounting guidance in ASC 805 on October 1, 2009; after which time the reductions in the
allowance, if any, will be recorded as a tax benefit in the statement of operations. Our
establishment of new deferred tax assets as a result of operating activities requires the
establishment of valuation allowances based upon more likely than not realization criteria. The
establishment of a valuation allowance relating to operating activities is recorded as an increase
to tax expense.
Our tax provision also includes state and foreign tax expense, which is determined on either a
legal entity or separate tax jurisdiction basis.
12
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $527.0 million as of September 30, 2009, an increase of
$265.5 million as compared to $261.5 million as of September 30, 2008. Our working capital was
$376.6 million as of September 30, 2009 as compared to $133.5 million as September 30, 2008. As of
September 30, 2009, our total accumulated deficit was $262.3 million. We do not expect our
accumulated deficit to impact our future ability to operate the business given our strong cash and
operating cash flow positions, and believe our current cash and cash equivalents on-hand are
sufficient to meet our operating needs for at least the next twelve months.
Cash provided by operating activities
Fiscal 2009 compared to Fiscal 2008
Cash provided by operating activities for fiscal 2009 was $258.7 million, an increase of $62.5
million, or 32%, as compared to cash provided by operating activities of $196.2 million for fiscal
2008. The increase was primarily driven by the following factors:
| an increase in cash from accounts payable and accrued expenses of $47.8 million primarily attributable to the timing of cash payments under our normal operating cycles; | ||
| an increase in cash resulting from a decrease in net loss, exclusive of non-cash adjustment items, of approximately $65.7 million mainly attributable to improvement in our operating margins, as well as the decrease in cash interest expense on our variable rate debt attributable to lower variable interest rates during fiscal 2009; | ||
| a decrease in cash of $10.1 million from prepaid expenses and other assets attributable to individually insignificant fluctuations in prepaid expenses related to our normal operations; and | ||
| a decrease in cash of $28.5 million from accounts receivable primarily attributable to the significant collection of acquired unbilled accounts receivable during fiscal 2008 and the timing of cash collections. |
Fiscal 2008 compared to Fiscal 2007
Cash provided by operating activities for fiscal 2008 was $196.2 million, an increase of $89.8
million, or 84%, as compared to cash provided by operating activities of $106.4 million for fiscal
2007. The net increase was primarily driven by the following factors:
| a decrease in cash from accounts payable and accrued expenses of $46.2 million, primarily attributable to the timing of cash payments under our normal operating cycles; | ||
| an increase in cash resulting from a decrease in our net loss, exclusive of non-cash adjustment items, of approximately $46.7 million mainly attributable to improvements in our operating margins, offset by an increase in cash interest expense resulting from our term loan and convertible notes being outstanding for the full fiscal 2008; | ||
| an increase in cash of $9.3 million resulting from increased deferred revenue; and | ||
| an increase in cash of $76.3 million from accounts receivable primarily attributable to the significant collection of acquired unbilled accounts receivable and the timing of cash collections during fiscal 2008. |
Cash used in investing activities
Fiscal 2009 compared to Fiscal 2008
Cash used in investing activities for fiscal 2009 was $184.6 million, a decrease of $261.5
million, or 59%, as compared to cash used in investing activities of $446.1 million for fiscal
2008. The net decrease was primarily driven by the following factors:
| a decrease in cash payments related to acquisitions of $293.4 million, primarily driven by the cash payment of $330.9 million to acquire eScription in May 2008; and |
13
| an increase of $29.4 million in cash payments to acquire speech-related patent portfolios and a royalty-free paid-up perpetual license to speech-related source code. |
Fiscal 2008 compared to Fiscal 2007
Cash used in investing activities for fiscal 2008 was $446.1 million, a decrease of $131.6
million, or 23%, as compared to cash used in investing activities of $577.7 million for fiscal
2007. The decrease was primarily driven by the following factors:
| a decrease of $171.8 million in cash payments related to acquisitions, primarily driven by the cash payments of $469.5 million for Tegic and VoiceSignal in fiscal 2007 compared to $330.9 million to acquire eScription in fiscal 2008; and | ||
| an increase of $29.0 million in cash payments for third party licenses and capitalized patent defense costs. |
Cash provided by financing activities
Fiscal 2009 compared to Fiscal 2008
Cash provided by financing activities for fiscal 2009 was $189.4 million, a decrease of $137.7
million, or 42%, as compared to cash provided by financing activities of $327.1 million for fiscal
2008. The change was primarily driven by the following factors:
| a decrease of $135.0 million in cash proceeds from the sale of our common stock. During fiscal 2009, we sold 17.4 million shares of our common stock and warrants to purchase 3.9 million shares of our common stock for net proceeds of $175.1 million as compared to a sale of 19.2 million shares of our common stock and warrants to purchase 3.7 million shares of our common stock for net proceeds of $330.6 million during fiscal 2008; | ||
| a decrease of $6.6 million in cash payments to net share settle employee equity awards, due to a decrease in the intrinsic value of the shares vested as a result of the overall decrease in our stock price in fiscal 2009 as compared to fiscal 2008; and | ||
| a decrease of $8.3 million in cash proceeds from the issuance of common stock upon exercise of employee stock options and pursuant to our employee stock purchase plan, due to a decrease in the number of options exercised during fiscal 2009 as compared to fiscal 2008. |
Fiscal 2008 compared to Fiscal 2007
Cash provided by financing activities for fiscal 2008 was $327.1 million, a decrease of $214.4
million, or 40%, as compared to cash provided by financing activities of $541.5 million for fiscal
2007. The change was primarily driven by the following factors:
| an increase of $330.6 million in cash proceeds from the sale of our common stock. During fiscal 2008, we sold 19.2 million shares of our common stock and warrants to purchase 3.7 million shares of our common stock for net proceeds of $330.6 million. There were no corresponding issuances of common stock during fiscal 2007; | ||
| a decrease of $551.4 million in cash received from new borrowings. In fiscal 2007, we received proceeds from our Credit Facility and the issuance of our 2.75% Convertible Senior Debentures, while we did not raise any significant funds through borrowings in fiscal 2008; and | ||
| an increase of $18.7 million related to deferred acquisition payments made in fiscal 2007 for an acquisition consummated in fiscal 2005., and not made in fiscal 2008. We did not make any deferred payments of this nature in fiscal 2008. |
14
Credit Facilities and Debt
2.75% Convertible Debentures
On August 13, 2007, we issued $250 million of 2.75% convertible senior debentures due in 2027
(the 2027 Debentures) in a private placement to Citigroup Global Markets Inc. and Goldman, Sachs
& Co. Total proceeds, net of debt discount of $7.5 million and deferred debt issuance costs of $1.1
million, were $241.4 million. The 2027 Debentures bear an interest rate of 2.75% per annum, payable
semi-annually in arrears beginning on February 15, 2008, and mature on August 15, 2027 subject to
the right of the holders of the 2027 Debentures to require us to redeem the 2027 Debentures on
August 15, 2014, 2017 and 2022. As required under ASC 470-20, the $54.7 million difference between
the fair value of the liability component of the 2027 Debentures and their net proceeds on the date
of issuance was retrospectively recorded as additional paid-in-capital and additional debt discount
(See Note 2a). The aggregate debt discount, consisting of both the discount related to the adoption
of ASC 470-20 and the date of issuance difference between the principal amount of the 2027
Debentures and the net proceeds received, and debt issuance costs are being amortized to interest
expense using the effective interest rate method through August 2014. As of September 30, 2009 and
2008, the ending unamortized discount was $44.9 million and $53.2 million, respectively, and the
ending unamortized deferred debt issuance costs were $0.5 million and $0.6 million, respectively.
The 2027 Debentures are general senior unsecured obligations, ranking equally in right of payment
to all of our existing and future unsecured, unsubordinated indebtedness and senior in right of
payment to any indebtedness that is contractually subordinated to the 2027 Debentures. The 2027
Debentures are effectively subordinated to our secured indebtedness to the extent of the value of
the collateral securing such indebtedness and are structurally subordinated to indebtedness and
other liabilities of our subsidiaries. If converted, the principal amount of the 2027 Debentures is
payable in cash and any amounts payable in excess of the $250 million principal amount, will (based
on an initial conversion rate, which represents an initial conversion price of $19.47 per share,
subject to adjustment as defined) 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 beginning after September 30, 2007 (and only during such fiscal quarter) if the closing
sale price of our common stock was more than 120% of the 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
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 2027 Debentures; and
(iv) at the option of the holder at any time on or after February 15, 2027. Additionally, we may
redeem the 2027 Debentures, in whole or in part, on or after August 20, 2014 at par plus accrued
and unpaid interest; each holder shall have the right, at such holders option, to require us to
repurchase all or any portion of the 2027 Debentures held by such holder on August 15, 2014, August
15, 2017 and August 15, 2022. Upon conversion, we will pay cash and shares of our common stock (or,
at our election, cash in lieu of some or all of such common stock), if any. If we undergo a
fundamental change (as described in the indenture for the 2027 Debentures) prior to maturity,
holders will have the option to require us to repurchase all or any portion of their debentures for
cash at 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, 2009, no conversion triggers were met. If the conversion triggers were
met, we could be required to repay all or some of the principal amount in cash prior to the
maturity date.
Credit Facility
We have a credit facility which consists of a $75 million revolving credit line including
letters of credit, a $355 million term loan entered into on March 31, 2006, a $90 million term loan
entered into on April 5, 2007 and a $225 million term loan entered into on August 24, 2007 (the
Credit Facility). The term loans are due March 2013 and the revolving credit line is due March
2012. As of September 30, 2009, $650.3 million remained outstanding under the term loans, there
were $16.2 million of letters of credit issued under the revolving credit line and there were no
other outstanding borrowings under the revolving credit line.
The Credit Facility contains covenants, including, among other things, covenants that restrict
our ability and those of our subsidiaries to incur certain additional indebtedness, create or
permit liens on assets, enter into sale-leaseback transactions, make loans or investments, sell
assets, make certain acquisitions, pay dividends, or repurchase stock. The agreement also contains
events of default, including failure to make payments of principal or interest, failure to observe
covenants, breaches of representations and warranties, defaults under certain other material
indebtedness, failure to satisfy material judgments, a change of control and certain insolvency
events. As of September 30, 2009, we were in compliance with the covenants under the Credit
Facility.
Borrowings under the Credit Facility bear interest at a rate equal to the applicable margin
plus, at our option, either (a) the base rate (which is the higher of the corporate base rate of
UBS AG, Stamford Branch, or the federal funds rate plus 0.50% per annum) or
15
(b) LIBOR (equal to (i) the British Bankers Association Interest Settlement Rates for deposits in
U.S. dollars divided by (ii) one minus the statutory reserves applicable to such borrowing). The
applicable margin for term loan borrowings under the Credit Facility ranges from 0.75% to 1.50% per
annum with respect to base rate borrowings and from 1.75% to 2.50% per annum with respect to
LIBOR-based borrowings, depending on our leverage ratio. The applicable margin for revolving loan
borrowings under the Credit Facility ranges from 0.50% to 1.25% per annum with respect to base rate
borrowings and from 1.50% to 2.25% per annum with respect to LIBOR-based borrowings, depending upon
our leverage ratio. As of September 30, 2009, our applicable margin for the term loan was 1.00% for
base rate borrowings and 2.00% for LIBOR-based borrowings. We are required to pay a commitment fee
for unutilized commitments under the revolving credit facility at a rate ranging from 0.375% to
0.50% per annum, based upon our leverage ratio. As of September 30, 2009, the commitment fee rate
was 0.375% and the effective interest rate was 2.27%.
We capitalized debt issuance costs related to the Credit Facility and are amortizing the costs
to interest expense using the effective interest rate method through March 2012 for costs
associated with the revolving credit facility and through March 2013 for costs associated with the
term loan. As of September 30, 2009 and 2008, the ending unamortized deferred financing fees were
$7.7 million and $10.0 million, respectively, and are included in other assets in the accompanying
consolidated balance sheet.
The Credit Facility is subject to repayment in four equal quarterly installments of 1% per
annum ($6.7 million per year, not including interest, which is also payable quarterly), and an
annual excess cash flow sweep, as defined in the Credit Facility, which is payable beginning in the
first quarter of each fiscal year, beginning in fiscal 2008, based on the excess cash flow
generated in the previous fiscal year. No payment under the excess cash flow sweep provision was
due in the first quarter of either fiscal 2009 or fiscal 2010 as there was no excess cash flow
generated in either of the respective prior fiscal years. We will continue to evaluate the extent
to which a payment is due in the first quarter of future fiscal years based on excess cash flow
generation. At the current time, we are unable to predict the amount of the outstanding principal,
if any, that we may be required to repay in future fiscal years pursuant to the excess cash flow
sweep provisions. Any term loan borrowings not paid through the baseline repayment, the excess cash
flow sweep, or any other mandatory or optional payments that we may make, will be repaid upon
maturity. If only the baseline repayments are made, the annual aggregate principal amount of the
term loans repaid would be as follows (in thousands):
Year Ending September 30, | Amount | |||
2010 |
$ | 6,700 | ||
2011 |
6,700 | |||
2012 |
6,700 | |||
2013 |
630,163 | |||
Total |
$ | 650,263 | ||
Our obligations under the Credit Facility are unconditionally guaranteed by, subject to
certain exceptions, each of our existing and future direct and indirect wholly-owned domestic
subsidiaries. The Credit Facility and the guarantees thereof are secured by first priority liens
and security interests in the following: 100% of the capital stock of substantially all of our
domestic subsidiaries and 65% of the outstanding voting equity interests and 100% of the non-voting
equity interests of first-tier foreign subsidiaries, all our material tangible and intangible
assets and those of the guarantors, and any present and future intercompany debt. The Credit
Facility also contains provisions for mandatory prepayments of outstanding term loans upon receipt
of the following, and subject to certain exceptions: 100% of net cash proceeds from asset sales,
100% of net cash proceeds from issuance or incurrence of debt, and 100% of extraordinary receipts.
We may voluntarily prepay borrowings under the Credit Facility without premium or penalty other
than breakage costs, as defined with respect to LIBOR-based loans.
We believe that cash flows from future operations in addition to cash and cash equivalents on
hand will be sufficient to meet our working capital, investing, financing and contractual
obligations and the contingent payments for acquisitions, if any are realized, as they become due
for at least the next twelve months. We also believe that in the event future operating results are
not as planned, that we could take actions, including restructuring actions and other cost
reduction initiatives, to reduce operating expenses to levels which, in combination with expected
future revenue, will continue to generate sufficient operating cash flow. In the event that these
actions are not effective in generating operating cash flows we may be required to issue equity or
debt securities on terms that may be less favorable.
16
Off-Balance Sheet Arrangements, Contractual Obligations, Contingent Liabilities and Commitments
Contractual Obligations
The following table outlines our contractual payment obligations as of September 30, 2009 (in
millions):
Payments Due by Fiscal Year Ended September 30, | ||||||||||||||||||||
2011 | 2013 | |||||||||||||||||||
Contractual Obligations | Total | 2010 | and 2012 | and 2014 | Thereafter | |||||||||||||||
Credit Facility(2) |
$ | 650.3 | $ | 6.7 | $ | 13.4 | $ | 630.2 | $ | | ||||||||||
2.75% Convertible Senior Debentures(1) |
250.0 | | | 250.0 | | |||||||||||||||
Interest payable under Credit Facility(2) |
50.8 | 14.7 | 29.0 | 7.1 | | |||||||||||||||
Interest payable under 2.75% Convertible Senior Debentures(3) |
34.5 | 6.9 | 13.8 | 13.8 | | |||||||||||||||
Lease obligations and other liabilities: |
| |||||||||||||||||||
Operating leases |
118.2 | 18.4 | 33.1 | 27.5 | 39.2 | |||||||||||||||
Other lease obligations associated with the closing of
duplicate facilities related to restructurings and
acquisitions(4) |
8.6 | 4.2 | 4.0 | 0.4 | | |||||||||||||||
Pension, minimum funding requirement(5) |
6.8 | 1.4 | 2.7 | 2.7 | | |||||||||||||||
Purchase commitments(6) |
1.9 | 1.9 | | | | |||||||||||||||
Other long-term liabilities assumed(7) |
47.7 | 13.5 | 26.3 | 4.6 | 3.3 | |||||||||||||||
Total contractual cash obligations |
$ | 1,168.8 | $ | 67.7 | $ | 122.3 | $ | 936.3 | $ | 42.5 | ||||||||||
(1) | Holders of the 2.75% Senior Convertible Debentures have the right to require us to repurchase the debentures on August 15, 2014, 2017 and 2022. The notes have a carrying value, which is principal net of debt discounts, of $205.1 million at September 30, 2009. | |
(2) | Interest is due and payable monthly under the Credit Facility, and principal is paid on a quarterly basis. The amounts included as interest payable in this table are based on the effective interest rate as of September 30, 2009 related to the Credit Facility excluding the effect of our interest rate swaps. | |
(3) | Interest is due and payable semi-annually under the 2.75% Convertible Senior Debentures. | |
(4) | Obligations include contractual lease commitments related to facilities that were part of restructuring plans entered into in fiscal 2005, 2008 and 2009. As of September 30, 2009, total gross lease obligations are $3.0 million and are included in the contractual obligations herein. The remaining $5.6 million in obligations represent contractual lease commitments associated with the implemented plans to eliminate duplicate facilities in conjunction with our acquisitions. As of September 30, 2009, we have subleased certain of the facilities to unrelated third parties with total sublease income of $3.0 million through fiscal 2013. | |
(5) | Our U.K. pension plan has a minimum funding requirement of £859,900 ($1.4 million based on the exchange rate at September 30, 2009) for each of the next 5 years, through fiscal 2014. | |
(6) | These amounts include non-cancelable purchase commitments for inventory in the normal course of business to fulfill customers orders currently scheduled in our backlog. | |
(7) | Obligations include assumed long-term liabilities relating to restructuring programs initiated by the predecessor companies prior to our acquisition of SpeechWorks International, Inc. in August 2003, and our acquisition of Former Nuance in September 2005. These restructuring programs related to the closing of two facilities with lease terms set to expire in 2016 and 2012, respectively. Total contractual obligations under these two leases are $47.7 million. As of September 30, 2009, we have sub-leased certain of the office space related to these two facilities to unrelated third parties. Total sublease income under contractual terms is expected to be $14.5 million, which ranges from $1.5 million to $3.2 million on an annualized basis through 2016. |
As a result of our adoption of FIN 48, Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109 (FIN 48), now referred to as ASC 740-10, on October 1,
2007, our gross liability for unrecognized tax benefits was approximately $2.5 million. The gross
liability as of September 30, 2009 was $12.1 million. We do not expect a significant change in the
amount of unrecognized tax benefits within the next 12 months. We estimate that approximately $1.1
million of this amount may be paid within the next year and we are currently unable to reasonably
estimate the timing of payments for the remainder of the liability.
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Contingent Liabilities and Commitments
In connection with certain of our acquisitions, we have agreed to make contingent cash
payments to the former shareholders of certain of the acquired companies. The following represents
the contingent cash payments that we may be required to make.
In connection with our acquisition of SNAPin, we agreed to make contingent earn-out payments
of up to $45.0 million in cash, to be paid, if at all, based on the business achieving certain
performance targets that are measurable from the acquisition date to December 31, 2009.
Additionally, we would be required to issue earn-out consideration to SNAPin option holders. This
option earn-out consideration, if earned, is payable at our sole discretion in cash, stock or
additional options to purchase common stock. The total value of this option earn-out consideration
may aggregate up to $2.5 million, which will be recorded as compensation expense over the service
period, if earned. These earn-out payments, if any would be payable upon the final measurement of
the performance targets. As of September 30, 2009, we have recorded approximately $12.9 million
related to the contingent earn-out provisions as additional purchase price.
In connection with our acquisition of PSRS, a deferred cash payment of 44.3 million ($64.6
million based on the exchange rate as of September 30, 2009) was due per the asset purchase
agreement on September 21, 2009. We paid the deferred acquisition payment on October 22, 2009. The
purchase price was finalized in November 2009 based on a final working capital adjustment agreed
between us and the former shareholder of PSRS, reducing the final purchase price by 1.4 million
($2.1 million based on exchange rate at September 30, 2009), reflective of the amount agreed to be
paid to us by the former shareholder of PSRS.
In connection with our acquisition of Multi-Vision, we agreed to make contingent earn-out
payments of up to $15.0 million, payable in stock, or cash, solely at our discretion, relating to
certain provisions as described in the share purchase agreement. Two-thirds of the earn-out is
conditioned on performance targets and continued employment; accordingly, up to $10.0 million of
any earn-out payments that become payable will be recorded to compensation expense, and up to $5.0
million, the portion of the prospective earn-out attributable solely to performance targets, will
be recorded as additional purchase price and allocated to goodwill. As of September 30, 2009, we
have not recorded any obligation or compensation expense relative to these measures.
In connection with our acquisition of Vocada, we agreed to make contingent earn-out payments
of up to an additional $21.0 million upon the achievement of certain financial targets measured
over defined periods through December 31, 2010, in accordance with the merger agreement. Payments,
if any, will be made in the form of cash or shares of our common stock, at our sole discretion. We
have notified the former shareholders of Vocada that the financial targets for certain periods were
not achieved. The former shareholders of Vocada have requested additional information regarding
this determination. We are currently in discussions with the former shareholders of Vocada
regarding this matter. As of September 30, 2009, we have not recorded any obligation relative to
these measures.
In connection with our acquisition of Commissure, we agreed to make contingent earn-out
payments of up to $8.0 million upon the achievement of certain financial targets for the fiscal
years ended September 30, 2008, 2009 and 2010, in accordance with the merger agreement. Payments,
if any, may be made in the form of cash or shares of our common stock, at our sole discretion. We
have notified the former shareholders of Commissure that the financial targets for fiscal year
ended September 30, 2008, were not achieved and the related contingent earn-out payment was not
earned. Through September 30, 2009, we have not recorded any obligation relative to these measures.
In connection with our acquisition of Phonetic Systems Ltd. (Phonetic) in February 2005, we
agreed to make contingent earn-out payments of $35.0 million upon achievement of certain
established financial and performance targets, in accordance with the merger agreement.
In December 2009, we paid $11.3 million to the former shareholders of Phonetic in final settlement of
the contingent earn-out provisions; recording the amount paid as additional purchase price related to the Phonetic acquisition.
Financial Instruments
We use financial instruments to manage our interest rate and foreign exchange risk. We follow
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments
and Hedging Activities, amended by SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, now referred to as Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) 815 (ASC 815), for certain designated forward contracts
and interest rate swaps.
18
To manage the interest rate exposure on our variable-rate borrowings, we use interest rate
swaps to convert specific variable-rate debt into fixed-rate debt. As of September 30, 2009, we
have two outstanding interest rate swaps designated as cash flow hedges with an aggregate notional
amount of $200 million. The interest rates on these swaps are 2.7% and 2.1%, plus the applicable
margin for the Credit Facility, and they expire in October 2010 and November 2010, respectively. As
of September 30, 2009 and September 30, 2008, the aggregate cumulative unrealized losses related to
these swaps, and a previous swap that matured on March 31, 2009, were $4.0 million and $0.9
million, respectively.
On December 31, 2008, we entered into foreign currency contracts to hedge exposure on the
variability of cash flows in Canadian dollars. These contracts expired in September 2009 and were
designated as cash flow hedges. The impact of these settled contracts on results of operations and
other comprehensive income are detailed in the Notes to our Consolidated Financial Statements. We
have no foreign currency contracts designated as cash flow hedges outstanding at September 30,
2009.
We have foreign currency contracts that are not designated as hedges. Changes in fair value of
foreign currency contracts not qualifying as hedges are reported in earnings as part of other
income (expense), net. During the three months ended December 31, 2008, we entered into foreign
currency forward contracts to offset foreign currency exposure on the deferred acquisition payment
of 44.3 million related to our acquisition of PSRS, resulting in a net gain of $8.0 million in
other income (expense).
In June 2009, we acquired certain intangible assets and issued 1,809,353 shares of our common
stock, valued at $25.0 million, as part of the total consideration. We also issued an additional
315,790 shares of our common stock, valued at $4.5 million, in June 2009 as a prepayment for
professional services. These shares issued are subject to security price guarantees which are
accounted for as derivatives, and are being accounted for separately from their host agreements due
to the determination that such instruments would not be considered equity instruments if
freestanding. The security price guarantees require a payment from, either, us to the third party
or from the third party to us based upon the difference between the price of our common stock on
the issue date and an average price of our common stock approximately six months following the
issue date. For the fiscal year ended September 30, 2009, increases in fair value of $2.3 million
related to these security price guarantees are reported in earnings as non-operating income within
other income (expense), net.
In October 2009, we entered into a five-year joint research collaboration with a third party
and made payments related to the first year of service consisting of 1,047,120 shares of our common
stock valued at $16.0 million. These shares issued are subject to security price guarantees of the
same nature as those described above.
In December 2009, we issued 879,567 shares of our common stock, valued at $13.0 million as an additional payment related to the acquisition of certain intangible assets. These shares issued are subject to security price guarantees of the same nature as those described above.
Pension Plans
We assumed the assets and obligations related to certain significant defined benefit pension
plans in connection with our acquisition of Dictaphone, which provide certain retirement and death
benefits for former Dictaphone employees located in the United Kingdom and Canada. These two
pension plans are closed to new participants. These plans require periodic cash contributions. The
Canadian plan is fully funded and expected to remain fully funded during fiscal 2010, without
additional funding by us. In fiscal 2009, total cash funding for the UK pension plan was $1.3
million. For the UK pension plan, we have a minimum funding requirement of £859,900 (approximately
$1.4 million based on the exchange rate at September 30, 2009) for each of the next five years,
through fiscal 2014.
Off-Balance Sheet Arrangements
Through September 30, 2009, 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 returns; accounting for patent
legal defense costs; the costs to complete the development of custom software applications; the
valuation of goodwill, intangible assets and tangible long-lived assets; accounting for business
combinations; share-based payments; valuation of 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 and various other factors
that are believed to be reasonable under the circumstances. Actual results could differ from these
estimates.
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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) post-contract customer
support, (3) fixed and variable fee hosting arrangements and (4) professional services. Our revenue
recognition policies for these revenue streams are discussed below.
The sale and/or license of software products and technology is deemed to have occurred when a
customer either has taken possession of the related software or technology or has the contractual
right to take possession of the software or technology at its sole discretion and without undue
economic cost or burden. In select situations, we sell or license intellectual property in
conjunction with, or in place of, embedding our intellectual property in software. We recognize
revenue from the sale or license of software products and licensing of technology when (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or
determinable and (iv) collectibility is probable. Vendor-specific objective evidence (VSOE) of
fair value for software and software-related services exists when a company can support what the
fair value of its software and/or software-related services is based on evidence of the prices
charged by the company when the same elements are sold separately. VSOE of fair value is required,
generally, in order to separate the accounting for various elements in a software and related
services arrangement. We have, in general, established VSOE of fair value of our post-contract
customer support (PCS), professional services, and training.
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
three years. Revenue from PCS is recognized ratably on a straight-line basis over the term that the
maintenance service is provided.
