Aspect Software Parent 10-Q 2014 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 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 E. Camelback Road, Suite 700

Phoenix, Arizona, 85016

(Address of principal executive offices) (Zip code)

Telephone Number: Telephone: (978) 250-7900

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 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 registrant had one ordinary share outstanding as of October 31, 2014.

TABLE OF CONTENTS

		Page
Part I	Financial Information:
Item 1.	Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013	4
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and 2013	4
	Condensed Consolidated Statement of Shareholder's Deficit for the Nine Months Ended September 30, 2014	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
Part II	Other Information:
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 6.	Exhibits	27
	Signatures	29

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Aspect Software Parent, Inc.

Condensed Consolidated Balance Sheets (unaudited)

(in thousands, except par value and share amounts)	September 30, 2014			December 31, 2013
Assets
Current assets:
Cash and cash equivalents	$	12,243		$	26,694
Accounts receivable, net	55,675			59,002
Receivable due from Aspect Software Group Holdings Ltd.	1,224			2,621
Deferred tax assets	9,660			9,197
Other current assets	19,703			21,020
Total current assets	98,505			118,534
Property, plant, and equipment, net	20,230			18,467
Intangible assets, net	62,866			72,832
Goodwill	750,858			750,785
Other assets	17,543			22,081
Total assets	$	950,002		$	982,699
Liabilities and shareholder's deficit
Current liabilities:
Accounts payable	$	11,737		$	7,858
Current portion of long-term debt (1)	10,663			37,851
Accrued liabilities	51,558			61,967
Deferred revenues	81,679			76,670
Total current liabilities	155,637			184,346
Deferred tax liabilities	22,393			31,876
Long-term deferred revenue	2,869			4,455
Long-term debt (2)	765,823			770,079
Other long-term liabilities	50,199			36,603
Total liabilities	996,921			1,027,359
Commitments and contingencies (Note 8)
Shareholder's deficit:
Ordinary shares, $1.00 par value: 50,000 share authorized and 1 share issued	—			—
Additional paid-in capital	16,241			8,967
Accumulated other comprehensive loss	(4,528		)	(4,448		)
Accumulated deficit	(62,647		)	(54,449		)
Total Aspect Software Parent, Inc. shareholder's deficit	(50,934		)	(49,930		)
Noncontrolling interest	4,015			5,270
Total shareholder's deficit	(46,919		)	(44,660		)
Total liabilities and shareholder's deficit	$	950,002		$	982,699

(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 September 30, 2014 and December 31, 2013.

See accompanying notes.

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Aspect Software Parent, Inc.

Condensed Consolidated Statements of Operations (unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2014			2013			2014			2013
Net revenues:
Product revenue	$	21,408		$	18,230		$	51,189		$	50,338
Maintenance revenue	59,599			64,676			183,519			196,586
Services revenue	19,794			17,712			59,777			58,517
Hosting and managed services revenue	12,649			7,894			34,237			8,042
Total net revenues	113,450			108,512			328,722			313,483
Cost of revenues:
Cost of product revenue	6,071			4,107			15,276			13,638
Cost of maintenance revenue	15,768			17,702			49,284			52,690
Cost of services revenue	19,198			18,260			56,197			52,281
Cost of hosting and managed services revenue	6,435			2,581			18,369			2,583
Amortization expense for acquired intangible assets	1,225			1,974			3,674			4,648
Total cost of revenues	48,697			44,624			142,800			125,840
Gross profit	64,753			63,888			185,922			187,643
Operating expenses:
Research and development	12,500			13,643			39,191			37,495
Selling, general and administrative	29,561			33,975			94,121			94,480
Amortization expense for acquired intangible assets	2,035			6,796			6,205			21,487
Restructuring credits	—			—			—			(46		)
Total operating expenses	44,096			54,414			139,517			153,416
Income from operations	20,657			9,474			46,405			34,227
Interest and other expense, net	(19,208		)	(18,690		)	(57,091		)	(50,814		)
Income (loss) before income taxes	1,449			(9,216		)	(10,686		)	(16,587		)
Benefit from income taxes	(846		)	(17,135		)	(1,233		)	(18,230		)
Net income (loss)	$	2,295		$	7,919		$	(9,453	)	$	1,643
Less: Net loss attributable to noncontrolling interest	(509		)	—			(1,255		)	—
Net income (loss) attributable to Aspect Software Parent, Inc.	$	2,804		$	7,919		$	(8,198	)	$	1,643

Aspect Software Parent, Inc .

Condensed Consolidated Statements of Comprehensive Loss (unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2014			2013			2014			2013
Net income (loss)	$	2,295		$	7,919		$	(9,453	)	$	1,643
Change in cumulative translation adjustment	759			(835		)	(80		)	(758		)
Comprehensive income (loss)	3,054			7,084			(9,533		)	885
Comprehensive loss attributable to noncontrolling interest	(509		)	—			(1,255		)	—
Comprehensive income (loss) attributable to Aspect Software Parent, Inc.	$	3,563		$	7,084		$	(8,278	)	$	885

See accompanying notes.

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Aspect Software Parent, Inc.

Condensed Consolidated Statements of Shareholder's Deficit (unaudited)

(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 Shareholder's Deficit
	Shares	Par Value
Balance at December 31, 2013	1	$	—	$	8,967	$	(4,448	)	$	(54,449	)	$	(49,930	)	$	5,270		$	(44,660	)
Net loss	—	—		—		—			(8,198		)	(8,198		)	(1,255		)	(9,453		)
Other comprehensive loss	—	—		—		(80		)	—			(80		)	—			(80		)
Additional contribution from Aspect Software Group Holdings, Ltd.	—	—		7,274		—			—			7,274			—			7,274
Balance at September 30, 2014	1	$	—	$	16,241	$	(4,528	)	$	(62,647	)	$	(50,934	)	$	4,015		$	(46,919	)

See accompanying notes.

5

Aspect Software Parent, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

	Nine Months Ended
	September 30,
(in thousands)	2014			2013
Cash flows from operating activities:
Net (loss) income	$	(9,453	)	$	1,643
Reconciliation of net (loss) income to net cash and cash equivalents provided by operating activities:
Depreciation	6,839			5,591
Amortization expense for acquired intangible assets	9,879			26,135
Non-cash interest expense	4,508			4,383
Non-cash compensation expense	270			429
Increase to accounts receivable allowances	2,284			920
Deferred income taxes	(9,986		)	(18,853		)
Changes in operating assets and liabilities:
Accounts receivable	2,090			4,208
Receivable due from Aspect Software Group Holdings Ltd.	1,397			(150		)
Other current assets and other assets	1,065			3,026
Accounts payable	2,162			(2,589		)
Accrued liabilities and other liabilities	4,023			(9,278		)
Deferred revenues	4,053			(68		)
Net cash and cash equivalents provided by operating activities	19,131			15,397
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired	—			(142,064		)
Purchases of property and equipment	(8,660		)	(8,953		)
Purchase of investment	—			(1,852		)
Net cash and cash equivalents used in investing activities	(8,660		)	(152,869		)
Cash flows from financing activities:
Repayment of borrowings	(46,800		)	(16,100		)
Borrowings under debt facilities	15,000			110,000
Debt issuance costs in connection with borrowings	—			(5,538		)
Proceeds received from capital contribution	7,004			—
Net cash and cash equivalents (used in) provided by financing activities	(24,796		)	88,362
Effect of exchange rate changes on cash	(126		)	(1,034		)
Net decrease in cash and cash equivalents	(14,451		)	(50,144		)
Cash and cash equivalents:
Beginning of period	26,694			80,838
End of period	$	12,243		$	30,694
Supplemental disclosure of cash flow information
Cash paid for interest	$	44,162		$	40,185
Cash paid for income taxes	$	1,553		$	2,277

See accompanying notes.

