Aspect Software
Aspect Software Parent, Inc. (Form: 10-K, Received: 03/27/2015 15:13:59)
Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-K
 
  
(Mark One)
ý
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2014
OR
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 333-170936
 
  
ASPECT SOFTWARE PARENT INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
20-3503231
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
2325 East Camelback Road, Suite 700
Phoenix, Arizona 85016
(Address of principal executive offices) (Zip code)
Telephone Number: Telephone: (978) 250-7900
 
  
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   ¨    No   ý
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨  No   ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
x   (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ý
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2014, the last business day of the registrant's most recently completed second fiscal quarter, was zero as there is currently no established public trading market for the registrant's equity securities.
The registrant had one ordinary share outstanding as of February 28, 2015.
 
 
 
 
 


Table of Contents

TABLE OF CONTENTS
Part I
 
 
 
 
 
Item 1
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
Part II
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
Part III
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
Part IV
 
 
 
 
 
Item 15.
 


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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including the “Management's Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “endeavors,” “strives,” “may,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under “Item 1A. Risk Factors” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.
PART I
Item 1. Business
Company Overview
Aspect Software Parent Inc. ("Aspect, "we", "our", "us") is a global provider of a fully-integrated solution that unifies the three most important facets of modern consumer engagement strategy: customer interaction management, workforce optimization and back-office. Aspect Software Group Holdings Ltd. ("Holdings") is Aspect Software Parent Inc.'s sole shareholder. Through a full suite of cloud, hosted and hybrid deployment options, we help the world’s most demanding contact centers and back offices seamlessly align their people, processes and touch points to map and deliver remarkable customer experiences.

Through seamless, two-way communications across phone, chat, email, instant message ("IM"), short message service ("SMS") and social channels, Aspect equips companies with the tools and technologies needed to design customer experiences that engage and serve today's demanding customers across multiple channels of communication. Whether delivered through Aspect's cloud infrastructure or as software deployed on the customers’ premises, our solutions enable organizations to integrate customer self-service, contact center operations, workforce optimization and back office workflow solutions into existing enterprise technology investments for companies looking to remove communication and workflow barriers or create more productive business processes. We believe that this flexible, forward-focused design approach drives enhanced business efficiencies, fosters loyalty and increases customer value.

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We operate in one reportable segment. Please see Note 24, “Segment Reporting,” of Item 8 of this Annual Report on Form 10-K for more information. For the year ended December 31, 2014, our total net revenues, net loss and earnings before interest, taxes, depreciation and amortization, as adjusted ("Adjusted EBITDA") were $444.9 million , $33.8 million and $106.7 million , respectively. See “Key Financial Measures” in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II of this Annual Report on Form 10-K for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to income from operations, the most directly comparable generally accepted accounting policies ("GAAP") financial performance measure.
Industry Overview
The contact center continues to evolve. Standard call centers consist of agents handling inbound and outbound calls using a collection of telephones. These single channel call centers still require multipoint systems consisting of a PBX, an automatic call distributor (“ACD”), and an automated attendant to handle voice-based interactions, along with optional enhancements such as an interactive voice response (“IVR”) system, a predictive outbound dialer and a call logger. As communication channels have evolved, many of these call centers transformed to multichannel contact centers by adding SMS texting, mobile applications, e-mails, web interaction, messaging capabilities, and social media. As cloud service availability has grown, call centers are increasingly opting for alternative software deployment models. This approach enables organizations to automate processes to improve organizational effectiveness, and the cloud-based deployments in particular help reduce total cost of ownership. Cloud-based deployments offer increased flexibility, faster deployment, minimal up front capital expense and reduced internal information technology staff costs to handle upgrades, maintenance and disaster recovery.
Widespread smartphone and tablet adoption has resulted in consumers expecting always-available omnichannel client software services and applications, which work uniformly on various mobile devices and operating systems. Companies will need to continue to increase their focus on omnichannel client development and the ability to deliver a consistent brand experience across all channels used by mobile consumers.
Additionally, the onslaught of the internet of things has made content management increasingly important and challenging for organizations, especially industries such as insurance, financial services, and healthcare that circulate large amounts of information internally and externally. This trend has driven the demand for analytics that can provide meaningful data about the increasingly large variety of interactions enterprises have with the customer and prioritize this disparate data as actionable information.
In a market where everything is changing at a higher degree and rate than ever before, our comprehensive product portfolio with flexible deployment capabilities positions Aspect as a key strategic partner to address customers' evolving needs.
Competitive Strengths
We believe that we benefit from the following competitive strengths:
Leading Market Positions, Differentiating Vision and Global Deployment Capabilities. Aspect is an innovator of various core contact center technologies such as intelligent automatic call distribution, predictive dialing and workforce management. Over the years, we have continued to maintain our leading position in these segments of the contact center market. We continue to innovate and develop our applications and expand our global footprint in support of our cloud deployment options.

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Large and Diversified Installed Base of Blue-Chip Customers. We are a major contact center solution provider with a comprehensive portfolio. We provide our solutions and services worldwide, with 72% of our revenues generated from the Americas, 19% from Europe and Africa and 9% from Asia Pacific for the year ended December 31, 2014, and we view our market opportunities on a global basis. We deliver our solutions to more than 2,300 customers in more than 80 countries and our products currently support approximately 1.5 million contact center agent seats managing over 100 million customer interactions daily. No one customer accounted for more than 10% of our revenues for the year ended December 31, 2014. We believe that this geographic diversity and lack of customer concentration helps us to mitigate the effects of isolated regional downturns. It also provides us with a broad range of relationships that we can leverage to implement our new technologies in our customers' contact centers and also on an enterprise-wide basis.
Recurring Revenue with High Renewal Rates. During the year ended December 31, 2014 our recurring revenues comprised 66% of our total revenues. Recurring revenue includes maintenance, hosting and managed services revenue. We believe that contact center operations have become critical business functions for many of our customers, positioning us as a key strategic supplier. Additionally, customers view switching contact center systems as a complex, risky and an expensive undertaking, given the considerable upfront license costs, lengthy implementations and potential for disruptions of critical operations. Renewal rates are positively impacted by the inclusion of investment protection features for those who are under maintenance of premise products as it includes software updates, upgrades and customer care support on a 24x7x365 coverage with customer care provided globally.
Our People and Management. We have a strong executive management team with considerable leadership and software industry experience and proven execution skills in growing companies organically and through acquisitions. This collection of talent includes many individuals who have experience transforming businesses. Our executive management team has an average of more than twenty years of technology experience.
Business Strategy
The following components are key to our strategy and achieving our growth objectives:

Expand our Global Presence . Aspect receives the majority of its revenue today from mature markets like North America and Western Europe. We are investing in emerging markets such as Brazil, Mexico, China and India, through both organic growth in personnel and partner channel development. We expect to generate more new customer wins from the emerging markets.
Develop Best-In-Class Solutions. During the past four decades, we have been a market leader in key segments of the contact center market, largely due to our ability to develop innovative products that meet the needs of our customers. In recognition of the contact center's business transformation from isolated phone-based, outbound communications to inbound and outbound multi-channel communications that are highly integrated into a company's operations, we believe we have developed and matured one of the industry's first truly integrated unified contact center offerings. With our flagship product Aspect Unified IP,

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we can provide both an effective and innovative platform that meets the evolving market needs for new customers, while offering a new set of capabilities to sell to our current customers who are upgrading their existing legacy contact center systems. Our workforce optimization capabilities have grown through organic developments and acquisitions to be an integrated full-featured workforce optimization platform leveraging both Microsoft Unified Communications ("UC") and other leading industry platform technologies. We have a unique advantage as the only recognized contact center infrastructure leader that offers truly integrated interaction management and workforce optimization technologies. The combined interaction management and workforce optimization solution takes full advantage of UC, allowing Aspect to lead the contact center transformation. We plan to continue to invest and develop new products and solutions ahead of changing contact center and enterprise needs and continually take advantage of the developing UC marketplace.
2014 was a year of material accomplishment and forward momentum for Aspect's solution portfolio, especially with regard to cloud offerings.
Become a Premier Cloud Solutions Provider. Aspect’s goal is to become a premier cloud solutions provider. We have increased our internal investments in cloud solution development activities and have had major releases of Unified IP, WFO, WFM, and our Proactive Engagement Suite offerings in the cloud. Our acquisition of Voxeo Corporation ("Voxeo") and Voxeo's wholly-owned subsidiary Qivox and the licensing of new Software as a Service ("SaaS") technology advanced our cloud infrastructure and product portfolio. We have leveraged the Voxeo product portfolio and cloud infrastructure, licensed technology and our contact center experience to develop Zipwire, our pure SaaS contact center offering. Zipwire, a true cloud contact center solution delivers superior functionality and ease of use. Unlike many smaller hosted solutions built on traditional on-premises platforms, Zipwire's scalability and multi-tenant capabilities offer on-demand flexibility without sacrificing performance or reliability. Additionally, we have released Aspect Outbound powered by LiveVox, which is a compliant, multi-tenant outbound cloud contact center solution that scales easily and provides advanced disaster recovery capabilities.
Migrate and Further Penetrate Our Installed Customer Base . We have a large installed customer base on our legacy telephony-based Signature predictive dialer and automatic call distribution products. As our customer base migrates to software-based platforms, we are using our relationships with these customers to market our Aspect Unified IP platform product and related unified communications applications. Migrations from Signature dialers to the Aspect Unified IP-based applications are essentially complete, and most of our customers have chosen to use Aspect Unified IP. As customers migrate to new solutions, we are marketing our workforce optimization solutions as well as additional capabilities and services to our customers.
Leverage Aspect Professional Services to Drive Customer Contact Deployments. Aspect’s deep technology expertise paired with our dedication to innovate is the driving force behind delivering meaningful business results to our clients spanning the contact center and beyond. Whether organizations require implementation, project planning, strategy and governance planning, application development, custom development or resources to augment their information technology ("IT") staff, Aspect’s Professional Services is uniquely positioned to help our customer get the most value from their software investment at every stage. Aspect’s Professional Services has three dedicated service areas: Implementation and Optimization Services, Interaction Enablement Services, and Performance Improvement Services. Through integration with leading customer relationship management ("CRM") applications, Aspect's Professional Services helps customers design and implement a seamless integrated system that unites communication functionality with usable customer data in a single location. The result is an integrated agent desktop solution that successfully empowers contact center with the data required to meet today’s growing demand for remarkable customer experiences.
Our Solutions
We generate revenues by selling and licensing our software and hardware products, selling maintenance contracts and services to support our products and providing professional services that help customers identify and implement the appropriate contact center and interaction management solutions.

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Contact Center Products and Applications
We offer a “one-stop-shop” for contact center solutions, delivering key components either in integrated suites or separate modules, tailored to suit customer preferences and requirements. Our applications for the contact center are internet protocol ("IP") based solutions that offer new ways to address particular customer interactions by delivering a specific combination of capabilities to improve contact center performance. Our primary platform products are categorized into four main product groups: Contact Center (Aspect Unified IP, Aspect Zipwire, and Aspect CXP), Workforce Optimization, Back Office Optimization and Signature. We offer deployment flexibility to suit our customer needs; from the convenience of the cloud to the familiarity of on-premise or somewhere in between.
Aspect Unified IP
Built to scale from 10-agent to several-thousand-agent contact centers, our flagship contact center platform, Aspect Unified IP, is a Microsoft web services platform contact center solution that unites inbound, outbound, interactive voice response and internet contact capabilities like email and web chat while delivering robust queuing, routing, reporting and agent empowerment capabilities in a single solution. The unified platform requires less professional services to implement than alternative solutions as less computer telephony integration is required and provides customers with a lower total cost of ownership. Aspect Unified IP generated approximately $192 million of revenue (43% of our total revenue) for the year ended December 31, 2014.
Aspect Zipwire
Zipwire, is a pure cloud, SaaS contact center solution. Zipwire’s highly competitive feature set offers simplicity in provisioning, support and on-going operations. Designed to get a contact center up and running in hours or days as opposed to traditional software solutions that can take months to deploy, Zipwire rapidly accelerates time-to-value for customers. Zipwire can be delivered through Aspect’s proven cloud and telecommunications infrastructure attained through our acquisition of Voxeo in July 2013 and can also be deployed within an enterprise’s private cloud network. Qivox, acquired through the Voxeo purchase, is a hosted omni-channel communications platform for providing SaaS-based solutions for customer engagement management. Aspect has branded the Qivox product portfolio as Aspect Proactive Engagement Suite. Aspect Zipwire products generated approximately $11 million of revenue (3% of our total revenue) for the year ended December 31, 2014.
Aspect Customer Experience Platform ("CXP")
The Aspect Customer Experience Platform ("CXP") makes it easy to design, implement and deploy IVR and self-service customer contact applications across multiple communications channels, like voice, text (IM, SMS, USSD), mobile web, social networks like Twitter and smartphone applications. With CXP, it’s easy to implement personalized self-service that gets customers a first-contact resolution - freeing up your contact center agents to address more complex problems. CXP products generated approximately $42 million of revenue (9% of our total revenue) for the year ended December 31, 2014.

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Workforce Optimization
Built on a Microsoft standards-based platform, our workforce optimization solutions improve the management and efficiency of contact center customer contact activities. Examples of specific customer needs our workforce optimization products can support include more efficient coordination of customer self-service with live contact center agent assisted service; greater visibility, control and staffing efficiency in a multichannel, distributed customer contact environment; automation of early stage contact and a more effective past due customer account targeted collections strategy; and tools and processes to optimize resource utilization and foster a continuous improvement culture. In 2014, we released version 8 of our Workforce Optimization Suite, which dramatically improves agent and supervisor efficiency via our simple widget-based user interfaces. Workforce Optimization products generated approximately $102 million of revenue (23% of our total revenue) for the year ended December 31, 2014.
Back Office Optimization
Aspect Back Office Optimizer provides the ability to distribute and redistribute work items (tasks) based on predicted task outcomes and real-time resource availability. The solution captures work from multiple sources and ensures work is allocated to the right individual, team, department and/or location based on resource availability,  backlog and desired service level outcome. Back Office Optimization products generated approximately $2 million of revenue (less than 1% of our total revenue) for the year ended December 31, 2014.
Signature Products
Our Signature products, which generated approximately $98 million of revenue (22% of our total revenue) in the year ended December 31, 2014, include all of the core technologies needed to operate a modern call center, including ACD, predictive dialer, computer telephony integration and IVR.
Managed Services
Aspect’s Managed Services provides customers management and operational assistance for Aspect solutions. There are three distinct services offered:
Operation. Provides client services designed to help operate and manage a technology environment by reducing staffing costs and technology maintenance costs. This could include hosted or premise-based solutions or remotely through the cloud.
Optimization. Provides services designed to improve technology adoption with the goal of increasing the business value by optimizing the technology in place.
Hosting. Hosting the technology and/or owning the technology for the customer which helps reduce the customer’s capital costs.