Non-software revenue, such as arrangements containing hosting services where the customer does
not take possession of the software at the outset of the arrangement and has no contractual right
to do so, is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has
occurred or services have been rendered, (iii) the fees are fixed or determinable and (iv)
collectibility is reasonably assured.
For revenue arrangements with multiple elements that are not considered to be software or
software-related, we allocate an arrangements fees into separate units of accounting based on fair
value. We generally support fair value of our deliverables based upon the prices we charge when we
sell similar elements separately.
Revenue from products offered on a subscription and/or hosted, on-demand basis is recognized
in the period the services are provided, based on a fixed minimum fee and/or variable fees based on
the volume of activity. Variable subscription and hosting revenue is recognized as we are notified
by the customer or through management reports that such revenue is due, provided that all other
revenue recognition criteria are met.
Set-up fees from arrangements containing hosting services, as well as the associated direct
and incremental costs, are deferred and recognized ratably over the longer of the contractual
lives, or the expected lives of the customer relationships.
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 classifying
the fair value of professional service revenue as professional service revenue and the residual
portion as license 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.
20
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 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 value-added
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 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.
When maintenance and support contracts renew automatically, we provide a reserve based on
historical experience for contracts expected to be cancelled for non-payment. All known and
estimated cancellations are recorded as a reduction to revenue and accounts receivable.
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 well as to in-process
research and development 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 combination date including:
| estimated fair values of intangible assets; | ||
| expected costs to complete any in-process research and development projects; | ||
| 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 value of restructuring liabilities to reorganize the acquirees pre-acquisition operations; | ||
| probability of required payment 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. |
In fiscal 2010, we will adopt the business combinations accounting guidance in FASB ASC 805
[formerly referred to as SFAS No. 141(Revised), Business Combinations (SFAS 141R)]. Refer to
Recently Issued Accounting Standards below for additional information
21
While we use our best estimates and assumptions as a 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 purchase price allocation period, which is generally one year from the business
combination date, we record adjustments to the assets acquired and liabilities assumed, with the
corresponding offset to goodwill. Generally, with the exception of unresolved income tax matters,
subsequent to the purchase price allocation period any adjustment to assets acquired or liabilities
assumed is included in operating results in the period in which the adjustment is determined. For
changes in the valuation of intangible assets between preliminary and final purchase price
allocation, the related amortization is adjusted on a prospective basis.
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, 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 companys brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined companys 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.
Other significant estimates associated with the accounting for business combinations include
restructuring costs. Restructuring costs are typically comprised of severance costs, costs of
consolidating duplicate facilities and contract termination costs. Restructuring expenses are based
upon plans that have been committed to by management, but are generally subject to refinement
during the purchase price allocation period (generally within one year of the acquisition date). To
estimate restructuring expenses, management utilizes assumptions of the number of employees that
would be involuntarily terminated and of future costs to operate and eventually vacate duplicate
facilities. Estimated restructuring expenses may change as management executes the approved plan.
For a given acquisition, we may identify certain pre-acquisition contingencies. If, during the
purchase price allocation period, we are able to determine the fair value of a pre-acquisition
contingency, we will include that amount in the purchase price allocation. If, as of the end of the
purchase price allocation period, we are unable to determine the fair value of a pre-acquisition
contingency, 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. With the exception of unresolved income tax matters, after the end of the purchase price
allocation period, any adjustment to amounts recorded for a pre-acquisition contingency will be
included in our operating results in the period in which the adjustment is determined.
Goodwill, Intangible and Other Long-Lived Assets and Impairment Assessments. We have
significant long-lived tangible and intangible assets, including goodwill and intangible assets
with indefinite lives, which are susceptible to valuation adjustments as a result of changes in
various factors or conditions. The most significant long-lived tangible and intangible assets are
licensed technology, patents and core technology, completed technology, customer relationships,
fixed assets and tradenames. All finite-lived intangible assets are amortized based upon patterns
in which the economic benefits are expected to be utilized. The values of intangible assets
determined in connection with a business combination, with the exception of goodwill, were
initially determined by a risk-adjusted, discounted cash flow approach. We assess the potential
impairment of intangible and fixed assets whenever events or changes in circumstances indicate that
the carrying values may not be recoverable. Goodwill and indefinite-lived intangible assets are
assessed for potential impairment at least annually, but also whenever events or changes in
circumstances indicate the carrying values may not be recoverable. Factors we consider important,
which could trigger an impairment of such assets, include the following:
22
| significant underperformance relative to historical or projected future operating results; | ||
| significant changes in the manner of or use of the acquired assets or the strategy for our overall business; | ||
| significant negative industry or economic trends; | ||
| significant decline in our stock price for a sustained period; and | ||
| a decline in our market capitalization below net book value. |
Future adverse changes in these or other unforeseeable factors could result in an impairment
charge that would materially impact future results of operations and financial position in the
reporting period identified.
We test goodwill and intangible assets with indefinite lives for impairment on an annual basis
as of July 1, and between annual tests if indicators of potential impairment exist. The impairment
test for goodwill and intangible assets with indefinite lives compares the fair value of identified
reporting unit(s) to its (their) carrying amount to assess whether such assets are impaired. We
have determined that beginning in fiscal 2009, we have three reporting units based on the evolution
during the current fiscal year of the level of information provided to, and review thereof, by our
core market management. Our three reporting units correspond to our three core market groups. Prior
to fiscal 2009, we concluded that we only had one reporting unit based on the same criteria. The
estimated fair values of the reporting units for the annual goodwill impairment test were
determined based on estimates of those reporting units enterprise values as if they were
standalone operations as a function of trailing-twelve-month (TTM) revenues and adjusted earnings
before interest, taxes, depreciation and amortization (EBITDA) as compared to companies
comparable to each of the reporting units on a standalone basis. The carrying values of the
reporting units were determined based on an allocation of our assets and liabilities through
specific allocation of certain assets and liabilities, including goodwill, to the reporting units
and an apportionment method based on relative size of the reporting units revenues and operating
expenses compared to the Company as a whole. Certain corporate assets that are not instrumental to
the reporting units operations and would not be transferred to hypothetical purchasers of the
reporting units were excluded from the reporting units carrying values. Key estimates and
judgments inherent to the analysis were the determination of TTM revenue and EBITDA multiples used
in estimating the fair values of the reporting units and the allocation methods used to determine
the carrying values of the reporting units. Intangible assets with indefinite lives are not
amortized, but are required to be evaluated periodically to ensure that their current fair value
exceeds the stated book value. Based on our assessments, we have not had any impairment charges
during our history as a result of our impairment evaluation of goodwill and other indefinite-lived
intangible assets. Significant adverse changes in our future revenues and/or adjusted EBITDA
results, or significant degradation in the enterprise values of comparable companies within our
core markets, could result in the determination that all or a portion of our goodwill is impaired.
However, as of our fiscal 2009 annual impairment assessment date, our estimated fair values of our
reporting units significantly exceeded their carrying values.
We periodically review long-lived assets other than goodwill or indefinite-lived intangible
assets for impairment whenever events or changes in business circumstances indicate that the
carrying amount of the assets may not be fully recoverable or that the useful lives of those assets
are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash
flows to the recorded carrying value for the asset or asset group. Asset groups utilized in this
analysis are identified as the lowest level grouping of assets for which largely independent cash
flows can be identified. If impairment is indicated, the asset or asset group is written down to
its estimated fair value.
Significant judgments and estimates are involved in determining the useful lives of our
long-lived assets, determining what reporting units exist and assessing when events or
circumstances would require an interim impairment analysis of goodwill or other long-lived assets
to be performed. Changes in our organization or management reporting structure, as well as other
events and circumstances, including but not limited to technological advances, increased
competition and changing economic or market conditions, could result in (a) shorter estimated
useful lives, (b) additional reporting units, which may require alternative methods of estimating
fair values or greater disaggregation or aggregation in our analysis by reporting unit, and/or (c)
other changes in previous assumptions or estimates. In turn, this could have a significant impact
on our consolidated financial statements through accelerated amortization and/or impairment
charges.
23
Accounting for Share-Based Payments. We account for share-based awards to employees and
directors, including grants of employee stock options, purchases under employee stock purchase
plans, awards in the form of restricted shares (Restricted Stock) and awards in the form of units
of stock purchase rights (Restricted Units) through recognition of the fair value of the
share-based awards as a charge against earnings in the form of stock-based compensation expense. We
recognize stock-based compensation expense over the requisite service period. The Restricted Stock
and Restricted Units are collectively referred to as Restricted Awards. Determining the fair
value of share-based awards at the grant date requires judgment, including estimating expected
dividends, share price volatility and the amount of share-based awards that are expected to be
forfeited. If actual results differ significantly from these estimates, stock-based compensation
expense and our results of operations could be materially impacted.
Income Taxes. Deferred tax assets and liabilities are determined based on differences between
the financial statement and tax bases of assets and liabilities using enacted tax rates in effect
in the years in which the differences are expected to reverse. We do not provide for U.S. income
taxes on the undistributed earnings of its foreign subsidiaries, which we consider to be
indefinitely reinvested outside of the U.S.
We make judgments regarding the realizability of our deferred tax assets. The balance sheet
carrying value of our net deferred tax assets is based on whether we believe that it is more likely
than not that we will generate sufficient future taxable income to realize these deferred tax
assets after consideration of all available evidence. We regularly review our deferred tax assets
for recoverability considering historical profitability, projected future taxable income, and the
expected timing of the reversals of existing temporary differences and tax planning strategies.
Valuation allowances have been established for U.S. 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, excluding the recognition of the portion of the
valuation allowance which relates to net deferred tax assets acquired in a business combination or
created as a result of share-based payments or other equity transactions where prevailing guidance
requires the change in valuation allowance to be traced forward. The recognition of the portion of
the valuation allowance which relates to net deferred tax assets resulting from share-based
payments or other qualifying equity transactions will be recorded as additional paid-in-capital;
the recognition of the portion of the valuation allowance which relates to net deferred tax assets
acquired in a business combination will reduce goodwill, intangible assets, and to the extent
remaining, the provision for income taxes, until our adoption of the business combination
accounting guidance in ASC 805 on October 1, 2009; after which time the reductions in the
allowance, if any, will be recorded as a benefit in the statement of operations.
We establish reserves for tax uncertainties that reflect the use of the comprehensive model
for the recognition and measurement of uncertain tax positions. Under the comprehensive model,
reserves are established when we have determined that it is more likely than not that a tax
position will or will not be sustained and at the greatest amount for which the result is more
likely than not.
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 19 of Notes to our Consolidated Financial Statements. Quarterly, 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 judgment is required in both the
determination of probability and the determination as to whether an exposure is reasonably
estimable. Because of uncertainties related to these matters, accruals are based only on the best
information available at the time. As additional information becomes available, we reassess the
potential liability related to our pending claims and litigation and may revise our estimates. Such
revisions in the estimates of the potential liabilities could have a material impact on our results
of operations and financial position.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2009, the Emerging Issues Task Force (EITF) ratified EITF Issue No. 08-1,
Revenue Arrangements with Multiple Deliverables (EITF 08-1). EITF 08-1, which has not yet been
codified in the FASB Accounting Standards Codification (the Codification or ASC), supersedes
EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, now referred to as ASC
605-25-50-1. EITF 08-1 eliminates the residual method of accounting for non-software arrangements,
as well as the associated requirements for establishing vendor objective evidence of fair value.
The residual method is replaced in EITF 08-1 by the estimated selling price method whereby revenue
in a multiple-element arrangement is allocated to each element based on its estimated selling
price. Estimating selling price is established through a hierarchy starting with vendor-specific
objective evidence (VSOE) of fair
24
value, following by third-party evidence, and lastly by any reasonable, objective estimate of
the selling price were the element to be sold on a standalone basis. Estimates of selling price
must consider both entity-specific factors and market conditions. EITF 08-1 is applied
prospectively to all revenue transactions entered into, or materially modified, after June 15,
2010. Early adoption is permitted if adopted as of the beginning of an entitys fiscal year and no
prior interim period financial statements from that fiscal year have already been issued or the
entity retrospectively applies the provisions of this EITF issue to its previously-issued current
fiscal year interim financial statements. We currently do not expect that the adoption of EITF 08-1
will have a material impact on our consolidated financial statements.
In September 2009, the EITF ratified EITF Issue No. 09-3, Applicability of AICPA Statement of
Position 97-2 to Certain Arrangements That Include Software Elements (EITF 09-3). EITF 09-3,
which has not yet been codified in the Codification, applies to multiple-element arrangements that
contain both software and hardware elements, and amends the scope of AICPA Statement of Position
(SOP) No. 97-2, Software Revenue Recognition (SOP 97-2), now referred to as ASC 985-605, to
exclude tangible products containing software and non-software components that together function to
deliver the products essential functionality from the scope of ASC 985-605. EITF 09-3 is applied
prospectively to all revenue transactions entered into, or materially modified, after June 15,
2010. Early adoption is permitted only when EITF 08-1 is also early adopted as of the same period.
We are currently evaluating the potential impact of EITF 09-3 on our consolidated financial
statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles (SFAS 168), now referred to as ASC 105-10,
Generally Accepted Accounting Principles. This standard establishes the Codification as the sole
source of authoritative accounting principles recognized by the FASB to be applied by
non-governmental entities in the preparation of financial statements in conformity with GAAP. Rules
and interpretive releases of the Securities and Exchange Commission (SEC) under authority of
federal securities laws remain sources of authoritative GAAP for SEC registrants. ASC 105-10 is
effective for financial statements issued for interim and annual periods ending after September 15,
2009. We have included references to the Codification, where appropriate, in our consolidated
financial statements and throughout this annual report on Form 10-K.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165), now referred to as
ASC 855-10. ASC 855-10 incorporates accounting and disclosure requirements related to subsequent
events into U.S. GAAP. The requirements of ASC 855-10 for subsequent-events accounting and
disclosure are not significantly different from those in existing auditing standards, which we have
historically followed for financial reporting purposes. As a result, we do not believe this
standard had any material impact on our financial statements.
In April 2009, the FASB issued FASB Staff Position (FSP) FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments, now referred to as ASC 825-10. ASC 825-10
requires disclosures about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. ASC 825-10 also requires those
disclosures in summarized financial information at interim reporting periods. ASC 825-10 was
effective for interim periods ending after June 15, 2009. We adopted ASC 825-10 in our third
quarter fiscal 2009, and it had no material impact on our third quarter financial statements.
In April 2009, the FASB issued FSP FAS 141R-1, Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies (FSP 141R-1), the guidance from
which is included in ASC 805. This FSP requires that assets acquired and liabilities assumed in a
business combination that arise from contingencies be recognized at fair value if fair value can be
reasonably estimated. This FSP is effective for the fiscal years beginning after December 15, 2008.
As this FSP essentially reinstates to SFAS No. 141 (Revised), Business Combinations (SFAS 141R),
now referred to as ASC 805, the guidance for accounting for acquired contingencies from SFAS No.
141, we do not believe FSP 141R-1 will have a material impact on our financial statements.
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly, now referred to as ASC 820-10. ASC 820-10 provides guidance on how to
determine the fair value of assets and liabilities under ASC 820 (formerly known as SFAS No. 157,
Fair Value Measurements) in the current economic environment and reemphasizes that the objective of
a fair value measurement remains an exit price. If we were to conclude that there has been a
significant decrease in the volume and level of activity of the asset or liability in relation to
normal market activities, quoted market values may not be representative of fair value and we may
conclude that a change in valuation technique or the use of multiple valuation techniques may be
appropriate. ASC 820 is effective for interim and annual periods ending after June 15, 2009. We
adopted this FSP effective April 1, 2009 and such adoption has not had a material impact on our
financial statements, nor do we expect it to in future periods.
25
In November 2008, the FASB ratified EITF Issue No. 08-7, Accounting for Defensive Intangible
Assets, now referred to as ASC 350-30-25-5. ASC 350-30-25-5 applies to defensive intangible assets,
which are acquired intangible assets that the acquirer does not intend to actively use but intends
to hold to prevent its competitors from obtaining access to them. As these assets are separately
identifiable, they must be recognized at fair value in accordance with ASC 805 and ASC 820.
Defensive intangible assets recognized are required to be amortized over the estimated period
during which an acquirer expects to receive benefit from preventing its competitors from obtaining
access to the intangible asset. ASC 350-30-25-5 is effective for fiscal years beginning on or after
December 15, 2008. The effect of adopting ASC 350-30-25-5 on our consolidated results of operations
and financial condition will be largely dependent on the size and nature of any business
combinations and asset acquisitions that we may complete after September 30, 2009.
In June 2008, the EITF ratified EITF Issue No. 07-5, Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entitys Own Stock, now referred to as ASC 815-40-15. ASC
815-40-15 provides guidance in assessing whether derivative instruments meet the criteria in
paragraph 11(a) of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, now
referred to as ASC 815, for being considered indexed to an entitys own common stock. ASC 815-40-15
is effective for fiscal years beginning after December 15, 2008. We have completed our evaluation
of the impact of ASC 815-40-15 and believe the impact will be immaterial based on the nature of our
derivative and hedging activities.
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments that
May be Settled in Cash upon Conversion, now referred to as ASC 470-20. ASC 470-20 requires
companies to separately account for the liability (debt) and equity (conversion option) components
of convertible debt instruments that require or permit settlement in cash upon conversion in a
manner that reflects the issuers nonconvertible debt borrowing rate at the time of issuance. ASC
470-20 is effective for fiscal years beginning after December 15, 2008 and may not be adopted
early. ASC 470-20 must be applied retrospectively to all periods presented. We have completed our
evaluation of the adoption of this standard. Refer to Note 2a to the consolidated financial
statements included herein for discussion of the impact of this recently issued standard.
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible
Assets, now referred to as ASC 350-30-65-1. It amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Intangible Assets, now referred to as ASC 350.
ASC 350-30-65-1 is effective for fiscal years beginning after December 15, 2008 and may not be
adopted early. We are continuing to evaluate the potential impact of ASC 350-30-65-1.
In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157, now
referred to as ASC 820-10-15-1A, which delays the effective date of ASC 820 for nonfinancial assets
and nonfinancial liabilities, except for certain items that are recognized or disclosed at fair
value in the financial statements on a recurring basis. ASC 820-10-15-1A defers our adoption of
these remaining provisions of ASC 820 to the first quarter of fiscal 2010. We do not believe the
adoption of the remaining portions of ASC 820 will have a material impact on our financial
statements.
In December 2007, the FASB issued SFAS 141R, now referred to as ASC 805. ASC 805 supersedes
the previous accounting guidance related to business combinations, including the measurement of
acquirer shares issued in consideration for a business combination, the recognition of and
subsequent accounting for contingent consideration, the recognition of acquired in-process research
and development, the accounting for acquisition-related restructurings, the treatment of
acquisition-related transaction costs and the recognition of changes in the acquirers income tax
valuation allowance. The guidance is applied prospectively from the date of acquisition with minor
exception related to income tax contingencies from companies acquired prior to the adoption date.
ASC 805 is effective for fiscal years beginning after December 15, 2008 and may not be adopted
early. The effect of adopting ASC 805 on our consolidated results of operations and financial
condition will be largely dependent on the size and nature of any business combinations that we may
complete after September 30, 2009; however we expect to write-off transaction costs of
approximately $2.2 million that are capitalized as of September 30, 2009 related to pending
acquisitions that were not consummated prior to our adoption date of October 1, 2009.
26
NUANCE COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
Page | ||
Report of Independent Registered Public Accounting Firm |
28 | |
Consolidated Statements of Operations |
29 | |
Consolidated Balance Sheets |
30 | |
Consolidated Statements of Stockholders Equity and Comprehensive Loss |
31 | |
Consolidated Statements of Cash Flows |
32 | |
Notes to Consolidated Financial Statements |
33 |
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Nuance Communications, Inc.
Burlington, Massachusetts
Nuance Communications, Inc.
Burlington, Massachusetts
We have audited the accompanying consolidated balance sheets of Nuance Communications, Inc. as
of September 30, 2009 and 2008, and the related consolidated statements of operations,
stockholders equity and comprehensive loss, and cash flows for each of the three years in the
period ended September 30, 2009. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Nuance Communications, Inc. at September 30, 2009 and
2008, and the results of its operations and its cash flows for each of the three years in the
period ended September 30, 2009, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 2a to the consolidated financial statements, Nuance Communications, Inc.
has retrospectively changed its method of accounting for the conversion options in its debt that
may be settled in cash upon conversion for all periods presented in its consolidated financial
statements due to the adoption of FASB Accounting Standards Codification 470-20, Accounting for
Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement) (ASC 470-20).
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Nuance Communications, Inc.s internal control over financial
reporting as of September 30, 2009, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations (COSO), and our report dated November
25, 2009 (not presented herein) expressed an unqualified opinion thereon.
/s/ BDO SEIDMAN, LLP | ||||
BDO Seidman, LLP | ||||
Boston, Massachusetts
November 25, 2009, except as to the effects of ASC 470-20, as
discussed in Note 2a, and Note 25 which are as of February 11, 2010
November 25, 2009, except as to the effects of ASC 470-20, as
discussed in Note 2a, and Note 25 which are as of February 11, 2010
28
NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(In thousands, except per share amounts) | ||||||||||||
Revenue: |
||||||||||||
Product and licensing |
$ | 373,367 | $ | 414,360 | $ | 311,847 | ||||||
Professional services and hosting |
411,363 | 305,540 | 165,520 | |||||||||
Maintenance and support |
165,622 | 148,562 | 124,629 | |||||||||
Total revenue |
950,352 | 868,462 | 601,996 | |||||||||
Cost of revenue: |
||||||||||||
Product and licensing |
37,255 | 45,746 | 43,162 | |||||||||
Professional services and hosting |
254,777 | 214,031 | 114,228 | |||||||||
Maintenance and support |
29,129 | 31,477 | 27,461 | |||||||||
Amortization of intangible assets |
38,390 | 24,389 | 13,090 | |||||||||
Total cost of revenue |
359,551 | 315,643 | 197,941 | |||||||||
Gross profit |
590,801 | 552,819 | 404,055 | |||||||||
Operating expenses: |
||||||||||||
Research and development |
119,434 | 114,986 | 80,024 | |||||||||
Sales and marketing |
219,226 | 231,244 | 184,948 | |||||||||
General and administrative |
112,068 | 105,910 | 75,564 | |||||||||
Amortization of intangible assets |
76,978 | 58,245 | 24,596 | |||||||||
In-process research and development |
| 2,601 | | |||||||||
Restructuring and other charges (credits), net |
5,520 | 7,219 | (54 | ) | ||||||||
Total operating expenses |
533,226 | 520,205 | 365,078 | |||||||||
Income from operations |
57,575 | 32,614 | 38,977 | |||||||||
Other income (expense): |
||||||||||||
Interest income |
3,562 | 8,032 | 5,991 | |||||||||
Interest expense |
(47,288 | ) | (62,088 | ) | (37,342 | ) | ||||||
Other income (expense), net |
7,155 | (964 | ) | 20 | ||||||||
Income (loss) before income taxes |
21,004 | (22,406 | ) | 7,646 | ||||||||
Provision for income taxes |
40,391 | 14,554 | 22,502 | |||||||||
Net loss |
$ | (19,387 | ) | $ | (36,960 | ) | $ | (14,856 | ) | |||
Net loss per share: |
||||||||||||
Basic and diluted |
$ | (0.08 | ) | $ | (0.18 | ) | $ | (0.08 | ) | |||
Weighted average common shares outstanding: |
||||||||||||
Basic and diluted |
253,644 | 209,801 | 176,424 | |||||||||
See accompanying notes. Financial statements have been adjusted for the retrospective application of ASC 470-20 (See Note 2a).
29
NUANCE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
(In thousands, except | ||||||||
per share amounts) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 527,038 | $ | 261,540 | ||||
Marketable securities |
| 56 | ||||||
Accounts receivable, less allowances for doubtful accounts of $6,833 and $6,925 |
199,548 | 203,542 | ||||||
Acquired unbilled accounts receivable |
9,171 | 14,457 | ||||||
Inventories, net |
8,525 | 7,152 | ||||||
Prepaid expenses and other current assets |
51,545 | 28,536 | ||||||
Total current assets |
795,827 | 515,283 | ||||||
Land, building and equipment, net |
53,468 | 46,485 | ||||||
Goodwill |
1,891,003 | 1,655,773 | ||||||
Intangible assets, net |
706,805 | 585,023 | ||||||
Other assets |
52,361 | 43,455 | ||||||
Total assets |
$ | 3,499,464 | $ | 2,846,019 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt and capital leases |
$ | 6,862 | $ | 7,006 | ||||
Contingent and deferred acquisition payments |
91,431 | 113,074 | ||||||
Accounts payable |
59,574 | 31,517 | ||||||
Accrued expenses and other current liabilities |
104,819 | 102,099 | ||||||
Accrued business combination costs |
12,144 | 9,166 | ||||||
Deferred maintenance revenue |
84,607 | 80,521 | ||||||
Unearned revenue and customer deposits |
59,788 | 38,381 | ||||||
Total current liabilities |
419,225 | 381,764 | ||||||
Long-term portion of debt and capital leases |
848,898 | 847,256 | ||||||
Long-term portion of accrued business combination costs |
24,904 | 32,012 | ||||||
Deferred revenue, net of current portion |
33,904 | 18,134 | ||||||
Deferred tax liability |
56,346 | 46,745 | ||||||
Other liabilities |
73,186 | 48,452 | ||||||
Total liabilities |
1,456,463 | 1,374,363 | ||||||
Commitments and contingencies (Notes 3, 5, and 19) |
||||||||
Stockholders equity: |
||||||||
Series B preferred stock, $0.001 par value; 15,000 shares authorized; 3,562
shares issued and outstanding (liquidation preference $4,631) |
4,631 | 4,631 | ||||||
Common stock, $0.001 par value; 560,000 shares authorized; 280,647 and 232,592
shares issued and 276,935 and 229,370 shares outstanding |
281 | 232 | ||||||
Additional paid-in capital |
2,308,992 | 1,712,993 | ||||||
Treasury stock, at cost (3,712 and 3,222 shares) |
(16,214 | ) | (16,070 | ) | ||||
Accumulated other comprehensive income |
7,567 | 12,739 | ||||||
Accumulated deficit |
(262,256 | ) | (242,869 | ) | ||||
Total stockholders equity |
2,043,001 | 1,471,656 | ||||||
Total liabilities and stockholders equity |
$ | 3,499,464 | $ | 2,846,019 | ||||
See accompanying notes. Financial statements have been adjusted for the retrospective application of ASC 470-20 (See Note 2a).