6

Aspect Software Parent, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE 1—DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND RECENT ACCOUNTING STANDARDS

Description of Business

Aspect Software Parent, Inc. (together with its subsidiaries, “Aspect Software” or the “Company”), a subsidiary of Aspect Software Group Holdings Ltd., a Cayman Islands company, provides customer engagement solutions such as; unified interaction management, workforce optimization, and back-office solutions to improve the customer experience. The Company’s technologies streamline and enhance customer-facing business processes by optimizing workflows across multiple communication channels and automating smarter business processes across the contact center and related functions. The Company offers the business and technology expertise to help its customers build, enhance and sustain relationships with their customers by bringing enterprise technologies like customer relationship management ("CRM") and content management together with unified multi-channel communications and effective people management to enrich customer interactions.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”). In the opinion of management, the financial information reflects all adjustments, consisting of adjustments of a normal recurring nature necessary to present fairly the financial position, results of operations, and cash flows of the Company for the periods presented. The results of operations for the three and nine months ended September 30, 2014, are not necessarily indicative of the results to be expected for the full year or any future periods. For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2013, included in the Annual Report of Aspect Software Group Holdings Ltd. on Form 10-K (File No. 333-170936). The accompanying condensed consolidated financial statements include amounts of Aspect Software Parent, Inc. and its wholly and majority owned subsidiaries. On August 1, 2014, Aspect Software Parent Inc. (“Parent”) provided notice to the trustee of the 10 5/8% senior second lien notes due 2017 (the “Notes”) issued by Aspect Software, Inc., a Delaware corporation (“Aspect”) and guaranteed by Parent, Aspect Software Group Holdings Ltd (“Holdings”) and certain subsidiaries of Aspect, that, as of June 30, 2014, Parent no longer intended to satisfy its reporting obligations under the indenture governing the Notes (the “Indenture”) by providing financial information relating to Holdings.  Accordingly, Holdings’ guarantee of the Notes was released pursuant to Section 10.05 of the Indenture. By virtue of the release of the guarantee, Holdings’ guarantee of the obligations under the Credit Agreement dated as of May 7, 2010, among Parent, Aspect, the lenders party thereto and the administrative agent and syndication agent (the “Credit Agreement”) is automatically released by its terms. In connection with the release of Holdings’ guarantee of the Notes, Holdings will no longer file reports with the Securities and Exchange Commission to satisfy Parent’s reporting obligations under Section 4.03 of the Indenture.  Parent will comply with Section 4.03 by filing all quarterly, annual and current reports that would be required to be filed with the SEC as if it were required to file such reports.  All intercompany amounts related to the Company's consolidated subsidiaries have been eliminated in consolidation.

Recent Accounting Standards

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties About an Entity’sAbility 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.

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 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. The Company is currently evaluating the method of adoption and the effect that implementation of this update will have on its consolidated financial position and results of operations upon adoption.

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In July 2013, the FASB issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective on a prospective basis for fiscal years and interim reporting periods within those years, beginning after December 15, 2013. The Company adopted the new guidance as of January 1, 2014. There has been no impact to the Company’s financial position or results of operations.

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 the Company’s financial position, results of operations or cash flows.

NOTE 2—REVENUE RECOGNITION

The Company derives its revenue from (i) product revenues, which typically include perpetual software licenses and hardware, (ii) service revenues, which include software license updates and product support, installation, consulting and education and (iii) hosting and managed services revenues, which include subscription fees for access to and use of our on-demand applications. Revenues from products and services have been derived from sales to end users through the Company's direct sales force, distributors and resellers.

The Company recognizes 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 the Company's 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, the Company believes 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, the Company allocates 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. The Company generally expects that it will not be able to establish TPE due to the nature of the products sold and the markets in which it competes, and therefore relies upon VSOE or ESP in allocating the arrangement's fee. Once the arrangement fee has been allocated to each deliverable, revenue is recognized as each item is delivered.

VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. The Company has established VSOE for support and maintenance services, certain professional services, and education services.

ESP reflects the Company's 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. The Company has established ESP for software licenses, hardware and subscriptions and reviews them annually or more frequently when a significant change in the Company's business or selling practices occurs.

Delivery generally occurs when the Product is delivered to a common carrier at the Company's loading dock unless title and risk of loss transfers upon delivery to the customer. In sales transactions through a distributor or reseller, the Company generally recognizes revenues upon shipment to the distributor, reseller or identified end user, as applicable.

At the time of the Product sale, the Company assesses 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 the Company's normal payment terms, the Company evaluates the specific facts and circumstances to determine if the fee is fixed or determinable. If it is determined

8

that the fee is not fixed or determinable, the Company recognizes revenue as the fees become due. If the Company determines that collection of a fee is not probable, then the Company 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 its software licenses, the Company sells 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 the Company's 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.

The Company recognizes 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, which is the date the Company's hosting and managed services are made available to the customer. 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. The Company believes its professional services have standalone value because those services are sold separately by us and similar services are sold by other vendors. In addition, the Company’s hosted offerings have standalone value as such offerings are often sold separately. The deferred revenue balance on the Company's condensed consolidated balance sheet does not represent the total contract value of annual or multi-year, non-cancelable hosting agreements. Unbilled deferred revenue represents future billings under hosting agreements that have not been invoiced and, accordingly, are not recorded in deferred revenue. Typical contract length is between 12 and 36 months for the Company's hosting and managed services subscriptions.

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.

The Company records its estimate for customer returns or other customer allowances as a reduction in revenues. In determining the Company’s revenue reserve estimate, and in accordance with internal policy, the Company relies on historical data and known returned goods in transit. These factors, and unanticipated changes in the economic and industry environment, could cause the Company’s return estimates to differ from actual results.

NOTE 3—BUSINESS COMBINATIONS

BRIGHT PATTERN

On October 4, 2013, the Company acquired a 54% interest in Bright Pattern, a leading provider of next generation cloud-based contact center and customer experience management solutions. The Company concurrently entered into a reseller agreement which grants Aspect the right to market and distribute Bright Pattern's products and services. The investment in Bright Pattern led to Aspect’s release of Zipwire.