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Consulting and Customer Care Services
We offer our consulting and customer care services and systems integration skills to help our customers plan, implement and support our solutions in the contact centers and across their entire enterprise. Our global professional and customer care services team is comprised of business professionals and Microsoft certified experts and consisted of approximately 800 employees worldwide as of December 31, 2014. Our worldwide delivery capability helps customers with their critical business communications needs and is supported by management tools and technical customer care centers around the world. The services we offer include:
installation and implementation of contact center solutions;
consulting services to help customers design and optimize their communications investments;
management services that provide customers with an alternative to owning and operating communications applications and infrastructure; and
on-site and remote customer care and managed services.
We believe the global market for these services is fragmented. Companies serving these markets range from local firms to large multi-national companies with global footprints to other vendors, including communications businesses, value-added resellers, distributors and system integrators. Our interaction management consultants help organizations identify the right opportunities, navigate implementation obstacles and get the right results from unified communications by offering services and support from strategy and design to implementation. From improving individual and group productivity and enhancing collaboration to implementing communications-enabled business processes and transforming enterprise communications, we provide experienced guidance and support organizations as they adopt unified communications solutions.
The major areas of our services include:
Aspect Professional Services delivers unified communications capabilities in the contact center and throughout the enterprise. Our consultants help organizations identify the right opportunities, navigate implementation obstacles and get the right results from unified communications with services that span conception through completion. From improving individual productivity and heightening collaboration to communications-enabling business processes and transforming enterprise communications, we provide experienced guidance at every step of an organization's unified communications journey.

Aspect Customer Care. Aspect Customer Care helps ensure optimal operations and continuous system uptime by providing support services throughout the entire lifecycle of our relationship with our customers. Our engineers provide 24x7x365 follow-the-sun service via the telephone, internet-based self-service, email consultation, remote computer access and on-site service. Nearly 90% of new customers that purchase contact center solutions from us also purchase maintenance contracts. Through our maintenance relationships, we provide upgrades to installed software for customers under a maintenance contract and provide support to help ensure optimal operations.
Microsoft Consulting Services . Leveraging our pool of Microsoft experts, this group provides strategic consulting and implementation for a wide variety of Microsoft products and solutions such as SharePoint, Lync, Microsoft Dynamics, and Business Intelligence. In addition to technical consultation and implementation, this group includes a Healthcare and an Education practice that provides targeted solutions for high-growth industries. With the introduction of next generation customer contact applications, that take advantage of both Aspect contact center technologies as well as Microsoft technology, this group is expanding its efforts to broaden Microsoft's utilization within the contact center.
Aspect Education Services. Aspect Education Services offers a variety of courses designed to provide contact center supervisors and administrators with the skills and knowledge needed to enhance productivity and improve customer satisfaction. Courses are offered online, at our worldwide training facilities and onsite at customer facilities.
Customers
Our customer base is diverse, ranging in size from small businesses employing a few employees to large government agencies and multinational companies with over 100,000 employees. Our products are used in many verticals and industries in businesses around the world that have a significant amount of interaction with their customers, including financial services, telecommunications, technology, business process outsourcers, transportation, utilities, health care and government.
Our customers include: American Airlines, American Express, British Airways, British Gas, Citigroup, Computer Sciences Corp., Discover Financial Services, FedEx, General Electric, Hilton Reservations Worldwide, JC Penney, Lands' End, Lloyds TSB, Southwest Airlines, The Royal Bank of Scotland, Verizon Wireless, U.S. Airways, VW Credit, and Wipro. No one customer represented more than 10% of our total revenue for the years ended December 31, 2014, 2013 and 2012. For customer geographic information, please see Note 24, “Segment Reporting,” to our audited consolidated financial statements in Item 8 of this Form 10-K.

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We are a market leader in all core contact center technologies:
A Visionairy in Gartner's Contact Center infrastructure magic quadrant (Source: Gartner, May 2014 “Magic Quadrant for Contact Center Infrastructure”)
#1 in Work Force Management (Source: Pelorus Associates, March 2014 “2014 World Contact Center Workforce Management Systems Market”)
#1 in Outbound Dialer (Source: Frost and Sullivan, September 2014 “Global Rollup-Contact Center Systems Market”)
Sales and Marketing
We have 318 sales personnel worldwide. We sell and market our products primarily through our direct sales force. In addition to our direct sales, we sell our products through referral providers, resellers and distributors. Referral providers identify and engage with sales leads and transfer the relationship with the potential customer to our sales force in exchange for a finder's fee. Resellers sell our products but do not provide related services to the customers. Distributors sell our products and provide services and support related to our products. We have formed a single global sales force that is cross-trained across our full product offerings and is in a position to understand the solutions required to address our customers' needs. The sales force is supported by a pre-sales group of solutions consultants that have an in-depth knowledge of all our products. In addition, we maintain a formal sales process that includes CRM software based tools and structured account development methodology. This allows us to track every opportunity by geography in real time and thus helps us forecast early in the quarter if any weakness is predicted.
Product Development
We employ over 340 employees involved in product development and follow a strict product lifecycle to ensure stringent process control. Our product lifecycle is a process that our cross-functional program teams use in the management of products and product releases. The process is followed from new program concept through introduction and provides a repeatable, predictable method that we believe enhances product quality and provides for predictable product delivery.
For research and development costs for the past three fiscal years, please see our audited consolidated financial statements located in Item 8 of this Form 10-K.
Intellectual Property
We own a significant number of commercially important patents in the contact center industry and have nearly 1,000 patents and patents pending worldwide that are applicable across our entire platform of products for the contact center industry. We expect to continue to file new applications to protect our research and development investments in new technology and products and receive numerous patents each year. The duration of our patents is determined by the laws of the country of issuance and for U.S. patents may be 17 years from the date of issuance of the patent or 20 years from the date of its filing depending upon when the patent application was filed. In addition, we hold numerous trademarks, both in the U.S. and in foreign countries.
We will obtain patents and other intellectual property rights used in connection with our business when practicable and appropriate. Our intellectual property policy is to protect our products, technology and processes by asserting our intellectual property rights where appropriate and prudent. From time to time, assertions of infringement of certain patents or other intellectual property rights of others have been made against us. In addition, a pending claim is in an early stage of litigation. Based on industry practice and our prior experience, we believe that any licenses or other rights that might be necessary for us to continue with our current business could be obtained on commercially reasonable terms. However, we cannot assure you that any of those licenses or other rights will always be available on acceptable terms or that litigation will not occur. The failure to obtain necessary licenses or other rights, or litigation arising out of such claims, could adversely affect our business.
Competition
We offer a wide range of applications and services and as result have a broad range of competitors. We compete against traditional enterprise voice communications providers, such as Avaya, Siemens Enterprise Communications, and data networking companies, such as Cisco. We also face competition from other competitors, including Genesys Laboratories, Interactive Intelligence, Altitude Software and Noble Systems. We face competition in certain geographies with companies that have a particular strength and focus in these regions, such as Huawei in China. In addition, Verint Systems and NICE Systems Ltd. compete with us in the workforce management and quality monitoring product areas. Aspect Global Professional Services also competes with the above mentioned companies and others offering services with respect to their own product offerings, as well as many value added resellers, consulting and systems integration firms and network service providers.

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Several of these existing competitors have, and many of our future competitors may have, greater financial, personnel, research and development and other resources, more well-established brands or reputations and broader customer bases than we do and, as a result, these competitors may be better positioned to respond quickly to potential acquisitions and other market opportunities, new or emerging technologies and changes in customer requirements. Some of these competitors may have customer bases that are more geographically balanced than ours and, therefore, may be less affected by an economic downturn in a particular region. Competitors with greater resources also may be able to offer lower prices, additional products or services or other incentives that we cannot match or do not offer. Industry consolidations may also create competitors with broader and more geographic coverage and the ability to reach enterprises through communications service providers.
Technological developments and consolidation within the communications industry result in frequent changes to our group of competitors. The principal competitive factors applicable to our products include:
 
product features, performance and reliability;
customer service and technical support;
relationships with distributors, value-added resellers and systems integrators;
an installed base of similar or related products;
relationships with buyers and decision makers;
price;
the financial condition of the competitor;
brand recognition;
the ability to integrate various products into a customer's existing networks, including the ability of a provider's products to interoperate with other providers' communications products; and
the ability to be among the first to introduce new products.
In addition, existing customers of data networking companies that compete against us may be inclined to purchase enterprise communications solutions from their current data networking vendor rather than from us. Also, as communications and data networks converge, we may face competition from systems integrators that have traditionally focused on data network integration. We cannot predict with precision which competitors may enter our markets in the future, what form such competition may take or whether we will be able to respond effectively to the entry of new competitors into our markets or the rapid evolution in technology and product development that has characterized our markets. In addition, in order to effectively compete with any new market entrant, we may need to make additional investments in our business or use more capital resources than our business currently requires or reduce prices, which may adversely affect our profitability.
Item 1A. Risk Factors
Our business depends on our ability to keep pace with rapid technological changes that impact our industry.
The market in which we operate is characterized by rapid, and sometimes disruptive, technological developments, evolving industry standards, frequent new product introductions and enhancements, changes in customer requirements and a limited ability to accurately forecast future customer orders. Our future success depends in part on our ability to continue to develop technology solutions that keep pace with evolving industry standards and changing customer demands. The process of developing new technology is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends our business could be harmed. We are required to commit significant resources to developing new products before knowing whether our investments will result in products the market will accept. If the industry does not evolve as we believe it will, or if our strategy for addressing this evolution is not successful, many of our strategic initiatives and investments may be of no or limited value. Furthermore, we may not execute successfully on our strategic plan because of errors in product planning or timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. This could result in competitors providing those solutions before we do, in which case we could lose market share and our net revenues and earnings would decrease.
A key component of our strategy is our focus on the development and sale of enterprise communications products and services, and this strategy may not be successful.
Contact center technology is undergoing a change in which previously separate voice and data networks are converging onto IP based platforms with software driven unified communications applications. Both traditional and new competitors are investing heavily in this market and competing for customers.
Our initial approach to this convergence has been to provide software permitting the integration of existing telephony environments with networks in which voice traffic is routed through data networks. Ultimately, the strategy is to have customers migrate over time to our unified communications applications. This integration and migration strategy requires enterprise-level selling and deployment of enterprise-wide solutions that reach further into customers’ information technology

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organizations, rather than selling and deployment efforts focused primarily on contact center managers and traditional telephone networks.
In order to execute our strategy successfully, we must:
expand our customer base by selling to enterprises that previously have not purchased from us;
expand our presence with existing customers by adding value with our products and services;
continue research and development investment, including investment in new software and platform development;
train our sales staff and distribution partners to sell new products and services;
improve our marketing of existing and new products and services;
acquire key technologies through licensing, development contracts, alliances and acquisitions;
train our professional services and support employees and channel partners to service new or enhanced products and applications and take other measures to ensure we can deliver consistent levels of service globally to our multinational customers;
enhance our professional services and customer care organizations’ ability to service complex, multi-vendor IP networks;
recruit and retain qualified personnel, particularly in research and development, professional services, customer care and sales;
develop relationships with new types of channel partners who are capable of both selling our products and extending our reach into new and existing markets; and
establish or expand our presence in key geographic markets.
We may or may not be able to successfully accomplish any or all of the foregoing, which may adversely impact our operating results. The success of our unified communications products strategy depends on several factors, including proper new product definition, timely completion and introduction of these products, differentiation of new products from those of our competitors, and market acceptance of these products. There can be no assurance that we will successfully achieve market acceptance of our products, or any other products that we may introduce in the future, or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive. If we do not successfully execute our strategy, our operating results may be materially and adversely affected.
Recent global economic trends could adversely affect our business, results of operations and financial condition, primarily through disrupting our customers’ businesses.
Recent global economic conditions, including disruption of financial markets, could adversely affect our business, results of operations and financial condition, primarily through disrupting our customers’ businesses. Higher rates of unemployment and lower levels of business activity generally adversely affect the level of demand for certain of our products and services. In addition, continuation or worsening of general market conditions in the U.S. economy or other national economies important to our businesses may adversely affect our customers’ level of spending, ability to obtain financing for purchases and ability to make timely payments to us for our products and services, which could require us to increase our allowance for doubtful accounts, negatively impact our days sales outstanding and adversely affect our results of operations. Consumer hesitancy or limited availability of credit may constrict the business operations of our end user customers and our channel, development, and implementation partners, and consequently impede our own operations. The consequences may include restrained or delayed investments, late payments, bad debts, and even insolvency among our customers and business partners. These have had an effect on our revenue growth and incoming payments, and the impact may continue. In addition, our prices could come under more pressure due to more intense competition or deflation. If current economic conditions persist or worsen, we expect that our revenue growth and results of operations will continue to be negatively impacted. Finally, an extended period of further economic deterioration could exacerbate the other risks we describe herein. If these or other conditions limit our ability to grow revenue or cause our revenue to decline and we cannot reduce costs on a timely basis or at all, our operating results may be materially and adversely affected.
If our products do not remain compatible with ever-changing operating environments, we could lose customers and the demand for our products and services could decrease, which could materially adversely affect our business, financial condition, operating results and cash flow.
The largest suppliers of systems and computing software are, in most cases, the manufacturers of the computer hardware and software systems used by most of our customers. Historically, these companies have from time to time modified or introduced new operating systems, systems software and computer hardware. In the future, such new products could require substantial modification of our products to maintain compatibility with these companies’ hardware or software. Failure to adapt our products in a timely manner to such changes or customer decisions to forgo the use of our products in favor of those with

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comparable functionality contained either in their hardware or software systems could have a material adverse effect on our business, financial condition, operating results and cash flow.
Our future revenue is dependent in large part upon our installed customer base continuing to license additional products, renew recurring subscription agreements and purchase additional professional services, and any migration of our customers away from our products and services would adversely impact our operating results.
Our large installed customer base traditionally has generated a very substantial portion of our revenue. Our support, hosting and managed services strategies are under constant review and development to assist us in addressing our customers’ broad range of requirements. Success in achieving our business goals depends significantly on the success of our maintenance, hosting and managed services models and on our ability to deliver high-quality services. It is possible that existing customers will decide not to renew or reduce their contracts with us or not to purchase more of our products or services in the future, which could have a material adverse effect on our business and results of operations.

Our gross margins may decrease due to competitive pressures or otherwise, which could negatively impact our profitability.
Gross margins may decrease in the future in response to competitive pricing pressures, new product introductions by us or our competitors, changes in the costs of components, increases in manufacturing costs, royalties we need to pay to use certain intellectual property, or other factors. If we experience decreased gross margins and we are unable to respond in a timely manner by introducing and selling new, higher-margin solutions successfully and continually reducing our costs, our gross margins may decline, which will harm our business and results of operations.
The decision-making process for purchasing our products and related services can be lengthy and unpredictable, which may make it difficult to forecast sales and budget expenses.
Because of the significant investment and executive-level decision-making typically involved in our customers’ decisions to license our products and purchase related services, the sales cycle for our products and related services typically ranges from six to twelve months, or longer for large enterprises. We use sales force automation applications, a common practice in our industry, to forecast sales and trends in our business. Our sales personnel monitor the status of all proposals and estimate when a customer will make a purchase decision and the dollar amount of the sale. These estimates are aggregated periodically to generate a sales pipeline. Because the success of our product sales process is subject to many factors, some of which we have little or no control over, our pipeline estimates can prove to be unreliable both in a particular quarter and over a longer period of time, in part because the “conversion rate” or “closure rate” of the pipeline into contracts can be very difficult to estimate. A contraction in the conversion rate, or in the pipeline itself, could cause us to plan or budget incorrectly and adversely affect our business or results of operations. In particular, a slowdown in information technology spending or economic conditions generally can unexpectedly reduce the conversion rate in particular periods as purchasing decisions are delayed, reduced in amount or canceled. The conversion rate can also be affected by the tendency of some of our customers to wait until the end of a fiscal period in the hope of obtaining more favorable terms, which can also impede our ability to negotiate and execute these contracts in a timely manner. In addition, if we acquire new companies or enter into related businesses, we will have limited ability to predict how their pipelines will convert into sales or revenues for one or more quarters following the acquisition, and their conversion rate post-acquisition may be quite different from their historical conversion rate.
Accordingly, our sales are difficult to forecast and can fluctuate substantially and we may expend substantial time, effort and money educating our current and prospective enterprise customers as to the value of, and benefits delivered by, our products, yet ultimately fail to produce a sale. If we are unsuccessful in closing sales after expending significant resources, our operating results will be adversely affected. As a result, if sales forecasted for a particular period do not occur in such period, our operating results for that period could be substantially lower than anticipated.
Many of our sales are made by competitive bid processes, which often requires us to expend significant resources, which we may not recoup.
Many of our sales, particularly in larger installations, are made by competitive bid processes. Successfully competing in competitive bidding situations subjects us to risks associated with the frequent need to bid on programs in advance of the completion of their design, which may result in unforeseen technological difficulties and cost overruns, as well as making substantial investments of time and money in research and development and marketing activities for contracts that may not be awarded to us. If we do not ultimately win a bid, we may obtain little or no benefit from these expenditures and may not be able to recoup these costs on future projects.
Even where we are not involved in a competitive bidding process, due to the intense competition in our markets and increasing customer demand for shorter delivery periods, we must in some cases begin the implementation of a project before the

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corresponding order has been finalized, increasing the risk that we will incur expenses associated with potential orders that do not come to fruition.
Disruption of or changes in our sales channels could harm our sales and gross margins.
If we fail to manage distribution of our products and services properly, or if our distributors’ financial condition or operations weaken, our revenue and gross margins could be adversely affected.
An important element of our market strategy involves developing our indirect sales, implementation and support channels, which includes our global network of alliance partners, distributors, dealers, value-added resellers (“VARs”), telecommunications service providers and system integrators. Systems integrators sell and promote our products and perform custom integration of systems and applications. VARs market, sell, service, install and deploy our products. The remainder of our products and services is sold through direct sales.