30
NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
Accumulated | ||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-In | Treasury Stock | Comprehensive | Accumulated | Stockholders | Comprehensive | |||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Shares | Amount | Income | Deficit | Equity | Loss | ||||||||||||||||||||||||||||||||||
Balance at October 1, 2006 |
3,562,238 | $ | 4,631 | 173,182,430 | $ | 174 | $ | 773,120 | 3,030,183 | $ | (12,859 | ) | $ | 1,656 | $ | (190,126 | ) | $ | 576,596 | |||||||||||||||||||||||||
Issuance of common stock under employee stock-based compensation plans |
6,383,051 | 6 | 30,654 | 30,660 | ||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock |
958,124 | 1 | | 1 | ||||||||||||||||||||||||||||||||||||||||
Cancellation of restricted stock, and repurchase of common stock at cost for
employee tax withholding |
(164,300 | ) | (1 | ) | (2,219 | ) | 159,554 | (2,559 | ) | (4,779 | ) | |||||||||||||||||||||||||||||||||
Share-based payments |
48,135 | 48,135 | ||||||||||||||||||||||||||||||||||||||||||
Excess tax benefit from share-based payment plans |
4,172 | 4,172 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with acquisitions |
14,794,848 | 15 | 227,337 | 227,352 | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock to escrow agent in connection with acquisitions |
1,400,091 | 1 | (1 | ) | | |||||||||||||||||||||||||||||||||||||||
Repurchase of shares |
(261,422 | ) | | (3,178 | ) | (3,178 | ) | |||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with exercise of warrants |
75,623 | | | | ||||||||||||||||||||||||||||||||||||||||
Value of
conversion options on 2.75% convertible subordinated notes |
54,481 | 54,481 | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||||||||||||||
Net loss |
(14,856 | ) | (14,856 | ) | $ | (14,856 | ) | |||||||||||||||||||||||||||||||||||||
Unrealized losses on cash flow hedge derivatives |
(355 | ) | (355 | ) | (355 | ) | ||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
9,628 | 9,628 | 9,628 | |||||||||||||||||||||||||||||||||||||||||
Adjustment to initially apply SFAS 158, net of tax |
4,050 | 4,050 | | |||||||||||||||||||||||||||||||||||||||||
Comprehensive loss |
$ | (5,583 | ) | |||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2007 |
3,562,238 | 4,631 | 196,368,445 | 196 | 1,132,501 | 3,189,737 | (15,418 | ) | 14,979 | (204,982 | ) | 931,907] | ||||||||||||||||||||||||||||||||
Issuance of common stock under employee stock-based compensation plans |
6,513,027 | 7 | 28,424 | 28,431 | ||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock |
3,315,736 | 3 | (3 | ) | | |||||||||||||||||||||||||||||||||||||||
Cancellation of restricted stock, and repurchase of common stock at cost for
employee tax withholding |
(911,031 | ) | (1 | ) | (17,007 | ) | 32,582 | (652 | ) | (17,660 | ) | |||||||||||||||||||||||||||||||||
Share-based payments |
68,631 | 68,631 | ||||||||||||||||||||||||||||||||||||||||||
Excess tax benefit from share-based payment plans |
5,200 | 5,200 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with equity offerings, net of expenses |
19,158,369 | 19 | 330,398 | 330,417 | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with acquisitions |
6,382,809 | 6 | 132,245 | 132,251 | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock to escrow agent in connection with acquisitions |
1,765,017 | 2 | (2 | ) | | |||||||||||||||||||||||||||||||||||||||
Vested options for the purchase of common stock, assumed in connection with
acquisitions |
32,606 | 32,606 | ||||||||||||||||||||||||||||||||||||||||||
Cumulative effect of adoption of FIN 48 |
(927 | ) | (927 | ) | ||||||||||||||||||||||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||||||||||||||
Net loss |
(36,960 | ) | (36,960 | ) | $ | (36,960 | ) | |||||||||||||||||||||||||||||||||||||
Unrealized gains on cash flow hedge derivatives |
50 | 50 | 50 | |||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
3,291 | 3,291 | 3,291 | |||||||||||||||||||||||||||||||||||||||||
Unrealized losses on pensions and other post-retirement benefits |
(5,581 | ) | (5,581 | ) | (5,581 | ) | ||||||||||||||||||||||||||||||||||||||
Comprehensive loss |
$ | (39,200 | ) | |||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2008 |
3,562,238 | 4,631 | 232,592,372 | 232 | 1,712,993 | 3,222,319 | (16,070 | ) | 12,739 | (242,869 | ) | 1,471,656 | ||||||||||||||||||||||||||||||||
Issuance of common stock under employee stock-based compensation plans |
3,722,505 | 5 | 19,832 | 19,837 | ||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock |
2,945,149 | 3 | (3 | ) | | |||||||||||||||||||||||||||||||||||||||
Cancellation of restricted stock, and repurchase of common stock at cost for
employee tax withholding |
(885,944 | ) | (1 | ) | (10,401 | ) | 14,654 | (143 | ) | (10,545 | ) | |||||||||||||||||||||||||||||||||
Share-based payments |
71,407 | 71,407 | ||||||||||||||||||||||||||||||||||||||||||
Excess tax benefit from share-based payment plans |
733 | 733 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with financing, net of expenses |
17,395,626 | 17 | 175,029 | 175,046 | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with warrant exercises, net of issuance costs |
4,574,718 | 5 | 20,520 | 20,525 | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with acquisitions |
19,196,229 | 19 | 268,669 | 474,558 | (1 | ) | 268,687 | |||||||||||||||||||||||||||||||||||||
Issuance of common stock to escrow agent in connection with acquisitions |
1,106,657 | 1 | (1 | ) | | |||||||||||||||||||||||||||||||||||||||
Vested options for the purchase of common stock, assumed in connection with
acquisitions |
11,523 | 11,523 | ||||||||||||||||||||||||||||||||||||||||||
Payments for escrow, make-whole and earn-out settlements |
38,691 | 38,691 | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||||||||||||||
Net loss |
(19,387 | ) | (19,387 | ) | $ | (19,387 | ) | |||||||||||||||||||||||||||||||||||||
Unrealized gains on cash flow hedge derivatives and investments |
(3,103 | ) | (3,103 | ) | (3,103 | ) | ||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
729 | 729 | 729 | |||||||||||||||||||||||||||||||||||||||||
Unrealized losses on pensions |
(2,798 | ) | (2,798 | ) | (2,798 | ) | ||||||||||||||||||||||||||||||||||||||
Comprehensive loss |
$ | (24,559 | ) | |||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2009 |
3,562,238 | $ | 4,631 | 280,647,312 | $ | 281 | $ | 2,308,992 | 3,711,531 | $ | (16,214 | ) | $ | 7,567 | $ | (262,256 | ) | $2,043,001 | ||||||||||||||||||||||||||
See accompanying notes. Financial statements have been adjusted for the retrospective application of ASC 470-20 (See Note 2a).
31
NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(In thousands) | ||||||||||||
Cash flows from operating activities |
||||||||||||
Net loss |
$ | (19,387 | ) | $ | (36,960 | ) | $ | (14,856 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||||||
Depreciation of property and equipment |
18,691 | 16,366 | 12,148 | |||||||||
Amortization of intangible assets |
115,368 | 82,634 | 37,685 | |||||||||
Non-cash interest expense |
12,492 | 12,100 | 5,010 | |||||||||
In-process research and development |
| 2,601 | | |||||||||
Bad debt provision |
1,823 | 4,173 | 2,449 | |||||||||
Stock-based compensation |
71,407 | 68,631 | 48,135 | |||||||||
Gain on foreign currency forward contracts |
(8,049 | ) | | | ||||||||
Deferred tax provision |
25,718 | 491 | 14,068 | |||||||||
Other |
143 | 1,799 | 465 | |||||||||
Changes in operating assets and liabilities, net of effects from acquisitions: |
||||||||||||
Accounts receivable |
33,481 | 62,034 | (14,217 | ) | ||||||||
Inventories |
(1,368 | ) | 1,125 | (624 | ) | |||||||
Prepaid expenses and other assets |
(12,659 | ) | (2,546 | ) | (4,413 | ) | ||||||
Accounts payable |
26,582 | (11,946 | ) | 10,736 | ||||||||
Accrued expenses and other liabilities |
(5,007 | ) | (14,251 | ) | 9,233 | |||||||
Deferred maintenance revenue, unearned revenue and customer deposits |
(546 | ) | 9,948 | 603 | ||||||||
Net cash provided by operating activities |
258,689 | 196,199 | 106,422 | |||||||||
Cash flows from investing activities |
||||||||||||
Capital expenditures |
(19,512 | ) | (17,716 | ) | (12,656 | ) | ||||||
Payments for acquisitions, net of cash acquired |
(99,120 | ) | (392,527 | ) | (564,295 | ) | ||||||
Payment for equity investment |
(159 | ) | (2,172 | ) | | |||||||
Payments for capitalized patent costs and licensing agreements |
(65,875 | ) | (36,479 | ) | (7,501 | ) | ||||||
Proceeds from maturities of marketable securities |
56 | 2,577 | 5,714 | |||||||||
Change in restricted cash balances |
| 238 | 1,023 | |||||||||
Net cash used in investing activities |
(184,610 | ) | (446,079 | ) | (577,715 | ) | ||||||
Cash flows from financing activities |
||||||||||||
Payments of debt and capital leases |
(6,999 | ) | (7,771 | ) | (6,768 | ) | ||||||
Deferred acquisition payments |
| | (18,650 | ) | ||||||||
Proceeds from credit facility and convertible debentures, net of discount and issuance
costs |
| | 551,447 | |||||||||
Proceeds from issuance of common stock and common stock warrants, net of issuance costs |
195,571 | 330,603 | | |||||||||
Purchase of treasury stock |
(144 | ) | (652 | ) | (2,559 | ) | ||||||
Repurchase of shares |
| | (3,178 | ) | ||||||||
Payments on other long-term liabilities |
(9,180 | ) | (11,379 | ) | (11,419 | ) | ||||||
Excess tax benefits from share-based awards |
733 | 5,200 | 4,172 | |||||||||
Proceeds from issuance of common stock from employee stock options and purchase
plan |
19,837 | 28,140 | 30,199 | |||||||||
Cash used to net share settle employee equity awards |
(10,402 | ) | (17,002 | ) | (1,758 | ) | ||||||
Net cash provided by financing activities |
189,416 | 327,139 | 541,486 | |||||||||
Effects of exchange rate changes on cash and cash equivalents |
2,003 | (54 | ) | 1,808 | ||||||||
Net increase in cash and cash equivalents |
265,498 | 77,205 | 72,001 | |||||||||
Cash and cash equivalents at beginning of year |
261,540 | 184,335 | 112,334 | |||||||||
Cash and cash equivalents at end of year |
$ | 527,038 | $ | 261,540 | $ | 184,335 | ||||||
See accompanying notes. Financial statements have been adjusted for the retrospective application of ASC 470-20 (See Note 2a).
32
NUANCE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Presentation
Nuance Communications, Inc. (we, Nuance, or the Company) is a leading provider of
speech, imaging and keypad solutions for businesses, organizations and consumers around the world.
Our technologies, applications and services make the user experience more compelling by
transforming the way people interact with devices and systems, and how they create, share and use
documents. Our solutions are used every day by millions of people and thousands of businesses for
tasks and services such as requesting information from a phone-based self-service solution,
dictating medical records, searching the mobile Web by voice, entering a destination into a
navigation system, or working with PDF documents. Our solutions help make these interactions, tasks
and experiences more productive, compelling and efficient. We leverage our global professional
services organization and our extensive network of partners to design and deploy innovative
solutions for businesses and organizations around the globe. We market and distribute our products
through a global network of resellers, including system integrators, independent software vendors,
value-added resellers, hardware vendors, telecommunications carriers and distributors, and also
sell directly through a dedicated sales force and through our e-commerce website.
We were incorporated in 1992 as Visioneer, Inc. In 1999, we changed our name to ScanSoft,
Inc., and changed our ticker symbol to SSFT. In October 2005, we changed our name to Nuance
Communications, Inc. and changed our ticker symbol to NUAN in November 2005.
We have built a portfolio of speech solutions through both internal development and
acquisitions, and expect to continue to pursue opportunities to broaden our solutions and customer
base through acquisitions. Significant business acquisitions during fiscal 2009, 2008 and 2007 were
as follows:
| October 1, 2008 SNAPin, Inc. (SNAPin) | ||
| September 26, 2008 Philips Speech Recognition Systems GMBH, a business unit of Royal Philips Electronics (PSRS); | ||
| May 20, 2008 eScription, Inc. (eScription); | ||
| November 26, 2007 Viecore, Inc. (Viecore); | ||
| August 24, 2007 Voice Signal Technologies, Inc. (VoiceSignal); | ||
| August 24, 2007 Tegic Communications, Inc. (Tegic); | ||
| April 24, 2007 BeVocal, Inc. (BeVocal); and | ||
| March 26, 2007 Bluestar Resources Limited, the parent of Focus Enterprises Limited and Focus India Private Limited (collectively Focus). |
The results of operations from the acquired businesses have been included in our consolidated
financial statements from their respective acquisition dates. See Note 3 for additional disclosure
related to each of these acquisitions.
2. Summary of Significant Accounting Policies
Use of 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. The most
important of these relate to revenue recognition; the allowance for doubtful accounts and sales
returns; accounting for patent legal defense costs; the costs to develop, and estimates of the
expected useful lives of, custom software applications; the valuation of goodwill, intangible
assets and tangible long-lived assets;
33
accounting for business combinations; accounting for stock-based compensation; accounting for
long-term facility obligations; the valuation of 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 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. The
accounts, results of operations and cash flows of acquired companies are included from their
respective acquisition dates.
Reclassification
Certain amounts presented in prior periods consolidated financial statements have been
reclassified to conform to the current periods presentation. Proceeds from employee stock options
and purchase plans and cash used to net-share settle employee equity awards are now presented as
two separate line items in the consolidated Statements of Cash Flows, whereas previously they were
presented within net proceeds from issuance of common stock under employee share-based payment
plans. The current portion of our deferred tax asset has been included in the prepaid expenses and
other current assets line item whereas previously it was presented as a separate line item.
Revenue Recognition
We derive revenue from the following sources: (1) software license agreements, including
royalty and other usage-based arrangements, (2) post-contract customer support, (3) fixed and
variable fee hosting arrangements and (4) professional services. Our revenue recognition policies
for these revenue streams are discussed below.
The sale and/or license of software products and technology is deemed to have occurred when a
customer either has taken possession of the related software or technology or has the contractual
right to take possession of the software or technology at its sole discretion and without undue
economic cost or burden. In select situations, we sell or license intellectual property in
conjunction with, or in place of, embedding our intellectual property in software. We recognize
revenue from the sale or license of software products and licensing of technology when (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or
determinable and (iv) collectibility is probable. Vendor-specific objective evidence (VSOE) of
fair value for software and software-related services exists when a company can support what the
fair value of its software and/or software-related services is based on evidence of the prices
charged when the same elements are sold separately. VSOE of fair value is required, generally, in
order to separate the accounting for various elements in a software and related services
arrangement. We, in general, have established VSOE of fair value of post-contract customer support
(PCS), professional services, and training.
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
three years. Revenue from PCS is generally recognized ratably on a straight-line basis over the
term that the maintenance service is provided.
Non-software revenue, such as arrangements containing hosting services where the customer does
not take possession of the software at the outset of the arrangement and has no contractual right
to do so, is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has
occurred or services have been rendered, (iii) the fees are fixed or determinable and (iv)
collectibility is reasonably assured.
For revenue arrangements with multiple elements that are not considered to be software or
software-related, we allocate an arrangements fees into separate units of accounting based on fair
value. We generally support fair value of our deliverables based upon the prices we charge when we
sell similar elements separately.
Revenue from products offered on a subscription and/or hosted, on-demand basis is recognized
in the period the services are provided, based on a fixed minimum fee and/or variable fees based on
the volume of activity. Variable subscription and hosting revenue is recognized as we are notified
by the customer or through management reports that such revenue is due, provided that all other
revenue recognition criteria are met.
34
Set-up fees from arrangements containing hosting services, as well as the associated direct
and incremental costs, are deferred and recognized ratably over the longer of the contractual
lives, or the expected lives of the customer relationships.
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 classifying
the fair value of professional service revenue as professional service revenue and the residual
portion as license 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.
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 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 value-added
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 to have 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 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.
When maintenance and support contracts renew automatically, we provide a reserve based on
historical experience for contracts expected to be cancelled for non-payment. All known and
estimated cancellations are recorded as a reduction to revenue and accounts receivable.
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.
Business Combinations
We determine and allocate the purchase price of an acquired company to the tangible and
intangible assets acquired and liabilities assumed as well as to in-process research and
development as of the business combination date. Results of operations and cash flows of acquired
companies are included from the date of acquisition. The purchase price allocation process requires
us to use significant estimates and assumptions, including fair value estimates, as of the business
combination date including:
| estimated fair values of intangible assets; | ||
| expected costs to complete any in-process research and development projects; | ||
| 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; |
35
| estimated value of restructuring liabilities to reorganize the acquirees pre-acquisition operations; | ||
| probability of required payment under contingent consideration provisions; | ||
| estimated income tax assets and liabilities assumed from the acquiree; and | ||
| estimated fair value of pre-acquisition contingencies assumed from the acquiree. |
While we use our best estimates and assumptions as a 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 purchase price allocation period, which is generally one year from the business
combination date, we record adjustments to the assets acquired and liabilities assumed, with the
corresponding offset to goodwill. Generally, with the exception of unresolved income tax matters,
subsequent to the purchase price allocation period any adjustment to assets acquired or liabilities
assumed is included in operating results in the period in which the adjustment is determined. For
changes in the valuation of intangible assets between preliminary and final purchase price
allocation, the related amortization is adjusted on a prospective basis.
In fiscal 2010, we will adopt the business combinations accounting guidance in Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805 [formerly
referred to as Statement of Financial Accounting Standards (SFAS) No. 141(Revised), Business
Combinations (SFAS 141R)]. Refer to Recently Issued Accounting Standards below for additional
information.
Goodwill and Indefinite-Lived Intangible Assets
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 are required to be evaluated at least annually to
ensure that their current fair value exceeds their carrying value.
The carrying amounts of these assets are reviewed for impairment at least annually or whenever
events or changes in circumstances indicate that the carrying value of these assets may not be
recoverable. Our annual impairment assessment date is July 1 of each fiscal year. Goodwill is
evaluated for impairment based on comparison of the fair value of our reporting units to their
recorded carrying values. We have determined that beginning in fiscal 2009, we have three reporting
units based on the level of information provided to, and review thereof, by our core market
management. The three determined reporting units are our three core market groups. Prior to fiscal
2009, we concluded that we were comprised of only one reporting unit. The fair values of the
reporting units for the annual impairment assessment were determined based on estimates of those
reporting units enterprise values as a function of trailing-twelve-month (TTM) revenues and
EBITDA as compared to companies comparable to each of the reporting units on a standalone basis.
The carrying values of the reporting units were determined based on an allocation of the Companys
assets and liabilities through specific allocation of certain assets and liabilities to the
reporting units and an apportionment method based on relative size of the reporting units revenues
and operating expenses compared to the Company as a whole. Certain corporate assets that are not
instrumental to the reporting units operations and would not be transferred to hypothetical
purchasers of the reporting units were excluded from the reporting units carrying values.
Indefinite-lived intangibles are evaluated for impairment through comparison of the fair value of
the assets to their net book value. No impairments of goodwill or indefinite-lived intangibles have
been recorded in fiscal 2009, 2008 or 2007.
Long-Lived Assets
Our long-lived assets consist principally of acquired intangible assets and land, buildings
and equipment. Land, buildings and equipment are stated at cost. Buildings and equipment are
depreciated over their estimated useful lives. Leasehold improvements are depreciated over the
shorter of the related lease term or the estimated useful life. Costs of computer software
developed or obtained for internal use are depreciated over the estimated useful life of the
software. Depreciation is computed using the straight-line method. Costs of significant
improvements on existing software are capitalized and amortized over the remaining useful life of
the related software. 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 operations.
We include in our amortizable intangible assets those intangible assets acquired in our
business and asset acquisitions, including certain technology that is licensed from third parties.
We amortize acquired intangible assets with finite lives over the estimated economic lives of the
assets, generally using the straight-line method except where the pattern of the expected economic
benefit is readily identifiable, primarily customer relationship intangibles, whereby amortization
follows that pattern. Each period, we evaluate the estimated remaining useful life of acquired and
licensed intangible assets, as well as land, buildings and equipment, to determine whether events
or changes in circumstances warrant a revision to the remaining period of depreciation or
amortization.
36
We evaluate long-lived assets for impairment whenever events or changes in circumstances
indicate the carrying value of an asset or asset group may not be recoverable. We assess the
recoverability of the assets based on the undiscounted future cash flows the assets are expected to
generate and recognize an impairment loss when estimated undiscounted future cash flows expected to
result from the use of the assets plus net proceeds expected from disposition of the assets, if
any, are less than the carrying value of the assets. If an asset or asset group is deemed to be
impaired, the amount of the impairment loss, if any, represents the excess of the asset or asset
groups carrying value compared to its estimated fair value.
We conducted a long-lived asset impairment analysis at the beginning of the fourth quarter of
fiscal 2009 and concluded that our long-lived assets were not impaired. In fiscal 2008, we recorded
impairment charges of $3.9 million resulting from the identification of certain specific acquired
intangible assets that were no longer being utilized or providing economic benefit, of which $0.3
million was included in cost of revenue from amortization of intangible assets, and $3.6 million
was included in amortization of intangible assets within operating expenses. There were no
impairment charges for long-lived assets recorded in fiscal 2007.
Cash and Cash Equivalents
Cash and cash equivalents consists of cash on hand, including money market funds and
commercial paper with original maturities of 90 days or less.
Marketable Securities and Minority Investments
Marketable Securities: 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, net of tax.
Minority Investment: We record investments in other companies where we do not have a
controlling interest or significant influence in the equity investment at cost within other assets
in our consolidated balance sheet.
We review all of our investments for impairment whenever estimated declines in fair value are
deemed to be other-than-temporary, reducing the carrying value of such investments to their
estimated fair value at that time.
Allowances against Accounts Receivable
Allowance for Doubtful Accounts: We maintain an allowance 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.
Allowance for Sales Returns: We maintain an allowance 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 in revenue and accounts receivable at the time the related revenue is
recorded. Receivables are written off against the allowance in the period the return is received.
For the years ended September 30, 2009, 2008 and 2007, the allowances against accounts
receivables were as follows (in thousands):
Allowance for | Allowance for | |||||||
Doubtful Accounts | Sales Returns | |||||||
Balance at October 1, 2006 |
$ | 4,106 | $ | 6,304 | ||||
Bad debt expenses |
2,449 | | ||||||
Write-offs, net of recoveries |
(400 | ) | | |||||
Reductions (additions) made to revenue, net |
| 1,019 | ||||||
Balance at September 30, 2007 |
6,155 | 7,323 | ||||||
Bad debt expenses |
4,173 | | ||||||
Write-offs, net of recoveries |
(3,403 | ) | | |||||
Reductions (additions) made to revenue, net |
| (960 | ) | |||||
Balance at September 30, 2008 |
6,925 | 6,363 | ||||||
Bad debt expenses |
1,823 | | ||||||
Write-offs, net of recoveries |
(1,915 | ) | | |||||
Reductions (additions) made to revenue, net |
| (257 | ) | |||||
Balance at September 30, 2009 |
$ | 6,833 | $ | 6,106 | ||||
37
Inventories
Inventories are stated at the lower of cost, computed using the first-in, first-out method, or
market. 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.
Research and Development Costs
Internal costs relating to research and development costs incurred for new software products
and enhancements to existing products, other than certain software development costs that qualify
for capitalization, are expensed as incurred.
Software Development Costs
Software 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, and accordingly, we have expensed the internal
costs relating to research and development when incurred.
Capitalized Patent Defense Costs
We monitor the anticipated outcome of legal actions, and if we determine that the success of
the defense of a patent is probable, and so long as we believe that the future economic benefit of
the patent will be increased, we capitalize external legal costs incurred in the defense of these
patents, up to the level of the expected increased future economic benefit. If changes in the
anticipated outcome occur, we write-off any capitalized costs in the period the change is
determined. Upon successful defense of the patent, the amounts previously capitalized are amortized
over the remaining life of the patent. As of September 30, 2009 and 2008, capitalized patent
defense costs recorded in other assets totaled $6.8 million and $6.7 million, respectively.
Advertising Costs
Advertising costs are expensed as incurred and are classified as sales and marketing expenses.
Cooperative advertising programs reimburse customers for marketing activities for certain of our
products, subject to defined criteria. Cooperative advertising obligations are accrued and the
costs expensed at the same time the related revenue is recognized. Cooperative advertising expenses
are recorded as expense to the extent that an advertising benefit separate from the revenue
transaction can be identified and the cash paid does not exceed the fair value of that advertising
benefit received. Any excess of cash paid over the fair value of the advertising benefit received
is recorded as a reduction in revenue. We incurred advertising costs of $15.8 million, $20.9
million and $19.2 million for fiscal 2009, 2008 and 2007, respectively.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse. We do not provide for U.S. income taxes on the
undistributed earnings of our foreign subsidiaries, which we consider to be indefinitely reinvested
outside of the U.S.
We make judgments regarding the realizability of our deferred tax assets. The balance sheet
carrying value of our net deferred tax assets is based on whether we believe that it is more likely
than not that we will generate sufficient future taxable income to realize these deferred tax
assets after consideration of all available evidence. We regularly review our deferred tax assets
for recoverability considering historical profitability, projected future taxable income, and the
expected timing of the reversals of existing temporary differences and tax planning strategies.
38
Valuation allowances have been established for U.S. 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 its results of operations in
the period in which the benefit is determined, excluding the recognition of the portion of the
valuation allowance which relates to net deferred tax assets acquired in a business combination or
created as a result of share-based payments or other equity transactions where prevailing guidance
requires the change in valuation allowance to be traced forward through stockholders equity. The
recognition of the portion of the valuation allowance which relates to net deferred tax assets
resulting from share-based payments or other qualifying equity transactions will be recorded as
additional paid-in-capital; the recognition of the portion of the valuation allowance which relates
to net deferred tax assets acquired in a business combination will reduce goodwill, intangible
assets, and to the extent remaining, the provision for income taxes, until our adoption of the
business combination accounting guidance in ASC 805 on October 1, 2009; after which time the
reductions in the allowance, if any, will be recorded as a benefit in the statement of operations.
We establish reserves for tax uncertainties that reflect the use of the comprehensive model
for the recognition and measurement of uncertain tax positions. Under the comprehensive model,
reserves are established when we have determined that it is more likely than not that a tax
position will or will not be sustained and at the greatest amount for which the result is more
likely than not.
Comprehensive Loss
Total comprehensive loss, net of taxes, was approximately $24.6 million, $39.2 million and
$5.6 million for fiscal 2009, 2008 and 2007, respectively. Comprehensive loss consists of net loss,
current period foreign currency translation adjustments, unrealized losses on cash flow hedge
derivatives, and unrealized gains (losses) on pensions. For the purposes of comprehensive loss
disclosures, we do not record tax provisions or benefits for the net changes in the foreign
currency translation adjustment, as we intend to reinvest undistributed earnings in our foreign
subsidiaries permanently.