The total purchase price paid by the Company was $6.7 million. The acquisition of Bright Pattern was accounted for as a purchase of a business under ASC 805 Business Combinations. Accordingly, the results of Bright Pattern have been included in the consolidated financial statements since the date of acquisition with the non-controlling interest deducted to arrive at net

9

income. Pro forma results of operations have not been presented because the effects of the acquisition were not material to the Company's financial results.

The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on a preliminary estimate of their fair values. The excess purchase price over those values was recorded as goodwill. The factors contributing to the recognition of goodwill were based upon the Company's determination that several strategic and synergistic benefits are expected to be realized from the combination. None of the goodwill is expected to be deductible for tax purposes. The fair values assigned to tangible and intangible assets acquired and liabilities assumed were based on management's estimates and assumptions, and other information compiled by management. Purchased intangibles with finite lives will be amortized over the respective estimated useful life using a method that is based on estimated future cash flows, as the Company believes this will approximate the pattern in which the economic benefits of the asset will be utilized (approximately 5-7 years).

The total purchase price for Bright Pattern has been allocated as follows (in thousands):

Description	Amount
Current assets, including $3,541 of acquired cash	$	3,651
Goodwill	5,712
Customer relationships	690
Tradename and Trademarks	350
Technology	5,550
Total assets acquired	15,953
Current liabilities	(1,101		)
Deferred tax liabilities	(2,537		)
	12,315
Less: noncontrolling interest	(5,665		)
Net assets acquired	$	6,650

The initial allocation of the purchase price of the acquired assets and liabilities as of December 31, 2013 was based on provisional measurements of fair value as determined by management.  During the nine months ended September 30, 2014, the Company revised its assessment of the fair value of the non-controlling interest in Bright pattern, which resulted in a decrease of approximately $0.7 million to goodwill and non-controlling interest on the balance sheet and revised its estimate of deferred tax liabilities, which resulted in the recognition of $2.5 million of deferred tax liabilties and goodwill.  This adjustment has been reflected in the December 31, 2013 balances of non-controlling interest and goodwill in the accompanying condensed consolidated balance sheets.

NOTE 4—EQUITY

Stock-based compensation expense is reflected within the Company’s condensed consolidated statements of operations as follows (in thousands):

	Nine Months Ended
	September 30,
	2014		2013
Cost of services	$	98	$	106
Research and development	74		144
Selling, general and administrative	98		179
Total	$	270	$	429

NOTE 5—FAIR VALUE

Financial Assets and Liabilities Recorded at Fair Value

The following table summarizes the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value as of September 30, 2014 (in thousands):

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	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Assets
Cash and cash equivalents	$	12,243	$	12,243	$	—	$	—

The following table summarizes the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value as of December 31, 2013 (in thousands):

	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Assets
Cash and cash equivalents	$	26,694	$	26,694	$	—	$	—

Financial Assets and Liabilities Not Recorded at Fair Value

The estimated fair values of the amounts borrowed under the Company's debt obligations were based on a Level 2 input using quotes from third-party banks for the Company's debt which is subject to infrequent transactions (i.e. a less active market). As of September 30, 2014 and December 31, 2013, the Company's first lien credit facility had a fair value of approximately $456.2 million and $476.7 million, respectively. As of September 30, 2014 and December 31, 2013, the Company's senior second lien notes had a fair value of approximately $317.6 million and $322.4 million, respectively. The fair value of the Company's unsecured note payable to a minority shareholder approximates book value as of December 31, 2013.

On February 4, 2013 the Company purchased 1,712,392 ordinary shares of eg solutions plc. ("eg"), a back office optimization software company in the United Kingdom at a cost of approximately £1.25 million, or $1.9 million. The Company concurrently entered into a reseller agreement which grants Aspect 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. The Company must achieve minimum annual revenue targets to maintain the exclusivity rights and was issued a conditional warrant to purchase up to 400,000 shares ,which is approximately 2% of its current outstanding equity, at a price of 0.79 pence per share based upon annual revenue levels within the first two years of the agreement. The Company recorded the acquired shares at cost and has accounted for this investment under the equity method. Under this method, the Company recorded a reduction in the investment of less than $0.1 million in the first half of 2014 for its proportionate share of eg’s net loss based on the most recently available financial statements.

NOTE 6—GOODWILL

Changes in the carrying amount of goodwill are as follows (in thousands):

Balance as of December 31, 2013	$	750,785
Foreign currency translation	73
Balance as of September 30, 2014	$	750,858

The Company recognized a change in estimate of $2.9 million, which has been reflected retrospectively in the December 31, 2013 balance of goodwill, with an offset primarily to deferred tax liabilities, relating to an adjustment in connection with finalizing estimates for purchase price allocation for the Voxeo and Bright Pattern acquisitions. 

NOTE 7—INCOME TAXES

The Company accounts for income taxes in accordance with ASC 740, Accounting for Income Taxes. Under ASC 740, each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective tax rate. The Company is required, at the end of each interim reporting period, to make its best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. However, if the Company is unable to make a reliable estimate of its annual effective tax rate, the actual effective tax rate for the year-to-date may be the best estimate of the annual effective tax rate. The precision required in estimating the annual effective tax rate is so high that it is not practical for the Company to make a reliable estimate for this purpose. Therefore, the Company has appropriately provided for income tax based on the actual effective tax rate for the year to date results.

11

The Company’s income tax benefit was $0.8 million and $1.2 million for the three and nine months ended September 30, 2014, respectively compared to an income tax benefit of $17.1 million and $18.2 million for the three and nine months ended September 30, 2013, respectively. The Company’s tax benefit in each period differs from the amount resulting from applying statutory rates primarily due to foreign operations in lower tax jurisdictions, tax reserve adjustments, valuation allowance adjustments and benefits recorded for tax credits.

The Company’s total unrecognized tax benefits were approximately $33.8 million as of September 30, 2014. The amount of unrecognized tax benefits could be reduced upon closure of tax examinations or if the statute of limitations on certain tax filings expires without assessment from the relevant tax authorities. During the three months ended September 30, 2014, the Company increased its uncertain tax positions for items related to prior years by approximately $7.4 million. In addition, during the three months ended September 30, 2014, the Company increased its uncertain tax positions for items related to the current year by approximately $11.2 million. During the three months ended September 30, 2014, the Company decreased its uncertain tax positions for items related to prior years by approximately$3.3 million due to the lapse in the statute of limitations. The Company believes that it is reasonably possible that there could be a reduction in unrecognized tax benefits during the next 12 months of approximately $1.5 million.

NOTE 8—CONTINGENCIES

Litigation

The Company, from time to time, is party to litigation arising in the ordinary course of its business. Management does not believe that the outcome of these claims will have a material adverse effect on the consolidated financial condition of the Company based on the nature and status of proceedings at this time.

At each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. Legal costs are expensed as incurred.