Our relationships with channel partners are important elements of our marketing, sales and support efforts. If these relationships fail, we will have to devote substantially more resources to the sales and marketing, implementation and support of our products than we would have had to otherwise. Some factors which could adversely affect our relationships with our channel partners include the following:
we compete with some of our channel partners, including through our direct sales, which may lead these channel partners to use other suppliers that do not directly sell their own products or otherwise compete with them;
some of our channel partners may demand that we absorb a greater share of the risks that their customers may ask them to bear; and
some of our channel partners may have insufficient financial resources and may not be able to withstand changes and challenges in business conditions.
In addition, we depend on our channel partners globally to comply with applicable regulatory requirements. To the extent that they fail to do so, that could have a material adverse effect on our business, operating results, and financial condition.
Our financial results could be adversely affected if our contracts with channel partners were terminated, if our relationships with channel partners were to deteriorate, if any of our competitors were to enter into strategic relationships with or acquire a significant channel partner or if the financial condition of our channel partners were to weaken. In addition, we may expend time, money and other resources on developing and maintaining channel relationships that are ultimately unsuccessful. There can be no assurance that we will be successful in maintaining, expanding or developing relationships with channel partners. If we are not successful, we may lose sales opportunities, customers and market share. In addition, there could be channel conflict among our varied sales channels, which could harm our business, financial condition and results of operations.
Moreover, the gross margin on our products and services may differ depending upon the channel through which they are sold and we may have greater difficulty in forecasting the mix of our products and the timing of orders from our customers for sales derived from our indirect sales channels. Changes in the balance of our distribution model in future periods therefore may have an adverse effect on our gross margins and profitability.
Customer implementation and installation of our products involves significant resources and is subject to significant risks.
Implementation of our software is a process that often involves a significant commitment of resources by our customers and is subject to a number of significant risks over which we may have little or no control. These risks include in particular:
shortages of our trained consultants available to assist customers in the implementation of our products;
system requirements and integrations to our customer’s databases and other software applications that do not meet customer expectations;
software that conflicts with the customer’s business processes;
third-party consultants who do not have the know-how or resources to successfully implement the software;
implementation of the software that is destabilized by custom specific software development or other anomalies in the customer’s environment; and
safeguarding measures recommended or offered by us are not properly implemented by customers and partners.
Due to these risks, some of our customers have experienced protracted implementation times in connection with the purchase and installation of our software products. In addition, the success of new software products introduced by us may be adversely

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impacted by the perceived or actual time and cost to implement the software products. We cannot guarantee that we can reduce or eliminate protracted installation times, that shortages of our trained consultants will not occur, or that our costs to perform installation projects will not exceed the fees we receive when fixed fees are charged by us. Accordingly, unsuccessful customer implementation projects could result in increased expenses and claims from customers, harm our reputation, and cause a loss of future revenues.
The migration of our installed base to our newer software-based products involves significant resources and is subject to significant risks.
The majority of maintenance revenue from our installed base is attributable to customers using our legacy contact center products. While we have begun to migrate those customers to our newer software based products, the process will continue for a number of years. Customers who are very satisfied with their current products may be concerned about the risk of disrupting their businesses during a migration. In addition, most migrations require customers to invest in new hardware systems on which our newer products will be installed. Even if our newer products provide additional functionality or are more efficient, certain customers may delay migrations for fear of disruption and/or an unwillingness to invest their internal and financial resources.
Engaging in a migration discussion with customers also carries the risk that such customers will consider replacing our installed products with competitive products. While we try to minimize the potential migration costs and disruptions for customers, some may decide to turn the migration process into a competitive bid process. In these cases, there can be no assurance that we will be able to retain these customers, which could adversely affect our operating results.
Even after a customer decides to undertake a migration to our newer software based products, there are additional execution risks. We may fail to properly scope the project or the customer’s requirements. Our newer products may not be fully compatible with other systems in the customer environment. We may not have trained consultants available on a timely basis to assist the customer with the migration. Any of these risks could delay the migration and disrupt the customer’s business. Accordingly, they could result in increased expenses and claims from customers, harm our reputation, and cause a loss of future revenues.
Our sales to government customers subject us to risks, including early termination, audits, investigations, sanctions and penalties.
These contracts are generally subject to annual fiscal funding approval, may be terminated at the convenience of the government, or both. Termination of a contract or reduced or eliminated funding for a contract could adversely
affect our sales, revenue and reputation. Additionally, government contracts are generally subject to audits and investigations, which could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the government.

Consolidation in the software industry may result in unstable and/or decreased demand for our software.
The entire IT sector, including the software industry, has in recent years experienced a period of consolidation through mergers and acquisitions. We expect this trend to continue for the foreseeable future. Although consolidations in the software industry may create market opportunities for remaining entities, any consolidation could create uncertainty among existing and potential customers regarding future IT investment plans. In turn, this could diminish customer demand for our products and services and could result in longer sales cycles as customers determine which company best addresses their needs, which would adversely affect our operating results.
We face intense competition from numerous competitors and, as the enterprise communications and information technology businesses evolve, we may face increased competition from companies that do not currently compete directly against us.
Because we focus on the development and marketing to enterprises of enterprise communications solutions, such as unified communications and contact center solutions, we compete against traditional enterprise voice communications providers, such as Avaya, Siemens, Genesys Labratories, Alcatel-Lucent and data networking companies, such as Cisco Systems, Inc., and software based competitors such as Interactive Intelligence, NICE, Verint, Altitude Software and Noble Corporation. We also face competition in the small and medium enterprise market from many competitors, including Cisco, Alcatel-Lucent, Mitel Networks Corp, and Shoretel, Inc., although the market for these products is more fragmented. We face competition in certain geographies with companies that have a particular strength and focus in these regions, such as Huawei in China. Our services division competes with companies like those above in offering services with respect to their own product offerings, as well as with many value added resellers, consulting and systems integration firms and network service providers.

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Because the market for our products is subject to rapid technological change, as the market evolves we may face competition in the future from companies that do not currently compete in the enterprise communications market, but whose current business activities may bring them into competition with us in the future. In particular, as the convergence of enterprise voice and data networks becomes more widely deployed by enterprises, the business, information technology and communication applications deployed on converged networks become more integrated. We may face increased competition from current leaders in information technology infrastructure, information technology, personal and business applications and the software that connects the network infrastructure to those applications. We may also face competition from companies that seek to sell remotely hosted services or software as a service directly to the end customer that are moving into the enterprise market. Competition from these potential market entrants may take many forms, including offering products and applications similar to those we offer as part of another product offering. In addition, these technologies continue to move from a proprietary environment to an open standards-based environment.
The principal competitive factors affecting the market for our professional services include responsiveness to customer needs, breadth and depth of technical skills offered, availability and productivity of personnel, ability to demonstrate achievement of results and price. There is no assurance that we will be able to compete successfully in the future.
Several of our existing competitors have, and many of our future competitors may have, greater financial, personnel, research and development and other resources, more well-established brands or reputations and broader customer
bases than we do and, as a result, these competitors may be in a stronger position to respond quickly to potential acquisitions and other market opportunities, new or emerging technologies and changes in customer requirements. Some of these competitors may have customer bases that are more geographically balanced than ours and, therefore, may be less affected by an economic downturn in a particular region. Competitors with greater resources also may be able to offer lower prices, additional products or services or other incentives that we cannot match or do not offer. Industry consolidations may also create competitors with broader and more geographic coverage and the ability to reach enterprises through more channels.
Existing customers of data networking companies that compete against us may be inclined to purchase enterprise communications solutions from their current data networking or software vendors rather than from us. Also, as communications and data networks converge, we may face competition from systems integrators that traditionally have been focused on data network integration. We cannot predict which competitors may enter our markets in the future, what form such competition may take or whether we will be able to respond effectively to the entry of new competitors into competition with us or the rapid evolution in technology and product development that has characterized our businesses. In addition, in order to effectively compete with any new market entrant, we may need to make additional investments in our business, use more capital resources than our business currently requires or reduce prices, any of which may materially and adversely affect our profitability.
Our Cloud-Based Applications Present Execution and Competitive Risks
We are devoting significant resources to extend our cloud-based alternative to our traditional, on-premises offerings. Certain competitors offer alternative cloud-based services. While we believe our expertise, investments in infrastructure, and the breadth of our cloud-based services provide us with a solid foundation to compete, it is uncertain whether our strategies will attract the users or generate the revenue required to be successful. In addition to certain software development costs, we may incur costs to build and maintain infrastructure to support cloud-based services. These costs could negatively impact our operating margins. Whether we are successful in this new business model depends on our execution in a number of areas, including:
continuing to innovate and bring to market compelling cloud-based experiences that generate increasing traffic,
improving the performance of our cloud-based services, and
continuing to enhance the attractiveness of our cloud-based platforms to partners.
The occurrence of cyber incidents, or a deficiency in our cybersecurity, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our brand image, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity, or availability of our information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data, or steal confidential information. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. Our three primary risks that could directly result from the occurrence of a cyber incident include operational interruption, damage to our brand image, and private data exposure. We have implemented solutions, processes, and procedures to help mitigate this risk, such as creating a proactive internal oversight function to evaluate and address our risks related to cybersecurity, but these measures, as well as our organization’s increased awareness of our risk of a cyber incident, do not guarantee that our financial results will not be negatively impacted by such an incident.

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To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations could harm our business, financial condition and results of operations.
Our ability to make payments on and to refinance our indebtedness, and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control.
If our business does not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness, on or before the maturity thereof, sell assets, reduce or delay capital investments or seek to raise additional capital, any of which could have a material adverse effect on our operations. In addition, we may not be able to affect any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may limit or prevent us from taking any of these actions. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on commercially reasonable terms or at all. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our business, financial condition and results of operations, as well as on our ability to satisfy our debt obligations.
In addition, if we are unable to meet our debt service obligations, the holders would have the right following a cure period to cause the entire principal amount to become immediately due and payable. If the amounts outstanding under these instruments are accelerated, we cannot assure you that our assets will be sufficient to repay in full the money owed to our debt holders.
The agreements governing our outstanding indebtedness impose significant operating and financial restrictions on our company and our subsidiaries, which may prevent us from capitalizing on business opportunities.
The agreements governing our outstanding indebtedness impose significant operating and financial restrictions on us. These restrictions limit our ability, among other things, to:
incur additional indebtedness;
pay certain dividends or make certain distributions on our capital stock or repurchase our capital stock;
make certain capital expenditures;
make certain investments or other restricted payments;
place restrictions on the ability of subsidiaries to pay dividends or make other payments to us;
engage in transactions with affiliates;
sell certain assets or merge with or into other companies;
guarantee indebtedness; and
create liens.
As a result of these covenants and restrictions, we are and will be limited in how we conduct our business, and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.
Our failure to comply with the restrictive covenants described above as well as others contained in our revolving credit facility from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms, our results of operations and financial condition could be adversely affected.

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Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our control, could result in an event of default that could materially and adversely affect our results of operations and our financial condition.
If there were an event of default under any of the agreements relating to our outstanding indebtedness, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. We cannot assure you that our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default. Further, if we are unable to repay, refinance or restructure our indebtedness under our secured debt, the holders of such debt could proceed against the collateral securing that indebtedness. In addition, any event of default or declaration of acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments. In addition, counterparties to some of our long-term customer contracts may have the right to amend or terminate those contracts if we have an event of default or a declaration of acceleration under certain of our indebtedness, which could adversely affect our business, financial condition or results of operations. Last, we could be forced into bankruptcy or liquidation. As a result, any default by us on our indebtedness could have a material adverse effect on our business and could impact our ability to make payments.
We may have exposure to additional tax liabilities.
As a multinational corporation, we are subject to income taxes in the U.S. and various foreign jurisdictions. Significant judgment is required in determining our global provision for income taxes and other tax liabilities. In the ordinary course of a global business, there are many intercompany transactions and calculations where the ultimate tax determination is uncertain. Our income tax returns are routinely subject to audits by tax authorities. Although we regularly assess the likelihood of adverse outcomes resulting from these examinations to determine our tax estimates, a final determination of tax audits or tax disputes could have an adverse effect on our results of operations and financial condition.
We are also subject to non-income taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes in the U.S. and various foreign jurisdictions. We are regularly under audit by tax authorities with respect to these non-income taxes and may have exposure to additional non-income tax liabilities which could have an adverse effect on our results of operations and financial condition.
In addition, our future effective tax rates could be favorably or unfavorably affected by changes in tax rates, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws or their interpretation. Such changes could have a material adverse impact on our financial results.
We may experience significant errors or security flaws in our products and services.
Despite testing prior to their release, software products frequently contain errors or security flaws, especially when first introduced or when new versions are released. The detection and correction of any security flaws can be time consuming and costly. Errors in our software products could affect the ability of our products to work with other hardware or software products, could delay the development or release of new products or new versions of products and could adversely affect market acceptance of our products. If we experience errors or delays in releasing new products or new versions of products, we could lose revenues. In addition, we run our own business operations and support and professional services on our products and networks and any security flaws, if exploited, could affect our ability to conduct internal business operations. End users, who rely on our products and services for applications that are critical to their businesses, may have a greater sensitivity to product errors and security vulnerabilities than customers for software products generally. Software product errors and security flaws in our products or services could expose us to product liability, performance and/or warranty claims as well as harm our reputation, which could impact our future sales of products and services. In addition, recent and future developments in information security laws and regulations may require us to publicly report security breaches of our products or services, which could adversely impact future business prospects for those products or services.
We depend on technology licensed to us by third parties, and the loss of this technology could delay implementation of our products or force us to pay higher license fees.
We license third-party technologies that we incorporate into our existing products, on which, in the aggregate, we may be substantially dependent. There can be no assurance that the licenses for such third-party technologies will not be terminated, that the licenses will be available in the future on terms acceptable to us or that we will be able to license third-party software for future products. In addition, we may be unable to renegotiate acceptable third-party license terms to reflect changes in our pricing models. While we do not believe that any one individual technology we license is material to our business, changes in or the loss of third-party licenses could lead to a material increase in the costs of licensing or to our software products becoming inoperable or their performance being materially reduced, with the result that we may need to incur additional development or licensing costs to ensure continued performance of our products. The risk increases if we acquire a company or a company’s intellectual property assets that have been subject to third-party technology licensing and product standards less