The components of accumulated other comprehensive income, reflected in the Consolidated
Statements of Stockholders Equity and Comprehensive Loss, consisted of the following (in
thousands):
2009 | 2008 | 2007 | ||||||||||
Foreign currency translation adjustment |
$ | 15,874 | $ | 15,145 | $ | 11,854 | ||||||
Net unrealized losses on cash flow hedge derivatives |
(3,982 | ) | (879 | ) | (925 | ) | ||||||
Net unrealized gains (losses) on pensions |
(4,325 | ) | (1,527 | ) | 4,050 | |||||||
$ | 7,567 | $ | 12,739 | $ | 14,979 | |||||||
Concentration of Risk
Financial instruments that potentially subject us to significant concentrations of credit risk
principally consist of cash, cash equivalents, and trade accounts receivable. We place our cash and
cash equivalents 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. At September
30, 2009 and 2008, no customer accounted for greater than 10% of our net accounts receivable
balance. No customer composed more than 10% of revenue for fiscal 2009, 2008 and 2007.
Fair Value of Financial Instruments
Financial instruments including cash equivalents, marketable securities, investments, accounts
receivable, and derivative instruments, are carried in the financial statements at amounts that
approximate their fair value based on the short maturities of those instruments. Refer to Note 11
for discussion of the fair value of our long-term debt.
Foreign Currency Translation
We have significant foreign operations and transact business in various foreign currencies. In
general, the functional currency of a foreign operation is the local countrys currency.
Non-functional currency monetary balances are re-measured into the functional currency of the
subsidiary with any related gain or loss recorded in other income (expense), net, in the
accompanying consolidated statements of operations. Assets and liabilities of operations outside
the United States, for which the functional currency is the local
39
currency, are translated into United States dollars using period-end exchange rates. Revenue
and expenses are translated at the average exchange rates in effect during each fiscal month during
the year. The effects of foreign currency translation adjustments are included as a component of
accumulated other comprehensive income in the accompanying consolidated balance sheets. Foreign
currency transaction gains (losses) included in net loss for fiscal 2009, 2008, and 2007 were $7.0
million, $(0.3) million, and $0.8 million, respectively.
Financial Instruments and Hedging Activities
We utilize derivative instruments in our business combination and asset acquisition
arrangements, as well as to hedge specific financial risks such as interest rate and foreign
exchange risk. We do not engage in speculative hedging activity. In order for us to account for a
derivative instrument as a hedge, specific criteria must be met, including: (i) ensuring at the
inception of the hedge that formal documentation exists for both the hedging relationship and the
entitys risk management objective and strategy for undertaking the hedge and (ii) at the inception
of the hedge and on an ongoing basis, the hedging relationship is expected to be highly effective
in achieving offsetting changes in fair value attributed to the hedged risk during the period that
the hedge is designated. Further, an assessment of effectiveness is required whenever financial
statements or earnings are reported. Absent meeting these criteria, changes in fair value are
recognized in other income (expense), net, in the consolidated statements of operations. Once the
underlying forecasted transaction is realized, the gain or loss from the derivative designated as a
hedge of the transaction is reclassified from accumulated other comprehensive income (loss) to the
statement of operations, in the appropriate revenue or expense caption. Any ineffective portion of
the derivatives designated as cash flow hedges is recognized in current earnings.
Accounting for Share-Based Payments
We account for share-based payments to employees and directors, including grants of employee
stock options, purchases under employee stock purchase plans, awards in the form of restricted
shares (Restricted Stock) and awards in the form of units of stock purchase rights (Restricted
Units) through recognition of the fair value of the share-based payments as a charge against
earnings. We recognize stock-based compensation expense over the requisite service period. The
Restricted Stock and Restricted Units are collectively referred to as Restricted Awards.
Net Income (Loss) Per Share
We compute net income (loss) per share in accordance with the Two-Class Method. Under the
two-class method, basic net income per share is computed by dividing the net income available to
common stockholders by the weighted-average number of common shares outstanding during the period.
Net losses are not allocated to preferred stockholders. We have determined that our outstanding
Series B convertible preferred stock represents a participating security and as such shares thereof
are excluded from basic earnings per share.
Diluted net income per share is computed using the more dilutive of (a) the two-class method,
or (b) the if-converted method. We allocate net income first to preferred stockholders based on
dividend rights and then to common and preferred stockholders based on ownership interests. The
weighted-average number of common shares outstanding gives effect to all potentially dilutive
common equivalent shares, including outstanding stock options and restricted stock, shares held in
escrow, contingently issuable shares under earn-out agreements once earned, warrants, and potential
issuance of stock upon conversion of convertible debentures. On August 13, 2007, we issued $250.0
million of 2.75% convertible debentures which are considered Instrument C securities due to the
fact that only the excess of the conversion value on date of conversion can be paid in our common
shares; the principal portion of the conversion must be paid in cash. Therefore, only the shares of
common stock potentially issuable with respect to the excess of the conversion value over its
principal amount, if any, is considered as dilutive potential common shares for purposes of
calculating diluted net income per share. The conversion value for the convertible debentures was
less than the principal amount since its issuance date and no shares were assumed to be issued for
purposes of computing the diluted net loss per share.
Common equivalent shares are excluded from the computation of diluted net income (loss) per
share if their effect is anti-dilutive. Potentially dilutive common equivalent shares aggregating
to 31.6 million shares, 33.1 million shares and 26.3 million shares for the years ended September
30, 2009, 2008 and 2007, respectively, have been excluded from the computation of diluted net loss
per share because their inclusion would be anti-dilutive.
40
Recently Issued Accounting Standards
In September 2009, the Emerging Issues Task Force (EITF) ratified EITF Issue No. 08-1,
Revenue Arrangements with Multiple Deliverables (EITF 08-1). EITF 08-1, which has not yet been
codified in the FASB Accounting Standards Codification (the Codification or ASC), supersedes
EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, now referred to as ASC
605-25-50-1. EITF 08-1 eliminates the residual method of accounting for non-software arrangements,
as well as the associated requirements for establishing vendor objective evidence of fair value.
The residual method is replaced in EITF 08-1 by the estimated selling price method whereby revenue
in a multiple-element arrangement is allocated to each element based on its estimated selling
price. Estimating selling price is established through a hierarchy starting with vendor-specific
objective evidence of fair value, following by third-party evidence, and lastly by any reasonable,
objective estimate of the selling price were the element to be sold on a standalone basis.
Estimates of selling price must consider both entity-specific factors and market conditions. EITF
08-1 is applied prospectively to all revenue transactions entered into, or materially modified,
after June 15, 2010. Early adoption is permitted if adopted as of the beginning of an entitys
fiscal year and no prior interim period financial statements from that fiscal year have already
been issued or the entity retrospectively applies the provisions of this EITF issue to its
previously-issued current fiscal year interim financial statements. We currently do not expect that
the adoption of EITF 08-1 will have a material impact on our consolidated financial statements.
In September 2009, the EITF ratified EITF Issue No. 09-3, Applicability of AICPA Statement of
Position 97-2 to Certain Arrangements That Include Software Elements (EITF 09-3). EITF 09-3,
which has not yet been codified in the Codification, applies to multiple-element arrangements that
contain both software and hardware elements, and amends the scope of AICPA Statement of Position
(SOP) No. 97-2, Software Revenue Recognition, now referred to as ASC 985-605, to exclude tangible
products containing software and non-software components that together function to deliver the
products essential functionality from the scope of ASC 985-605. EITF 09-3 is applied prospectively
to all revenue transactions entered into, or materially modified, after June 15, 2010. Early
adoption is permitted only when EITF 08-1 is also early adopted as of the same period. We are
currently evaluating the potential impact of this EITF issue on our consolidated financial
statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles (SFAS 168), now referred to as ASC 105-10,
Generally Accepted Accounting Principles. This standard establishes the Codification as the sole
source of authoritative accounting principles recognized by the FASB to be applied by
non-governmental entities in the preparation of financial statements in conformity with GAAP. Rules
and interpretive releases of the Securities and Exchange Commission (SEC) under authority of
federal securities laws remain sources of authoritative GAAP for SEC registrants. ASC 105-10 is
effective for financial statements issued for interim and annual periods ending after September 15,
2009. We have included references to the Codification, where appropriate, in our consolidated
financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165), now referred to as
ASC 855-10. ASC 855-10 incorporates accounting and disclosure requirements related to subsequent
events into U.S. GAAP. The requirements of ASC 855-10 for subsequent-events accounting and
disclosure are not significantly different from those in existing auditing standards, which we have
historically followed for financial reporting purposes. As a result, we do not believe this
standard had any material impact on our financial statements. We have evaluated subsequent events
through the date of issuance of these consolidated financial statements, which is November 25,
2009.
In April 2009, the FASB issued FASB Staff Position (FSP) FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments, now referred to as ASC 825-10. ASC 825-10
requires disclosures about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. ASC 825-10 also requires those
disclosures in summarized financial information at interim reporting periods. ASC 825-10 was
effective for interim periods ending after June 15, 2009. We adopted ASC 825-10 in our third
quarter fiscal 2009, and it had no material impact on our third quarter financial statements.
In April 2009, the FASB issued FSP FAS 141R-1, Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies (FSP 141R-1), the guidance from
which is included in ASC 805. This FSP requires that assets acquired and liabilities assumed in a
business combination that arise from contingencies be recognized at fair value, if fair value can
be reasonably estimated. This FSP is effective for the fiscal years beginning after December 15,
2008. As this FSP essentially reinstates to SFAS No. 141 (Revised), Business Combinations (SFAS
141R), now referred to as ASC 805, the guidance for accounting for acquired contingencies from
SFAS No. 141, we do not believe FSP 141R-1 will have a material impact on our financial statements.
41
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly, now referred to as ASC 820-10. ASC 820-10 provides guidance on how to
determine the fair value of assets and liabilities under ASC 820 (formerly known as SFAS No. 157,
Fair Value Measurements) in the current economic environment and reemphasizes that the objective of
a fair value measurement remains an exit price. If we were to conclude that there has been a
significant decrease in the volume and level of activity of the asset or liability in relation to
normal market activities, quoted market values may not be representative of fair value and we may
conclude that a change in valuation technique or the use of multiple valuation techniques may be
appropriate. ASC 820 is effective for interim and annual periods ending after June 15, 2009. We
adopted ASC 820-10 effective April 1, 2009 and such adoption has not had a material impact on our
financial statements, nor do we expect it to in future periods.
In November 2008, the EITF ratified EITF Issue No. 08-7, Accounting for Defensive Intangible
Assets, now referred to as ASC 350-30-25-5. ASC 350-30-25-5 applies to defensive intangible assets,
which are acquired intangible assets that the acquirer does not intend to actively use but intends
to hold to prevent its competitors from obtaining access to them. As these assets are separately
identifiable, they must be recognized at fair value in accordance with ASC 805 and ASC 820.
Defensive intangible assets recognized are required to be amortized over the estimated period
during which an acquirer expects to receive benefit from preventing its competitors from obtaining
access to the intangible asset. ASC 350-30-25-5 is effective for fiscal years beginning on or after
December 15, 2008. The effect of adopting ASC 350-30-25-5 on our consolidated results of operations
and financial condition will be largely dependent on the size and nature of any business
combinations and asset acquisitions that we may complete after September 30, 2009.
In June 2008, the EITF ratified EITF Issue No. 07-5, Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entitys Own Stock, now referred to as ASC 815-40-15. ASC
815-40-15 provides guidance in assessing whether derivative instruments meet the criteria in
paragraph 11(a) of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, now
referred to as ASC 815, for being considered indexed to an entitys own common stock. ASC 815-40-15
is effective for fiscal years beginning after December 15, 2008. We have completed our evaluation
of the impact of ASC 815-40-15 and believe the impact will be immaterial based on the nature of our
derivative and hedging activities.
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments that
May be Settled in Cash upon Conversion, now referred to as ASC 470-20. ASC 470-20 requires
companies to separately account for the liability (debt) and equity (conversion option) components
of convertible debt instruments that require or permit settlement in cash upon conversion in a
manner that reflects the issuers nonconvertible debt borrowing rate at the time of issuance. ASC
470-20 is effective for fiscal years beginning after December 15, 2008 and may not be adopted
early. ASC 470-20 must be applied retrospectively to all periods presented. We have completed our
evaluation of the adoption of this standard. Refer to Note 2a for discussion of the impact of this
recently issued standard.
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible
Assets, now referred to as FASB ASC 350-30-65-1. It amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Intangible Assets, now referred to as ASC 350.
ASC 350-30-65-1 is effective for fiscal years beginning after December 15, 2008 and may not be
adopted early. We are continuing to evaluate the potential impact of ASC 350-30-65-1.
In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157, now
referred to as ASC 820-10-15-1A, which delays the effective date of ASC 820 for non-financial
assets and non-financial liabilities, except for certain items that are recognized or disclosed at
fair value in the financial statements on a recurring basis. ASC 820-10-15-1A defers our adoption
of these remaining provisions of ASC 820 to the first quarter of fiscal 2010. We do not believe the
adoption of the remaining portions of ASC 820 will have a material impact on our financial
statements.
In December 2007, the FASB issued SFAS 141R, now referred to as ASC 805. ASC 805 supersedes
the previous accounting guidance related to business combinations, including the measurement of
acquirer shares issued in consideration for a business combination, the recognition of and
subsequent accounting for contingent consideration, the recognition of acquired in-process research
and development, the accounting for acquisition-related restructurings, the treatment of
acquisition-related transaction costs and the recognition of changes in the acquirers income tax
valuation allowance. The guidance is applied prospectively from the date of acquisition with minor
exception related to income tax contingencies from companies acquired prior to the adoption date.
ASC 805 is effective for fiscal years beginning after December 15, 2008 and may not be adopted
early. The effect of adopting ASC 805 on our consolidated results of operations and financial
condition will be largely dependent on the size and nature of any business combinations that we may
complete after September 30, 2009; however we expect to write-off transaction costs of
approximately $2.2 million that are capitalized as of September 30, 2009 related to pending
acquisitions that were not consummated prior to our adoption date of October 1, 2009.
42
2a. Accounting for Convertible Debt That May be Settled in Cash Upon Conversion
On May 9, 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That
May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement), now referred to as ASC
470-20, which requires issuers of a certain type of convertible debt to separately account for the
debt and equity components of the convertible debt in a way that reflects the issuers borrowing
rate at the date of issuance for similar debt instruments without the conversion feature. ASC
470-20 applies to our 2.75% Convertible Senior Notes in that, if converted, the principal amount of
the notes is payable in cash, with any amounts payable in excess of the $250 million principal
amount payable in cash or shares of our common stock, at our election (discussed in further detail
in Note 11). ASC 470-20 was effective for us beginning on October 1, 2009 and has been applied
retrospectively to all periods presented in our consolidated financial statements. As required
under ASC 470-20, the $54.7 million difference between the fair value of the liability component of
the 2027 Debentures as of the date of issuance and the net proceeds received upon issuance thereof
was retrospectively recorded as additional paid-in-capital and additional debt discount. The
aggregate debt discount, consisting of both the discount related to the adoption of ASC 470-20 and
the date of issuance difference between the principal amount of the 2027 Debentures and the net
proceeds received, and debt issuance costs are being amortized to interest expense using the
effective interest rate method through August 2014. As a result, although the adoption of ASC
470-20 does not affect our actual past or future cash flows, we expect to incur additional non-cash
interest expense as a result of ASC 470-20 of approximately $7.5 million for fiscal 2010, $7.8
million for fiscal 2011, $8.1 million for fiscal 2012, $8.5 million for fiscal 2013 and $7.7
million for fiscal 2014, notwithstanding any debt repurchases, modifications, extinguishments or
conversion of our 2.75% Convertible Senior Notes prior to maturity, or issuance of any additional
convertible debt that would be subject to ASC 470-20.
The following table illustrates the retrospective effect of adopting ASC 470-20 to the
consolidated statements of operations for each of the three years in the period ended September 30,
2009 (in thousands, except per share data):
2009 | 2008 | 2007 | ||||||||||||||||||||||
As | As Adjusted for | As | As Adjusted for | As | As Adjusted for | |||||||||||||||||||
Originally | Retrospective | Originally | Retrospective | Originally | Retrospective | |||||||||||||||||||
reported | Application | reported | Application | reported | Application | |||||||||||||||||||
Interest Expense |
(40,103 | ) | (47,288 | ) | (55,196 | ) | (62,088 | ) | (36,501 | ) | (37,342 | ) | ||||||||||||
Income (loss) before income taxes |
28,189 | 21,004 | (15,514 | ) | (22,406 | ) | 8,487 | 7,646 | ||||||||||||||||
Net loss |
(12,202 | ) | (19,387 | ) | (30,068 | ) | (36,960 | ) | (14,015 | ) | (14,856 | ) | ||||||||||||
Basic and diluted loss per share |
(0.05 | ) | (0.08 | ) | (0.14 | ) | (0.18 | ) | (0.08 | ) | (0.08 | ) |
The following table illustrates the retrospective effect of adopting ASC 470-20 to the
consolidated balance sheets as of September 30, 2009 and September 30, 2008 (in thousands):
2009 | 2008 | |||||||||||||||
As | As Adjusted for | As | As Adjusted for | |||||||||||||
Originally | Retrospective | Originally | Retrospective | |||||||||||||
reported | Application | reported | Application | |||||||||||||
Other assets (a) |
52,511 | 52,361 | 43,636 | 43,455 | ||||||||||||
Long-term portion of debt and
capital leases (b) |
888,611 | 848,898 | 894,184 | 847,256 | ||||||||||||
Additional paid-in-capital (c) |
2,254,511 | 2,308,992 | 1,658,512 | 1,712,993 | ||||||||||||
Accumulated deficit |
(247,338 | ) | (262,256 | ) | (235,136 | ) | (242,869 |
(a) | Other assets have been adjusted for the portion of the debt issuance costs attributable to the 2.75% Convertible Senior Notes that must be retrospectively allocated to the equity component of the debt instrument through additional paid-in-capital as of the date of the notes issuance. | |
(b) | Long-term portion of debt and capital leases has been adjusted to reflect retrospective recognition of the debt discount created by bifurcating the equity component of the convertible notes from the liability component. | |
(c) | Additional paid-in-capital has been adjusted to reflect recording, retrospectively, the equity component of the convertible notes, as well as the equity component allocation of the debt issuance costs attributable to the 2.75% Convertible Senior Notes. |
43
We recognized
total interest expense of approximately $15.1 million in fiscal
2009, $14.8 million in fiscal 2008 and $1.8 million in fiscal 2007 related to both the contractual interest
coupon and amortization of the discount on the liability component of our 2.75% Convertible Senior
Notes. The effective interest rate on the liability component of our 2.75% Convertible Senior Notes
is approximately 6.3%. We are amortizing the discount on the liability component of our 2.75%
Convertible Senior Notes through August 2014, the date at which holders may first put the
convertible notes back to us as described in Note 11.
The carrying amount of the equity component, principal amount of the liability component,
unamortized debt discount related to the liability component and net carrying amount of the
liability component of our 2.75% Convertible Senior Notes as of September 30, 2009 and September
30, 2008 were as follows (in thousands):
2009 | 2008 | |||||||
Carrying amount of equity component (conversion options) |
$ | 54,695 | $ | 54,695 | ||||
Principal amount of liability component |
250,000 | 250,000 | ||||||
Unamortized discount related to liability component |
(44,936 | ) | (53,229 | ) | ||||
Net carrying amount of liability component |
$ | 205,064 | $ | 196,771 | ||||
3. Business Acquisitions
2009 Acquisitions
Acquisition of SNAPin
On October 1, 2008, we acquired all of the outstanding capital stock of SNAPin, a developer of
self-service software for mobile devices, to expand our Mobile-Enterprise offerings. The
acquisition was a taxable event.
In connection with our acquisition of SNAPin, we agreed to make a contingent earn-out payment
of up to $45.0 million in cash to be paid, if at all, based on the business achieving certain
performance targets that are measurable from the acquisition date to December 31, 2009.
Additionally, we would be required to issue earn-out consideration to SNAPin option holders. This
option earn-out consideration, if earned, is payable at our sole discretion, in cash, stock or
additional options to purchase common stock. The total value of this option earn-out consideration
may aggregate up to $2.5 million which will be recorded as compensation expense over the service
period, if earned. These earn-out payments, if any, would be payable upon the final measurement of
the performance targets. As of September 30, 2009, we have recorded approximately $12.9 million
related to the contingent earn-out provisions as additional purchase price.
A summary of the purchase price allocation for the acquisition of SNAPin is as follows (in
thousands):
Total purchase consideration: |
||||
Common stock(a) |
$ | 166,253 | ||
Stock options and restricted stock units assumed |
11,523 | |||
Contingent earn-out consideration |
12,941 | |||
Transaction costs |
2,825 | |||
Total purchase consideration |
$ | 193,542 | ||
Allocation of the purchase consideration: |
||||
Current assets |
$ | 6,084 | ||
Other assets |
2,972 | |||
Deferred tax asset(c) |
2,327 | |||
Identifiable intangible assets |
60,900 | |||
Goodwill |
153,299 | |||
Total assets acquired |
225,582 | |||
Current liabilities |
(2,191 | ) | ||
Deferred tax liability(c) |
(2,327 | ) | ||
Deferred revenue(b) |
(27,522 | ) | ||
Total liabilities assumed |
(32,040 | ) | ||
Net assets acquired |
$ | 193,542 | ||
(a) | Approximately 9.5 million shares of our common stock valued at $15.81 per share were issued at closing and 1.1 million shares valued at $14.11 per share were issued upon release of shares held in escrow. |
44
(b) | We assumed significant legal performance obligations related to acquired customer contracts. We estimate the fair market value of the obligations based on expected costs we will incur to fulfill the obligation plus a normal profit margin. The fair value of the legal performance obligations remaining to be delivered on these customer contracts was approximately $53.4 million and the remaining cash to be collected on these contracts was approximately $25.9 million at the date of acquisition. | |
(c) | We recorded a deferred tax liability as a result of purchase accounting associated with SNAPin. This results in an increase of the net deferred tax asset and a reduction of the corresponding valuation allowance in the consolidated group. Therefore, there is no impact on goodwill related to the deferred tax liability. |
We assumed vested and unvested stock options that were converted into options to purchase
1,258,708 shares of our common stock and restricted stock units that were converted into
299,446 shares of our common stock. The fair value of the assumed vested stock options and
restricted stock units as of the date of acquisition are included in the purchase price above. The
fair value of the assumed vested stock options was calculated under the Black-Scholes option
pricing model, with the following weighted-average assumptions: dividend yield of 0.0%; expected
volatility of 55.5%; average risk-free interest rate of 2.8%; and an expected term of 4.8 years.
Assumed unvested stock options and restricted stock units as of the date of acquisition will be
recorded as stock-based compensation expense over the requisite service period as disclosed in
Note 18.
The following are the identifiable intangible assets acquired and their respective weighted
average useful lives (table in thousands):
Weighted | ||||||||
Average | ||||||||
Amount | Life | |||||||
(In years) | ||||||||
Customer relationships |
$ | 21,200 | 10.8 | |||||
Core and completed technology |
39,000 | 10.0 | ||||||
Non-compete agreements |
700 | 4.0 | ||||||
Total |
$ | 60,900 | ||||||
Third and Fourth Quarter Acquisitions
During the third and fourth quarters of fiscal 2009, we acquired several businesses primarily
to expand our product offerings within our core markets. The pro forma effect of these acquisitions
on our previously reported financial results is immaterial and is not included in our pro forma
financial results as disclosed in Note 4. The results of operations of these acquisitions are
included in our fiscal 2009 financial statements since their respective acquisition dates. In the
aggregate, the purchase price for these acquisitions was approximately $121.2 million, net of cash
assumed of $36.8 million. The gross purchase price consisted of the issuance of 6.4 million shares
of our common stock valued at $80.8 million, $68.0 million in cash and $9.2 million for transaction
costs. $8.9 million in cash in aggregate has been placed in escrow related to two of the
acquisitions and has been excluded from the total purchase consideration until the escrow
contingencies have been satisfied. In allocating the total purchase consideration for these
acquisitions based on estimated fair values, we have preliminarily recorded $47.2 million of
goodwill, $85.0 million of identifiable intangible assets, and $25.8 million in net assets
(resulting primarily from cash assumed; acquired unbilled receivables, net of liabilities assumed
including contingencies; deferred income taxes; and restructuring). We have assumed a $5.0 million
tax contingency established for uncertain foreign tax positions relating to one of the
acquisitions. The preliminary allocations of the purchase consideration were based upon preliminary
or final valuations and our estimates and assumptions remain subject to change. Intangible assets
acquired included primarily core and completed technology and customer relationships with weighted
average useful lives of 9.6 years.
2008 Acquisitions
Acquisition of PSRS
On September 26, 2008, we acquired PSRS, a business unit of Royal Philips Electronics, a
provider of speech recognition solutions, primarily in the European healthcare market, for total
consideration of $101.8 million, consisting of: net cash consideration of 66.0 million, which
equated to $96.6 million based on the exchange rate as of the acquisition date, and transaction
costs of $4.2 million. The acquisition was a taxable event. $34.4 million was paid at the
acquisition date and the remaining deferred acquisition payment of 44.3 million ($64.6 million
based on the exchange rate as of September 30, 2009) was due per the asset purchase agreement on
September 21, 2009. We paid the deferred acquisition payment on October 22, 2009. The purchase
price was finalized in November 2009 based on a final working capital adjustment agreed between us
and the former shareholder of PSRS, reducing the final purchase price by 1.4 million ($2.1 million
based on the exchange rate as of September 30, 2009), reflective of the amount agreed to be paid to
us by the former shareholder of PSRS.
45
A summary of the purchase price allocation for the acquisition of PSRS is as follows (in
thousands):
Total purchase consideration: |
||||
Cash |
$ | 99,006 | ||
Transaction costs |
4,167 | |||
Total purchase consideration |
$ | 103,173 | ||
Allocation of the purchase consideration: |
||||
Cash |
$ | 2,374 | ||
Accounts receivable |
8,223 | |||
Other assets |
4,641 | |||
Identifiable intangible assets |
54,099 | |||
In-process research and development |
2,601 | |||
Goodwill |
55,773 | |||
Total assets acquired |
127,711 | |||
Accounts payable and accrued expenses |
(5,757 | ) | ||
Other liabilities |
(18,781 | ) | ||
Total liabilities assumed |
(24,538 | ) | ||
Net assets acquired |
$ | 103,173 | ||
Other assets include refundable research and development credits, refundable value added tax
payments, prepaid expenses and inventory. Other liabilities assumed primarily relate to deferred
tax liabilities, statutory benefits due to PSRS employees and deferred revenue. The in-process
research and development of $2.6 million was expensed at the time of acquisition as the related
projects had not yet reached technological feasibility and it was deemed that the research and
development in-progress had no alternative future uses.
The following are the identifiable intangible assets acquired and their respective weighted
average lives (dollars in thousands):
Weighted | ||||||||
Average | ||||||||
Amount | Life | |||||||
(In years) | ||||||||
Customer relationships |
$ | 45,197 | 9.0 | |||||
Core and completed technology |
7,924 | 6.7 | ||||||
Tradename |
978 | 9.0 | ||||||
Total |
$ | 54,099 | ||||||
Acquisition of Multi-Vision
On July 31, 2008, we acquired all of the outstanding capital stock of Multi-Vision, a provider
of technology for proactive notification which can be implemented as a hosted application or on a
customers premises, for total purchase consideration of approximately $10.5 million, which
included 0.5 million shares of our common stock valued at $15.59 per share. The acquisition was a
taxable event.