NOTE 9—RELATED PARTY TRANSACTIONS

The Company incurred advisory fees from Holdings' majority shareholder totaling $0.5 million for the three months ended September 30, 2014 and 2013, and $1.5 million for the nine months ended September 30, 2014 and 2013. The fees related to management and advisory services rendered in connection with a consulting agreement entered into by both parties. The advisory fees are included in general and administrative expenses in the accompanying condensed consolidated statements of operations, with a related accrued expense amount of $2.5 million and $1.0 million as of September 30, 2014 and December 31, 2013, respectively.

As of September 30, 2014 and December 31, 2013, approximately $50.0 million of the second lien credit facility was held by a corporation owned by certain of Holdings' shareholders to which the Company paid semi-annual interest of $2.7 million during the nine months ended September 30, 2014 and 2013. The Company had accrued interest expense of approximately $2.0 million and $0.7 million related to certain of Holdings' shareholders' second lien credit facility holdings as of September 30, 2014 and December 31, 2013, respectively.

In March 2014, the majority shareholder of Holdings' acquired LiveVox, Inc. (“LiveVox”) a leading provider of cloud contact center solutions. The Company concurrently entered into a strategic partnership with LiveVox which initially focuses on a joint go to market between the companies. Aspect and LiveVox will cross-license and cross-sell each other’s products to better serve current and new customers. The companies will leverage the scale of both organizations to optimize efficiencies in network and telco infrastructure. The Company’s Chief Executive Officer, Stew Bloom, was appointed to the board of directors of LiveVox. There were no amounts recorded in the accompanying condensed consolidated statements of operations or condensed consolidated balance sheet during the nine months ended September 30, 2014 as a result of this partnership.

NOTE 10—SUBSEQUENT EVENTS

On November 7, 2014, Aspect Software, Inc., the Company's main operating subsidiary, amended its Credit Facility to provide the appropriate level of flexibility to execute the Company's strategy and absorb the current volatility inherent in its business. The amended Credit Facility maintains the $457.5 million senior secured term loan ("Term Loan") maturing May 7, 2016 and extended the $30.0 million senior secured revolving facility ("Revolver") to a maturity date of February 7, 2016. The Credit Facility can be increased by $100.0 million under certain circumstances.

The Credit Facility contains three financial maintenance covenants, each measured for the most recent four fiscal quarter period: 1) a leverage ratio (debt divided by EBITDA, each as defined in the Credit Facility) 2) a Term loan leverage ratio (Term Loan debt divided by EBITDA, each as defined in the Credit Facility) and 3) an interest coverage ratio (EBITDA divided by

12

cash interest expense, each as defined in the Credit Facility). EBITDA, as defined in the Credit Facility, excludes certain items including non-recurring charges, acquisition related adjustments to revenue, stock compensation and impairments.

In exchange for the lenders resetting the loan covenants for each quarterly period from September 30, 2014 through December 31, 2015, the amendment required the Company to pay consent fees that totaled approximately $3 million upon effectiveness and in the event the debt has not been refinanced prior to June 30, 2015, the annual interest rate will increase by 25 basis points and an additional 50 basis points fee will be payable in kind by the issuance of additional Term Loans.

In connection with the amendment, certain holders of Aspect Software Group Holdings’ Class L shares also elected to invest another $20.0 million of cash into the Company through the purchase of additional shares.

The Company has evaluated all subsequent events and determined that there are no additional material recognized or unrecognized subsequent events requiring disclosure.

13

NOTE 11—SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIALS

The Company’s debt issued in May 2010 is fully and unconditionally and jointly and severally guaranteed by Aspect Software Parent, Inc. and each of its domestic subsidiaries. Aspect Software Inc. is the issuer of the Company’s debt. Each of the guarantor subsidiaries is 100% owned, directly or indirectly by Aspect Software Parent, Inc. The following represents the supplemental condensed financial information of Aspect Software Parent, Inc. and its guarantor and non-guarantor subsidiaries, as of September 30, 2014 and December 31, 2013, and for the three and nine months ended September 30, 2014 and 2013.

Supplemental Condensed Consolidating Balance Sheet (unaudited)

September 30, 2014

(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	424		$	11,819	$	—		$	12,243
Accounts receivable, net	60,907			67,158		(72,390		)	55,675
Receivable due from Aspect Software Group Holdings Ltd.	1,224			—		—			1,224
Deferred tax assets	7,934			1,726		—			9,660
Other current assets	14,039			5,664		—			19,703
Total current assets	84,528			86,367		(72,390		)	98,505
Property, plant, and equipment, net	17,538			2,692		—			20,230
Intangible assets, net	53,519			9,347		—			62,866
Goodwill	717,332			33,526		—			750,858
Investment in subsidiaries	62,287			—		(62,287		)	—
Other assets	8,507			9,036		—			17,543
Total assets	$	943,711		$	140,968	$	(134,677	)	$	950,002
Liabilities and shareholder's equity (deficit)
Current liabilities:
Accounts payable	$	53,509		$	30,618	$	(72,390	)	$	11,737
Current portion of long-term debt	10,663			—		—			10,663
Accrued liabilities	38,519			13,039		—			51,558
Deferred revenues	59,160			22,519		—			81,679
Total current liabilities	161,851			66,176		(72,390		)	155,637
Deferred tax liabilities	21,943			450		—			22,393
Long-term deferred revenue	1,924			945		—			2,869
Long-term debt	765,823			—		—			765,823
Other long-term liabilities	39,089			11,110		—			50,199
Total liabilities	990,630			78,681		(72,390		)	996,921
Total Aspect Software Parent, Inc. shareholders’ (deficit) equity	(46,919		)	58,272		(62,287		)	(50,934		)
Noncontrolling interest	—			4,015		—			4,015
Total shareholder's (deficit) equity	(46,919		)	62,287		(62,287		)	(46,919		)
Total liabilities and shareholder's (deficit) equity	$	943,711		$	140,968	$	(134,677	)	$	950,002

14

Supplemental Condensed Consolidating Balance Sheet (unaudited)

December 31, 2013

(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	3,764		$	22,930	$	—		$	26,694
Accounts receivable, net	76,387			50,657		(68,042		)	59,002
Receivable due from Aspect Software Group Holdings Ltd.	2,621			—		—			2,621
Deferred tax assets	7,934			1,263		—			9,197
Other current assets	14,958			6,062		—			21,020
Total current assets	105,664			80,912		(68,042		)	118,534
Property, plant, and equipment, net	16,396			2,071		—			18,467
Intangible assets, net	61,922			10,910		—			72,832
Goodwill	717,334			33,451		—			750,785
Investment in subsidiaries	45,047			—		(45,047		)	—
Other assets	13,094			8,987		—			22,081
Total assets	$	959,457		$	136,331	$	(113,089	)	$	982,699
Liabilities and shareholder's equity (deficit)
Current liabilities:
Accounts payable	$	35,963		$	39,937	$	(68,042	)	$	7,858
Current portion of long-term debt	37,851			—		—			37,851
Accrued liabilities	49,354			12,613		—			61,967
Deferred revenues	52,330			24,340		—			76,670
Total current liabilities	175,498			76,890		(68,042		)	184,346
Deferred tax liabilities	31,425			451		—			31,876
Long-term deferred revenue	3,047			1,408		—			4,455
Long-term debt	770,079			—		—			770,079
Other long-term liabilities	24,068			12,535		—			36,603
Total liabilities	1,004,117			91,284		(68,042		)	1,027,359
Total Aspect Software Parent, Inc. shareholders’ (deficit) equity	(44,660		)	39,777		(45,047		)	(49,930		)
Noncontrolling interest	—			5,270		—			5,270
Total shareholder's (deficit) equity	(44,660		)	45,047		(45,047		)	(44,660		)
Total liabilities and shareholder's (deficit) equity	$	959,457		$	136,331	$	(113,089	)	$	982,699