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rigorous than our own. We cannot exclude the possibility that adverse effects may result from a product of a business we acquire.
We depend on third-party suppliers for certain services and components and underperformance by these suppliers could cause us to lose customers and could harm our business.
We have outsourced our manufacturing requirements to third parties and rely on those suppliers to order components; build, configure and test systems and subassemblies; and ship products to meet our customers’ delivery requirements in a timely manner. Failure to ship product on time or failure to meet our quality standards would result in delays to customers, customer dissatisfaction or cancellation of customer orders.
If we have performance issues with our manufacturing sub-contractors, the process to move from one sub-contractor to another or manufacture products ourselves is a lengthy and costly process that could affect our ability to execute customer shipment requirements and might negatively affect revenues and costs. We depend on certain critical components in the production of our products. Some of these components such as certain server computers, integrated circuits, power supplies, connectors and plastic housings are obtained only from a single supplier and only in limited quantities. In addition, some of our major suppliers use proprietary technology and software code that could require significant redesign of our products in the case of a change in vendor. Further, suppliers could discontinue their products, or modify them in a manner incompatible with our current use, or use manufacturing processes and tools that could not be easily migrated to other vendors. Our inability to obtain these components from our current suppliers or quickly identify and qualify alternative suppliers could harm our ability to timely and cost-effectively produce and deliver our products.
We also outsource certain of our IT activities to third parties. We rely heavily on these vendors to provide day-to-day support. We may experience disruption in our business if these vendors or we have difficulty meeting our requirements, or if we need to transition the activities to other vendors or ourselves, which could negatively affect our revenues and costs.
Certain software we use is from open source code sources, which, under certain circumstances, may lead to unintended consequences and, therefore, could materially adversely affect our business, financial condition, operating results and cash flow.
Some of our products contain software from open source code sources. The use of such open source code may subject us to certain conditions, including the obligation to offer our products that use open source code for no cost. We monitor our use of such open source code to avoid subjecting our products to conditions we do not intend. However, the use of such open source code may ultimately subject some of our products to unintended conditions, so that we would be required to take remedial action that may divert resources away from our development efforts and therefore could have a material adverse effect on our business, financial condition, operating results and cash flow.
Man-made problems such as computer viruses may disrupt our operations and harm our operating results.
We rely on encryption, authentication technology and firewalls to provide security for confidential information transmitted to and from us over the Internet. Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. In the past, computer viruses and software programs that disable or impair computers have been distributed and have rapidly spread over the Internet. Computer viruses could be introduced into our systems or those of our customers or suppliers, which could disrupt our network or make it inaccessible to customers or suppliers. Our security measures may be inadequate to prevent security breaches, and our business would be harmed if we do not prevent them. In addition, we may be required to expend significant capital and other resources to protect against the threat of security breaches and to alleviate problems caused by breaches as well as by any unplanned unavailability of our internal IT systems.

Furthermore, if an actual or perceived breach of our customers’ network security occurs, allowing access to our customers’ data or their IT environments, regardless of whether the breach is attributable to our products, the market perception of the effectiveness of our products could be harmed. Because the techniques used by computer hackers to access or sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques. Alleviating any of these problems could require significant expenditures of our capital and diversion of our technical resources from development efforts. Additionally, these efforts could cause interruptions, delays or cessation of our product licensing, or modification of our software, which could cause us to lose existing or potential customers, which could materially adversely affect our business, financial condition, operating results and cash flow.

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We may not be able to prevent unauthorized or premature disclosure of our future strategies, technologies and products, resulting in competitive disadvantage.
We have established a range of IT security standards and organizational communication protocols to help ensure that internal, confidential communications and information about sensitive subjects such as our future strategies, technologies and products are not improperly or prematurely disclosed to the public. There is no guarantee that the established protective mechanisms will work in every case. Our competitive position could be compromised considerably if confidential information about the future direction of our strategies, technologies or products becomes public knowledge.
We may not be able to adequately protect our proprietary information or technology.
Our success depends in part upon our proprietary information and technology. We rely on a combination of copyright, patent, trademark and trade secret laws, as well as on confidentiality procedures and non-compete agreements, to establish and protect our proprietary rights in each of our market segments. Third parties may infringe or misappropriate our patents, trademarks, trade names, trade secrets or other intellectual property rights, which could adversely affect our business, results of operations and financial condition, and litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. The steps we have taken to deter misappropriation of our proprietary information and technology or customer data may be insufficient to protect us, and we may be unable to prevent infringement of our intellectual property rights or misappropriation of our proprietary information. Any infringement or misappropriation could harm any competitive advantage we currently derive or may derive from our proprietary rights. In addition, because we operate in many foreign jurisdictions, we may not be able to protect our intellectual property in the foreign jurisdictions in which we operate. Any actions taken in these countries may have results that are different than if such actions were taken under the laws of the United States. Patent litigation and other challenges to our patents and other proprietary rights are costly and unpredictable and may prevent us from marketing and selling a product in a particular geographic area. Our intellectual property also may otherwise fall into the public domain. If we are unable to protect our proprietary rights, we may be at a disadvantage to others who did not incur the substantial time and expense we incurred to create our products.
Our technology and services may infringe upon the intellectual property rights of others. Intellectual property infringement claims would be time consuming and expensive to defend and may result in limitations on our ability to use the intellectual property subject to these claims.
Customers have asserted in the past and may assert claims against us in the future alleging that our products violate or infringe upon third party intellectual property rights. We cannot assure you that the number of these notices will not increase in the future and that others will not claim that our proprietary or licensed products, systems and software are infringing their intellectual property rights or that we do not in fact infringe those intellectual property rights. We may be unaware of intellectual property rights of others that may cover some of our technology. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Any claims and any resulting litigation could subject us to significant liability for damages. An adverse determination in any litigation of this type could require us to design around a third party’s patent, license alternative technology from another party or reduce or modify our product and service offerings. In addition, litigation is time-consuming and expensive to defend and could result in the diversion of our time and resources. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims.
We are subject to litigation that could strain our resources and distract management.
From time to time, we are involved in a variety of claims, lawsuits and other disputes arising in the ordinary course of business. It is not feasible to predict the outcome of all pending suits and claims, and the ultimate resolution of these matters as well as future lawsuits could have a material adverse effect on our business, financial condition, results of operations or cash flows or reputation.
Our acquisitions of companies, products or technologies or internal restructurings and cost savings initiatives may disrupt our ongoing business, may involve increased expenses and may present risks not initially contemplated.
We have acquired and may continue to acquire companies, products and technologies that complement our strategic direction. Acquisitions involve significant risks and uncertainties, including:
inability to successfully integrate the acquired technology and operations into our business and maintain uniform standards, controls, policies, and procedures;
inability to realize synergies expected to result from an acquisition;
challenges retaining the key employees, customers, resellers and other business partners of the acquired operation;
the internal control environment of an acquired entity may not be consistent with our standards and may require significant time and resources to improve;

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expenses, including the settlement of tax contingencies, associated with the acquisition; and
unidentified issues not discovered in our due diligence process, including product or service quality issues, intellectual property issues and legal contingencies.
Acquisitions and divestitures are inherently risky. Our transactions may not be successful and may, in some cases, harm our operating results or financial condition. If we use debt to fund acquisitions or for other purposes, our interest expense and leverage may increase significantly. If we issue equity securities as consideration in an acquisition, current shareholders’ percentage ownership and earnings per share may be diluted.
In addition, from time to time we may undertake internal restructurings and other initiatives intended to reduce expenses. These initiatives may not lead to the benefits we expect, may be disruptive to our personnel and operations, and may require substantial management time and attention. Moreover, we could encounter delays in executing our plans, which could entail further disruption and associated costs. If these disruptions result in a decline in productivity of our personnel, negative impacts on operations, or if we experience unanticipated expenses associated with these initiatives, our business and operating results may be harmed.
Our future success depends on our ability to retain and attract key personnel, including key managerial, technical, marketing and sales personnel. Our inability to continue to attract and retain a sufficient number of qualified employees could adversely affect our business, results of operations and financial condition.
Our future success depends on the experience and continuing efforts and abilities of our management team and on the management teams of our operating subsidiaries. The loss of the services of one or more of these key employees could adversely affect our business, results of operations and financial condition. A large portion of our operations also require specially trained employees. From time to time, we must recruit and train qualified personnel at an accelerated rate in order to keep pace with our customers’ demands and our resulting need for specially trained employees. If we are unable to continue to hire, train and retain a sufficient labor force of qualified employees, our business, results of operations and financial condition could be adversely affected.
Because we have operations in countries outside of the U.S., we may be subject to political, economic and other conditions affecting these countries that could result in increased operating expenses and regulation.
We operate or rely upon businesses in numerous countries outside the U.S. We may expand further into additional countries and regions. There are risks inherent in conducting business internationally, including the following:
difficulties in staffing and managing international operations;
accounting (including managing internal control over financial reporting in our non-U.S. subsidiaries), tax and legal complexities arising from international operations;
burdensome regulatory requirements and unexpected changes in these requirements, including data protection requirements;
data privacy laws that may apply to the transmission of our customers’ and employee’s data to the United States;
localization of our services, including translation into foreign languages and associated expenses;
longer accounts receivable payment cycles and collection difficulties;
political and economic instability;
fluctuations in currency exchange rates;
potential difficulties in transferring funds generated overseas to the United States in a tax efficient manner, including for the payment of indebtedness;
seasonal reductions in business activity during the summer months in Europe and other parts of the world; and
potentially adverse tax consequences.
If we cannot manage our international operations successfully, our business, results of operations and financial condition could be adversely affected.

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We are subject to regulation under U.S. and Irish export control laws.
As an exporter of certain items such as software that includes encryption capabilities, we are subject to U.S. laws and regulations governing international trade and exports, including, but not limited to, the Export Administration Regulations, administered by the U.S. Department of Commerce Bureau of Industry and Security. In addition, we are subject to economic sanctions against embargoed countries, administered by the Office of Foreign Assets Control within the U.S. Department of the Treasury. With the establishment of our shared services centers in Ireland, we are also subject to Irish export control laws administered by the Department for Enterprise, Trade and Investment. A determination that we have failed to comply with one or more of these export control or economic sanctions laws or regulations could result in significant civil or criminal penalties, including the imposition of fines upon us, as well as the denial of export privileges and debarment from participation in U.S. and other countries’ government contracts. In addition, changes to international trade and export or import laws and regulations could adversely affect our business, results of operations and financial condition.
Changes in foreign exchange rates may adversely affect our revenue and net income attributed to foreign subsidiaries.
We conduct business in countries outside of the United States. Revenue and expense from our foreign operations are typically denominated in local currencies, thereby creating exposure to changes in exchange rates. Revenue and profit generated by our international operations will increase or decrease compared to prior periods as a result of changes in foreign currency exchange rates. Adverse changes to foreign exchange rates could decrease the value of revenue we receive from our international operations and have a material adverse impact on our business. Generally, we do not attempt to hedge our foreign currency transactions.
Future changes to generally accepted accounting principles may negatively impact our operating results or ability to operate our business.
Revisions to generally accepted accounting principles or related rules of the Securities & Exchange Commission ("SEC") will require us to review our accounting and financial reporting procedures in order to ensure continued compliance. From time to time, such changes have an impact on our accounting and financial reporting, and these changes may impact market perception of our financial condition. In addition, new legislation or regulations may lead to an increase in our costs related to audits in particular and regulatory compliance generally. A failure to comply with these new laws and regulations could materially harm our business.
Fraud and errors may still occur despite our disclosure controls and procedures and internal controls we have implemented. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.
Increases in interest rates could increase interest payable under our variable rate indebtedness.
We are subject to interest rate risk in connection with variable rate indebtedness. Interest rate changes could increase the amount of our interest payments and thus negatively impact our future earnings and cash flows. We currently estimate that our annual interest expense on our floating rate indebtedness under our senior secured credit facility would increase by approximately $5.0 million for each increase in interest rates of 1% once interest rates rise above our 1.75% LIBOR floor. If we do not have sufficient earnings, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or sell more securities, none of which we can guarantee we will be able to do.
Business disruptions could affect our operating results.
A significant portion of our research and development activities and certain other critical business operations is concentrated in a few geographic areas. We are a highly automated business and a disruption or failure of our systems could cause delays in completing sales and providing services. A major earthquake, fire or other catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems, or the critical business or information technology systems of our service providers, could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be materially and adversely affected.
We cannot predict every event and circumstance that may impact our business and, therefore, the risks and uncertainties discussed above may not be the only ones you should consider.
The risks and uncertainties discussed above are in addition to those that apply to most businesses generally. In addition, as we continue to grow our business, we may encounter other risks of which we are not aware at this time. These additional risks may cause serious damage to our business in the future, the impact of which we cannot estimate at this time.

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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2014 we had 42 offices located in 20 countries. This included seven primary sales, research and development facilities located in India, the United Kingdom and the United States. Our real property portfolio consisted of aggregate floor space of approximately 512,000 square feet, all of which is leased. We believe that all of our facilities and equipment are in good condition and are well maintained. For information regarding property, plant and equipment by geographic region for each of the last two fiscal years, see Note 24 of Item 8 of this Annual Report on Form 10-K.
Item 3. Legal Proceedings
The information set forth under Note 22 of Item 8 of this Annual Report on Form 10-K is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.


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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
There is no established public trading market for our common stock or preferred stock. We have not declared or paid cash dividends for the past two fiscal years and our ability to pay dividends is restricted by the instruments governing our outstanding indebtedness. Any payment of cash dividends on our common stock in the future will be at the discretion of our board of directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual restrictions and other factors deemed relevant by our board of directors.
The Company has 50,000 shares authorized and one share issued at a par value of $1.00 . Aspect Software Group Holdings Ltd. is the Company's sole shareholder.
Item 6. Selected Financial Data
The following table sets forth selected financial data as of and for the last five fiscal years. This selected financial data should be read in conjunction with the consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K. Over the last five fiscal years, we have acquired a number of companies including a majority interest in Bright Pattern in 2013, Voxeo Corporation in 2013, Corsidian entities in Brazil, Mexico and Puerto Rico and certain assets and liabilities of Corsidian's Columbia entity in 2011, and Quilogy, Inc. in fiscal 2010. The results of our acquired companies have been included in our consolidated financial statements since their respective dates of acquisition.
 