We may also be required to issue up to an additional $15.0 million, payable in stock, or cash,
solely at our discretion, relating to earn-out provisions as described in the share purchase
agreement. Two-thirds of the earn-out is conditioned on performance targets and continued
employment; accordingly, up to $10.0 million of any earn-out payments that become payable will be
recorded to compensation expense, and up to $5.0 million, the portion of the prospective earn-out
attributable solely to performance targets, will be recorded as additional purchase price and
allocated to goodwill. As of September 30, 2009, we have not recorded any obligation or related
compensation expense relative to these measures.
The purchase price allocation for the acquisition of Multi-Vision is as follows (in
thousands):
Total purchase consideration: |
||||
Cash |
$ | 1,000 | ||
Common stock issued |
8,348 | |||
Debt assumed |
331 | |||
Transaction costs |
845 | |||
Total purchase consideration |
$ | 10,524 | ||
Allocation of the purchase consideration: |
46
Accounts receivable and acquired unbilled accounts receivable |
$ | 2,330 | ||
Other assets |
1,234 | |||
Identifiable intangible assets |
9,630 | |||
Goodwill |
2,585 | |||
Total assets acquired |
15,779 | |||
Accounts payable and accrued expenses |
(1,886 | ) | ||
Other liabilities |
(3,369 | ) | ||
Total liabilities assumed |
(5,255 | ) | ||
Net assets acquired |
$ | 10,524 | ||
Other liabilities include deferred tax liabilities and deferred revenue.
The following are the identifiable intangible assets acquired and their respective weighted
average lives (dollars in thousands):
Weighted | ||||||
Average | ||||||
Amount | Life | |||||
(In years) | ||||||
Customer relationships |
$ | 7,200 | 8.9 | |||
Core and completed technology |
2,400 | 6.5 | ||||
Non-compete |
30 | 4.0 | ||||
Total |
$ | 9,630 | ||||
Acquisition of eScription
On May 20, 2008, we acquired all of the outstanding capital stock of eScription, a provider of
hosted and premises-based computer-aided medical transcription solutions, for total purchase
consideration of $412.1 million, which included 0.2 million shares of our common stock valued at
$17.98 per share issued at closing and 0.7 million shares valued at $12.34 per share and 0.3
million shares valued at $13.77 issued in fiscal 2009 upon release of shares held in escrow. During
the second quarter of fiscal 2009, we elected to treat this acquisition as an asset purchase under
provisions contained in the Internal Revenue Code. See Note 21 for further discussion of this
election.
A summary of the purchase price allocation for the acquisition of eScription is as follows (in
thousands):
Total purchase consideration: |
||||
Cash |
$ | 354,071 | ||
Common stock issued |
16,162 | |||
Stock options and restricted stock units assumed |
32,606 | |||
Transaction costs |
9,295 | |||
Total purchase consideration |
$ | 412,134 | ||
Allocation of the purchase consideration: |
||||
Cash |
$ | 4,520 | ||
Accounts receivable and acquired unbilled accounts receivable |
9,838 | |||
Other assets |
6,282 | |||
Property and equipment |
2,758 | |||
Identifiable intangible assets |
157,700 | |||
Goodwill |
237,846 | |||
Total assets acquired |
418,944 | |||
Accounts payable and accrued expenses |
(4,730 | ) | ||
Other liabilities |
(2,080 | ) | ||
Total liabilities assumed |
(6,810 | ) | ||
Net assets acquired |
$ | 412,134 | ||
Other assets include prepaid expenses and other current assets. Other liabilities assumed
primarily relate to deferred tax liabilities, deferred revenue and amounts accrued relating to
excess facilities accrued as a component of accrued business combination costs.
We assumed vested and unvested stock options for the purchase of 2,846,118 shares of Nuance
common stock, and restricted stock units that may convert to 806,044 shares of Nuance common stock,
in connection with our acquisition of eScription. These stock options and restricted stock units
are governed by the original agreements under which they were issued under the eScription Stock
47
Option Plan, but are now exercisable for, or will vest into, shares of Nuance common stock. Assumed
vested stock options and restricted stock units as of the date of acquisition are included in the
purchase price above. The fair value of the assumed vested stock options is calculated under the
Black-Scholes option pricing model, with the following weighted-average assumptions: dividend yield
of 0.0%, expected volatility of 50.8%, average risk-free interest rate of 2.3% and an expected term
of 1.9 years. Assumed unvested stock options and restricted stock units as of the date of
acquisition will be recorded as stock-based compensation expense over the requisite service period
as disclosed in Note 18.
The following are the identifiable intangible assets acquired and their respective weighted
average lives (dollars in thousands):
Weighted | ||||||
Average | ||||||
Amount | Life | |||||
(In years) | ||||||
Customer relationships |
$ | 130,300 | 9.0 | |||
Core and completed technology |
24,300 | 5.0 | ||||
Non-compete |
2,500 | 3.0 | ||||
Tradenames |
600 | 5.0 | ||||
Total |
$ | 157,700 | ||||
Acquisition of Viecore
On November 26, 2007, we acquired all of the outstanding capital stock of Viecore, a
consulting and systems integration firm, for total purchase consideration of approximately $112.4
million, which included 4.4 million shares of our common stock valued at $21.01 per share issued at
closing and 0.6 million shares valued at $9.05 per share issued in fiscal 2009 upon release of
shares held in escrow. The acquisition was a non-taxable event.
A summary of the purchase price allocation for the acquisition of Viecore is as follows (in
thousands):
Total purchase consideration: |
||||
Common stock issued |
$ | 98,405 | ||
Cash |
8,874 | |||
Transaction costs |
4,695 | |||
Debt assumed |
384 | |||
Total purchase consideration |
$ | 112,358 | ||
Allocation of the purchase consideration: |
||||
Cash |
$ | 5,491 | ||
Accounts receivable |
13,848 | |||
Acquired unbilled accounts receivable |
19,151 | |||
Other assets |
1,529 | |||
Property and equipment |
1,327 | |||
Identifiable intangible assets |
22,770 | |||
Goodwill |
79,421 | |||
Total assets acquired |
143,537 | |||
Accounts payable and accrued expenses |
(7,438 | ) | ||
Deferred revenue |
(23,741 | ) | ||
Total liabilities assumed |
(31,179 | ) | ||
Net assets acquired |
$ | 112,358 | ||
The following are the identifiable intangible assets acquired and their respective weighted
average lives (dollars in thousands):
Weighted | ||||||
Average | ||||||
Amount | Life | |||||
(In years) | ||||||
Customer relationships |
$ | 22,390 | 8.0 | |||
Tradename |
380 | 1.0 | ||||
Total |
$ | 22,770 | ||||
Acquisition of Vocada
48
On November 2, 2007, we acquired all of the outstanding capital stock of Vocada, a provider of
software and services for managing critical medical test results for total purchase consideration
of approximately $22.4 million, which included 0.8 million shares of our common stock valued at
$20.47 per share issued at closing and 0.1 million shares valued at $10.36 per share issued in
fiscal 2009 upon release of shares held in escrow. The acquisition was a non-taxable event.
In connection with our acquisition of Vocada, we agreed to make contingent earn-out payments
of up to $21.0 million upon the achievement of certain financial targets measured over defined
periods through December 31, 2010, in accordance with the merger agreement. Payments, if any, may
be made in the form of cash or shares of our common stock, at our sole discretion. We have notified
the former shareholders of Vocada that the financial targets for certain periods were not achieved.
The former shareholders of Vocada have requested additional information regarding this
determination. We are currently in discussions with the former shareholders of Vocada regarding
this matter. As of September 30, 2009, we have not recorded any obligation relative to these
measures.
A summary of the purchase price allocation for the acquisition of Vocada is as follows (in
thousands):
Total purchase consideration: |
||||
Common stock issued |
$ | 18,320 | ||
Cash |
3,186 | |||
Transaction costs |
910 | |||
Total purchase consideration |
$ | 22,416 | ||
Allocation of the purchase consideration: |
||||
Accounts receivable and acquired unbilled accounts receivable |
$ | 2,964 | ||
Other assets |
429 | |||
Identifiable intangible assets |
5,930 | |||
Goodwill |
15,292 | |||
Total assets acquired |
24,615 | |||
Accounts payable and other liabilities |
(305 | ) | ||
Deferred revenue |
(1,894 | ) | ||
Total liabilities assumed |
(2,199 | ) | ||
Net assets acquired |
$ | 22,416 | ||
The following are the identifiable intangible assets acquired and their respective weighted
average lives (dollars in thousands):
Weighted | ||||||
Average | ||||||
Amount | Life | |||||
(In years) | ||||||
Customer relationships |
$ | 3,800 | 10.0 | |||
Core and completed technology |
2,000 | 5.0 | ||||
Trademark |
90 | 5.0 | ||||
Non-compete |
40 | 3.0 | ||||
Total |
$ | 5,930 | ||||
2007 Acquisitions
Acquisition of Commissure
On September 28, 2007, we acquired all of the outstanding capital stock of Commissure, a
medical imaging software company that provides speech-enabled radiology workflow optimization and
data analysis solutions for total purchase consideration of approximately $27.2 million, which
included 1.2 million shares of our common stock valued at $19.49 per share issued at closing and
0.2 million shares valued at $9.63 per share issued in fiscal 2009 upon release of shares held in
escrow. The acquisition was a non-taxable event.
The merger agreement includes a contingent earn-out payment of up to $8.0 million upon the
achievement of certain financial targets for fiscal years 2008, 2009 and 2010. Payments, if any,
may be made in the form of cash or shares of our common stock, solely at our discretion. We have
notified the former shareholders of Commissure that the financial targets for the fiscal year ended
September 30, 2008, were not achieved and the related contingent earn-out payment was not earned.
Through September 30, 2009, we have not recorded any obligation relative to the Commissure
transaction earn-out provisions.
49
A summary of the purchase price allocation for the acquisition of Commissure is as follows (in
thousands):
Total purchase consideration: |
||||
Common stock issued |
$ | 24,974 | ||
Transaction costs |
2,260 | |||
Total purchase consideration |
$ | 27,234 | ||
Allocation of the purchase consideration: |
||||
Current assets |
$ | 3,493 | ||
Identifiable intangible assets |
5,650 | |||
Goodwill |
21,310 | |||
Total assets acquired |
30,453 | |||
Total liabilities assumed |
(3,219 | ) | ||
Net assets acquired |
$ | 27,234 | ||
Current assets acquired primarily relate to cash, accounts receivable, prepaid expenses, and
acquired unbilled accounts receivable. Liabilities assumed primarily relate to accounts payable,
accrued expenses, and deferred revenue.
The following are the identifiable intangible assets acquired and their respective weighted
average lives (dollars in thousands):
Weighted | ||||||
Average | ||||||
Amount | Life | |||||
(In years) | ||||||
Customer relationships |
$ | 3,000 | 7.0 | |||
Core and completed technology |
2,010 | 4.8 | ||||
Non-compete |
590 | 4.0 | ||||
Trademark |
50 | 2.0 | ||||
Total |
$ | 5,650 | ||||
Acquisition of VoiceSignal
On August 24, 2007, we acquired all of the outstanding capital stock of VoiceSignal, a
software company that provides speech technology for cell phones and other mobile devices for total
purchase consideration of approximately $319.3 million, which included 5.8 million shares of our
common stock valued at $15.57 per share issued at closing. The acquisition was a taxable event.
A summary of the purchase price allocation for the acquisition of VoiceSignal is as follows
(in thousands):
Total purchase consideration: |
||||
Cash |
$ | 204,490 | ||
Common stock issued |
90,851 | |||
Transaction costs |
23,962 | |||
Total purchase consideration |
$ | 319,303 | ||
Allocation of the purchase consideration: |
||||
Cash |
$ | 10,874 | ||
Accounts receivable, including acquired unbilled accounts receivable |
15,493 | |||
Other assets |
3,838 | |||
Identifiable intangible assets |
71,700 | |||
Goodwill |
228,170 | |||
Total assets acquired |
330,075 | |||
Accounts payable and accrued expenses |
(5,873 | ) | ||
Other liabilities |
(4,899 | ) | ||
Total liabilities assumed |
(10,772 | ) | ||
Net assets acquired |
$ | 319,303 | ||
Other liabilities include deferred tax liabilities and deferred revenue.
The following are the identifiable intangible assets acquired and their respective weighted
average lives (dollars in thousands):
50
Weighted | ||||||
Average | ||||||
Amount | Life | |||||
(In years) | ||||||
Customer relationships |
$ | 60,700 | 7.0 | |||
Core and completed technology |
11,000 | 6.0 | ||||
Total |
$ | 71,700 | ||||
Acquisition of Tegic
On August 24, 2007, we acquired all of the outstanding capital stock of Tegic, a developer of
embedded software for mobile devices for total purchase consideration of $268.3 million. The
acquisition was a taxable event.
A summary of the purchase price allocation for the acquisition of Tegic is as follows (in
thousands):
Total purchase consideration: |
||||
Cash |
$ | 265,000 | ||
Transaction costs |
3,304 | |||
Total purchase consideration |
$ | 268,304 | ||
Allocation of the purchase consideration: |
||||
Accounts receivable, including acquired unbilled accounts receivable |
$ | 58,607 | ||
Other assets |
548 | |||
Identifiable intangible assets |
52,490 | |||
Goodwill |
164,984 | |||
Total assets acquired |
276,629 | |||
Accounts payable and accrued expenses |
(3,919 | ) | ||
Other liabilities |
(4,406 | ) | ||
Total liabilities assumed |
(8,325 | ) | ||
Net assets acquired |
$ | 268,304 | ||
Other liabilities include deferred tax liabilities and deferred revenue.
The following are the identifiable intangible assets acquired and their respective weighted
average lives (dollars in thousands):
Weighted | ||||||
Average | ||||||
Amount | Life | |||||
(In years) | ||||||
Customer relationships |
$ | 34,490 | 5.4 | |||
Core and completed technology |
16,400 | 9.6 | ||||
Trademark |
1,600 | 10.0 | ||||
Total |
$ | 52,490 | ||||
Acquisition of BeVocal
On April 24, 2007, we acquired all of the outstanding capital stock of BeVocal, a provider of
on-demand self-service customer care solutions that address the unique business requirements of the
mobile communications market and its customers for total purchase consideration of $187.8 million,
which included 7.0 million shares of our common stock valued at $14.96 per share issued at closing.
In connection with this acquisition, 1.2 million shares of our common stock were placed into escrow
to satisfy any indemnification claims. In August 2009, 0.8 million of the escrow shares, worth $9.2
million, were released to the former BeVocal shareholders in settlement of all outstanding claims
between the former BeVocal shareholders and us and accounted for as an increase to the BeVocal
purchase price. The acquisition was a non-taxable event.
Under the terms of the merger agreement, we agreed to make contingent earn-out payments of up
to $65.1 million upon the achievement of certain financial targets through December 31, 2007. A
portion of the total amount of the earn-out payments was further conditioned on continued
employment provisions. During the three months ended December 31, 2008, we paid to the former
shareholders of BeVocal, Inc. $46.1 million to satisfy our contingent earn-out obligations, of
which $40.2 million was paid in cash, $5.9 million was paid in stock at that time, and an
additional $3.0 million is being disbursed to BeVocal option holders through April
51
2011. $40.0
million of the total earn-out payment has been recorded as an increase to purchase price and the
remaining $9.1 million has been recorded to compensation expense from the date of acquisition
through September 30, 2009.
A summary of the purchase price allocation for the acquisition of BeVocal is as follows (in
thousands):
Total purchase consideration: |
||||
Common stock issued |
$ | 113,649 | ||
Cash |
30,000 | |||
Contingent earn-out consideration |
40,025 | |||
Transaction costs |
4,161 | |||
Total purchase consideration |
$ | 187,835 | ||
Allocation of the purchase consideration: |
||||
Cash |
$ | 9,266 | ||
Accounts receivable and acquired unbilled accounts receivable |
11,018 | |||
Other assets |
5,152 | |||
Identifiable intangible assets |
41,200 | |||
Goodwill |
148,711 | |||
Total assets acquired |
215,347 | |||
Accounts payable and accrued expenses |
(24,215 | ) | ||
Deferred revenue |
(3,297 | ) | ||
Total liabilities assumed |
(27,512 | ) | ||
Net assets acquired |
$ | 187,835 | ||
The following are the identifiable intangible assets acquired and their respective weighted
average lives (dollars in thousands):
Weighted | ||||||
Average | ||||||
Amount | Life | |||||
(In years) | ||||||
Customer relationships |
$ | 34,700 | 7.0 | |||
Core and completed technology |
6,400 | 4.6 | ||||
Non-compete |
100 | 2.0 | ||||
Total |
$ | 41,200 | ||||
Acquisition of Focus
On March 26, 2007, we acquired all of the outstanding capital stock of Focus, which provides
medical transcription services with operations in the United States and India for total purchase
consideration of $58.7 million. The acquisition was a taxable event.
A summary of the purchase price allocation for the acquisition of Focus is as follows (in
thousands):
Total purchase consideration: |
||||
Cash |
$ | 54,477 | ||
Debt assumed |
2,060 | |||
Transaction costs |
2,132 | |||
Total purchase consideration |
$ | 58,669 | ||
Allocation of the purchase consideration: |
||||
Accounts receivable |
$ | 3,940 | ||
Other assets |
2,607 | |||
Identifiable intangible assets |
23,700 | |||
Goodwill |
31,804 | |||
Total assets acquired |
62,051 | |||
Accounts payable and accrued expenses |
(2,181 | ) | ||
Other liabilities |
(1,201 | ) | ||
Total liabilities assumed |
(3,382 | ) | ||
Net assets acquired |
$ | 58,669 | ||
The following are the identifiable intangible assets acquired and their respective weighted
average lives (dollars in thousands):
52
Weighted | ||||||
Average | ||||||
Amount | Life | |||||
(In years) | ||||||
Customer relationships |
$ | 19,800 | 9.5 | |||
Core and completed technology |
2,900 | 7.3 | ||||
Non-compete |
1,000 | 6.2 | ||||
Total |
$ | 23,700 | ||||
Acquisition of MVC
On December 29, 2006, we acquired all of the outstanding capital stock of Mobile Voice
Control, Inc. (MVC), a provider of speech-enabled mobile search and messaging services, for total
purchase consideration of $20.7, which included 0.8 million shares of our common stock valued at
$8.3 million. The acquisition was a non-taxable event
Under the agreement, we agreed to make additional earn-out payments of up to 1,700,839 shares
of our common stock upon achievement of established targets. 566,946 of these shares were
apportioned to calendar 2007 targets, and 1,133,893 shares to calendar 2008 targets. During fiscal
2008, we amended the earn-out provisions set forth in the merger agreement such that the former
shareholders of MVC were eligible to earn the remaining calendar 2007 earn-out amount, consisting
of 188,962 shares, if certain conditions were met at December 31, 2008. As of December 31, 2008, we
determined that the full 188,962 shares had been earned. The total value of the shares was $3.0
million, of which $1.0 million was recorded to goodwill as incremental purchase price during fiscal
2008, and the remaining $2.0 million was amortized as compensation expense from May 2008 to
December 2008. In November 2008, a second amendment to the merger agreement was signed pursuant to
which the earn-out period for the calendar 2008 earn-out was extended, such that 377,964 and
755,929 shares could now be earned based on the achievement of calendar 2008 and 2009 targets,
respectively. The stock payments, if any, that are made based on the provisions of this second
amendment will be recorded to goodwill, as incremental purchase price. We notified the former
shareholders of MVC that the financial targets for calendar 2008 were not achieved and the 377,964
shares were not earned. As of September 30, 2009, we have not recorded any obligation relative to
the second amendment.
A summary of the purchase price allocation for the acquisition of MVC, including the impact of
certain components of the earn-out, as amended, is as follows (in thousands):
Total purchase consideration: |
||||
Common stock issued |
$ | 8,300 | ||
Contingent earn-out consideration |
7,983 | |||
Cash |
4,104 | |||
Transaction costs |
362 | |||
Total purchase consideration |
$ | 20,749 | ||
Allocation of the purchase consideration: |
||||
Other assets |
$ | 79 | ||
Identifiable intangible assets |
2,700 | |||
Goodwill |
18,136 | |||
Total assets acquired |
20,915 | |||
Total liabilities assumed |
(166 | ) | ||
Net assets acquired |
$ | 20,749 | ||
The following are the identifiable intangible assets acquired and their respective weighted
average lives (dollars in thousands):
Weighted | ||||||
Average | ||||||
Amount | Life | |||||
(In years) | ||||||
Customer relationships |
$ | 1,300 | 5.0 | |||
Completed technology |
1,100 | 4.0 | ||||
Non-compete |
300 | 3.0 | ||||
Total |
$ | 2,700 | ||||
4. Pro Forma Results (Unaudited)
53
The following table shows unaudited pro forma results of operations as if we had acquired
SNAPin and our other material acquisitions from fiscal 2008 (PSRS, eScription, Inc., and Viecore,
Inc.) on October 1, 2007 (table in thousands, except per share data):
2009 | 2008 | |||||||
Revenue |
$ | 950,352 | $ | 946,028 | ||||
Net loss |
$ | (19,387 | ) | $ | (80,761 | ) | ||
Net loss per share |
$ | (0.08 | ) | $ | (0.36 | ) |
We have not furnished pro forma financial information relating to the Vocada, Multi-Vision, or
our immaterial fiscal 2009 acquisitions because such information is not material, individually or
in the aggregate, to our financial results. The unaudited pro forma results of operations are not
necessarily indicative of the actual results that would have occurred had the transactions actually
taken place at the beginning of the periods indicated.
5. Contingent Acquisition Payments
Contingent acquisition payment arrangements related to acquisitions completed during fiscal
2009, 2008, or 2007 are discussed above in Note 3. However, we remain party to certain contingent
consideration arrangements relative to acquisitions completed prior to those fiscal years. Those
arrangements are discussed below.
Earn-out Payments
In connection with our acquisition of Phonetic Systems Ltd. (Phonetic) in February 2005, a
deferred payment of $17.5 million was due and paid to the former shareholders of Phonetic on
February 1, 2007. We also agreed to make contingent earn-out payments of $35.0 million upon
achievement of certain established financial and performance targets, in accordance with the merger
agreement. We have notified the former shareholders of Phonetic that the financial and performance
targets were not achieved. Accordingly, we have not recorded any obligations relative to these
measures as of September 30, 2009. The former shareholders of Phonetic have objected to this
determination and have filed for arbitration.
Escrow and Holdback Arrangements
In connection with certain of our acquisitions, we have placed either cash or shares of our
common stock in escrow to satisfy any claims we may have. If no claims are made, the escrowed
amounts will be released to the former shareholders of the acquired companies. Generally, we cannot
make a determination, beyond a reasonable doubt, whether the escrow will become payable to the
former shareholders of these companies until the escrow period has expired. Accordingly these
amounts have been treated as contingent purchase price until it is determined that the escrow will
be payable, at which time the escrowed amounts may be recorded as additional purchase price and
allocated to goodwill.
The following table summarizes the terms of the escrow arrangements that were not released as
of September 30, 2009 (table in thousands):
Initially Scheduled | |||||||||
Escrow | Share Payment | ||||||||
Release Date | Cash Payment | Number of Shares | |||||||
Focus(a) |
March 26, 2008 | $ | 5,800 | n/a | |||||
eScription(b) |
May 20, 2009 | n/a | 103 | ||||||
SNAPin(c) |
October 1, 2009 | n/a | 1,107 | ||||||
X-Solutions |
December 10, 2010 | 1,050 | n/a | ||||||
eCopy |
December 30, 2010 | 7,800 | n/a | ||||||
Total |
$ | 14,650 | 1,210 | ||||||
Discussion of amounts held in escrow following their initially scheduled release date: | ||
(a) | We filed a claim against the Focus Infomatics, Inc. escrow related to the breach of certain representations and warranties made in the share purchase agreement. We determined that the entire escrow would be paid to either satisfy liabilities indemnified under the agreement or paid to the former shareholders. Accordingly, an amount equal to the escrow was recorded as additional purchase price during fiscal 2008. The escrow was released in October 2009. | |
(b) | We filed a claim against the escrow related to the breach of certain representations and warranties made in the merger agreement. |
54
1.0 million shares held in escrow were released during fiscal 2009. We expect the remaining amount to remain in escrow until the settlement of the contingent liabilities is finalized. | ||
(c) | We released these shares in October 2009. |
In connection with the escrow relating to the eScription acquisition, we guaranteed a minimum
market value of $17.7954 per share when the escrow shares are released. If the market value was
less than $17.7954 per share on the date of release, we would be required to pay the difference, if
any, and limited to $5.0 million, in cash. In May 2009, upon release of all but 103,000 of the
escrow shares, which remain in escrow at September 30, 2009, we paid the maximum $5.0 million cash
payment to the former shareholders of eScription. This payment was recorded as a reduction to
additional paid-in-capital.
6. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for fiscal years 2009 and 2008, are as follows
(in thousands):
Balance as of October 1, 2007 |
$ | 1,249,642 | ||
Goodwill acquired |
355,648 | |||
Escrow amounts released |
30,000 | |||
Purchase price increases due to earn-out achievements |
12,501 | |||
Purchase accounting adjustments |
3,327 | |||
Effect of foreign currency translation |
4,655 | |||
Balance as of September 30, 2008 |
$ | 1,655,773 | ||
Goodwill acquired |
200,501 | |||
Escrow amounts released |
30,869 | |||
Purchase accounting adjustments |
4,956 | |||
Effect of foreign currency translation |
(1,096 | ) | ||
Balance as of September 30, 2009 |
$ | 1,891,003 | ||
Purchase accounting adjustments recorded in fiscal 2009 consisted primarily of the following
increases: $18.9 million of additional purchase price upon our election to treat our acquisition of
eScription as an asset purchase under Section 338(h)(10) of the Internal Revenue Code of 1986 (as
amended) and $10.8 million related to the recording of contingent liabilities assumed; partially
offset by the following decreases: a $9.7 million reversal of assumed deferred tax liabilities as a
result of our election to treat eScription as an asset purchase, $5.8 million related to the
utilization of acquired net operating losses from acquisitions, a $6.3 million adjustment to
deferred taxes, and a $4.7 million decrease in accrued transaction costs.
Purchase accounting adjustments recorded in fiscal 2008 consisted primarily of the following
increases: $15.4 million relating to the estimated fair value of contingent liabilities assumed in
connection with the acquisition of BeVocal, $7.6 million due to a revised estimate of the fair
value of the intangible assets for customer relationships relating to the acquisition of Tegic,
$10.4 million relating to an adjustment of assumed deferred tax liabilities and $5.8 million
related to the escrow associated with our acquisition of Focus. In addition, we increased goodwill
by $2.8 million to correct an error in the acquired balance sheet of Dictaphone for contractual
liabilities to a certain customer, incurred prior to the acquisition date of March 31, 2006. These
increases to goodwill were partially offset by decreases which included $23.8 million of additional
acquired unbilled accounts receivable identified in connection with the acquisition of Tegic, and
by $16.6 million related to the utilization of acquired deferred tax assets in connection with
certain of our prior acquisitions.