15

Supplemental Condensed Consolidating Statement of Operations (unaudited)

For the Three Months Ended September 30, 2014

(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
Net revenues	$	74,048		$	49,156		$	(9,754	)	$	113,450
Cost of revenues	35,233			23,218			(9,754		)	48,697
Gross profit	38,815			25,938			—			64,753
Operating expenses:
Research and development	9,290			3,210			—			12,500
Selling, general and administrative	17,327			12,234			—			29,561
Amortization expense for acquired intangible assets	1,741			294			—			2,035
Total operating expenses	28,358			15,738			—			44,096
Income from operations	10,457			10,200			—			20,657
Interest and other income (expense), net	(15,109		)	(4,099		)	—			(19,208		)
(Loss) income before income taxes	(4,652		)	6,101			—			1,449
(Benefit from) provision for income taxes	(1,897		)	1,051			—			(846		)
Equity in earnings of subsidiaries	5,559			—			(5,559		)	—
Net income (loss)	2,804			5,050			(5,559		)	2,295
Less: Net loss attributable to noncontrolling interest	—			(509		)	—			(509		)
Net income (loss) attributable to Aspect Software Parent, Inc.	$	2,804		$	5,559		$	(5,559	)	$	2,804

For the Three Months Ended September 30, 2013

(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
Net revenues	$	74,703		$	39,412		$	(5,603	)	$	108,512
Cost of revenues	32,895			17,332			(5,603		)	44,624
Gross profit	41,808			22,080			—			63,888
Operating expenses:
Research and development	11,409			2,234			—			13,643
Selling, general and administrative	22,617			11,358			—			33,975
Amortization expense for acquired intangible assets	6,540			256			—			6,796
Total operating expenses	40,566			13,848			—			54,414
Income from operations	1,242			8,232			—			9,474
Interest and other income (expense), net	54			(18,744		)	—			(18,690		)
Income (loss) before income taxes	1,296			(10,512		)	—			(9,216		)
Provision for (benefit from) income taxes	(19,308		)	2,173			—			(17,135		)
Equity in earnings of subsidiaries	(12,513		)	—			12,513			—
Net income (loss)	$	8,091		$	(12,685	)	$	12,513		$	7,919

16

Supplemental Condensed Consolidating Statement of Operations (unaudited)

For the Nine Months Ended September 30, 2014

(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
Net revenues	$	219,090		$	129,284		$	(19,652	)	$	328,722
Cost of revenues	104,685			57,767			(19,652		)	142,800
Gross profit	114,405			71,517			—			185,922
Operating expenses:
Research and development	29,894			9,297			—			39,191
Selling, general and administrative	59,987			34,134			—			94,121
Amortization expense for acquired intangible assets	5,324			881			—			6,205
Total operating expenses	95,205			44,312			—			139,517
Income from operations	19,200			27,205			—			46,405
Interest and other income (expense), net	(48,703		)	(8,388		)	—			(57,091		)
(Loss) income before income taxes	(29,503		)	18,817			—			(10,686		)
(Benefit from) provision for income taxes	(4,037		)	2,804			—			(1,233		)
Equity in earnings of subsidiaries	17,268			—			(17,268		)	—
Net (loss) income	(8,198		)	16,013			(17,268		)	(9,453		)
Less: Net loss attributable to noncontrolling interest	—			(1,255		)	—			(1,255		)
Net (loss) income attributable to Aspect Software Parent, Inc.	$	(8,198	)	$	17,268		$	(17,268	)	$	(8,198	)

For the Nine Months Ended September 30, 2013

(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
Net revenues	$	214,392		$	114,935		$	(15,844	)	$	313,483
Cost of revenues	93,146			48,538			(15,844		)	125,840
Gross profit	121,246			66,397			—			187,643
Operating expenses:
Research and development	31,270			6,225			—			37,495
Selling, general and administrative	63,742			30,738			—			94,480
Amortization expense for acquired intangible assets	20,692			795			—			21,487
Restructuring credits	(44		)	(2		)	—			(46		)
Total operating expenses	115,660			37,756			—			153,416
Income from operations	5,586			28,641			—			34,227
Interest and other income (expense), net	(17,750		)	(33,064		)	—			(50,814		)
Loss before income taxes	(12,164		)	(4,423		)	—			(16,587		)
(Benefit from) provision for income taxes	(18,686		)	456			—			(18,230		)
Equity in earnings of subsidiaries	(4,879		)	—			4,879			—
Net income (loss)	$	1,643		$	(4,879	)	$	4,879		$	1,643

17

Supplemental Condensed Consolidating Statement of Comprehensive Income (Loss) (unaudited)

For the Three Months Ended September 30, 2014

(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
Net income (loss)	$	2,804		$	5,050		$	(5,559	)	$	2,295
Change in cumulative translation adjustment	(151		)	918			(8		)	759
Comprehensive income (loss)	2,653			5,968			(5,567		)	3,054
Comprehensive loss attributable to noncontrolling interest	—			(509		)	—			(509		)
Comprehensive (loss) income attributable to Aspect Software Parent, Inc.	$	2,653		$	6,477		$	(5,567	)	$	3,563

For the Three Months Ended September 30, 2013

(in thousands)	Issuer / Guarantor Subsidiaries		Non-guarantor Subsidiaries			Eliminations			Consolidated
Net income (loss)	$	8,091	$	(12,685	)	$	12,513		$	7,919
Change in cumulative translation adjustment	559		(1,389		)	(5		)	(835		)
Comprehensive income (loss)	$	8,650	$	(14,074	)	$	12,508		$	7,084

For the Nine Months Ended September 30, 2014

(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
Net (loss) income	$	(8,198	)	$	16,013		$	(17,268	)	$	(9,453	)
Change in cumulative translation adjustment	(248		)	183			(15		)	(80		)
Comprehensive (loss) income	(8,446		)	16,196			(17,283		)	(9,533		)
Comprehensive loss attributable to noncontrolling interest	—			(1,255		)	—			(1,255		)
Comprehensive (loss) income attributable to Aspect Software Parent, Inc.	$	(8,446	)	$	17,451		$	(17,283	)	$	(8,278	)