 
Years Ended December 31,
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
(dollars in thousands)
Net revenues
 
$
444,897

 
$
436,778

 
$
442,711

 
$
515,600

 
$
506,783

Income from operations
 
62,034

 
56,854

 
64,673

 
110,618

 
106,532

Net (loss) income
 
(33,820
)
 
6,058

 
(1,388
)
 
40,189

 
22,013

Cash and cash equivalents
 
17,030

 
26,694

 
80,838

 
139,813

 
84,844

Total assets
 
951,861

 
981,886

 
876,097

 
993,833

 
983,392

Total debt
 
781,505

 
807,930

 
711,463

 
789,683

 
801,147

Total liabilities
 
1,006,555

 
1,027,359

 
932,282

 
1,050,779

 
1,078,801

Total shareholder's deficit
 
(54,694
)
 
(45,473
)
 
(56,185
)
 
(56,946
)
 
(95,409
)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Item 1A. “Risk Factors.”
Overview
We are a global provider of customer contact and workforce optimization solutions. We help our customers build, enhance and sustain stronger relationships with their customers by uniting enterprise technologies with customer contact solutions. Through seamless, two-way communications across phone, chat, email, IVR, IM, SMS and social channels, we equip companies with the tools and technologies needed to serve today's demanding customers. Aspect solutions enable organizations to integrate customer contact and workforce optimization solutions into existing enterprise technology investments for companies looking to ensure a consistent and integrated multi-channel customer support experience while creating more productive business processes. We believe that this integrated multi-channel solution approach drives enhanced business efficiencies, fosters loyalty and grows customer value. Our customer contact and workforce optimization software can enhance business processes throughout the organization by incorporating interaction management, collaboration and other enterprise technologies. Our interaction management applications for customer contact are built on feature-rich, high-availability, next-generation platforms that fully leverage real-time communications and intelligent workflows, enabling organizations to maintain best practices while engaging consumers through the channels and devices they expect, including social media and mobile services.


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Acquisitions
On October 4, 2013, we acquired a 54% interest in Bright Pattern, a leading provider of next generation cloud-based contact center and customer experience management solutions for $6.7 million. We concurrently entered into a reseller agreement which grants us the right to market and distribute Bright Pattern's products and services. Our investment in Bright Pattern led to the January 2014 release of our cloud-based contact center offering, Zipwire, which provides the right blend of enterprise-grade functionality, reliability, and scalability not otherwise available in the industry. Bright Pattern had 34 employees and a negligible amount of annual revenue in 2012.
On July 25, 2013, we acquired Voxeo, a leading provider of hosted and on-premise IVR solutions and a leading platform provider for Communications Enabled Business Processes. The Voxeo acquisition significantly enhanced our ability to support cloud, hybrid and premise-based deployments while adding a market-leading IVR and multi-channel self-service capability to our solution portfolio. The purchase price was $145.0 million, subject to customary adjustments for items such as working capital, cash, and certain specified payments. We funded the acquisition purchase price by drawing $85.0 million of additional term loans and issuing an additional $25.0 million of second lien notes with the residual amount addressed from our cash on hand. Voxeo had 145 employees and annual revenue of approximately $44 million in 2012.
On February 4, 2013, we acquired a 10% interest in eg solutions plc. ("eg"), a back office optimization software company in the United Kingdom for $1.9 million. We concurrently entered into a reseller agreement which grants us the right to market and distribute eg's products and services in all territories with exclusivity rights in all territories other than Europe, Middle East and Africa. We must achieve minimum annual revenue targets to maintain the exclusivity rights and we were issued a conditional warrant to purchase up to 400,000 eg shares,which is approximately 2% of its current outstanding equity, at a price of 79 pence per share based upon annual revenue levels within the first two years of the agreement.

Results and Trends in 2014
Our Core business includes our Interaction Management and Workforce Optimization offerings and our Signature business includes our legacy hardware offerings. Our strategy has been focused on migrating our Signature customers to on-premise or cloud Unified IP solutions, targeting new customers and better leveraging Workforce Optimization up-sell opportunities to offset lower contribution from our Signature business. Total revenue from our Core solutions increased by more than 9% in 2014 compared to the prior year, as we added 134 new customers to our customer portfolio. Orders for our cloud-based deployments grew 28% year over year as we continued to experience an increase in customers moving from on-premise to cloud-based alternatives. A key element of our 2014 strategy was to expand our cloud solution portfolio as well as our global data center footprint as we expect cloud-based subscriptions to increase as a percentage of our total recurring revenue. In 2014, we continued to increase our investments in research and development activities while reducing our overall operating expenses by relocating certain resources to lower cost geographies.
We have identified certain items that management uses as performance indicators to manage our business, including revenue and Adjusted EBITDA, and we describe these items further below.

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Financial Summary
The following table sets forth, for the periods presented, our results of operations expressed in dollars and as a percentage of net revenue. In the table below and throughout this “Management's Discussion and Analysis of Financial Condition and Results of Operations,” consolidated statements of income data for the years ended December 31 2014 , 2013 and 2012 have been derived from our audited consolidated financial statements which are included elsewhere in this annual report. The information contained in the table below should be read in conjunction with our consolidated financial statements and the related notes.
(Dollars in millions)
Years Ended December 31,
 
Years Ended December 31
 
2014
 
2013
 
2012
 
2014
 
2013
 
2012
Net revenues
$
444.9

 
$
436.8

 
$
442.7

 
100
 %
 
100
 %
 
100
 %
Total cost of revenues
191.4

 
174.7

 
175.7

 
43
 %
 
40
 %
 
40
 %
Gross profit
253.5

 
262.1

 
267.0

 
57
 %
 
60
 %
 
60
 %
Operating expenses
191.5

 
205.2

 
202.3

 
43
 %
 
47
 %
 
46
 %
Income from operations
62.0

 
56.9

 
64.7

 
14
 %
 
13
 %
 
15
 %
Interest and other expense, net
(74.9
)
 
(70.4
)
 
(67.7
)
 
(17
)%
 
(16
)%
 
(15
)%
Loss before income taxes
(12.9
)
 
(13.5
)
 
(3.0
)
 
(3
)%
 
(3
)%
 
(1
)%
Provision for (benefit from) income taxes
22.6

 
(19.2
)
 
(1.6
)
 
5
 %
 
(4
)%
 
 %
Net (loss) income
(35.5
)
 
5.7

 
(1.4
)
 
(8
)%
 
1
 %
 
(1
)%
Less: Net loss attributable to noncontrolling interest
(1.6
)
 
(0.4
)
 

 
 %
 
 %
 
 %
Net (loss) income attributable to Aspect Software Parent, Inc.
$
(33.9
)
 
$
6.1

 
$
(1.4
)
 
(8
)%
 
1
 %
 
(1
)%
Adjusted EBITDA
Earnings before interest, taxes, depreciation and amortization, as adjusted (“Adjusted EBITDA”) is used in our debt agreements to determine compliance with financial covenants and our ability to engage in certain activities, such as making certain payments. In addition to covenant compliance, our management also uses Adjusted EBITDA to assess our operating performance and to calculate performance-based cash bonuses which are tied to Adjusted EBITDA targets. Adjusted EBITDA contains other charges and gains, for which we believe adjustment is permitted under our senior secured credit agreement. Adjusted EBITDA is not a measure of our liquidity or financial performance under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measures derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. The use of Adjusted EBITDA instead of income from operations has limitations as an analytical tool, including the failure to reflect changes in cash requirements, including cash requirements necessary to service principal or interest payments on our debt, or changes in our working capital needs. Management compensates for these limitations by relying primarily on our GAAP results and by using Adjusted EBITDA on a supplemental basis. Other companies in our industry may calculate this measure differently than we do, limiting its usefulness as a comparative measure.
The following is a reconciliation of income from operations to Adjusted EBITDA:
 
(In millions)
 
Years Ended December 31,
 
 
2014
 
Change ($)
 
2013
 
Change ($)
 
2012
Income from operations
 
$
62.0

 
$
5.1

 
$
56.9

 
$
(7.8
)
 
$
64.7

Depreciation and amortization
 
22.9

 
(14.4
)
 
37.3

 
(6.0
)
 
43.3

Stock based compensation
 
0.4

 
(0.1
)
 
0.5

 

 
0.5

Sponsor management fees
 
2.0

 

 
2.0

 

 
2.0

Severance costs
 
7.5

 
0.8

 
6.7

 
2.8

 
3.9

Cost savings initiatives
 
6.1

 
2.9

 
3.2

 
3.2

 

Facilities restructuring charges
 
3.3

 
3.3

 

 
(2.6
)
 
2.6

Acquisition related costs & adjustments
 

 
(7.3
)
 
7.3

 
7.3

 

Other (1)
 
2.5

 
(1.3
)
 
3.8

 
(1.2
)
 
5.0

Adjusted EBITDA
 
$
106.7

 
$
(11.0
)
 
$
117.7

 
$
(4.3
)
 
$
122.0

 

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(1)
These costs represent amounts that are allowed to be added back for calculation of compliance with our debt agreement covenants, including; acquisition related adjustments to revenue, debt related costs, foreign withholding taxes, and certain non-recurring charges.
Net Revenues
The following table presents the breakdown of net revenues:
(In millions)
 
Years Ended December 31,
 
 
2014
 
Change ($)
 
2013
 
Change ($)
 
2012
Product revenue
 
$
74.2

 
$
(0.5
)
 
$
74.7

 
$
5.8

 
$
68.9

Recurring revenue
 
291.6

 
9.0

 
282.6

 
(3.2
)
 
285.8

Services revenue
 
79.1

 
(0.3
)
 
79.4

 
(8.6
)
 
88.0

Total revenue
 
$
444.9

 
$
8.2

 
$
436.7

 
$
(6.0
)
 
$
442.7

Product
Our product revenue is comprised of software sales that are installed on a customer's premise. Product revenue was slightly lower in 2014 compared to the prior year period. During 2014, we continued to experience lengthening decision and approval cycles and many customers remain cautious with capital investments resulting in a prolonged sales cycle. Our Voxeo acquisition complimented our managed services offering by adding a hosted deployment alternative. Hosted offerings allow capital investment cautious customers an opportunity to delay cash outflow by switching from up front license fees to a recurring service. Over the past eighteen months we have had many customers change their deployment model from on-premise to either hosted or managed services. We expect this trend to continue and we will continue to invest in these alternative deployment methods across our broad scale customer base.
The increase in product revenue in 2013 when compared to the prior year is primarily related to a solid fourth quarter where our strategy to offset the decline in demand for our legacy Signature product sales with growth in Unified IP, new customers and Workforce Optimization up-sell opportunities materialized. Product revenue in the fourth quarter of 2013 was 50% higher than the prior year quarter. During 2013, our product revenue was negatively impacted by our customers shifting away from on-premise deployment to either hosted or managed services deployment models. For example, during 2013 we had two significant customers opt for multi-year hosting and managed services agreements with aggregate contract values of more than $15 million each. Hosted offerings allow capital investment cautious customers the opportunity to delay cash outflow by switching from up front license fees to a recurring service. We expect this trend to continue and we will continue to invest in these alternative deployment methods across our broad scale customer base.
Recurring
(In millions)
 
Years Ended December 31,
 
 
2014
 
Change ($)
 
2013
 
Change ($)
 
2012
Cloud revenue
 
$
49.3

 
$
28.6

 
$
20.7

 
$
18.9

 
$
1.8

Core maintenance revenue
 
161.9

 
5.5

 
156.4

 
7.6

 
148.8

Signature maintenance revenue
 
80.4

 
(25.1
)
 
105.5

 
(29.7
)
 
135.2

Total revenue
 
$
291.6

 
$
9.0

 
$
282.6

 
$
(3.2
)
 
$
285.8

Cloud revenue is comprised of hosting and managed service revenue. Our Cloud revenue increased during 2014 as we recognized a full year of Voxeo's business and a large managed services contract in the current year. Additionally, we had organic growth in this business during 2014 as we expanded our cloud deployed product portfolio. Our acquisition of Voxeo in July 2013 significantly enhanced our ability to support cloud, hybrid and premise-based deployments while adding a market-leading IVR and multi-channel self-service capability to our solution portfolio. We expect this revenue stream to continue to become a more significant component of our total revenue as both prospective customers and existing customers opt for solutions requiring lower start up costs and predictable ongoing operating expenses. Our hosting and managed services deals typically include a service ramp up schedule of six or more months before the customer reaches their monthly committed booking level. This can result in a considerable conversion lag between bookings and revenue. We expanded our data center capabilities and coverage areas and we are focused on ease of implementation to accelerate the earnings process for these deals.
Our Core maintenance revenue increased during 2014 and 2013, when compared to the prior year periods as we experienced significant growth in Voxeo and WFO on premise upsell opportunities. Substantially all of our customers subscribe to maintenance when purchasing our on premise solutions.

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Our Signature maintenance revenue decreased during 2014 and 2013, when compared to the prior year periods as we migrated many of these customers to on premise or cloud Unified IP solutions. Additionally, we have experienced some customer consolidation due to license decommissioning resulting from agent downsizing. As customers migrate from Signature products, we have experienced some competitive displacements as the customer typically follows a request for proposal ("RFP") process when upgrading their contact center solution. In some cases our customers began migrating to the competitive platform in previous years.
As our business continues to shift from on premise deployment to the cloud, our off balance sheet contracted unbilled revenue balance will continue to grow. The deferred revenue balance on our consolidated balance sheet does not represent the total contract value of annual or multi-year, non-cancelable hosting and managed services agreements. Contracted unbilled revenue represents future billings under our hosting and managed services agreements that have not been invoiced and, accordingly, are not recorded in deferred revenue. The following schedule outlines our contractual on balance sheet and off balance sheet amounts that we expect to recognize as revenue as well as an estimate for minute usage revenue for our cloud customers which is based on historical activity.
(In millions)
 
Years Ended December 31,
 
 
2014
 
Change ($)
 
2013
 
Change ($)
 
2012
Deferred revenue - on balance sheet
 
$
72.4

 
$
(8.7
)
 
$
81.1

 
$
(8.2
)
 
$
89.3

Contracted unbilled revenue - off balance sheet
 
69.4

 
15.8

 
53.6

 
53.6

 

Anticipated minute usage revenue - off balance sheet
 
21.6

 
6.3

 
15.3

 
15.3

 

Total
 
$
163.4

 
$
13.4

 
$
150.0

 
$
60.7

 
$
89.3

Our typical cloud contract length is between 12 and 36 months. We expect that the amount of contracted unbilled revenue will change from period to period for several reasons, including the specific timing and duration of large customer hosting and managed services agreements, varying billing cycles of these agreements, the specific timing of customer renewals, foreign currency fluctuations, the timing of when contracted unbilled revenue is to be recognized, and changes in customer financial circumstances.
Services
Services revenue is comprised of consulting, implementation and education revenue. Services revenue was relatively consistent at approximately $79 million for the years ended December 31, 2014 and 2013. The decline in services revenue in 2013, compared to the prior year is primarily the result of the timing of our product revenue volume closing late in 2013 as our revenue from customers purchasing installation services lags their product order.
For information regarding net revenue by geographic region see Note 24 of Item 8 of this Annual Report on Form 10-K.
Cost of Revenues
The following table presents the breakdown of cost of revenues:
(In millions)
 
Years Ended December 31,
 
 
2014
 
Change ($)
 
2013
 
Change ($)
 
2012
Cost of product revenue
 
$
20.6

 
$
0.1

 
$
20.5

 
$
(2.8
)
 
$
23.3

Cost of recurring revenue
 
92.6

 
14.9

 
77.7

 
4.0

 
73.7

Cost of services revenue
 
73.3

 
2.9

 
70.4

 
(2.8
)
 
73.2

Amortization expense for acquired intangible assets
 
4.9

 
(1.2
)
 
6.1

 
0.6

 
5.5

Total cost of revenues
 
$
191.4

 
$
16.7

 
$
174.7

 
$
(1.0
)
 
$
175.7

The following table presents gross profit as a percentage of related revenue:
 
 
Years Ended December 31,
 
 
2014
 
Change (pts)
 