Intangible assets consist of the following as of September 30, 2009 and 2008, which includes
$112.7 million and $33.5 million of licensed technology, respectively (table in thousands, except
for years):
September 30, 2009 | ||||||||||||||
Weighted Average | ||||||||||||||
Gross Carrying | Accumulated | Net Carrying | Remaining | |||||||||||
Amount | Amortization | Amount | Life (Years) | |||||||||||
Customer relationships |
$ | 565,654 | $ | (159,150 | ) | $ | 406,504 | 7.3 | ||||||
Technology and patents |
341,504 | (83,882 | ) | 257,622 | 6.8 | |||||||||
Tradenames, trademarks, and other |
17,543 | (5,374 | ) | 12,169 | 3.8 | |||||||||
Non-competition agreements |
5,707 | (2,997 | ) | 2,710 | 2.3 | |||||||||
Subtotal |
930,408 | (251,403 | ) | 679,005 | 7.1 | |||||||||
Tradename, indefinite life |
27,800 | | 27,800 | n/a | ||||||||||
Total |
$ | 958,208 | $ | (251,403 | ) | $ | 706,805 | |||||||
55
September 30, 2008 | ||||||||||||||
Weighted Average | ||||||||||||||
Gross Carrying | Accumulated | Net Carrying | Remaining | |||||||||||
Amount | Amortization | Amount | Life (Years) | |||||||||||
Customer relationships |
$ | 503,800 | $ | (93,285 | ) | $ | 410,515 | 7.5 | ||||||
Technology and patents |
192,341 | (55,344 | ) | 136,997 | 7.6 | |||||||||
Tradenames, trademarks, and other |
9,546 | (3,584 | ) | 5,962 | 6.2 | |||||||||
Non-competition agreements |
5,169 | (1,420 | ) | 3,749 | 3.0 | |||||||||
Subtotal |
710,856 | (153,633 | ) | 557,223 | 7.5 | |||||||||
Tradename, indefinite life |
27,800 | | 27,800 | n/a | ||||||||||
Total |
$ | 738,656 | $ | (153,633 | ) | $ | 585,023 | |||||||
In June 2009, we acquired a royalty free paid-up perpetual source and object code license from
a third party for $20.0 million in common stock. The estimated useful life of this license is 7
years and this asset has been included within the technology and patents grouping above. Also in
June 2009, we amended the December 2008 agreement discussed below and entered into a joint
marketing and selling agreement with the same third party and paid $7.0 million, consisting of $2.0
million in cash and $5.0 million in common stock. We have capitalized the $7.0 million payment as
an intangible asset, included in the tradenames, trademarks, and other grouping above, and assigned
a useful life of 3 years, commensurate with the legal term of the rights in the arrangement. In
addition to the $7.0 million paid in June, we also agreed to pay an additional $13.0 million,
payable in common stock or cash at our option, upon the third party meeting certain performance
criteria under the agreement by October 31, 2009. We are currently in the process of evaluating
whether such performance criteria were met.
In December 2008, we acquired a speech-related patent portfolio from the same third party and
a royalty free paid-up perpetual license providing us with access to, and use of, the third partys
speech-related source code for an aggregate purchase price of $50.0 million. These assets are
included within the technology and patents asset grouping above. The weighted average useful life
related to these acquired assets is 8.7 years. We agreed to pay an additional license fee of up to
$20.0 million if certain revenue growth targets are met in calendar 2009. Any additional license
fee was to be payable in cash or stock at our sole discretion on March 1, 2010. In June 2009, this
additional license fee provision was amended, and as a result we no longer have any amounts due
under this agreement.
Amortization expense for acquired technology and patents is included in the cost of revenue
from amortization of intangible assets in the accompanying statements of operations and amounted to
$38.4 million, $24.4 million and $13.1 million in fiscal 2009, 2008 and 2007, respectively.
Amortization expense for customer relationships; tradenames, trademarks, and other; and
non-competition agreements is included in operating expenses and was $77.0 million, $58.2 million
and $24.6 million in fiscal 2009, 2008 and 2007, respectively. Estimated amortization expense for
each of the five succeeding years as of September 30, 2009, is as follows (in thousands):
Other | ||||||||||||
Cost of | Operating | |||||||||||
Year Ending September 30, | Revenue | Expenses | Total | |||||||||
2010 |
$ | 45,512 | $ | 80,657 | $ | 126,169 | ||||||
2011 |
44,112 | 72,584 | 116,696 | |||||||||
2012 |
40,345 | 63,799 | 104,144 | |||||||||
2013 |
34,849 | 53,020 | 87,869 | |||||||||
2014 |
28,017 | 46,736 | 74,753 | |||||||||
Thereafter |
64,787 | 104,587 | 169,374 | |||||||||
Total |
$ | 257,622 | $ | 421,383 | $ | 679,005 | ||||||
7. Accounts Receivable
Accounts receivable, excluding acquired unbilled accounts receivable, consisted of the
following (in thousands):
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
Trade accounts receivable |
$ | 197,176 | $ | 200,892 | ||||
Unbilled accounts receivable under long-term contracts |
15,311 | 15,938 | ||||||
Gross accounts receivable |
212,487 | 216,830 | ||||||
Less allowance for doubtful accounts |
(6,833 | ) | (6,925 | ) | ||||
Less allowance for sales returns |
(6,106 | ) | (6,363 | ) | ||||
Accounts receivable, net |
$ | 199,548 | $ | 203,542 | ||||
8. Inventories, net
56
Inventories, net of allowances, consisted of the following (in thousands):
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
Components and parts |
$ | 6,479 | $ | 4,429 | ||||
Inventory at customers |
967 | 1,585 | ||||||
Finished products |
1,079 | 1,138 | ||||||
$ | 8,525 | $ | 7,152 | |||||
Inventory at customers reflects equipment related to in-process installations of solutions
with customers. These contracts have not been recorded as revenue as of the balance sheet date, and
therefore the related equipment is recorded in inventory until installation is complete.
9. Land, Building and Equipment, Net
Land, building and equipment, net at September 30, 2009 and 2008 were as follows (in
thousands):
September 30, | September 30, | |||||||||||
Useful Life | 2009 | 2008 | ||||||||||
(In years) | ||||||||||||
Land |
| $ | 2,400 | $ | 2,400 | |||||||
Building |
30 | 5,117 | 5,117 | |||||||||
Machinery and equipment |
3-5 | 5,558 | 4,435 | |||||||||
Computers, software and equipment |
3-5 | 75,586 | 60,679 | |||||||||
Leasehold improvements |
2-7 | 15,073 | 13,491 | |||||||||
Furniture and fixtures |
5 | 10,366 | 9,071 | |||||||||
Construction in progress |
n/a | 4,266 | | |||||||||
Subtotal |
118,366 | 95,193 | ||||||||||
Less: accumulated depreciation |
(64,898 | ) | (48,708 | ) | ||||||||
Land, building and equipment, net |
$ | 53,468 | $ | 46,485 | ||||||||
At September 30, 2009, construction in progress related to the build-out of hosted data
centers. There were no corresponding ongoing projects at September 30, 2008. Depreciation expense,
associated with building and equipment, for fiscal 2009, 2008 and 2007 was $18.7 million, $16.4
million and $12.1 million, respectively.
10. Accrued Expenses and Other Current Liabilities
Accrued expenses consisted of the following (in thousands):
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
Compensation |
$ | 52,600 | $ | 45,316 | ||||
Professional fees |
8,945 | 5,009 | ||||||
Acquisition costs and liabilities |
8,522 | 14,167 | ||||||
Cost of revenue related liabilities |
7,585 | 6,596 | ||||||
Income taxes payable |
7,185 | 16,047 | ||||||
Sales and other taxes payable |
5,913 | 2,179 | ||||||
Sales and marketing incentives |
4,413 | 4,705 | ||||||
Deferred tax liability |
1,614 | | ||||||
Other |
8,042 | 8,080 | ||||||
Total |
$ | 104,819 | $ | 102,099 | ||||
11. Credit Facilities and Debt
At September 30, 2009 and 2008, we had the following borrowing obligations (in thousands):
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
2.75% Convertible Debentures, net of unamortized discount of $44.9 million and $53.2 million, respectively |
$ | 205,064 | $ | 196,771 |
57
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
Credit Facility |
650,263 | 656,963 | ||||||
Obligations under capital leases |
307 | 489 | ||||||
Other |
126 | 39 | ||||||
Total long-term debt |
855,760 | 854,262 | ||||||
Less: current portion |
6,862 | 7,006 | ||||||
Non-current portion of long-term debt |
$ | 848,898 | $ | 847,256 | ||||
The estimated fair value of our long-term debt, including the conversion features of its 2.75%
convertible senior notes, approximated $893.2 million at September 30, 2009 and $786.9 million at
September 30, 2008. These fair value amounts represent the value at which our lenders could trade
our debt within the financial markets, and do not represent the settlement value of these long-term
debt liabilities to us at each reporting date. The fair value of these long-term debt issues will
continue to fluctuate each period based on fluctuations in market interest rates, and these
fluctuations may have little to no correlation to our outstanding debt balances. The increase in
fair value from September 30, 2008 to September 30, 2009 is attributable to the general
improvements in the debt markets. The term loan portion of our Credit Facility is traded and the
fair values are based upon traded prices as of the reporting dates. The fair values of the 2.75%
Convertible Debentures at each respective reporting date were estimated using the averages of the
September 30, 2009 and September 30, 2008 bid and ask trading quotes. We had no outstanding balance
on the revolving credit line portion of our Credit Facility. Our capital lease obligations and
other debt are not traded and the fair values of these instruments are assumed to approximate their
carrying values as of September 30, 2009 and September 30, 2008.
2.75% Convertible Debentures
On August 13, 2007, we issued $250 million of 2.75% convertible senior debentures due in 2027
(the 2027 Debentures) in a private placement to Citigroup Global Markets Inc. and Goldman, Sachs
& Co. Total proceeds, net of debt discount of $7.5 million and deferred debt issuance costs of $1.1
million, were $241.4 million. The 2027 Debentures bear an interest rate of 2.75% per annum, payable
semi-annually in arrears beginning on February 15, 2008, and mature on August 15, 2027 subject to
the right of the holders of the 2027 Debentures to require us to redeem the 2027 Debentures on
August 15, 2014, 2017 and 2022. As required under ASC 470-20, the $54.7 million difference between
the fair value of the liability component of the 2027 Debentures and their net proceeds on the date
of issuance was retrospectively recorded as additional paid-in-capital and additional debt discount
(See Note 2a). The aggregate debt discount, consisting of both the discount related to the adoption
of ASC 470-20 and the date of issuance difference between the principal amount of the 2027
Debentures and the net proceeds received, and debt issuance costs are being amortized to interest
expense using the effective interest rate method through August 2014. As of September 30, 2009 and
2008, the ending unamortized discount was $44.9 million and $53.2 million, respectively, and the
ending unamortized deferred debt issuance costs were
$0.5 million and $0.6 million, respectively.
The 2027 Debentures are general senior unsecured obligations, ranking equally in right of payment
to all of our existing and future unsecured, unsubordinated indebtedness and senior in right of
payment to any indebtedness that is contractually subordinated to the 2027 Debentures. The 2027
Debentures are effectively subordinated to our secured indebtedness to the extent of the value of
the collateral securing such indebtedness and are structurally subordinated to indebtedness and
other liabilities of our subsidiaries. If converted, the principal amount of the 2027 Debentures is
payable in cash and any amounts payable in excess of the $250 million principal amount, will (based
on an initial conversion rate, which represents an initial conversion price of $19.47 per share,
subject to adjustment) be paid in cash or shares of our common stock, at our election, only in the
following circumstances and to the following extent: (i) on any date during any fiscal quarter
beginning after September 30, 2007 (and only during such fiscal quarter) if the closing sale price
of our common stock was more than 120% of the 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
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 2027 Debentures; and
(iv) at the option of the holder at any time on or after February 15, 2027. Additionally, we may
redeem the 2027 Debentures, in whole or in part, on or after August 20, 2014 at par plus accrued
and unpaid interest; each holder shall have the right, at such holders option, to require us to
repurchase all or any portion of the 2027 Debentures held by such holder on August 15, 2014, August
15, 2017 and August 15, 2022. Upon conversion, we will pay cash and shares of our common stock (or,
at our election, cash in lieu of some or all of such common stock), if any. If we undergo a
fundamental change (as described in the indenture for the 2027 Debentures) prior to maturity,
holders will have the option to require us to repurchase all or any portion of their debentures for
cash at 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, 2009, no conversion triggers were met. If the conversion triggers were
met, we could be required to repay all or some of the principal amount in cash prior to the
maturity date.
Credit Facility
58
We entered into a credit facility which consists of a $75 million revolving credit line
including letters of credit, a $355 million term loan entered into on March 31, 2006, a $90 million
term loan entered into on April 5, 2007 and a $225 million term loan entered into on August 24,
2007 (the Credit Facility). The term loans are due March 2013 and the revolving credit line is
due March 2012. As of September 30, 2009, $650.3 million remained outstanding under the term loans,
there were $16.2 million of letters of credit issued under the revolving credit line and there were
no other outstanding borrowings under the revolving credit line.
The Credit Facility contains covenants, including, among other things, covenants that restrict
our ability and those of our subsidiaries to incur certain additional indebtedness, create or
permit liens on assets, enter into sale-leaseback transactions, make loans or investments, sell
assets, make certain acquisitions, pay dividends, or repurchase stock. The agreement also contains
events of default, including failure to make payments of principal or interest, failure to observe
covenants, breaches of representations and warranties, defaults under certain other material
indebtedness, failure to satisfy material judgments, a change of control and certain insolvency
events. As of September 30, 2009, we were in compliance with the covenants under the Credit
Facility.
Borrowings under the Credit Facility bear interest at a rate equal to the applicable margin
plus, at our option, either (a) the base rate (which is the higher of the corporate base rate of
UBS AG, Stamford Branch, or the federal funds rate plus 0.50% per annum) or (b) LIBOR (equal to (i)
the British Bankers Association Interest Settlement Rates for deposits in U.S. dollars divided by
(ii) one minus the statutory reserves applicable to such borrowing). The applicable margin for term
loan borrowings under the Credit Facility ranges from 0.75% to 1.50% per annum with respect to base
rate borrowings and from 1.75% to 2.50% per annum with respect to LIBOR-based borrowings, depending
on our leverage ratio. The applicable margin for the revolving loan borrowings under the Credit
Facility ranges from 0.50% to 1.25% per annum with respect to base rate borrowings and from 1.50%
to 2.25% per annum with respect to LIBOR-based borrowings, depending upon our leverage ratio. As of
September 30, 2009, the applicable margin for the term loan was 1.00% for base rate borrowings and
2.00% for LIBOR-based borrowings. We are required to pay a commitment fee for unutilized
commitments under the revolving credit facility at a rate ranging from 0.375% to 0.50% per annum,
based upon our leverage ratio. As of September 30, 2009, the commitment fee rate was 0.375% and the
effective interest rate was 2.27%.
We capitalized debt issuance costs related to the Credit Facility and are amortizing the costs
to interest expense using the effective interest rate method through March 2012 for costs
associated with the revolving credit facility and through March 2013 for costs associated with the
term loan. As of September 30, 2009 and 2008, the ending unamortized deferred financing fees were
$7.7 million and $10.0 million, respectively, and are included in other assets in the accompanying
consolidated balance sheet.
The Credit Facility is subject to repayment in four equal quarterly installments of 1% per
annum ($6.7 million per year, not including interest, which is also payable quarterly), and an
annual excess cash flow sweep, as defined in the Credit Facility, which is payable beginning in the
first quarter of each fiscal year, beginning in fiscal 2008, based on the excess cash flow
generated in the previous fiscal year. No payment under the excess cash flow sweep provision was
due in the first quarter of either fiscal 2009 or fiscal 2010 as there was no excess cash flow
generated in either of the respective prior fiscal years. We will continue to evaluate the extent
to which a payment is due in the first quarter of future fiscal years based on excess cash flow
generation. At the current time, we are unable to predict the amount of the outstanding principal,
if any, that may be required to be repaid in future fiscal years pursuant to the excess cash flow
sweep provisions. Any term loan borrowings not paid through the baseline repayment, the excess cash
flow sweep, or any other mandatory or optional payments that we may make, will be repaid upon
maturity. If only the baseline repayments are made, the annual aggregate principal amount of the
term loans repaid would be as follows (in thousands):
Year Ending September 30, | Amount | |||
2010 |
$ | 6,700 | ||
2011 |
6,700 | |||
2012 |
6,700 | |||
2013 |
630,163 | |||
Total |
$ | 650,263 | ||
Our obligations under the Credit Facility are unconditionally guaranteed by, subject to
certain exceptions, each of our existing and future direct and indirect wholly-owned domestic
subsidiaries. The Credit Facility and the guarantees thereof are secured by first priority liens
and security interests in the following: 100% of the capital stock of substantially all of our
domestic subsidiaries and 65% of the outstanding voting equity interests and 100% of the non-voting
equity interests of first-tier foreign subsidiaries, all our material tangible and intangible
assets and those of the guarantors, and any present and future intercompany debt. The Credit
Facility also contains provisions for mandatory prepayments of outstanding term loans upon receipt
of the following, and subject to certain exceptions: 100% of net cash proceeds from asset sales,
100% of net cash proceeds from issuance or incurrence of debt, and 100% of extraordinary receipts.
We may voluntarily prepay borrowings under the Credit Facility without premium or penalty other
than breakage costs, as defined with respect to LIBOR-based loans.
12. Financial Instruments and Hedging Activities
59
Interest Rate Swap Agreements
To manage the interest rate exposure on our variable-rate borrowings, we use interest rate
swaps to convert specific variable-rate debt into fixed-rate debt. As of September 30, 2009, we
have two outstanding interest rate swaps designated as cash flow hedges with an aggregate notional
amount of $200 million. The interest rates on these swaps are 2.7% and 2.1%, plus the applicable
margin for the Credit Facility, and they expire in October 2010 and November 2010, respectively. As
of September 30, 2009 and September 30, 2008, the aggregate cumulative unrealized losses related to
these swaps, and a previous swap that matured on March 31, 2009, were $4.0 million and $0.9
million, respectively and were included in accumulated other comprehensive income (loss) in the
accompanying balance sheets.
Forward Currency Contracts Designated as Cash Flow Hedges
On December 31, 2008, we entered into foreign currency contracts to hedge exposure on the
variability of cash flows in Canadian dollars. These contracts expired in September 2009 and were
designated as cash flow hedges. The impact of these settled contracts on results of operations and
other comprehensive income are detailed in the tables below. We have no foreign currency contracts
designated as cash flow hedges outstanding at September 30, 2009.
Other Derivative Activities
We have foreign currency contracts that are not designated as hedges. Changes in fair value of
foreign currency contracts not qualifying as hedges are reported in earnings as part of other
income (expense), net. During the three months ended December 31, 2008, we entered into foreign
currency forward contracts to offset foreign currency exposure on the deferred acquisition payment
of 44.3 million related to our acquisition of PSRS, resulting in a net gain of $8.0 million in
other income (expense). The foreign currency contracts matured and were settled on October 22,
2009.
In June 2009, we acquired certain intangible assets and issued 1,809,353 shares of our common
stock, valued at $25.0 million, as part of the total consideration. We also issued an additional
315,790 shares of our common stock, valued at $4.5 million, in June 2009 as a prepayment for
professional services. These shares issued are subject to security price guarantees which are
accounted for as derivatives, and are being accounted for separately from their host agreements due
to the determination that such instruments would not be considered equity instruments if
freestanding. The security price guarantees require a payment from either us to the third party, or
from the third party to us based upon the difference between the price of our common stock on the
issue date and an average price of our common stock approximately six months following the issue
date. For the fiscal year ended September 30, 2009, increases in fair value of $2.3 million related
to these security price guarantees are reported in earnings as non-operating income within other
income (expense), net.
In October 2009, we entered into a five-year joint research collaboration with a third party
and made payments consisting of 1,047,120 shares of our common stock valued at $16.0 million. These
shares issued are subject to a security price guarantee of the same nature as those described
above.
The following table provides a quantitative summary of the fair value of our hedged and
non-hedged derivative instruments as of September 30, 2009 and September 30, 2008 (table in
thousands):
Fair Value | ||||||||||||
September 30, | September 30, | |||||||||||
Description | Balance Sheet Classification | 2009 | 2008 | |||||||||
Derivatives Not Designated as Hedges: |
||||||||||||
Foreign currency contracts |
Prepaid expenses and other current assets |
$ | 8,682 | $ | | |||||||
Security Price Guarantees |
Prepaid expenses and other current assets |
2,299 | | |||||||||
Net asset (liability) value of non-hedged
derivative instruments |
$ | 10,981 | $ | | ||||||||
Derivatives Designated as Hedges: |
||||||||||||
Interest rate swaps |
Accrued expenses and other current liabilities |
$ | | $ | (879 | ) | ||||||
Interest rate swaps |
Other long-term liabilities |
(3,982 | ) | | ||||||||
Net asset (liability) value of hedged
derivative instruments |
$ | (3,982 | ) | $ | (879 | ) | ||||||
The following tables summarize the activity of derivative instruments for fiscal 2009 and 2008
(tables in thousands):
Derivatives Designated as Hedges for the Fiscal Year Ended September 30,
60
Amount of Gain (Loss) | Location and Amount of Gain (Loss) Reclassified from | ||||||||||||||||
Recognized in OCI | Accumulated OCI into Income (Effective Portion) | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||||||
Foreign currency contracts |
$ | | $ | | N/A | $ | $ | | |||||||||
Interest rate swaps |
$ | (3,103 | ) | $ | 50 | N/A | $ | $ | |
Derivatives Not Designated as Hedges
Amount of Gain (Loss) | ||||||||||||
Recognized in Income | ||||||||||||
Fiscal Year Ended | ||||||||||||
September 30, | ||||||||||||
Location of Gain (Loss) | ||||||||||||
Recognized in Income | 2009 | 2008 | ||||||||||
Foreign currency contracts |
Other income (expense), net | $ | 8,682 | $ | | |||||||
Security price guarantees |
Other income (expense), net | $ | 2,299 | $ | |
13. Fair Value Measures
We adopted the provisions of SFAS No. 157, Fair Value Measurements (SFAS 157), now referred to
as ASC 820, relative to financial instruments on October 1, 2008. ASC 820 defines fair value,
establishes a framework for measuring fair value, and enhances disclosures about fair value
measurements. Fair value is defined as the price that would be received for an asset, or paid to
transfer a liability, in an orderly transaction between market participants at the measurement
date. Valuation techniques must maximize the use of observable inputs and minimize the use of
unobservable inputs.
ASC 820 establishes a value hierarchy based on three levels of inputs, of which the first two
are considered observable and the third is considered unobservable:
| Level 1. Quoted prices for identical assets or liabilities in active markets which we can access. | ||
| Level 2. Observable inputs other than those described as Level 1. | ||
| Level 3. Unobservable inputs. |
Assets and liabilities measured at fair value on a recurring basis at September 30, 2009
consisted of (table in thousands):
September 30, 2009 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
||||||||||||||||
Money market funds(a) |
$ | 403,250 | $ | | $ | | $ | 403,250 | ||||||||
US government agency securities(a) |
10,013 | | | 10,013 | ||||||||||||
Foreign currency exchange contracts(b) |
| 8,682 | | 8,682 | ||||||||||||
Security price guarantees(d) |
| 2,299 | | 2,299 | ||||||||||||
Total assets at fair value |
$ | 413,263 | $ | 10,981 | $ | | $ | 424,244 | ||||||||
Liabilities: |
||||||||||||||||
Interest rate swaps(c) |
$ | | $ | 3,982 | $ | | $ | 3,982 | ||||||||
Total liabilities at fair value |
$ | | $ | 3,982 | $ | | $ | 3,982 | ||||||||
(a) | Money market funds and US government agency securities, included in cash and cash equivalents in the accompanying balance sheet, are valued at quoted market prices in active markets. | |
(b) | The fair value of our foreign currency exchange contracts is the intrinsic value of the contracts based on observable inputs for similar derivative instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable. | |
(c) | The fair values of the interest rate swaps are estimated using discounted cash flow analyses that factor in observable market inputs such as LIBOR based yield curves, forward rates, and credit spreads. | |
(d) | The fair values of the security price guarantees are determined using a Black-Scholes model, derived from observable inputs such |
61
as US treasury interest rates, our common stock price, and the volatility of our common stock. The valuation model values both the put and call components of the guarantees simultaneously, with the net value of those components representing the fair value of each instrument. |
Items Measured at Fair Value on a Nonrecurring Basis
Certain assets, including our cost-method investments, are measured at fair value on a
nonrecurring basis when indicators of impairment are identified and such indicators appear to be
other than temporary. These assets are recognized at fair value when they are deemed to be
other-than-temporarily impaired. During the fourth quarter 2009, we recognized a $1.2 million
impairment of our cost-method investment in a non-public company, representing the deficiency in
the estimated fair value of our investment based on a quoted-price methodology as compared to its
carrying value. This impairment charge was recorded as a non-operating loss in our fiscal 2009
consolidated statement of operations. We did not record any impairment charges for these assets
during fiscal 2008 or 2007. Subsequent to September 30, 2009, we entered into an additional
cost-method investment of a non-public company for approximately $15.0 million.
14. Accrued Business Combination Costs
We have, in connection with certain of our business combinations, incurred restructuring
costs. Restructuring costs are typically comprised of severance costs, costs of consolidating
duplicate facilities and contract termination costs. Restructuring expenses are based upon plans
that have been committed to by management, but are generally subject to refinement during the
purchase price allocation period (generally within one year of the acquisition date). In addition
to plans resulting from the business combination, we have historically acquired companies who have
previously established restructuring charges relating to lease exit costs. Regardless of the origin
of the lease exit costs, we are required to make assumptions relating to sublease terms, sublease
rates and discount rates. We base our estimates and assumptions on the best information available
at the time of the obligation having arisen. These estimates are reviewed and revised as facts and
circumstances dictate, with any changes being recorded to goodwill or restructuring and other
charges (credits), net. Changes in these estimates could have a material effect on the amount
accrued on the balance sheet. Discussed in detail below are two individually significant facilities
which were abandoned by the acquired company prior to our acquisition of the company, and for which
the obligations to the lessors, we have assumed.
In connection with the acquisitions of SpeechWorks International, Inc. in August 2003 and
Former Nuance in September 2005, we assumed two individually significant lease obligations that
were abandoned prior to the acquisition dates. These obligations expire in 2016 and 2012,
respectively, and the fair value of the obligations, net of estimated sublease income, was
recognized as liabilities assumed by us in the allocation of the final purchase price. The net
payments have been discounted in calculating the fair value of these obligations, and the discount
is being accreted through the term of the lease. Cash payments net of sublease receipts are
presented as cash used in financing activities on the consolidated statements of cash flows.