For the Nine Months Ended September 30, 2013

(in thousands)	Issuer / Guarantor Subsidiaries		Non-guarantor Subsidiaries			Eliminations			Consolidated
Net income (loss)	$	1,643	$	(4,879	)	$	4,879		$	1,643
Change in cumulative translation adjustment	830		(1,535		)	(53		)	(758		)
Comprehensive income (loss)	$	2,473	$	(6,414	)	$	4,826		$	885

18

Supplemental Condensed Consolidating Statement of Cash Flows (unaudited)

For the Nine Months Ended September 30, 2014

(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations		Consolidated
Operating activities:
Net cash provided by (used in ) operating activities	$	28,480		$	(9,349	)	$	—	$	19,131
Investing activities:
Purchases of property and equipment	$	(7,024	)	$	(1,636	)	$	—	$	(8,660	)
Net cash used in investing activities	(7,024		)	(1,636		)	—		(8,660		)
Financing activities:
Repayment of borrowings	(46,800		)	—			—		(46,800		)
Borrowings under debt facilities	15,000								15,000
Proceeds received from capital contribution	7,004								7,004
Net cash used in by financing activities	(24,796		)	—			—		(24,796		)
Effect of exchange rate changes on cash	—			(126		)	—		(126		)
Net change in cash and cash equivalents	(3,340		)	(11,111		)	—		(14,451		)
Cash and cash equivalents:
Beginning of period	3,764			22,930			—		26,694
End of period	$	424		$	11,819		$	—	$	12,243

Supplemental Condensed Consolidating Statement of Cash Flows (unaudited)

For the Nine Months Ended September 30, 2013

(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations		Consolidated
Operating activities:
Net cash provided by operating activities	$	47,758		$	(32,361	)	$	—	$	15,397
Investing activities:
Cash paid for acquisitions, net of cash acquired	(135,163		)	(6,901		)	—		(142,064		)
Purchases of property and equipment	(7,981		)	(972		)	—		(8,953		)
Purchase of investment	$	—		$	(1,852	)	$	—	$	(1,852	)
Net cash used in investing activities	(143,144		)	(9,725		)	—		(152,869		)
Financing activities:
Repayment of borrowings	(16,100		)	—			—		(16,100		)
Borrowings under debt facilities	110,000			—			—		110,000
Debt issuance costs in connection with borrowings	(5,538		)						(5,538		)
Net cash provided by financing activities	88,362			—			—		88,362
Effect of exchange rate changes on cash	—			(1,034		)	—		(1,034		)
Net change in cash and cash equivalents	(7,024		)	(43,120		)	—		(50,144		)
Cash and cash equivalents:
Beginning of period	11,093			69,745			—		80,838
End of period	$	4,069		$	26,625		$	—	$	30,694

19

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q, or this “Quarterly Report”, and in conjunction with the Annual Report for Aspects Software Group Holdings Ltd.'s on Form 10-K (File No. 333-170936).

This Quarterly Report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Quarterly Report, including, but not limited to, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products, statements regarding our reliance on third parties and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “should,” “will” and “would,” and words of similar import and the negatives thereof, are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, or the expected outcome or impact of pending or threatened litigation are forward-looking statements. Actual results could vary materially as a result of certain factors, including, but not limited to, those expressed in these statements. We refer you to the “Risk Factors,” “Quantitative and Qualitative Disclosures of Market Risks,” and “Liquidity and Capital Resources” sections contained in this Quarterly Report, and the risks discussed in our other SEC filings, which identify important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.

We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report. We claim the protection of the Private Securities Litigation Reform Act of 1995 for all forward-looking statements in this report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We do not intend, and undertake no obligation, to update these forward-looking statements.

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.

Unbilled Deferred Revenue

The deferred revenue balance on our condensed consolidated balance sheet does not represent the total contract value of annual or multi-year, non-cancelable hosting agreements. Unbilled deferred revenue represents future billings under our hosting agreements that have not been invoiced and, accordingly, are not recorded in deferred revenue. Unbilled deferred revenue was approximately $64 million as of September 30, 2014 and approximately $54 million as of September 30, 2013. Our typical contract length is between 12 and 36 months. We expect that the amount of unbilled deferred revenue will change from quarter to quarter for several reasons, including the specific timing and duration of large customer hosting agreements, varying billing cycles of hosting agreements, the specific timing of customer renewals, foreign currency fluctuations, the timing of when unbilled deferred revenue is to be recognized as revenue, and changes in customer financial circumstances.

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Financial Summary

The following table sets forth the unaudited results of our operations expressed in dollars and as a percentage of net revenue for the three and nine months ended September 30, 2014 and 2013:

(Dollars in millions)	Three Months Ended September 30,										Nine Months Ended September 30,
	2014			2013			2014		2013		2014			2013			2014		2013
Net revenues	$	113.5		$	108.5		100	%	100	%	$	328.7		$	313.5		100	%	100	%
Total cost of revenues	48.7			44.6			43	%	41	%	142.8			125.9			43	%	40	%
Gross profit	64.8			63.9			57	%	59	%	185.9			187.6			57	%	60	%
Operating expenses	44.1			54.4			39	%	50	%	139.5			153.4			42	%	49	%
Income from operations	20.7			9.5			18	%	9	%	46.4			34.2			14	%	11	%
Interest and other expense, net	(19.2		)	(18.7		)	(17	)%	(17	)%	(57.1		)	(50.8		)	(17	)%	(16	)%
Income (loss) before income taxes	1.5			(9.2		)	1	%	(8	)%	(10.7		)	(16.6		)	(3	)%	(5	)%
Benefit from income taxes	(0.8		)	(17.1		)	(1	)%	(16	)%	(1.2		)	(18.2		)	—	%	(6	)%
Net income (loss)	2.3			7.9			2	%	7	%	(9.5		)	1.6			(3	)%	1	%
Less: Net loss attributable to noncontrolling interest	(0.5		)	—			—	%	—	%	(1.3		)	—			—	%	—	%
Net income (loss) attributable to Aspect Software Parent, Inc.	$	2.8		$	7.9		2	%	12	%	$	(8.2	)	$	1.6		(2	)%	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)	Three Months Ended September 30,							Nine Months Ended September 30,
	2014		2013		Change ($)			2014		2013		Change ($)
Income from operations	$	20.7	$	9.5	$	11.2		$	46.4	$	34.2	$	12.2
Depreciation and amortization	5.6		10.9		(5.3		)	16.7		31.7		(15.0		)
Stock based compensation	0.3		—		0.3			0.4		0.4		—
Sponsor management fees	0.5		0.5		—			1.5		1.5		—
Other (1)	3.0		7.4		(4.4		)	18.2		13.0		5.2
Adjusted EBITDA	$	30.1	$	28.3	$	1.8		$	83.2	$	80.8	$	2.4

(1) These costs represent amounts that are allowed to be added back for calculation of compliance with our debt agreement covenants, including but not limited to; acquisition related adjustments to revenue, strategic investment costs, legal entity rationalization, IRS audit, debt issuance, Sarbanes-Oxley compliance, foreign withholding taxes, and non-recurring charges. The holders of Aspect Software Holdings Ltd.’s shares contributed approximately $6.6 million of cash to solve a potential covenant deficiency by adding equity to Adjusted EBITDA. The nine months ended September 30, 2014 include $6.6 million as a result of the equity cure.