2013
 
Change (pts)
 
2012
Product gross margin
 
72.3
%
 
(0.3
)
 
72.6
%
 
6.4

 
66.2
%
Recurring gross margin
 
68.2
%
 
(4.3
)
 
72.5
%
 
(1.7
)
 
74.2
%
Services gross margin
 
7.3
%
 
(4.0
)
 
11.3
%
 
(5.6
)
 
16.9
%

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Table of Contents

Product
As the composition of our product revenue has continued to shift from Signature to our Core solutions during 2014 and 2013 our product gross margins benefited from these solutions having considerably less hardware costs, which results in more favorable gross margins. Product gross margin in 2012 were unfavorably impacted by approximately $2.3 million of additional excess and obsolete inventory reserves recorded during the year. The increase in inventory reserves related to excess Signature inventory on hand based upon the significant decrease in anticipated future sales of our Signature product as the majority of customers are migrating to our Core solutions.
Recurring
 
 
Years Ended December 31,
 
 
2014
 
Change (pts)
 
2013
 
Change (pts)
 
2012
Cloud gross margin
 
47.1
%
 
(13.4
)
 
60.5
%
 
*

 
*

Maintenance gross margin
 
72.5
%
 
(1.0
)
 
73.5
%
 
(0.6
)
 
74.1
%
* not meaningful given the low volume
Cloud gross margins for 2014 were lower than the prior year primarily due to our investment in our data center expansion and technical staff to support our expanding cloud customer base. We are rapidly adding new cloud-based customers and have built out our data centers for potential customers in advance of revenue generation. We expect these margins to improve as we grow this business.
Maintenance gross margins were unfavorably impacted by severance costs resulting from workforce redistributions that occurred in 2014 and 2013 to ultimately reduce overall costs and better deliver service to our customers. Excluding the impact of these actions, maintenance gross margins were relatively consistent when comparing 2014 and 2013 to the prior year periods.
Services
During 2014 we redesigned the structure of our professional services organization to realign, invest and hire the skill sets necessary to better meet customer experience expectations and improve utilization. These actions resulted in additional one-time separation costs during the current year which had an unfavorable impact on gross margins. During 2014, we made significant progress in growing our project backlog, improving our realized billing rate and increasing our stand-alone services opportunities to reduce our dependency on product bookings.
Our services gross margin during 2013 was unfavorably impacted by lower volume of projects due to the timing of our product revenue volume closing late in 2013. Our revenue from customers purchasing installation services lags their product order.
Amortization
During 2014, amortization expense for acquired intangible assets decreased as compared to the prior year as legacy balances were fully depleted. During 2013, amortization expense for acquired intangible assets increased as compared to the prior year as the result of the Voxeo acquisition.

28

Table of Contents

Operating Expenses
(In millions)
 
Years Ended December 31,
 
 
2014
 
Change ($)
 
2013
 
Change ($)
 
2012
Research and development
 
$
51.1

 
$
0.9

 
$
50.2

 
$
9.6

 
$
40.6

Selling, general and administrative
 
129.0

 
(2.6
)
 
131.6

 
2.9

 
128.7

Amortization expense for acquired intangible assets
 
8.1

 
(15.3
)
 
23.4

 
(7.3
)
 
30.7

Restructuring charges
 
3.3

 
3.3

 

 
(2.3
)
 
2.3

Total
 
$
191.5

 
$
(13.7
)
 
$
205.2

 
$
2.9

 
$
202.3

Research & Development
The increase in research and development expenses in 2014, compared to the prior year is primarily related to the current year including a full year of Voxeo headcount expenses, as well as increased investment in tools to improve our development and delivery of new and enhanced solutions. The increase in research and development expenses for 2013, is primarily related to an increase in headcount of approximately 10% in 2013 compare to the prior year. We increased our research and development spend as we sought to expand our product development portfolio with next generation customer contact solutions. Customer contact solutions are evolving with consumers to provide multichannel interactions utilizing unified communications and collaboration platforms to improve agent productivity and customer satisfaction.
Selling, General & Administrative
The decrease in selling, general and administrative expenses in 2014 is primarily related to cost reduction initiatives which included workforce adjustments to lower cost geographies as well as reduced overall headcount. The increase in selling, general and administrative expenses in 2013 as compared to 2012 is primarily related to third party costs related to our Voxeo acquisition.
Amortization Expense for Acquired Intangible Assets
Amortization expense for acquired intangible assets in both 2014 and 2013 decreased as compared to the same period in the prior years as certain assets became fully amortized.
Restructuring Charges
Restructuring charges during 2014 relate to vacating excess capacity office space in certain facilities in the United States. Restructuring charges during 2012 consisted of organizational realignments as well as a workforce reduction in response to a decline in revenue volume. In addition, we incurred restructuring charges relating to reducing our office space in the United Kingdom during 2012.
Interest and Other Expense, Net
The components of interest and other expense, net, were as follows:
(In millions)
 
Years Ended December 31,
 
 
2014
 
Change ($)
 
2013
 
Change ($)
 
2012
Interest expense, net
 
$
76.0

 
$
4.4

 
$
71.6

 
$
5.9

 
$
65.7

Exchange rate (gain) loss
 
(0.9
)
 
(0.3
)
 
(0.6
)
 
(3.5
)
 
2.9

Other (income) expense, net
 
(0.2
)
 
0.4

 
(0.6
)
 
0.3

 
(0.9
)
Total interest and other expense, net
 
$
74.9

 
$
4.5

 
$
70.4

 
$
2.7

 
$
67.7

Interest expense for 2014 and 2013 increased as compared to 2012 due to increased debt levels resulting from $85.0 million of incremental delayed draw term loan and $25.0 million of issued second lien notes to partially fund the Voxeo acquisition in July 2013.
We experienced an exchange rate gain in the years ended December 31, 2014 and 2013 compared to losses in 2012 , as the United States dollar strengthened against foreign currencies in 2012.

29

Table of Contents

Income Taxes
The following table presents (benefit from) provision for income taxes and the effective tax rate:
(Dollars in millions)
 
Years Ended December 31,
 
 
2014
 
Change
 
2013
 
Change
 
2012
Provision for (benefit from) income taxes
 
$
22.6

 
$
41.8

 
$
(19.2
)
 
$
(17.6
)
 
$
(1.6
)
Effective tax rate
 
(57.6
)%
 
197.9 pts

 
140.3
%
 
89.1 pts

 
51.2
%
The increase in the provision for income taxes for the year ended December 31, 2014 as compared to the prior year is primarily related to an increase in the valuation allowance on our United States deferred tax assets as we determined it was more likely than not that these deferred tax assets would not be realizable. This determination was based upon consideration of a number of factors and weighing all evidence available as of December 31, 2014.

The increase in benefit from income taxes for the year ended December 31, 2013 as compared to the prior year is primarily due to a significant release of a portion of the valuation allowance on our United States deferred tax assets as a result of our Voxeo acquisition as we determined these deferred tax assets were more likely than not realizable.
LIQUIDITY AND CAPITAL RESOURCES
Our existing cash balance generated by operations and borrowings available under our credit facilities have served as
our primary sources of short-term liquidity. During 2014, the holders of certain of Aspect Software Group Holdings
Ltd.’s shares contributed approximately $27.0 million of cash. Approximately $7 million of this amount was to solution a covenant deficiency in the second quarter of 2014 and the remainder was in connection with the November 2014 debt amendment which provided additional covenant flexibility. Our Credit Agreement allows no more than two equity cures in any trailing four quarter period. Based on our current level of operations, we believe that our existing cash balance, cash flows generated from operations and borrowings available under our credit facilities will be adequate to meet our liquidity needs for at least the next 12 months.
A condensed statement of cash flows for the years ended December 31, 2014 , 2013 and 2012 follows:
(In millions)
 
Years Ended December 31,
 
 
2014
 
2013
 
2012
 
Net cash provided by:
 
 
 
 
 
 
 
Net (loss) income
 
$
(35.5
)
 
$
5.7

 
$
(1.4
)
 
Adjustments to net (loss) income for non-cash items
 
38.1

 
16.8

 
51.1

 
Changes in operating assets and liabilities
 
3.5

 
(10.1
)
 
(25.0
)
 
Operating activities
 
6.1

 
12.4

 
24.7

 
Investing activities
 
(13.2
)
 
(158.2
)
 
(5.1
)
 
Financing activities
 
(2.7
)
 
92.3

 
(80.4
)
 
Effect of exchange rate changes
 
0.1

 
(0.6
)
 
1.8

 
Net change in cash and cash equivalents
 
(9.7
)
 
(54.1
)
 
(59.0
)
 
Cash and cash equivalents at beginning of period
 
26.7

 
80.8

 
139.8

 
Cash and cash equivalents at end of period
 
$
17.0

 
$
26.7

 
$
80.8

 
Net Cash Provided by Operating Activities
 
T he decrease in net cash provided by operating activities for the year ended December 31, 2014 as compared to the prior year was primarily related to increased interest payments as a result of the additional principal we issued to partially fund the Voxeo acquisition as well as 2014 representing a full year of Voxeo expenses.

The decrease in net cash provided by operating activities for the year ended December 31, 2013 as compared to December 31, 2012 was primarily due to increased interest payments and acquisition related expenses during 2013.
Net Cash Used In Investing Activities
 
Net cash used in investing activities for the year ended December 31, 2014 primarily represents our investments in our hosting data centers, revitalization of our office spaces and equipment purchases.


30


Net cash used in investing activities for the year ended December 31, 2013 primarily consisted of our $142.1 million acquisition of Voxeo, $6.7 million investment in Bright Pattern and $1.9 million investment in eg. Net cash used in investing activities for the year ended December 31, 2013 also included $11.1 million of capital expenditures compared to $5.1 million in the prior year. This additional investment in 2013 is primarily related to the establishment of our corporate headquarters in Phoenix, Arizona as well as an initiative to revitalize each of our existing office spaces.
Net Cash Used In/Provided by Financing Activities

Net cash used in financing activities for the year ended December 31, 2014 reflects scheduled quarterly principal payments to our first-lien lenders, draws and repayments under our revolver and $2.8 million of fees related to our November covenant amendment. The aforementioned $27 million capital contribution partially offset these financing uses of cash in the current year.
Net cash provided by financing activities for the year ended December 31, 2013 primarily represented $110.0 million of additional debt to fund a portion of our Voxeo acquisition partially offset by scheduled principal payments under our debt facilities and debt issuance fees.
Existing Credit Facilities
Outstanding debt obligations consist of the following:
 
As of December 31,
(in thousands)
2014
 
Senior secured term loan
$
450,979

 
Senior secured revolving credit line
11,000

 
Senior second lien notes
319,526

 
Subtotal debt
781,505

 
Less-contractual current maturities
17,094

 
Total long-term borrowings
$
764,411

 
Credit Facility
Our Credit Facility consists of an outstanding senior secured term loan maturing May 7, 2016 and a $30.0 million senior secured revolving facility with a maturity date of February 7, 2016. The Credit Facility can be increased by $100.0 million under certain circumstances.
Our first lien credit facility bears interest at the greater of USD LIBOR or 1.75% , plus a margin of 5.25% . The interest rate is subject to a further 25 basis point increase if our most recently announced corporate credit rating is below the following criteria: (1) Moody's is not B2 or better and (2) Standard & Poor's is not B or better. If we are able to achieve a certain Leverage Ratio as defined, the additional 5.25% of interest will be reduced by up to 0.50% . Since the inception of the first lien credit facility, LIBOR has remained below 1.75% and we have not achieved the Leverage Ratios required for a reduction in the additional rate.
In connection with our November 2014 debt amendment, in the event our Credit Facility has not been either refinanced or paid in full prior to June 30, 2015, a 50 basis points fee will be payable in cash and the annual interest rate will increase by 25 basis points which will be payable in kind by the issuance of additional term loans.
Our $30.0 million revolving credit line bears interest at USD LIBOR plus a margin of 5.25%.
Mandatory prepayments of the term loans are required upon the occurrence of certain events, as defined in the credit facility agreement, in addition to a percentage of our annual excess cash flow, as defined. The percentage is determined based on our leverage ratio as of 10 business days after the end of each fiscal year commencing with fiscal 2011 and ranges from 0% to 50% . As of December 31, 2011, we calculated a mandatory prepayment of approximately $27 million , which was included in current portion of long-term debt and was paid in April 2012. As of December 31, 2014, 2013 and 2012, our calculation did not result in a mandatory prepayment.
In the event of a prepayment of principal, the required quarterly principal payments following the voluntary payment are not required to the extent that the voluntary payment affords, and to the extent that the prepayment exceeds the scheduled required principal payments. Principal payments of $1.5 million are due quarterly until the final principal payment of the then outstanding principal which is due in May 2016 and will only be impacted by mandatory prepayments made after the amendment date, if applicable.

31


The credit facility agreements include customary representations, covenants, and warranties. The financial covenants include minimum interest coverage ratios, leverage ratio maximums, and a maximum capital expenditures test to be reviewed on a quarterly basis. We were in compliance with these covenant requirements as of December 31, 2014. Based on our annual operating plan for 2015, we believe we will be in compliance with the financial covenants during 2015. If we are unable to maintain compliance with such covenants and the lenders do not waive the event of non-compliance, the lenders may accelerate payment of the debt.
The facility also limits our ability to make capital expenditures in excess of $15.0 million in any fiscal year, provided however, that we may carry forward unused amounts of our capital expenditures allowance to the next succeeding fiscal year.
Senior Second Lien Notes
The senior second lien notes require semiannual interest payments fixed at 10.625% . The entire principal amount is due at maturity of the loan in May 2017.
Our obligations under the notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by Aspect Software Parent, Inc. and each of our direct and indirect domestic subsidiaries that guarantee our senior secured credit facility and on a senior unsecured basis by Holdings. The notes and the related note guarantees are secured by a second lien on substantially all of our and each guarantor's assets, other than certain excluded assets. The indenture governing the notes contains covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to: incur additional indebtedness; pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments; enter into agreements that restrict distributions from restricted subsidiaries; sell or otherwise dispose of assets, including capital stock of restricted subsidiaries; enter into transactions with affiliates; create or incur liens and merge, consolidate or sell substantially all of our assets. These covenants are subject to important exceptions and qualifications.
We evaluated compliance with our financial covenants for 2015 based on our most recent forecast and we believe that we will meet each of our financial covenant requirements in 2015.
The revolving credit facility matures on February 7, 2016, the First Lien Credit Facility matures on May 7, 2016, and the Senior Second Lien Notes mature in May 2017. Because we lack the cash flow from operations to fully pay the Credit Facility and Senior Second Lien Notes at maturity, we will have to seek a restructuring, amendment or refinancing of our debt, or if necessary, pursue additional debt or equity offerings, in advance of the debt becoming due. Our ability to restructure, amend or refinance our debt, or to issue additional debt or equity, will depend upon, among other things: (1) the condition of the capital markets at the time, which is beyond our control; (2) our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, many of which are beyond our control; and (3) our continued compliance with the terms and covenants in our Credit Facility and Senior Second Lien Notes that govern our debt.
Contractual Cash Obligations and Commitments
We enter into long-term contractual obligations and commitments in the normal course of business, primarily debt obligations and non-cancelable operating leases. Other than operating leases that are detailed below, we do not utilize variable interest entity financing or any other form of off-balance sheet financing. As of December 31, 2014 , our contractual cash obligations and commercial commitments over the next several periods are set forth below.  
 