Additionally, we have implemented restructuring plans to eliminate duplicate facilities,
personnel or assets in connection with business combinations. These costs are recognized as
liabilities assumed, and accordingly are included in the allocation of the purchase price,
generally resulting in an increase to the recorded amount of the goodwill.
The activity for the years ended September 30, 2009, 2008 and 2007, relating to all facilities
and personnel recorded in accrued business combination costs, is as follows (in thousands):
Facilities | Personnel | Total | ||||||||||
Balance at October 1, 2006 |
$ | 59,221 | $ | 844 | $ | 60,065 | ||||||
Charged to goodwill |
542 | 1,484 | 2,026 | |||||||||
Charged to restructuring and other charges, net |
| | | |||||||||
Charged to interest expense |
1,889 | | 1,889 | |||||||||
Cash payments, net of sublease receipts |
(12,412 | ) | (1,549 | ) | (13,961 | ) | ||||||
Balance at September 30, 2007 |
$ | 49,240 | $ | 779 | $ | 50,019 | ||||||
Charged to goodwill |
1,586 | (68 | ) | 1,518 | ||||||||
Charged to restructuring and other charges, net |
198 | | 198 | |||||||||
Charged to interest expense |
1,718 | | 1,718 | |||||||||
Cash payments, net of sublease receipts |
(11,564 | ) | (711 | ) | (12,275 | ) | ||||||
Balance at September 30, 2008 |
41,178 | | 41,178 | |||||||||
Charged to goodwill |
2,689 | 6,391 | 9,080 | |||||||||
Charged to restructuring and other charges, net |
111 | | 111 |
62
Facilities | Personnel | Total | ||||||||||
Charged to interest expense |
1,677 | | 1,677 | |||||||||
Cash payments, net of sublease receipts |
(11,104 | ) | (3,894 | ) | (14,998 | ) | ||||||
Balance at September 30, 2009 |
$ | 34,551 | $ | 2,497 | $ | 37,048 | ||||||
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
Reported as: |
||||||||
Current |
$ | 12,144 | $ | 9,166 | ||||
Long-term |
24,904 | 32,012 | ||||||
Total |
$ | 37,048 | $ | 41,178 | ||||
15. Restructuring and Other Charges, net
Fiscal 2009
In fiscal 2009, we recorded restructuring and other charges of $5.4 million, of which $5.3
million related to the elimination of approximately 220 personnel across multiple functions within
our company.
Fiscal 2008
In fiscal 2008, we recorded restructuring and other charges of $7.0 million, of which $4.2
million related to the elimination of approximately 155 personnel across multiple functions, $1.4
million related to a non-recurring, adverse ruling arising from a vendors claims of underpayment
of historical royalties for technology discontinued in 2005 and $1.4 million related to the
consolidation or elimination of excess facilities.
The following table sets forth the fiscal 2009, 2008 and 2007 accrual activity relating to
restructuring and other charges (in thousands):
Personnel | Facilities | Other | Total | |||||||||||||
Balance at October 1, 2006 |
$ | 374 | $ | 530 | $ | | $ | 904 | ||||||||
Restructuring and other charges (credits), net |
(38 | ) | (16 | ) | | (54 | ) | |||||||||
Cash payments |
(28 | ) | (514 | ) | | (542 | ) | |||||||||
Balance at September 30, 2007 |
308 | | | 308 | ||||||||||||
Restructuring and other charges (credits), net |
4,231 | 1,397 | 1,393 | 7,021 | ||||||||||||
Non-cash adjustment |
| (10 | ) | | (10 | ) | ||||||||||
Cash payments |
(4,173 | ) | (628 | ) | | (4,801 | ) | |||||||||
Balance at September 30, 2008 |
366 | 759 | 1,393 | 2,518 | ||||||||||||
Restructuring and other charges (credits), net |
5,283 | 95 | 31 | 5,409 | ||||||||||||
Non-cash adjustment |
| | | | ||||||||||||
Cash payments |
(5,042 | ) | (544 | ) | (1,396 | ) | (6,982 | ) | ||||||||
Balance at September 30, 2009 |
$ | 607 | $ | 310 | $ | 28 | $ | 945 | ||||||||
16. Supplemental Cash Flow Information
Cash paid for Interest and Income Taxes:
During fiscal 2009, 2008 and 2007, we made cash payments for interest totaling $33.9 million,
$50.0 million and $31.4 million, respectively.
During fiscal 2009, 2008 and 2007, total net cash paid for income taxes were $18.0 million,
$5.6 million and $3.5 million, respectively.
Non Cash Investing and Financing Activities:
During fiscal 2009, 2008 and 2007, we issued shares of our common stock in connection with
several of our business and asset acquisitions, including shares initially held in escrow. Note 3
details the shares of our common stock, including per share prices thereof, issued in fiscal 2009,
2008, and 2007 to complete each of our business acquisitions during those years. Note 6 details the
same
63
information with regard to our fiscal 2009 intangible asset acquisitions. We did not complete
any significant asset acquisitions in fiscal 2008 or 2007.
17. Stockholders Equity
Preferred Stock
We are authorized to issue up to 40,000,000 shares of preferred stock, par value $0.001 per
share. We have designated 100,000 shares as Series A Preferred Stock and 15,000,000 shares as
Series B Preferred Stock. In connection with the acquisition of ScanSoft from Xerox Corporation
(Xerox), we issued 3,562,238 shares of Series B Preferred Stock to Xerox. On March 19, 2004, we
announced that Warburg Pincus, a global private equity firm, had agreed to purchase all outstanding
shares of our stock held by Xerox Corporation for approximately $80 million, including the
3,562,238 shares of Series B Preferred Stock. The Series B Preferred Stock is convertible into
shares of common stock on a one-for-one basis. The Series B Preferred Stock 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. 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. We have reserved 3,562,238 shares of our common
stock for issuance upon conversion of the Series B Preferred Stock. Other than the 3,562,238 shares
of Series B Preferred Stock that are issued and outstanding, there are no other shares of preferred
stock issued or outstanding as of September 30, 2009 or September 30, 2008.
Common Stock and Common Stock Warrants
Underwritten Public Offerings in Fiscal 2008
On June 4, 2008, we completed an underwritten public offering in which we sold 5,575,000
shares of our common stock. Gross proceeds were $100.1 million, and the net proceeds after
underwriting commissions and other offering expenses were $99.8 million.
On December 21, 2007, we completed an underwritten public offering in which we sold 7,823,000
shares of our common stock. Gross proceeds from this sale were $136.9 million, and the net proceeds
after underwriting commissions and other offering expenses were $130.3 million.
Private Placements of Securities
On January 13, 2009, we entered into a purchase agreement by and among us, Warburg Pincus
Private Equity X, L.P. and Warburg Pincus X Partners L.P. (together, Warburg Pincus X), pursuant
to which Warburg Pincus X agreed to purchase, and we agreed to sell, 17,395,626 shares of our
common stock at a purchase price of $10.06 per share and warrants to purchase 3,862,422 shares of
our common stock for an aggregate purchase price of $175.2 million. The warrants have an exercise
price of $11.57 and a term of four years. On January 29, 2009, the sale of the shares and the
warrants pursuant to the purchase agreement was completed.
On May 20, 2008, in connection with our acquisition of eScription, we sold 5,760,369 shares of
our common stock for a purchase price of $100.0 million, and warrants to purchase 3,700,000 shares
of our common stock for a purchase price of $0.5 million, pursuant to the terms of a purchase
agreement dated April 7, 2008 with Warburg Pincus Private Equity VIII, L.P. and certain of its
affiliated entities (collectively Warburg Pincus) (the Purchase Agreement). The warrants have
an exercise price of $20.00 per share and a term of four years. Warburg Pincus also agreed not to
sell any shares of our common stock for a period of six months from the closing of the transaction
contemplated by the Purchase Agreement.
64
On May 5, 2005, we entered into a Securities Purchase Agreement (the Securities Purchase
Agreement) with Warburg Pincus pursuant to which Warburg Pincus agreed to purchase, and we agreed
to sell, 3,537,736 shares of our common stock and warrants to purchase 863,236 shares of our common
stock for an aggregate purchase price of $15.1 million. The warrants have an exercise price of
$5.00 per share and a term of four years. On May 9, 2005, the sale of the shares and the warrants
pursuant to the Securities Purchase Agreement was completed, and on July 29, 2009, Warburg Pincus
exercised all 863,236 of the above-described warrants at the stated exercise price. We also entered
into a Stock Purchase Agreement (the Stock Purchase Agreement) with Warburg Pincus pursuant to
which Warburg Pincus agreed to purchase and we agreed to sell 14,150,943 shares of our common stock
and warrants to purchase 3,177,570 shares of our common stock for an aggregate purchase price of
$60.0 million. The warrants have an exercise price of $5.00 per share and a term of four years. The
warrants provide the holder with the option to exercise the warrants on a net, or cashless, basis.
On September 15, 2005, the sale of the shares and the warrants pursuant to the Stock Purchase
Agreement was completed. The net proceeds from these two fiscal 2005 financings were $73.9 million.
On September 15, 2009, Warburg Pincus exercised all 3,177,570 of the above-described warrants at
the stated exercise price. As a result of the exercise of these warrants and the 863,236 warrants
described above, we issued an aggregate 4,566,538 shares of our common stock to Warburg Pincus
during our fiscal fourth quarter 2009.
In connection with the fiscal 2005 and fiscal 2008 offerings, we granted Warburg Pincus
registration rights giving them the right to request that we use commercially reasonable efforts to
register some or all of the shares of common stock issued to them under each of the Securities
Purchase Agreement, Stock Purchase Agreement and Purchase Agreement, including shares of common
stock underlying the warrants.
Other Common Stock Warrant Activity
On November 15, 2004, in connection with the acquisition of Phonetic, we issued unvested
warrants to purchase 750,000 shares of our common stock at an exercise price of $4.46 per share
that were to vest, if at all, upon the achievement of certain performance targets. Based on our
assessment of the results relative to the financial and performance measures, these warrants to
purchase shares of our common stock have not vested and will not vest. The former shareholders of
Phonetic have objected to this determination and have filed for arbitration.
In March 1999, we issued Xerox a ten-year warrant with an exercise price of $0.61 per share.
This warrant is exercisable for the purchase of 525,732 shares of our common stock. On March 19,
2004, we announced that Warburg Pincus had agreed to purchase all outstanding shares of our stock
held by Xerox Corporation, including this warrant, for approximately $80.0 million. In connection
with this transaction, Warburg Pincus acquired new warrants to purchase 2.5 million additional
shares of our common stock for total consideration of $0.6 million. The warrants have a six-year
life and an exercise price of $4.94 per share. The warrants provide the holder with the option to
exercise the warrants on a net, or cashless, basis
In connection with the acquisition of SpeechWorks in 2003, we issued a warrant to our
investment banker, expiring on August 11, 2011, for the purchase of 150,000 shares of our common
stock at an exercise price of $3.98 per share. The warrant provides the holder with the option to
exercise the warrants on a net, or cashless, basis. The warrant became exercisable on August 11,
2005, and was valued at its issuance at $0.2 million based upon the Black-Scholes option pricing
model. In October 2006, the warrant was exercised to purchase 125,620 shares of our common stock.
The holder of the warrant elected a cashless exercise resulting in a net issuance of 75,623 shares
of our common stock. As of September 30, 2009, a warrant to purchase 12,190 shares of our common
stock remains outstanding.
We have determined that all of our common stock warrants should be classified within the
stockholders equity section of the accompanying consolidated balance sheets based on the
conclusion that the above-noted warrants are indexed to our common stock and are exercisable only
into our common stock.
65
18. Stock-Based Compensation
We recognize stock-based compensation expense over the requisite service period. Our
share-based awards are accounted for as equity instruments. The amounts included in the
consolidated statements of operations relating to stock-based compensation are as follows (dollars
in thousands):
2009 | 2008 | 2007 | ||||||||||
Cost of product and licensing |
$ | 11 | $ | 18 | $ | 18 | ||||||
Cost of professional services, subscription and hosting |
9,889 | 7,991 | 3,816 | |||||||||
Cost of maintenance and support |
743 | 1,278 | 966 | |||||||||
Research and development |
9,840 | 14,325 | 7,160 | |||||||||
Selling and marketing |
27,057 | 24,394 | 20,293 | |||||||||
General and administrative |
23,867 | 20,625 | 15,882 | |||||||||
$ | 71,407 | $ | 68,631 | $ | 48,135 | |||||||
Stock Options
We have share-based award plans under which employees, officers and directors may be granted
stock options to purchase our common stock, generally at fair market value. During fiscal 2008 and
2009, stock options have been primarily granted to senior management and officers of the Company.
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 plans adopted by the Company become exercisable over
various periods, typically 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.
The table below summarizes activity relating to stock options for the years ended September
30, 2009, 2008 and 2007:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Shares | Price | Term | Value(1) | |||||||||||||
Outstanding at October 1, 2006 |
20,654,083 | $ | 4.80 | |||||||||||||
Assumed from BeVocal and VoiceSignal |
795,994 | $ | 4.14 | |||||||||||||
Granted |
3,183,450 | $ | 14.14 | |||||||||||||
Exercised |
(5,742,274 | ) | $ | 4.32 | ||||||||||||
Forfeited |
(555,724 | ) | $ | 7.57 | ||||||||||||
Expired |
(94,807 | ) | $ | 3.23 | ||||||||||||
Outstanding at September 30, 2007 |
18,240,722 | $ | 6.48 | |||||||||||||
Assumed from eScription |
2,846,118 | $ | 4.35 | |||||||||||||
Granted |
636,440 | $ | 15.45 | |||||||||||||
Exercised |
(5,861,906 | ) | $ | 3.19 | ||||||||||||
Forfeited |
(813,972 | ) | $ | 11.18 | ||||||||||||
Expired |
(50,888 | ) | $ | 6.89 | ||||||||||||
Outstanding at September 30, 2008 |
14,996,514 | $ | 7.47 | |||||||||||||
Assumed from SNAPin |
1,258,708 | $ | 3.48 | |||||||||||||
Granted |
1,092,000 | $ | 12.07 | |||||||||||||
Exercised |
(2,570,999 | ) | $ | 3.92 | ||||||||||||
Forfeited |
(987,399 | ) | $ | 15.44 | ||||||||||||
Expired |
(234,958 | ) | $ | 12.67 | ||||||||||||
Outstanding at September 30, 2009 |
13,553,866 | $ | 7.48 | 3.9 years | $ | 104.3 million | ||||||||||
Exercisable at September 30, 2009 |
10,575,346 | $ | 6.22 | 3.3 years | $ | 94.0 million | ||||||||||
Exercisable at September 30, 2008 |
10,473,073 | |||||||||||||||
Exercisable at September 30, 2007 |
11,017,997 | |||||||||||||||
(1) | The aggregate intrinsic value on this table was calculated based on the positive difference, if any, between the closing market value of our common stock on September 30, 2009 ($14.96) and the exercise price of the underlying options. |
66
As of September 30, 2009, the total unamortized fair value of stock options was $22.8 million
with a weighted average remaining recognition period of 1.4 years. A summary of weighted-average
grant-date (including assumed options) fair value and intrinsic value of stock options exercised is
as follows:
2009 | 2008 | 2007 | ||||||||||
Weighted-average grant-date fair value per share |
$ | 8.0 | $ | 14.8 | $ | 7.7 | ||||||
Total intrinsic value of stock options exercised (in millions) |
$ | 21.0 | $ | 89.6 | $ | 62.9 |
We use the Black-Scholes option pricing model to calculate the grant-date fair value of an
award. The fair value of the stock options granted and unvested options assumed from acquisitions
were calculated using the following weighted-average assumptions:
2009 | 2008 | 2007 | ||||||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Expected volatility |
55.1 | % | 53.9 | % | 49.7 | % | ||||||
Average risk-free interest rate |
2.7 | % | 3.3 | % | 4.6 | % | ||||||
Expected term (in years) |
5.8 | 5.5 | 3.9 |
The dividend yield of zero is based on the fact that we have never paid cash dividends and
have no present intention to pay cash dividends. Expected volatility is based on the historical
volatility of our common stock over the period commensurate with the expected life of the options
and the historical implied volatility from traded options with a term of 180 days or greater. The
risk-free interest rate is derived from the average U.S. Treasury STRIPS rate during the period,
which approximates the rate in effect at the time of grant, commensurate with the expected life of
the instrument. We estimate the expected term of options granted based on historical exercise
behavior.
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. The Restricted Awards generally
are subject to vesting over a period of two to four years, and may have opportunities for
acceleration for achievement of defined goals. 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 the Company
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 the Company.
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:
Number of Shares | ||||||||
Number of Shares | Underlying | |||||||
Underlying | Restricted Units | |||||||
Restricted Units | Time-Based | |||||||
Contingent Awards | Awards | |||||||
Outstanding at October 1, 2006 |
21,055 | 2,728,999 | ||||||
Granted |
813,000 | 4,662,923 | ||||||
Earned/released |
(1,000 | ) | (942,569 | ) | ||||
Forfeited |
(103,638 | ) | (369,970 | ) | ||||
Outstanding at September 30, 2007 |
729,417 | 6,079,383 | ||||||
Assumed in acquisition of eScription |
367,253 | 438,791 | ||||||
Granted |
1,543,365 | 3,812,617 | ||||||
Earned/released |
(199,208 | ) | (2,866,528 | ) | ||||
Forfeited |
(26,303 | ) | (606,739 | ) | ||||
Outstanding at September 30, 2008 |
2,414,524 | 6,857,524 | ||||||
Assumed in acquisition of SNAPin |
| 299,446 | ||||||
Granted |
1,292,617 | 5,392,361 | ||||||
Earned/released |
(291,450 | ) | (2,865,505 | ) | ||||
Forfeited |
(575,018 | ) | (928,496 | ) | ||||
Outstanding at September 30, 2009 |
2,840,673 | 8,755,330 | ||||||
67
Number of Shares | ||||||||
Number of Shares | Underlying | |||||||
Underlying | Restricted Units | |||||||
Restricted Units | Time-Based | |||||||
Contingent Awards | Awards | |||||||
Weighted average remaining contractual term of outstanding Restricted Units |
1.0 years | 1.3 years | ||||||
Aggregate intrinsic value of outstanding Restricted Units(1) |
$ | 42.5 million | $ | 131.0 million | ||||
Restricted Units vested and expected to vest |
2,338,422 | 7,521,997 | ||||||
Weighted average remaining contractual term of Restricted Units vested and expected to
vest |
1.0 years | 1.2 years | ||||||
Aggregate intrinsic value of Restricted Units vested and expected to vest(1) |
$ | 35.0 million | $ | 112.5 million |
(1) | The aggregate intrinsic value on this table was calculated based on the positive difference between the closing market value of our common stock on September 30, 2009 ($14.96) and the exercise price of the underlying Restricted Units. |
The purchase price for vested Restricted Units is $0.001 per share. As of September 30, 2009,
unearned stock-based compensation expense related to all unvested Restricted Units is $123.2
million, which will, based on expectations of future performance vesting criteria, where
applicable, be recognized over a weighted-average period of 1.8 years.
A summary of weighted-average grant-date fair value, including those assumed in respective
periods, and intrinsic value of all Restricted Units vested is as follows:
2009 | 2008 | 2007 | ||||||||||
Weighted-average grant-date fair value per share |
$ | 11.39 | $ | 18.01 | $ | 14.73 | ||||||
Total intrinsic value of shares vested (in millions) |
$ | 33.25 | $ | 55.50 | $ | 13.40 |
Restricted Stock is included in the issued and outstanding common stock in these financial
statements at date of grant. The table below summarizes activity relating to Restricted Stock:
Number of | ||||||||
Shares | Weighted | |||||||
Underlying | Average Grant | |||||||
Restricted | Date Fair | |||||||
Stock | Value | |||||||
Outstanding at October 1, 2006 |
1,547,341 | $ | 5.93 | |||||
Granted |
17,421 | $ | 8.75 | |||||
Vested |
(368,860 | ) | $ | 5.29 | ||||
Forfeited |
| $ | | |||||
Outstanding at September 30, 2007 |
1,195,902 | $ | 6.17 | |||||
Granted |
250,000 | $ | 15.89 | |||||
Vested |
(820,832 | ) | $ | 5.53 | ||||
Forfeited |
| $ | | |||||
Outstanding at September 30, 2008 |
625,070 | $ | 10.90 | |||||
Granted |
| $ | | |||||
Vested |
(625,070 | ) | $ | 10.90 | ||||
Forfeited |
| $ | | |||||
Outstanding at September 30, 2009 |
| $ | | |||||
The purchase price for vested Restricted Stock is $0.001 per share. As of September 30, 2009,
there is no unearned stock-based compensation expense related to unvested Restricted Stock. A
summary of weighted-average grant-date fair value and intrinsic value of Restricted Stock vested
are as follows:
2009 | 2008 | 2007 | ||||||||||
Weighted-average grant-date fair value per share |
N/A | $ | 15.89 | $ | 8.75 | |||||||
Total intrinsic value of shares vested (in millions) |
$ | 8.65 | $ | 16.85 | $ | 5.60 |
In order to satisfy our employees withholding tax liability as a result of the vesting of
Restricted Stock, we have historically repurchased shares upon the employees vesting. Similarly,
in order to satisfy our employees withholding tax liability as a result of the release of our
employees Restricted Units, we have historically cancelled a portion of the common stock upon the
release. In fiscal 2009, we paid cash of $10.4 million relating to 0.9 million shares of common
stock that were repurchased or cancelled. Based on our estimate of the Restricted Awards that will
vest, or be released, in fiscal 2010, and further assuming that one-third of these Restricted
Awards would be repurchased or cancelled to satisfy the employees withholding tax liability (such
amount approximating the tax rate of our employees), we would have an obligation to pay cash
relating to approximately 1.8 million shares during fiscal 2010.
68
1995 Employee Stock Purchase Plan
Our 1995 Employee Stock Purchase Plan (the Plan), as amended and restated on April 21, 2008,
authorizes the issuance of a maximum of 6,000,000 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, 2009, 1,565,127 shares were
reserved for future issuance. During fiscal 2009, 2008, and 2007, we issued 1,153,805, 651,121 and
640,777 shares of common stock under this plan, respectively. The weighted average fair value of
all purchase rights granted in fiscal 2009, 2008 and 2007, were $3.49, $5.09 and $4.51. Stock-based
compensation expense related to the employee stock purchase plan was $3.7 million, $3.4 million and
$2.2 million for the fiscal years ended 2009, 2008 and 2007, respectively.
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:
2009 | 2008 | 2007 | ||||||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Expected volatility |
62.1 | % | 53.1 | % | 44.7 | % | ||||||
Average risk-free interest rate |
0.3 | % | 2.1 | % | 4.7 | % | ||||||
Expected term (in years) |
0.5 | 0.5 | 0.5 |
19. Commitments and Contingencies
Operating Leases
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 certain office locations that were vacated by certain of the acquired companies
prior to the acquisition date (Note 14). Additionally, certain of our lease obligations have been
included in various restructuring charges (Note 15). The following table outlines our gross future
minimum payments under all non-cancelable operating leases as of September 30, 2009 (in thousands):
Operating | Leases Under | Other Contractual | ||||||||||||||
Year Ending September 30, | Leases | Restructuring | Obligations Assumed | Total | ||||||||||||
2010 |
$ | 18,448 | $ | 4,196 | $ | 13,547 | $ | 36,191 | ||||||||
2011 |
17,185 | 2,647 | 13,965 | 33,797 | ||||||||||||
2012 |
15,880 | 1,352 | 12,314 | 29,546 | ||||||||||||
2013 |
14,874 | 408 | 2,323 | 17,605 | ||||||||||||
2014 |
12,631 | | 2,326 | 14,957 | ||||||||||||
Thereafter |
39,225 | | 3,294 | 42,519 | ||||||||||||
Total |
$ | 118,243 | $ | 8,603 | $ | 47,769 | $ | 174,615 | ||||||||
At September 30, 2009, we have subleased certain office space that is included in the above
table to third parties. Total sublease income under contractual terms is $17.5 million and ranges
from approximately $1.5 million to $4.4 million on an annual basis through February 2016.
Total rent expense charged to operations was approximately $19.6 million, $15.2 million and
$9.3 million for the years ended September 30, 2009, 2008 and 2007, respectively.
Litigation and Other Claims
Like many companies in the software industry, we have, from time to time been notified of
claims that we may be infringing, or contributing to the infringement of, the intellectual property
rights of others. These claims have been referred to counsel, and they are in various stages of
evaluation and negotiation. If it appears necessary or desirable, we may seek licenses for these
intellectual property rights. There is no assurance that licenses will be offered by all claimants,
that the terms of any offered licenses will be
69
acceptable to us or that in all cases the dispute will be resolved without litigation, which
may be time consuming and expensive, and may result in injunctive relief or the payment of damages
by us.
In August 2001, the first of a number of complaints was filed in the United States District
Court for the Southern District of New York, on behalf of a purported class of persons who
purchased stock of Former Nuance, which we acquired in September 2005, between April 12, 2000 and
December 6, 2000. Those complaints have been consolidated into one action. The complaint generally
alleges that various investment bank underwriters engaged in improper and undisclosed activities
related to the allocation of shares in Former Nuances initial public offering of securities. The
complaint makes claims for violation of several provisions of the federal securities laws against
those underwriters, and also against Former Nuance and some of the Former Nuances directors and
officers. Similar lawsuits, concerning more than 250 other companies initial public offerings,
were filed in 2001. In February 2003, the Court denied a motion to dismiss with respect to the
claims against Former Nuance. In the third quarter of 2003, a proposed settlement in principle was
reached among the plaintiffs, the issuer defendants (including Former Nuance) and the issuers
insurance carriers. The settlement called for the dismissal and release of claims against the
issuer defendants, including Former Nuance, in exchange for a contingent payment to be paid, if
necessary, by the issuer defendants insurance carriers and an assignment of certain claims. The
settlement was not expected to have any material impact, as payments, if any, were expected to be
made by insurance carriers, rather than by us. On December 5, 2006, the Court of Appeals for the
Second Circuit reversed the Courts order certifying a class in several test cases that had been
selected by the underwriter defendants and plaintiffs in the coordinated proceeding. The plaintiffs
petitioned the Second Circuit for rehearing of the Second Circuits decision, however, on April 6,
2007, the Second Circuit denied the petition for rehearing. At a status conference on April 23,
2007, the district court suggested that the issuers settlement could not be approved in its
present form, given the Second Circuits ruling. On June 25, 2007 the district court issued an
order terminating the settlement agreement. The plaintiffs in the case have since filed amended
master allegations and amended complaints. On March 26, 2008, the Court largely denied the
defendants motion to dismiss the amended complaints. On April 2, 2009, the plaintiffs filed a
motion for preliminary approval of a new proposed settlement between plaintiffs, the underwriter
defendants, the issuer defendants and the insurers for the issuer defendants. Under the settlement,
which remains subject to Court approval, the insurers would pay the full amount of the settlement
attributable to Former Nuance, and Former Nuance would not bear any financial liability. The Court
issued an order granting preliminary approval of the settlement, dated June 9, 2009, and a hearing
on final approval of the settlement was held on September 10, 2009. On October 5, 2009, the court
issued an opinion granting plaintiffs motion for final approval of the settlement, approval of the
plan of distribution of the settlement fund and certification of the settlement classes. On October
20, 2009, a petition for permission to appeal the courts October 5, 2009 certification of the
settlement classes was filed in the United States Court of Appeals for the Second Circuit. Due to
the inherent uncertainties of litigation, we are unable to determine the ultimate outcome or
potential range of loss, if any.