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Net Revenue

The following table presents the breakdown of net revenues between product, maintenance and services revenue:

(In millions)	Three Months Ended September 30,							Nine Months Ended September 30,
	2014		2013		Change ($)			2014		2013		Change ($)
Product revenue:
Core (IM & WFO)	$	18.6	$	17.3	$	1.3		$	45.8	$	46.8	$	(1.0	)
Signature	2.8		0.9		1.9			5.4		3.5		1.9
	21.4		18.2		3.2			51.2		50.3		0.9
Maintenance revenue	59.6		64.7		(5.1		)	183.5		196.6		(13.1		)
Services revenue	19.8		17.7		2.1			59.8		58.6		1.2
Hosting & managed services revenue	12.7		7.9		4.8			34.2		8.0		26.2
Total revenue	$	113.5	$	108.5	$	5.0		$	328.7	$	313.5	$	15.2

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 converting our Signature customers to Unified IP, targeting new logos and better leveraging Workforce Optimization up-sell opportunities to offset the runoff of our Signature business.

The increase in product revenue for both the three and nine month periods ended September 30, 2014, when compared to the prior year periods is primarily related to growth in our Voxeo product line as well as a number of add-on Signature orders in the third quarter of 2014 that we do not expect to recur. During 2014, we continued to experience lengthening decision and approval cycles and many customers remain cautious with capital investments resulting in a number of slipped deals each quarter. 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 twelve months we have had several 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.

Our Core maintenance revenue for the three months ended September 30, 2014 grew 3% over the prior year as retention rates exceeded 90% for this business and we maximized up-sell opportunities. Our Signature maintenance revenue declined 25% when compared to the prior year as our customers consolidated due to license decommissioning resulting from agent downsizing and in some cases we experienced competitive displacement. In many of these instances, our customers began migrating to the competitive platform in previous years and completed the migration during 2014.

Hosting and managed services revenue during 2014 represents the acquired Voxeo business as well as recurring revenue from customers that outsource management of their call center hardware and software to us and Aspect's hosted business. Our acquisition of Voxeo 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 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 are expanding our data center capabilities and coverage areas and we are focused on ease of implementation to accelerate the earnings process for these deals.

The increase in services revenue for the three and nine months ended September 30, 2014, compared to the prior year period is primarily the result of increased product volume as a majority of our customers also purchase installation services with their product order.

Cost of Revenue

The following table presents the breakdown of cost of revenues between product, maintenance and services revenue and amortization expense for acquired intangible assets:

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(In millions)	Three Months Ended September 30,							Nine Months Ended September 30,
	2014		2013		Change ($)			2014		2013		Change ($)
Cost of product revenue	$	6.1	$	4.1	$	2.0		$	15.3	$	13.7	$	1.6
Cost of maintenance revenue	15.8		17.7		(1.9		)	49.3		52.7		(3.4		)
Cost of services revenue	19.2		18.2		1.0			56.2		52.3		3.9
Cost of hosting & managed services revenue	6.4		2.6		3.8			18.3		2.6		15.7
Amortization expense for acquired intangible assets	1.2		2.0		(0.8		)	3.7		4.6		(0.9		)
Total cost of revenues	$	48.7	$	44.6	$	4.1		$	142.8	$	125.9	$	16.9

The following table presents gross profit as a percentage of related revenue:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014		2013		Change (pts)		2014		2013		Change (pts)
Product gross margin	71.5	%	77.5	%	(6.0	)	70.1	%	73.0	%	(2.9	)
Maintenance gross margin	73.5	%	72.6	%	0.9		73.1	%	73.2	%	(0.1	)
Services gross margin	3.0	%	(2.8	)%	5.8		6.0	%	10.6	%	(4.6	)
Hosting & managed services margin	49.2	%	67.1	%	(17.9	)	46.2	%	67.5	%	(21.3	)

Product gross margin declined in the three and nine month periods ended September 30, 2014 compared to the prior year period primarily related to increased sales of our legacy Signature hardware products in the current year quarter. These legacy product sales require hardware and typically result in lower margins compared to sales of our Core business products.

The slight improvement in maintenance gross margin in the three months ended September 30, 2014 is primarily related to actions taken in the first half of 2014 to reduce our costs globally to offset the volume decrease. We will continue to routinely assess our cost structure to ensure that it aligns with our revenue streams.

Services gross margin deteriorated significantly in the nine month period ended September 30, 2014 when compared to the prior year primarily resulting from one-time costs associated with workforce adjustments and lower volume of projects as our product revenue declined in the first half of 2014. We have 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.

Hosting and managed services margins reflect the significant investments that we have made in our Voxeo, Zipwire and managed services product offerings. Given the lag in conversion of bookings to revenue, we expect these margins to continue to improve as our customers ramp up their service levels and we continue to grow this business.

Operating Expenses

(In millions)	Three Months Ended September 30,							Nine Months Ended September 30,
	2014		2013		Change ($)			2014		2013		Change ($)
Research and development	$	12.5	$	13.6	$	(1.1	)	$	39.2	$	37.5	$	1.7
Selling, general and administrative	29.6		34.0		(4.4		)	94.1		94.4		(0.3		)
Amortization expense for acquired intangible assets	2.0		6.8		(4.8		)	6.2		21.5		(15.3		)
Total	$	44.1	$	54.4	$	(10.3	)	$	139.5	$	153.4	$	(13.9	)

The increase in research and development expenses for the nine months ended September 30, 2014 compared to the prior year period, is primarily related to the increased headcount from our Voxeo acquisition, severance costs related to realigning our workforce, as well as increased investment in tools to improve our development and delivery of new and enhanced solutions. The decrease in research and development expenses for the three months ended September 30, 2014 compared to the prior year period, is primarily related to cost reduction initiatives executed in the first half of 2014.

The decrease in selling, general and administrative expenses for the three months ended September 30, 2014 is primarily related to cost reduction initiatives which included workforce adjustments to lower cost geographies as well as reduced overall headcount. In addition, expenses for the three months ended September 30, 2014 benefited from cost savings initiatives with two significant vendors.

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Amortization expense for acquired intangible assets in 2014 decreased as compared to the same period in the prior year as certain assets became fully amortized.