 
Payments Due by Period  
 
(in thousands)
 
Total
 
< 1 Year  
 
1 - 3 Years  
 
3 - 5 Years  
 
> 5 Years  
Debt (1)
 
$
782,400

 
$
6,100

 
$
776,300

 
$

 
$

Operating leases (2)
 
28,852

 
8,786

 
12,505

 
4,696

 
2,865

Total
 
$
811,252

 
$
14,886

 
$
788,805

 
$
4,696

 
$
2,865

 
(1)
Amounts shown in the table above exclude interest in an aggregate amount of approximately $129.1 million that will become due over the expected term of our existing credit facilities based on interest rates in effect at December 31, 2014 .
(2)
We enter into operating leases in the normal course of business. Most lease arrangements provide us with the option to renew the leases at defined terms. The future operating lease obligations would change if we were to exercise these options, or if we were to enter into additional new operating leases. As of December 31, 2014 , we had 48 operating leases, which expire from 2015 to 2023.

32


In addition to the amounts set forth in the table above, we have contractual obligations to pay royalties to certain third-party technology companies based upon our future licensing of their products and patented technologies. We cannot estimate what these future amounts will be; however, we expect them to increase as our product revenues continue to grow.
Off-Balance Sheet Arrangements
Except as set forth above in the contractual obligations table, we have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future impact on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources as of December 31, 2014 .
We provide indemnification provisions in certain of our agreements with customers and our leases of real estate in the ordinary course of our business. With respect to customer agreements, these provisions may obligate us to indemnify and hold harmless the customer against losses, expenses, liabilities and damages that are awarded against the customer in the event our products or services infringe upon a patent or other intellectual property right of a third party, in the event the customer's confidential information is misused, or in other circumstances. The customer agreements may limit the scope of and remedies for such indemnification obligations in certain respects, including, but not limited to, geographical limitations and the right to replace or modify an infringing product or service. We believe our internal development processes and other policies and practices limit our exposure related to the indemnification provisions of these agreements. We generally warrant our products against certain manufacturing and other defects. These product warranties are provided for specific periods of time depending on the nature of the product, geographic location of its sale and other factors. We accrue for estimated product warranty claims for certain customers based primarily on historical experience of actual warranty claims, as well as current information on repair costs. To date, we have not incurred any material costs associated with these product warranties, and as such, we have not reserved for any such warranty liabilities in our operating results.
Critical Accounting Policies
Our financial statements are prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities. Management evaluates its estimates on an on-going basis. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from the estimates used. Our actual results have generally not differed materially from our estimates. However, we monitor such differences and, in the event that actual results are significantly different from those estimated, we disclose any related impact on our results of operations, financial position and cash flows. The notes to our consolidated financial statements provide a description of significant accounting policies. We believe that of these significant accounting policies, the following involve a higher degree of judgment or complexity:
Long-Lived Assets, including Goodwill and Other Acquired Intangible Assets
We review property, plant, and equipment and certain identifiable intangible assets with finite lives, excluding goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to the future undiscounted cash flows the assets are expected to generate. If property, plant, and equipment and certain identifiable intangible assets with finite lives are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its estimated fair value.
We estimated the fair value of our single reporting unit using an income approach and a market approach. The discounted cash flow model used in our income approach relies on assumptions regarding revenue growth rates, gross margin, projected working capital needs, selling, general and administrative expenses, research and development expenses, capital expenditures, income tax rates, discount rates and exit multiples. To estimate fair value, we discount the expected cash flows of our single reporting unit. The discount rate used represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved and the rate of return an outside investor would expect to earn. To estimate cash flows beyond the final year of our model, we use a terminal value approach. Under this approach, we use the estimated cash flows in the final year of our model and apply an exit multiple assumption. We incorporate the present value of the resulting terminal value into our estimate of fair value. We forecasted cash flows for our single reporting unit and took into consideration current economic conditions and trends, estimated future operating results, our view of growth rates and anticipated future economic conditions. Revenue growth rates inherent in this forecast are based on input from internal and external market intelligence research sources that compare factors such as growth in global economies, regional trends in the industry and product evolution from a technological segment basis. Macro-economic factors such as changes in economies, product evolutions, industry consolidations and other changes beyond our control could have a positive or negative impact on achieving our targets. We forecasted continued revenue growth in 2015 in our discounted cash flow model. If actual results differ materially and adversely from the forecast used in the valuation, our determination of fair value and conclusions on goodwill impairment

33


could be negatively affected. More specifically, the following factors could have a negative impact on the estimated fair value of our single reporting unit; we are not successful in growing our cloud deployment revenue stream, we are not successful in our upsell efforts across our installed customer base, we are not successful against competitors in attaining our targeted new customers, maintenance retention rates deteriorate more than expected, research and development investments do not materialize, amongst a more comprehensive list of risks and uncertainties which are discussed further in Item 1A. Risk Factors. Since our equity has a negative carrying value, we considered the guidance in ASC 350-20-35-8A in determining whether it was necessary to perform step 2 of the impairment analysis. We weighed potential indicators of impairment that had been identified during 2014, and ultimately placed higher weighting on the level of recoverability identified in our most recent enterprise valuation, which is approximately 10% in excess of the carrying value, as well as company specific positive qualitative factors such as recent and projected industry growth rates, Aspect Software Group Holdings Ltd.'s ability to issue additional equity, and our ability to amend the terms of our debt and determined that it was not more likely than not that goodwill was impaired as of October 1, 2014. Application of the goodwill impairment analysis requires significant judgment.
Revenue Recognition
We derive our revenue from (i) product revenues, which typically include perpetual software licenses and hardware, (ii) recurring revenues, which are comprised of (a) maintenance revenues which include software license updates and product support and (b) hosting and managed services revenues, which include subscription fees for access to and use of our on-demand applications, and (iii) services revenues, which include installation, consulting and education. Revenues have been derived from sales to end users through our direct sales force, distributors and resellers.
We recognize revenue from the sale of software licenses and hardware (the “Product”) when persuasive evidence of an arrangement exists, the Product has been delivered, the fee is fixed or determinable and collection of the resulting receivable is probable. Revenue recognition for software licenses with multiple-element arrangements generally requires recognition of revenue using the residual method. Under the residual method, the portion of the total arrangement fee attributable to undelivered elements is deferred based upon its vendor-specific objective evidence (“VSOE”) of fair value, or the stated amount if higher, and subsequently recognized as the service is delivered. The difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements, which is generally Product.
Certain of our multiple-element arrangements include software and hardware components that function together to deliver the product's essential functionality. When these software and non-software elements are sold together, we believe the arrangements meet the scope exception in Accounting Standards Codification 985-605, Software Revenue Recognition, (“ASC 985-605") because of (i) the infrequency of the tangible product's sale without a software element, (ii) the degree of integration between the tangible product and the software element, which is considered significant and (iii) the non-software element of the tangible product's substantive contributions to the tangible product's essential functionality. For these multiple-element arrangements, we allocate the total arrangement fee to all deliverables based on a selling price hierarchy. The selling price for a deliverable is based on VSOE, if available, third party evidence (“TPE"), if VSOE is not available, or estimated selling price (“ESP”), if neither VSOE nor TPE is available. We generally expect that we will not be able to establish TPE due to the nature of the products sold and the markets in which we competes, and therefore rely upon VSOE or ESP in allocating the arrangement's arrangement fee. Once the arrangement fee has been allocated to each deliverable, revenue is recognized as each item is delivered.
VSOE generally exists only when we sell the deliverable separately and is the price actually charged by us for that deliverable. We have established VSOE for support and maintenance services, certain professional services, and education services.
ESP reflects our best estimate of what the selling prices of elements would be if they were sold regularly on a standalone basis. ESP is based upon all reasonably available information including both market data and conditions and entity-specific factors. These factors include market trends and competitive conditions, product maturity, differences related to geography, distribution channel, deal size, and cumulative customer purchases. We have established ESP for software licenses, hardware and subscriptions and review them annually or more frequently when a significant change in our business or selling practices occurs.
Delivery generally occurs when the Product is delivered to a common carrier at our loading dock unless title and risk of loss transfers upon delivery to the customer. In sales transactions through a distributor or reseller, we generally recognize revenues upon shipment to the distributor, reseller or identified end user, as applicable.
At the time of the Product sale, we assess whether the fee associated with the revenue transaction is fixed or determinable and whether collection is probable. The assessment of whether the fee is fixed or determinable is based in part on the payment terms associated with the transaction. If any portion of a fee is due beyond our normal payment terms, we evaluate the specific

34


facts and circumstances to determine if the fee is fixed or determinable. If it is determined that the fee is not fixed or determinable, we recognize revenue as the fees become due. If we determine that collection of a fee is not probable, then we will defer the entire fee and recognize revenue upon receipt of cash.
Product revenue for software licenses sold on a perpetual basis, along with hardware, is recognized at the inception of the arrangement, presuming all other relevant revenue recognition criteria are met. Product revenue for software sold on a non-perpetual basis (Rental or Term) is recognized ratably over the license term.
In connection with the sale of our software licenses, we sell support and maintenance services, which are recognized ratably over the term of the arrangement, typically one year. Under support and maintenance services, customers receive unspecified software product upgrades, maintenance and patch releases during the term, as well as internet and telephone access to technical support personnel.
Many of our software arrangements also include professional services for consulting and implementation sold under separate agreements. Professional services revenue from these arrangements is generally accounted for separately from the software license because the services qualify as a separate element under ASC 985-605. The more significant factors considered in determining whether professional services revenue should be accounted for separately include (i) the nature of the services and whether they are essential to the functionality of the licensed product, (ii) the degree of risk, (iii) the availability of services from other vendors, (iv) the timing of payments and (v) the impact of milestones or acceptance criteria on the realizability of the software license fee. Professional services revenue under these arrangements, as well as when sold on a standalone basis, is generally recognized as the services are performed.
We recognize revenue associated with education as these services are performed.
Hosting and managed services revenue reflects subscription and other recurring revenues which includes fees for access rights to software solutions offered under a subscription-based delivery model where the users do not take possession of the software. Under this model, the software applications are hosted by us or by a third party and the customer accesses and uses the software on an as-needed basis over the internet or via a dedicated line. The underlying arrangements typically (i) include a single fee for the service that is billed monthly, quarterly or annually, (ii) cover a period from 12 to 36 months and (iii) do not provide the customer with an option to take delivery of the software at any time during or after the subscription term. Hosting revenues are recognized ratably over the subscription term beginning on the commencement dates of each contract. Professional services revenue for consulting or training services, when sold with hosted offerings, are accounted for separately if they have standalone value to the customer. We believe our professional services have standalone value because those services are sold separately by us and similar services are sold by other vendors. In addition, our hosted offerings have standalone value as such offerings are often sold separately.
Deferred revenues primarily represent payments received from customers for software licenses and updates, hardware, product support, installation services, educational services and hosting prior to satisfying the revenue recognition criteria related to those payments.The deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable hosting and managed services agreements. Deferred revenue that will be recognized during the succeeding twelve month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent.
We record our estimate for customer returns or other customer allowances as a reduction in revenues. In determining our revenue reserve estimate, and in accordance with internal policy, we rely on historical data and known returned goods in transit. These factors, and unanticipated changes in the economic and industry environment, could cause our return estimates to differ from actual results.
Business Combinations
We apply the provisions of ASC 805, Business Combinations , in the accounting for our acquisitions. It requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-

35


acquisition contingencies and contingent consideration, where applicable. 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 include but are not limited to:
future expected cash flows from software license sales, cloud software subscriptions contracts, hardware systems product sales, support agreements, consulting contracts, other customer contracts, acquired developed technologies and patents;
expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed;
the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio; and
discount rates.
 
Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. We estimate the fair values of cloud software subscriptions, software license updates and product support and hardware systems support obligations assumed. The estimated fair values of these performance obligations are determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin. The estimated costs to fulfill the obligations are based on the historical direct costs related to providing the services including the correction of any errors in the products acquired. The sum of these costs and operating profit approximates, in theory, the amount that we would be required to pay a third party to assume the performance obligations. We do not include any costs associated with selling efforts or research and development or the related fulfillment margins on these costs. Profit associated with any selling efforts is excluded because the acquired entities would have concluded those selling efforts on the performance obligations prior to the acquisition date. We also do not include the estimated research and development costs in our fair value determinations, as these costs are not deemed to represent a legal obligation at the time of acquisition. Historically, substantially all of our customers, including customers from acquired companies, renew their software license updates and product support contracts when the contracts are eligible for renewal and we strive to renew cloud software subscriptions and hardware systems support contracts. To the extent cloud software subscriptions, software support or hardware systems support contracts are renewed, we will recognize the revenues for the full values of the contracts over the contracts’ periods, which are generally one year in duration.
For a given acquisition, we may identify certain pre-acquisition contingencies as of the acquisition date and may extend our review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess whether we include these contingencies as a part of the fair value estimates of assets acquired and liabilities assumed and, if so, to determine their estimated amounts.
If we cannot reasonably determine the fair value of a pre-acquisition contingency (non-income tax related) by the end of the measurement period, which is generally the case given the nature of such matters, we will recognize an asset or a liability for such pre-acquisition contingency if: (i) it is probable that an asset existed or a liability had been incurred at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated. Subsequent to the measurement period, changes in our estimates of such contingencies will affect earnings and could have a material effect on our results of operations and financial position.
In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date with any adjustments to our preliminary estimates being recorded to goodwill if identified within the measurement period. Subsequent to the measurement period or our final determination of the tax allowance’s or contingency’s estimated value, whichever comes first, changes to these uncertain tax positions and tax related valuation allowances will affect our provision for income taxes in our consolidated statement of operations and could have a material impact on our results of operations and financial position.
Stock-Based Compensation
Stock Options
We grant options to our employees under Aspect Software Group Holdings Ltd.'s 2004 and 2003 Option Plans. We generally issue options at no less than fair market value with a four-year vesting period, and which expire seven years from the date of grant. Options issued under the 2004 Option Plan are not exercisable until the consummation of a liquidity event, defined as an initial public offering of our equity securities. Because the options are not exercisable until a liquidity event, as defined, we will record compensation expense at the time the liquidity event becomes probable. If the option holder terminates their

36


employment with us prior to the option becoming exercisable, then under certain circumstances that are all within our control and outside of the control of the employee, the intrinsic value related to the vested options of the holder at the time of their termination will be paid to them in cash and accounted for as compensation expense at the time when such a liability becomes probable.
The fair value of the Aspect Software Group Holdings Ltd.'s ordinary shares is determined by our management and approved by the Board of Directors. In the absence of a public trading market for the ordinary shares, our management and Board of Directors consider objective and subjective factors in determining the fair value of our ordinary shares, including a fair value analysis prepared by an independent third-party valuation firm, dividend rights, and voting control attributable to our then-outstanding shares and, primarily, the likelihood of achieving a liquidity event such as an initial public offering or sale our company.
We use the Black-Scholes option pricing model to determine the fair value of stock options granted. We recognize the compensation cost of stock-based awards on a straight-line basis over the vesting period of the award.
As there is no public market for the ordinary shares, we determined the volatility for options granted based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options granted has been determined using an average of the historical volatility measures of this peer group of companies. The expected life of options has been determined utilizing the “Simplified” method as there is not sufficient historical data of exercises to develop the expected term assumption. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. We do not anticipate paying cash dividends in the future on our ordinary shares; therefore, the expected dividend yield is assumed to be zero. We applied an estimated annual forfeiture rate of 23% for the years ended December 31, 2014 and 2013 and 24% for the year ended December 31, 2012 in determining the expense recorded in our consolidated statements of operations relating to Aspect Software Group Holdings Ltd.'s 2003 Share Purchase and Option Plan (“2003 Option Plan”). For options granted under the Second Amended and restated 2004 Option Plan (“2004 Option Plan”), we have deferred recognition of compensation expense until a liquidity event occurs, causing the options to become exercisable. The weighted-average assumptions utilized to determine the values of stock options granted using the Black-Scholes option pricing model are presented in the following table:
 