Vianix LLC has filed three legal actions against us, consisting of two breach of contract
actions and a copyright infringement claim. It is too early for us to reach a conclusion as to the
ultimate outcome or proposed settlement of these actions or to estimate the potential loss that
could result from a settlement or adverse judgment against us in these matters. However, we believe
that we have substantial defenses against these claims, and intend to defend them vigorously.
We do not believe that the final outcome of the above litigation matters will have a material
adverse effect on our financial position and results of operations. However, even if our defense is
successful, the litigation could require significant management time and will be costly. Should we
not prevail, our operating results, financial position and cash flows could be adversely impacted.
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.
We indemnify our directors and officers to the fullest extent permitted by law. These
agreements, among other things, indemnify 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
have agreed to indemnify the former officers and members of the boards of directors of those
companies, on similar terms as described above, for a 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
70
six year periods. To the extent that we do not purchase a director and officer insurance
policy for the full period of any contractual indemnification, we would be required to pay for
costs incurred, if any, as described above.
At September 30, 2009, we have $1.9 million of non-cancelable purchase commitments for
inventory to fulfill customers orders currently scheduled in our backlog.
20. Pension and Other Post-Retirement Benefits
Defined Contribution Plan
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. Effective July 1, 2003, Company match of employees contributions
was established. We match 50% of employee contributions up to 4% of eligible salary. Employees who
were hired prior to April 1, 2004 were 100% vested into the plan as soon as they started to
contribute to the plan. Employees hired April 1, 2004 and thereafter, vest one-third of the
contribution annually over a three-year period. Our contributions to the 401(k) Plan totaled $3.2
million, $2.9 million and $1.8 million for fiscal 2009, 2008 and 2007, respectively.
Defined Benefit Pension Plans
In accordance with the provisions set forth in ASC 715, we recognized the funded status, which
is the difference between the fair value of plan assets and the projected benefit obligations, of
our postretirement benefit plans in the consolidated balance sheets with a corresponding adjustment
to accumulated other comprehensive loss, net of tax. The adjustment to accumulated other
comprehensive loss at adoption represents the net unrecognized actuarial losses and unrecognized
prior service costs, both of which were previously netted against the plans funded status in our
consolidated balance sheet pursuant to the provisions of SFAS No. 87, Employers Accounting for
Pensions, also now included, as amended, within ASC 715. These amounts will be subsequently
recognized as net periodic pension expense.
We assumed the assets and obligations related to certain significant defined benefit pension
plans in connection with our acquisition of Dictaphone, which provide certain retirement and death
benefits for former Dictaphone employees located in the United Kingdom and Canada. These two
pension plans are closed to new participants.
The following table shows the changes in fiscal 2009 and 2008 in the projected benefit
obligation, plan assets and funded status of the defined benefit pension plans (in thousands):
Pension Benefits | ||||||||
2009 | 2008 | |||||||
Change in Benefit Obligations: |
||||||||
Benefit obligation at beginning of period |
$ | 22,408 | $ | 23,741 | ||||
Service cost |
| | ||||||
Interest cost |
1,179 | 1,275 | ||||||
Plan participants contributions |
| | ||||||
Curtailments |
| | ||||||
Actuarial loss (gain) |
2,752 | 1,245 | ||||||
Expenses paid |
| (4 | ) | |||||
Currency exchange rate changes |
(2,456 | ) | (2,545 | ) | ||||
Benefits paid |
(1,033 | ) | (1,304 | ) | ||||
Benefit obligation at end of period |
22,850 | 22,408 | ||||||
Change in Plan Assets: |
||||||||
Fair value of plan assets, beginning of period |
18,397 | 23,366 | ||||||
Actual return on plan assets |
1,121 | (3,021 | ) | |||||
Employer contribution |
958 | 1,371 | ||||||
Plan participants contribution |
| | ||||||
Expenses paid |
| (4 | ) | |||||
Currency exchange rate changes |
(1,894 | ) | (2,011 | ) | ||||
Benefits paid |
(1,033 | ) | (1,304 | ) | ||||
Fair value of plan assets, end of period |
17,549 | 18,397 | ||||||
Funded status at end of period |
$ | (5,301 | ) | $ | (4,011 | ) | ||
71
The amounts recognized in our consolidated balance sheets consisted of the following (in
thousands):
Pension Benefits | ||||||||
2009 | 2008 | |||||||
Other assets |
$ | 1,124 | $ | 1,958 | ||||
Current liabilities |
| | ||||||
Other liabilities |
(6,425 | ) | (5,969 | ) | ||||
Net liability recognized |
$ | (5,301 | ) | $ | (4,011 | ) | ||
The amounts recognized in accumulated other comprehensive loss as of September 30, 2009
consisted of the following (in thousands):
Pension Benefits | ||||
Prior service cost |
$ | | ||
Actuarial gain (loss) |
(4,953 | ) | ||
Total amount recognized in accumulated other comprehensive loss |
$ | (4,953 | ) | |
The following represents the amounts included in accumulated other comprehensive loss on the
consolidated balance sheet as of September 30, 2009, that we expect to recognize in earnings during
fiscal 2010 (in thousands):
Pension Benefits | ||||
Prior service cost |
$ | | ||
Actuarial gain (loss) |
(404 | ) |
The projected benefit obligations for the two defined benefit pension plans was $22.8 million
at September 30, 2009.
Included in the table below are the amounts relating to our UK pension plans, which have
accumulated benefit obligations and projected benefit obligations in excess of plan assets (in
thousands):
Pension Benefits | ||||||||
2009 | 2008 | |||||||
Aggregate projected benefit obligations |
$ | 19,967 | $ | 19,426 | ||||
Aggregate accumulated benefit obligations |
19,967 | 19,426 | ||||||
Aggregate fair value of plan assets |
13,542 | 13,456 |
The components of net periodic benefit cost of the pension plans were as follows (in
thousands):
Pension Benefits | ||||||||
2009 | 2008 | |||||||
Service cost |
$ | | $ | | ||||
Interest cost |
1,179 | 1,275 | ||||||
Expected return on plan assets |
(1,058 | ) | (1,596 | ) | ||||
Amortization of unrecognized gain (loss) |
47 | (103 | ) | |||||
Net periodic pension cost |
$ | 168 | $ | (424 | ) | |||
Plan Assumptions:
Weighted-average assumptions used in developing the benefit obligations and net periodic
benefit cost for the pension plans were as follows:
Pension Benefits | ||||||||
2009 | 2008 | |||||||
Discount rate |
6.1 | % | 6.2 | % | ||||
Average compensation increase |
N/A | (1) | N/A | (1) | ||||
Expected rate of return on plan assets |
6.7 | % | 7.0 | % |
(1) | Rate of compensation increase is not applicable as there are no active members in the plan. |
72
We considered several factors when developing the expected return on plan assets, including
reviewing analysis of returns relevant to the country where each plan is in effect, historical
rates of return from investments, local actuarial projections and market outlook from investment
managers. The expected rate of return disclosed above is the weighted average of each countrys
expected return on plan assets.
Assets Allocation and Investment Strategy:
The percentages of the fair value of pension plan assets actually allocated and targeted for
allocation, by asset category, at September 30, 2009 and September 30, 2008, were as follows:
Actual | Target | |||||||||||||||
Asset Category | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Equity securities |
62 | % | 59 | % | 58 | % | 57 | % | ||||||||
Debt securities |
38 | % | 41 | % | 42 | % | 43 | % | ||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Our investment goal for pension plan assets is designed to provide as much assurance as is
possible, in our opinion, that the pension assets are available to pay benefits as they come due
and minimize market risk. The expected long-term rate of return for the plan assets is 6.7% for the
UK pension plan and for the Canadian pension plan.
Employer Contributions:
We expect to contribute $1.4 million to our pension plans in fiscal 2010. Included in this
contribution is a minimum funding requirement associated with our UK pension which requires an
annual minimum payment of £859,900 (approximately $1.4 million based on the exchange rate at
September 30, 2009) for each year through fiscal 2014.
Estimated Future Benefit Payments:
The following benefit payments, which reflect expected future service, as appropriate, are
expected to be paid (in thousands):
Year Ending September 30, | Pension Benefits | |||
2010 |
$ | 1,095 | ||
2011 |
1,145 | |||
2012 |
1,168 | |||
2013 |
1,192 | |||
2014 |
1,238 | |||
Thereafter |
6,018 | |||
Total |
$ | 11,856 | ||
21. Income Taxes
The components of income (loss) before income taxes are as follows (in thousands):
Year Ended September 30, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Domestic |
$ | (1,549 | ) | $ | (30,434 | ) | $ | (2,729 | ) | |||
Foreign |
22,553 | 8,028 | 10,375 | |||||||||
Income (loss) before income taxes |
$ | 21,004 | $ | (22,406 | ) | $ | 7,646 | |||||
The components of the income tax provision (benefit) are as follows (in thousands):
Year Ended September 30, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 1,119 | $ | 1,048 | $ | 1,849 | ||||||
State |
5,439 | 10,782 | 3,880 | |||||||||
Foreign |
8,115 | 2,233 | 2,705 | |||||||||
14,673 | 14,063 | 8,434 | ||||||||||
Deferred: |
73
Year Ended September 30, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Federal |
14,952 | 20,177 | 11,421 | |||||||||
State |
12,740 | (20,796 | ) | 1,036 | ||||||||
Foreign |
(1,974 | ) | 1,110 | 1,611 | ||||||||
25,718 | 491 | 14,068 | ||||||||||
Provision for income taxes |
$ | 40,391 | $ | 14,554 | $ | 22,502 | ||||||
A reconciliation of our effective tax rate to the statutory federal rate is as follows:
2009 | 2008 | 2007 | ||||||||||
Federal statutory tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Stock-based compensation |
17.5 | (30.1 | ) | 35.1 | ||||||||
Foreign taxes |
(6.2 | ) | (13.8 | ) | 9.7 | |||||||
Foreign benefit refundable credits |
| 24.9 | | |||||||||
State tax, net of federal benefit |
25.3 | (48.2 | ) | 58.0 | ||||||||
State tax law enactment, net of federal benefit |
39.9 | 131.6 | | |||||||||
Nondeductible expenditures |
8.8 | (9.3 | ) | 6.0 | ||||||||
Change in valuation allowance |
62.5 | (163.4 | ) | 133.1 | ||||||||
Executive compensation |
7.6 | (1.1 | ) | 20.7 | ||||||||
Federal credits, net |
| 6.3 | (6.4 | ) | ||||||||
Other |
1.9 | 3.1 | 3.1 | |||||||||
Effective income tax rate |
192.3 | % | (65.0 | )% | 294.3 | % | ||||||
During fiscal 2009, the tax provision includes a charge of $8.0 million related to the
Companys election to treat the eScription acquisition as an asset purchase. Also included in the
fiscal 2009 tax provision is a charge of $3.2 million as a result of the Massachusetts state tax
law enactment relating to the utilization of net operating losses.
During fiscal 2008, a tax benefit of $20.4 million was recorded when the tax law in
Massachusetts was changed which reduced the tax rate that certain deferred tax liabilities would be
taxed at when reported in the tax provision in the future. Included in this benefit is $8.0 million
related to the treatment of the eScription acquisition as a stock purchase, which the Company
subsequently elected to treat as an asset purchase in 2009, as noted above.
The cumulative amount of undistributed earnings of our foreign subsidiaries amounted to $54.1
million at September 30, 2009. We have not provided any additional federal or state income taxes or
foreign withholding taxes on the undistributed earnings, as such earnings have been indefinitely
reinvested in the business. An estimate of the tax consequences from the repatriation of these
earnings is not practicable at this time resulting from the complexities of the utilization of
foreign tax credits and other tax assets.
Deferred tax assets (liabilities) consist of the following at September 30, 2009 and 2008 (in
thousands):
2009 | 2008 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
$ | 225,660 | $ | 194,547 | ||||
Federal and state credit carryforwards |
19,241 | 12,600 | ||||||
Capitalized development costs |
26,351 | 23,302 | ||||||
Accrued expenses and other reserves |
51,315 | 75,079 | ||||||
Deferred revenue |
14,490 | 13,576 | ||||||
Deferred compensation |
18,335 | 15,914 | ||||||
Depreciation |
2,955 | 2,988 | ||||||
Other |
8,712 | 10,054 | ||||||
Total deferred tax assets |
367,059 | 348,060 | ||||||
Valuation allowance for deferred tax assets |
(224,597 | ) | (165,150 | ) | ||||
Net deferred tax assets |
142,462 | 182,910 | ||||||
Deferred tax liabilities: |
||||||||
Convertible debt |
(15,131 | ) | (17,880 | ) | ||||
Acquired intangibles |
(180,148 | ) | (210,072 | ) | ||||
Net deferred tax liabilities |
$ | (52,817 | ) | $ | (45,042 | ) | ||
Reported as: |
||||||||
Current deferred tax assets(a) |
$ | 1,394 | $ | 1,703 | ||||
Long-term deferred tax assets(b) |
3,749 | | ||||||
Current deferred tax liabilities(c) |
(1,614 | ) | | |||||
Long-term deferred tax liability(d) |
(56,346 | ) | (46,745 | ) | ||||
Net deferred tax liabilities |
$ | (52,817 | ) | $ | (45,042 | ) | ||
74
(a) | Included in prepaid expenses and other current assets in the consolidated balance sheets. | |
(b) | Included in other assets in the consolidated balance sheets. | |
(c) | Included in accrued expenses and other current liabilities in the consolidated balance sheets. | |
(d) | Included in deferred tax liability in the consolidated balance sheets. |
As of September 30, 2009, our valuation allowance for U.S. net deferred tax assets totaled
$174.8 million, which consists of $138.2 million in beginning allowance, plus a $15.7 million
increase to income tax provision due to increases in net deferred tax assets in fiscal 2009 and a
$36.0 million increase in valuation allowance resulting from goodwill and acquisition related
adjustments. A portion of the deferred tax liabilities are created resulting from the different
treatment of goodwill for book and tax purposes which cannot offset deferred tax assets in
determining the valuation allowance.
As of September 30, 2009 and 2008, $164.3 million and $124.5 million, respectively, of our
valuation allowance is associated with tax assets arising from business combinations. When and if
any of this valuation allowance is released, it will be recorded as a benefit in the statement of
operations upon our adoption of ASC 805 on October 1, 2010.
At September 30, 2009 and 2008, we had U.S. federal net operating loss carryforwards of $600.6
million and $546.4 million, respectively, of which $186.7 million and $194.9 million, respectively,
relate to tax deductions from stock-based compensation. At September 30, 2009 and 2008, we had
state net operating loss carryforwards of $170.2 million and $133.5 million, respectively. At
September 30, 2009 and 2008, we had federal research and development carryforwards of $13.0 million
and $8.2 million, respectively. At September 30, 2009 and 2008, we had state research and
development credit carryforwards of $6.9 million and $7.1 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. These
carryforwards will expire at various dates beginning in 2009 and extending through 2028, if not
utilized.
Uncertain Tax Positions
Effective October 1, 2007, we adopted the provisions of FASB Interpretation No. 48 (FIN 48),
now referred to as ASC 740-10 and we began establishing reserves for tax uncertainties that reflect
the use of the comprehensive model for the recognition and measurement of uncertain tax positions.
Under the comprehensive model, reserves are established when we have determined that it is more
likely than not that a tax position will or will not be sustained and at the greatest amount for
which the result is more likely than not. As a result of the adoption of ASC 740-10, during fiscal
2008, we recognized an adjustment of $0.9 million in our liability for unrecognized tax benefits.
The aggregate changes in the balance of our gross unrecognized tax benefits were as follows:
September 30, | ||||||||
2009 | 2008 | |||||||
Balance, beginning of year |
$ | 2.7 | $ | 2.5 | ||||
Increases for tax positions taken during prior periods |
3.1 | | ||||||
Increases for interest charges |
0.5 | 0.2 | ||||||
Increases for acquisitions |
6.8 | | ||||||
Decreases for tax settlements |
(1.0 | ) | | |||||
Balance, at end of year |
$ | 12.1 | $ | 2.7 | ||||
As of September 30, 2009, $12.1 million of the unrecognized tax benefits, if recognized, would
affect 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 and had accrued $0.9 million of such interest and
penalties as of September 30, 2009.
We are subject to U.S. federal income tax, various state and local taxes, and international
income taxes in numerous jurisdictions. The federal, state and foreign tax returns are generally
subject to tax examinations for the tax years ended in 2005 through 2008.
75
22. Segment and Geographic Information and Significant Customers
We follow the provisions of SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information, now referred to as ASC 280, which establishes standards for reporting
information about operating segments. ASC 280 also established standards for disclosures about
products, services and geographic areas. Operating segments are defined as components of an
enterprise for which separate financial information is available and evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in assessing performance.
Our chief operating decision maker (CODM) is the Chief Executive Officer of the Company.
We have several customer-facing market groups that oversee the core markets where we conduct
business. Beginning in fiscal 2009, these groups were referred to as Mobile-Enterprise,
Healthcare-Dictation, and Imaging. Each of these market groups has a president who has direct
responsibility and oversight related to go-to-market strategies and plans, product management and
product marketing activities. These groups do not directly manage centralized or shared resources
or the allocation decisions regarding the activities related to these functions, which include
sales and sales operations, certain research and development initiatives, business development and
all general and administrative activities. Our CODM directly oversees each of the presidents, as
well as each of the functions that provide the shared and centralized activities noted above. To
manage the business, allocate resources and assess performance, the CODM primarily reviews revenue
data by market group, while reviewing gross margins, operating margins, and other measures of
income or loss on a consolidated basis. Thus, we have determined that we operate in one segment.
The following table presents revenue information for our three core markets (in thousands):
Fiscal | Fiscal | Fiscal | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Mobile-Enterprise |
$ | 462,316 | $ | 438,785 | $ | 246,762 | ||||||
Healthcare-Dictation |
418,373 | 349,744 | 281,290 | |||||||||
Imaging |
69,663 | 79,933 | 73,944 | |||||||||
Total Revenue |
$ | 950,352 | $ | 868,462 | $ | 601,996 | ||||||
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 (table in thousands):
2009 | 2008 | 2007 | ||||||||||
United States |
$ | 706,858 | $ | 669,239 | $ | 471,636 | ||||||
International |
243,494 | 199,223 | 130,360 | |||||||||
Total |
$ | 950,352 | $ | 868,462 | $ | 601,996 | ||||||
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
(table in thousands):
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
United States |
$ | 2,395,773 | $ | 2,065,926 | ||||
International |
307,864 | 264,810 | ||||||
Total |
$ | 2,703,637 | $ | 2,330,736 | ||||
23. Related Parties
A member of our Board of Directors is also a partner at Wilson Sonsini Goodrich & Rosati,
Professional Corporation, a law firm that provides professional services to us. These services may
from time-to-time include contingent fee arrangements. For fiscal 2009, 2008 and 2007, we paid $8.7
million, $13.1 million and $8.6 million, respectively, to Wilson Sonsini Goodrich & Rosati for
professional services. As of September 30, 2009 and 2008, we had $1.7 million and $2.6 million,
respectively, included in accounts payable and accrued expenses to Wilson Sonsini Goodrich &
Rosati.
Two members of our Board of Directors are employees of Warburg Pincus, a significant
shareholder. On January 29, 2009 and May 20, 2008, we consummated stock purchase agreements with
Warburg Pincus. See Note 17 for further information.
24. Quarterly Data (Unaudited)
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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 (in thousands, except per share amounts):
First | Second | Third | Fourth | |||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Year | ||||||||||||||||
2009 | ||||||||||||||||||||
Total revenue |
$ | 216,834 | $ | 229,145 | $ | 241,040 | $ | 263,333 | $ | 950,352 | ||||||||||
Gross margin |
$ | 134,534 | $ | 140,767 | $ | 147,081 | $ | 168,419 | $ | 590,801 | ||||||||||
Net income (loss) |
$ | (26,318 | ) | $ | 5,280 | $ | (2,815 | ) | $ | 4,466 | $ | (19,387 | ) | |||||||
Net income (loss) per share: |
||||||||||||||||||||
Basic |
$ | (0.11 | ) | $ | 0.02 | $ | (0.01 | ) | $ | 0.02 | $ | (0.08 | ) | |||||||
Diluted |
$ | (0.11 | ) | $ | 0.02 | $ | (0.01 | ) | $ | 0.02 | $ | (0.08 | ) | |||||||
Weighted average common shares outstanding: |
||||||||||||||||||||
Basic |
236,237 | 250,656 | 260,750 | 266,932 | 253,644 | |||||||||||||||
Diluted |
236,237 | 269,187 | 260,750 | 285,948 | 253,644 |
First | Second | Third | Fourth | |||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Year | ||||||||||||||||
2008 | ||||||||||||||||||||
Total revenue |
$ | 195,024 | $ | 203,302 | $ | 216,744 | $ | 253,392 | $ | 868,462 | ||||||||||
Gross margin |
$ | 126,183 | $ | 119,506 | $ | 137,859 | $ | 169,271 | $ | 552,819 | ||||||||||
Net income (loss) |
$ | (17,121 | ) | $ | (28,505 | ) | $ | (11,598 | ) | $ | 20,264 | $ | (36,960 | ) | ||||||
Net income (loss) per share: |
||||||||||||||||||||
Basic |
$ | (0.09 | ) | $ | (0.14 | ) | $ | (0.05 | ) | $ | 0.09 | $ | (0.18 | ) | ||||||
Diluted |
$ | (0.09 | ) | $ | (0.14 | ) | $ | (0.05 | ) | $ | 0.08 | $ | (0.18 | ) | ||||||
Weighted average common shares outstanding: |
||||||||||||||||||||
Basic |
194,528 | 206,348 | 213,683 | 224,568 | 209,801 | |||||||||||||||
Diluted |
194,528 | 206,348 | 213,683 | 246,525 | 209,801 |
25. Subsequent Events
Collaboration Agreement
On October 9, 2009, we entered into a five-year agreement with a third party to accelerate
the development of new speech technologies. All intellectual property derived from the
collaboration will be jointly-owned by the two parties and Nuance will have the sole rights to
commercialize the intellectual property during the term of the agreement. All sales related
thereto will be recorded as revenue by the selling party. In consideration for the services from
the third party in the collaboration efforts, as well as the joint ownership rights over
intellectual property developed under the arrangement and the exclusive right to commercialize
such developed intellectual property for the term of the arrangement, we will pay $80.0 million in
five equal payments of $16.0 million on August 15th of each year, payable in cash or
our common stock, at our option. These upfront payments will be recorded as a prepaid asset and
expensed ratably over each annual period, commensurate with the pattern in which we expect the
third party to perform its services and convey our rights under the arrangement. On October 14,
2009, we made our first payment under the arrangement consisting of 1,047,120 shares of our common
stock valued at $16.0 million.
On January 13, 2010, we amended the collaboration agreement to extend certain provisions
thereof for eighteen months following the termination of the agreement. In consideration for the
extension, we agreed to pay an additional $12.0 million to the third-party in five equal payments
of $2.4 million on August 15th of each year over the five-year agreement term, payable
in cash or our common stock, at our option, with the exception of the first of these additional
payments, which we expect to make during the second quarter of fiscal 2010. These upfront payments
will be recorded as a prepaid asset when made and expensed ratably over the eighteen-month
extension period.
Joint Sales and Marketing Agreement Update
We issued 879,567 shares of our common stock, valued at $13.0 million, in December 2009 as an
additional payment related to the joint sales and marketing agreement discussed in Note 6 upon the
third party meeting certain performance criteria under the agreement by October 31, 2009. This
payment was subject to a security price guarantee of the same nature as that described above
related to the collaboration agreement. The additional $13.0 million was capitalized and
classified in the same manner as the initial $7.0 million payment.
Escrow Release
The remaining 103,000 shares of our common stock held in escrow at September 30, 2009 related
to our acquisition of eScription, discussed in Note 5, were released to the former shareholders of
eScription on February 8, 2010.
Earn-out Resolution
In December 2009, we paid $11.3 million to the former shareholders of Phonetic in final
settlement of the contingent earn-out provisions discussed in Note 5; recording the amount paid as
additional purchase price related to the Phonetic acquisition. The 750,000 unvested common stock
warrants discussed in Note 17 attributable to the Phonetic contingent earn-out did not vest and
were cancelled as a result of the final settlement.
Acquisition of SpinVox
On December 30, 2009 we acquired all of the outstanding capital stock of SpinVox Limited
(SpinVox), a UK-based privately-held company engaged in the business of providing voice to text
services. The acquisition was a non-taxable event and the goodwill resulting from this acquisition
is not expected to be deductible for tax purposes.
A summary of the preliminary allocation of the purchase consideration is as follows (in
thousands):
77
Total purchase consideration: |
||||
Cash |
$ | 67,500 | ||
Common stock (a) |
36,352 | |||
Total purchase consideration |
$ | 103,852 | ||
Allocation of the purchase consideration: |
||||
Cash |
$ | 4,061 | ||
Accounts receivable(b) |
13,715 | |||
Other assets |
2,836 | |||
Property and equipment |
1,902 | |||
Identifiable intangible assets |
45,300 | |||
Goodwill |
110,105 | |||
Total assets acquired |
177,919 | |||
Current liabilities |
(73,015 | ) | ||
Deferred revenue |
(1,052 | ) | ||
Total liabilities assumed |
(74,067 | ) | ||
Net assets acquired |
$ | 103,852 | ||
(a) | Approximately 2.3 million shares of our common stock valued at $15.81 per share based on the closing price of our common stock on the acquisition date were issued at closing. | |
(b) | Accounts receivable have been recorded at their estimated fair value, which consists of the gross accounts receivable assumed of $14.4 million, reduced by fair value reserve of $0.7 million, which represents the portion of SpinVoxs contractually owed accounts receivable we do not expect to be able to collect. |
The following are the identifiable intangible assets acquired and their respective weighted
average useful lives, as determined based on a preliminary valuation (table in thousands, except
for years):
Weighted | ||||||||
Average | ||||||||
Amount | Life | |||||||
(In years) | ||||||||
Customer relationships |
$ | 28,000 | 14.0 | |||||
Core and completed technology |
16,300 | 4.3 | ||||||
Trade name |
1,000 | 1.5 | ||||||
Total |
$ | 45,300 | ||||||
Pro Forma Results (unaudited)
The following table shows unaudited pro forma results of operations as if we had acquired
SNAPin, our other material acquisitions from fiscal 2008 (PSRS, eScription, Inc., and Viecore,
Inc.), as well as SpinVox on October 1, 2007 (table in thousands, except per share data):
2009 | 2008 | |||||||
Revenue |
$ | 970,271 | $ | 952,877 | ||||
Net loss |
$ | (122,032 | ) | $ | (129,311 | ) | ||
Net loss per share |
$ | (0.48 | ) | $ | (0.57 | ) |
78