Interest and Other Expense, Net

The components of interest and other expense, net, were as follows:

(In millions)	Three Months Ended September 30,									Nine Months Ended September 30,
	2014			2013			Change ($)			2014		2013			Change ($)
Interest expense, net	$	19.0		$	18.9		$	0.1		$	56.9	$	51.6		$	5.3
Exchange rate loss (gain)	0.3			(0.4		)	0.7			0.2		(0.7		)	0.9
Other (income) expense, net	(0.1		)	0.2			(0.3		)	—		(0.1		)	0.1
Total interest and other expense, net	$	19.2		$	18.7		$	0.5		$	57.1	$	50.8		$	6.3

Interest expense for the nine months ended September 30, 2014 increased as compared to the prior year period due

to increased debt levels resulting from $85.0 million of delayed draw term loan and $25.0 million of issued second lien notes to fund the Voxeo acquisition in July 2013.

For the three and nine months ended September 30, 2014 as compared to the prior year periods, we experienced an exchange rate loss primarily due to the weakening of the United States dollar against foreign currencies.

Income Taxes

The following table presents benefit from income taxes and the effective tax rate:

(Dollars in millions)	Three Months Ended September 30,									Nine Months Ended September 30,
	2014			2013			Change			2014			2013			Change
Benefit from income taxes	$	(0.8	)	$	(17.1	)	$	16.3		$	(1.2	)	$	(18.2	)	$	17.0
Effective tax rate	(58.4		)%	185.9		%	(244.3		) pts	11.5		%	109.9		%	(98.4		) pts

Our income tax benefit was $0.8 million and $1.2 million for the three and nine months ended September 30, 2014, respectively compared to an income tax benefit of $17.1 million and $18.2 million for the three and nine months ended September 30, 2014, respectively. Our tax benefit in each period differs from the amount resulting from applying statutory rates primarily due to foreign operations in lower tax jurisdictions, tax reserve adjustments, valuation allowance adjustments and benefits recorded for tax credits.

We account for income taxes in accordance with ASC 740, Accounting for Income Taxes. Under ASC 740, each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective tax rate. We are required, at the end of each interim reporting period, to make our best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. However, if we are unable to make a reliable estimate of our annual effective tax rate, the actual effective tax rate for the year-to-date may be the best estimate of the annual effective tax rate. The precision required in estimating the annual effective tax rate is such that it is not practical for us to make a reliable estimate for this purpose. Therefore, we have appropriately provided for income tax based on the actual effective tax rate for the year to date results.

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LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents decreased by $18.5 million to $12.2 million at September 30, 2014 from $30.7 million at September 30, 2013. Our existing cash balance generated by operations and borrowings available under our credit facilities have served as our primary sources of short-term liquidity. On August 7, 2014, the holders of certain of Aspect Software Group Holdings Ltd.’s shares contributed approximately $7.0 million of cash to solution a covenant deficiency in the second quarter of 2014 by adding equity to Adjusted EBITDA. 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, borrowings available under our credit facilities and continued support from our shareholders, if needed, will be adequate to meet our liquidity needs for at least the next 12 months

A condensed statement of cash flows for the nine months ended September 30, 2014 and 2013 follows:

(In millions)	Nine Months Ended September 30,
	2014			2013
Net cash (used for) provided by:
Net loss	$	(9.5	)	$	1.6
Adjustments to net loss for non-cash items	13.8			18.6
Changes in operating assets and liabilities	14.8			(4.8		)
Operating activities	19.1			15.4
Investing activities	(8.7		)	(152.9		)
Financing activities	(24.8		)	88.4
Effect of exchange rate changes	(0.1		)	(1.0		)
Net change in cash and cash equivalents	(14.5		)	(50.1		)
Cash and cash equivalents at beginning of period	26.7			80.8
Cash and cash equivalents at end of period	$	12.2		$	30.7

Net Cash Provided by Operating Activities

The decrease in net cash provided by operating activities was primarily due to lower cash flows from our annual maintenance renewals primarily resulting from agent downsizing, license decommissioning and competitive displacements. In addition, in 2014 our interest payments were higher as a result of the additional principal we issued to partially fund the Voxeo acquisition.

Net Cash Used In Investing Activities

Net cash used in investing activities primarily represents our investments in our hosting data centers, revitalization of our office spaces and equipment purchases. In addition, net cash used in investing activities for the nine months ended September 30, 2013 included our Voxeo acquisition and our investment in eg solutions plc. ("eg"), a back office optimization software company in the United Kingdom.

Net Cash Used In/Provided By Financing Activities

Financing cash flow activities for both periods presented primarily represents activities related to our debt. In the current year net cash used in financing activities reflects scheduled quarterly principal payments to our first-lien lenders and draws and repayments under our revolver. The aforementioned $7 million capital contribution partially offset these financing uses of cash in the current year. During the nine month period ended September 30, 2013 we issued $110 million of additional principal to fund our Voxeo acquisition which was included in financing cash flows.

Debt Covenants

We were in compliance with all of our financial debt covenants as of September 30, 2014.

Off-Balance Sheet Arrangements

In the Annual Report of Aspect Software Group Holdings Ltd. on Form 10-K (333-170936), we included a discussion of our off-balance sheet arrangements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Off-Balance Sheet Arrangements.” There have been no significant changes to our off-balance sheet arrangements since December 31, 2014.

Critical Accounting Policies

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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.

During the first nine months of 2014, there were no significant changes to our critical accounting policies and estimates. For a complete discussion of all other critical accounting policies, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Annual Report of Aspect Software Group Holdings Ltd. on Form 10-K (File No. 333-170936). There are no differences between the critical accounting policies of Aspect Software Group Holdings Ltd. and Aspect Software Parent, Inc.

Item 3. Quantitative and Qualitative Disclosure of Market Risks

During the first nine months of 2014, there were no significant changes to our quantitative and qualitative disclosures about market risk. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures of Market Risks” in the Annual Report of Aspect Software Group Holdings Ltd. on Form 10-K (File No. 333-170936), for a more complete discussion of the market risks we encounter.

Item 4. Controls and Procedures

Disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures as of September 30, 2014 and have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 8 to the Condensed Consolidated Financial Statements included in our Quarterly Report, which is incorporated by reference herein.

Item 1A. Risk Factors

We operate in a rapidly changing environment that involves certain risks and uncertainties, some of which are beyond our control. In addition to the information provided in this report, please refer to the Risk Factors section included the Annual Report of Aspect Software Group Holdings Ltd. on Form 10-K (File No. 333-170936), for a more complete discussion regarding certain factors that could materially affect our business, financial condition or future results.

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Item 6. Exhibits

The following exhibits are filed or furnished as part of this quarterly report on Form 10-Q:

Exhibit No.	Description
31.1*	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**	Certification of Principal Financial Officer and Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS***	XBRL Instance Document
101.SCH***	XBRL Taxonomy Extension Schema Document
101.CAL***	XBRL Calculation Linkbase Document
101.DEF***	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB***	XBRL Label Linkbase Document
101.PRE***	XBRL Taxonomy Presentation Linkbase Document

* Filed herewith

** Furnished herewith

*** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 14, 2014	ASPECT SOFTWARE PARENT, INC.
	By:	/s/ Robert J. Krakauer
		Robert J. Krakauer, Executive Vice President and Chief Financial Officer

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