 
Years Ended December 31,
 
 
2014
 
2013
 
2012
Risk-free interest rate
 
1.64
%
 
0.77
%
 
1.40
%
Expected volatility
 
37.00
%
 
49.00
%
 
48.80
%
Expected life (in years)
 
4.58

 
4.58

 
4.58

Dividend yield
 

 

 

Weighted average fair value per share
 
$
0.43

 
$
0.80

 
$
0.98

As of December 31, 2014 , there was $0.5 million of unrecognized compensation expense related to non-vested stock option awards granted under the 2003 Option Plan that is expected to be recognized over a weighted-average period of 3.22 years. In addition, as of December 31, 2014 , there was $10.0 million of unrecognized compensation expense related to contingently exercisable stock options granted under the 2004 Option Plan, which is being deferred until a contingent liquidity event occurs, as defined in the 2004 Option Plan.
  Claims and Contingencies
We are subject to various claims and contingencies related to legal, regulatory, and other matters arising out of the normal course of business. Our determination of the treatment of claims and contingencies in the consolidated financial statements is based on management's view of the expected outcome of the applicable claim or contingency. Management may also use outside legal advice on matters related to litigation to assist in the estimating process. We accrue a liability if the likelihood of an adverse outcome is probable and the amount is estimable. If the likelihood of an adverse outcome is only reasonably possible, or if an estimate is not determinable, disclosure of a material claim or contingency is disclosed in the Notes to the consolidated financial statements. We re-evaluate these assessments on a quarterly basis or as new and significant information becomes available to determine whether a liability should be established or if any existing liability should be adjusted. However, the ultimate outcome of various legal issues could be different than management's estimates and, as a result, adjustments may be required.
Allowances for Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We specifically analyze historical

37


bad debts, the aging of the accounts receivable, customer concentrations and credit worthiness, potential disagreements with customers, current economic trends and changes in customer payment terms to evaluate the allowance for doubtful accounts. We review our allowance for doubtful accounts quarterly. Past due balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
We also record a provision for estimated sales returns and allowances on product- and service-related revenues in the same period as the related revenues are recorded. These estimates are based on the specific facts and circumstances of a particular order, analysis of credit memo data, and other known factors. If the data we use to calculate these estimates does not properly reflect reserve requirements, then a change in the allowances would be made in the period in which such a determination is made and revenues in that period could be affected.
Income Taxes
We account for income taxes in accordance with ASC 740, Accounting for Income Taxes. Under ASC 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of income in the period that includes the enactment date.
  Under ASC 740, we can only recognize a deferred tax asset for the future benefit of its tax loss, tax credit carryforwards and cumulative temporary differences to the extent that it is more likely than not that these assets will be realized. In determining the realizability of these assets, we considered numerous factors, including historical profitability, estimated future taxable income and the industry in which it operates.
ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and provides a model for recognizing and measuring, in the financial statements, positions taken or expected to be taken in a tax return. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
We recognize interest and penalties related to uncertain tax positions in income tax expense.
Recent Accounting Pronouncements
In January 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-01 - Income Statement - Extraordinary and Unusual Items ("ASU 2015-01"), which eliminates the concept of extraordinary items. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard is not expected to have an impact on the our Consolidated Financial Statements.
In December 2014, the FASB issued ASU No. 2014-17 - Business Combinations ("ASU 2014-17") , which provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. ASU 2014-17 is effective on November 18, 2014. The adoption of this standard is not expected to have an impact on our Consolidated Financial Statements.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern , which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The adoption of this standard is not expected to have an impact on our Consolidated Financial Statements.
In June 2014, the FASB issued ASU No. 2014-12 - Compensation - Stock Compensation ("ASU 2014-12") which provides guidance that a performance target that affects vesting of a share-based payment and that could be achieved after the requisite service period is a performance condition. As a result, the target is not reflected in the estimation of the award’s grant date fair value. Compensation cost for such an award would be recognized over the required service period, if it is probable that the performance condition will be achieved. ASU 2014-12 is effective for all entities for annual periods beginning after December

38


15, 2015 and interim periods within those annual periods. ASU 2014-12 should be applied on a prospective basis to awards that are granted or modified on or after the effective date. The adoption of this standard is not expected to have an impact on our Consolidated Financial Statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016; early adoption is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. This update could impact the timing and amounts of revenue recognized. We are currently evaluating the method of adoption and the effect that implementation of this update will have on our consolidated financial position and results of operations upon adoption.
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries. None of the updates are expected to a have a material impact on our financial position, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to interest rate risk primarily relates to our senior secured credit facility. Interest to be paid on our first lien debt is at a floor of 1.75% or USD LIBOR, plus 5.25%. We are able to select the USD LIBOR rate based upon a 1 month, 3 month or 6 month interval, at our option. Our next date to elect our USD LIBOR rate is May 7, 2015. The published USD LIBOR rate is subject to change on a periodic basis. Recently, interest rates have trended downwards in major global financial markets, stabilizing at relatively low levels over the past year. If these interest rate trends were to reverse, this would result in increased interest expense as a result of higher LIBOR rates. We currently estimate that our annual interest expense on our floating rate indebtedness under our senior secured credit facility would increase by approximately $5.0 million for each increase in interest rates of 1%, however this estimate does not give effect to the fact that until interest rates rise above our 1.75% floor there will be no impact on our interest expense.
Foreign Exchange
We conduct business globally in numerous currencies. Our sales are primarily denominated in U.S. dollars, however we do face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as our business practices evolve and could have a material adverse impact on our financial results. Our primary exposures to fluctuations in foreign currency exchange rates relate to sales and operating expenses denominated in currencies other than the U.S. dollar. The majority of our sales are denominated in US dollars, however when we do invoice customers in a non U.S. dollar currency, we are exposed to foreign exchange fluctuations from the time of invoice until collection occurs. In Europe and Asia Pacific, where we sometimes invoice our customers in U.S. dollars, we pay our operating expenses in local currencies. Accordingly, fluctuations in the local currencies relative to the U.S. dollar are reflected directly in our consolidated statement of operations. We are also exposed to foreign currency rate fluctuations between the time we collect in U.S. dollars and the time we pay our operating expenses in local currency. Fluctuations in foreign currency exchange rates could affect the profitability and cash flows in U.S. dollars of our products and services sold in international markets.
Market Risk
Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are held primarily with three financial institutions and consist primarily of money market funds and cash on deposit with banks. We sell our products primarily to large organizations in diversified industries worldwide. We perform ongoing credit evaluations of our customers' financial condition and generally do not require our customers to provide collateral or other security to support accounts receivable. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in our accounts receivable. No single customer accounted for 10% or more of accounts receivable as December 31, 2014 and 2013 or net revenues during the years ended December 31, 2014 , 2013 and 2012 .

39


Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Aspect Software Parent, Inc.
We have audited the accompanying consolidated balance sheets of Aspect Software Parent, Inc. (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive (loss) income, deficit, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aspect Software Parent, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Phoenix, Arizona
March 27, 2015

40


Aspect Software Parent, Inc.
Consolidated Balance Sheets
 
December 31,
( in thousands, except par value and share amounts)
2014
 
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
17,030

 
$
26,694

Accounts receivable, net
59,923

 
59,002

Receivable due from Aspect Software Group Holdings Ltd.
415

 
1,808

Deferred tax assets
3,716

 
9,197

Other current assets
21,505

 
21,020

Total current assets
102,589

 
117,721

Property, plant, and equipment, net
21,573

 
18,467

Intangible assets, net
59,480

 
72,832

Goodwill
751,063

 
750,785

Other assets
17,156

 
22,081

Total assets
$
951,861

 
$
981,886

Liabilities and deficit
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
15,087

 
$
7,858

Current portion of long-term debt (1)
17,094

 
37,851

Accrued liabilities
53,691

 
61,967

Deferred revenues
69,912

 
76,670

Total current liabilities
155,784

 
184,346

Deferred tax liabilities
32,619

 
31,876

Long-term deferred revenue
2,468

 
4,455

Long-term debt (2)
764,411

 
770,079

Other long-term liabilities
51,273

 
36,603

Total liabilities
1,006,555

 
1,027,359

Commitments and contingencies ( Note 19 and Note 22 )

 

Deficit:
 
 
 
Ordinary shares, $1.00 par value: 50,000 share authorized and 1 share issued

 

Additional paid-in capital
35,588

 
8,154

Accumulated other comprehensive loss
(5,645
)
 
(4,448
)
Accumulated deficit
(88,269
)
 
(54,449
)
Total Aspect Software Parent, Inc. shareholder's deficit
(58,326
)
 
(50,743
)
Noncontrolling interest
3,632

 
5,270

Total deficit
(54,694
)
 
(45,473
)
Total liabilities and deficit
$
951,861

 
$
981,886

 
(1)
$3.5 million held by a minority shareholder of Aspect Software Group Holdings Ltd. as of December 31, 2013.
(2)
$50.0 million held by a related party as of December 31, 2014 and December 31, 2013 .


See accompanying notes.
41


Aspect Software Parent, Inc.
Consolidated Statements of Operations
 
Years Ended December 31,
(in thousands)
2014
 
2013
 
2012
Net revenues:
 
 
 
 
 
Product revenue
$
74,232

 
$
74,745

 
$
68,900

Recurring revenue
291,576

 
282,592

 
285,808

Services revenue
79,089

 
79,441

 
88,003


Total net revenues

444,897

 
436,778

 
442,711

Cost of revenues:
 
 
 
 
 
Cost of product revenue
20,594

 
20,451

 
23,309

Cost of recurring revenue
92,580

 
77,658

 
73,663

Cost of services revenue
73,339

 
70,449

 
73,162

Amortization expense for acquired intangible assets
4,898

 
6,114

 
5,549

Total cost of revenues
191,411

 
174,672

 
175,683


Gross profit

253,486

 
262,106

 
267,028

Operating expenses:
 
 
 
 
 
Research and development
51,068

 
50,217

 
40,648

Selling, general and administrative
129,006

 
131,724

 
128,691

Amortization expense for acquired intangible assets
8,123

 
23,357

 
30,734

Restructuring charges (credits)
3,255

 
(46
)
 
2,282

Total operating expenses
191,452

 
205,252

 
202,355

Income from operations
62,034

 
56,854

 
64,673

Interest and other expense, net
(74,935
)
 
(70,411
)
 
(67,695
)
Loss before income taxes
(12,901
)
 
(13,557
)
 
(3,022
)
Provision (benefit from) for income taxes
22,557

 
(19,220
)
 
(1,634
)
Net (loss) income
(35,458
)
 
5,663

 
(1,388
)
Less: Net loss attributable to noncontrolling interest
(1,638
)
 
(395
)
 

Net (loss) income attributable to Aspect Software Parent, Inc.
$
(33,820
)
 
$
6,058

 
$
(1,388
)
Aspect Software Parent, Inc.
Consolidated Statements of Comprehensive (Loss) Income
 
Years Ended December 31,
(in thousands)
2014
 
2013
 
2012
Net (loss) income
$
(35,458
)
 
$
5,663

 
$
(1,388
)
Change in cumulative translation adjustment
(1,197
)
 
(306
)
 
1,622

Comprehensive (loss) income
(36,655
)
 
5,357

 
234

Comprehensive loss attributable to noncontrolling interest
(1,638
)
 
(395
)
 

Comprehensive (loss) income attributable to Aspect Software Parent, Inc.
$
(35,017
)
 
$
5,752

 
$
234


See accompanying notes.
42

Table of Contents

Aspect Software Parent, Inc.
Consolidated Statements of Deficit
(In Thousands, Except Share Amounts)
 
 
Ordinary Shares
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Accumulated
Deficit
 
Total Aspect Software Parent, Inc. Shareholder's Deficit
 
Non-controlling Interest
 
Total Deficit
 
 
Shares
 
Par
Value
 
 
 
Balance at December 31, 2011
 
1

 

 
$
7,124

 
$
(5,764
)
 
$
(59,119
)
 
$
(57,759
)
 
$

 
$
(57,759
)
Net loss
 

 

 

 

 
(1,388
)
 
(1,388
)
 

 
(1,388
)
Other comprehensive income
 

 

 

 
1,622

 

 
1,622

 

 
1,622

Stock-based compensation
 

 

 
527

 

 

 
527

 

 
527

Balance at December 31, 2012
 
1

 

 
7,651

 
(4,142
)
 
(60,507
)
 
(56,998
)
 

 
(56,998
)
Net income (loss)
 

 

 

 

 
6,058

 
6,058

 
(395
)
 
5,663

Purchase of shares from noncontrolling interest
 

 

 

 

 

 

 
5,665

 
5,665

Other comprehensive loss
 

 

 

 
(306
)
 

 
(306
)
 

 
(306
)
Stock-based compensation
 

 

 
503

 

 

 
503

 

 
503

Balance at December 31, 2013
 
1

 

 
8,154

 
(4,448
)
 
(54,449
)
 
(50,743
)
 
5,270

 
(45,473
)
Net loss
 

 

 

 

 
(33,820
)
 
(33,820
)
 
(1,638
)
 
(35,458
)
Other comprehensive loss
 

 

 

 
(1,197
)
 

 
(1,197
)
 

 
(1,197
)
Stock-based compensation
 

 

 
429

 

 

 
429

 

 
429

Contribution from Aspect Software Group Holdings, Ltd.
 

 

 
27,005

 

 

 
27,005

 

 
27,005

Balance at December 31, 2014
 
1

 
$

 
$
35,588

 
$
(5,645
)
 
$
(88,269
)
 
$
(58,326
)
 
$
3,632

 
$
(54,694
)

See accompanying notes.
43

Table of Contents

Aspect Software Parent, Inc.
Consolidated Statements of Cash Flows
 

 
Years Ended December 31,
(in thousands)
2014
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
 
Net (loss) income
$
(35,458
)
 
$
5,663

 
$
(1,388
)
Reconciliation of net (loss) income to net cash and cash equivalents provided by operating activities:
 
 
 
 
 
Depreciation
9,899

 
7,785

 
6,981

Amortization expense for acquired intangible assets
13,021

 
29,471

 
36,283

Non-cash interest expense
6,344

 
6,038

 
4,080

Stock-based compensation expense
429

 
503

 
527

Increase to accounts receivable allowances
2,339

 
774

 
3,060

Deferred income taxes
6,108

 
(27,756
)
 
197

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
(2,861
)
 
(63
)
 
2,887

Receivable due from Aspect Software Group Holdings Ltd.
1,394

 
(175
)
 
(200
)
Other current assets and other assets
(1,822
)
 
7,361

 
2,778

Accounts payable
5,647

 
20

 
(8,573
)
Accrued liabilities and other liabilities
8,218

 
(5,739
)
 
(18,988
)
Deferred revenues
(7,100
)
 
(11,480
)
 
(2,933
)
Net cash and cash equivalents provided by operating activities
6,158

 
12,402

 
24,711

Cash flows from investing activities:
 
 
 
 
 
Cash paid for acquisitions, net of cash acquired

 
(145,173
)
 

Purchases of property and equipment
(13,215
)
 
(11,132
)
 
(5,060
)
Purchase of investment