S-1/A 1 d542338ds1a.htm AMENDMENT NO. 5 TO FORM S-1 Amendment No. 5 to Form S-1
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As filed with the Securities and Exchange Commission on May 31, 2013

Registration No. 333-174801

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Amendment No. 5

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

AVAYA HOLDINGS CORP.

(Exact name of registrant as specified in its charter)

 

Delaware   3661   26-1119726

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

 

 

4655 Great America Parkway

Santa Clara, California 95054

(908) 953-6000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

Pamela F. Craven, Esq.

Chief Administrative Officer

Avaya Holdings Corp.

211 Mount Airy Road

Basking Ridge, New Jersey 07920

(908) 953-6000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

With copies to:

 

Julie H. Jones, Esq.
Ropes & Gray LLP
Prudential Tower
800 Boylston St.
Boston, MA 02199
Telephone (617) 951-7000
Fax (617) 951-7050
 

Daniel J. Zubkoff, Esq.

Douglas S. Horowitz, Esq.

Cahill Gordon & Reindel LLP

80 Pine Street

New York, NY 10005

Telephone (212) 701-3000

Fax (212) 269-5420

 

 

 

Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

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 of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

  Large accelerated filer   ¨      Accelerated filer   ¨
  Non-accelerated filer   x    (Do not check if a smaller reporting company)   Smaller reporting company   ¨

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 


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PROSPECTUS (Subject to Completion)

Issued May 31, 2013

 

                Shares

 

LOGO

 

COMMON STOCK

 

 

 

Avaya Holdings Corp. is offering             shares of its common stock. This is the initial public offering of shares of our common stock and no public market currently exists for our shares. We expect the initial public offering price of our common stock to be between $             and $             per share.

 

After the completion of this offering, funds affiliated with our Sponsors (as defined herein) will continue to own a majority of the voting power of our outstanding common stock. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange. See “Principal Stockholders.”

 

 

 

We have applied to list our common stock on the New York Stock Exchange under the symbol “AVYA.”

 

 

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 18.

 

 

 

PRICE $            A SHARE

 

 

 

       Public Offering
Price
    

Underwriting
Discounts and
Commissions

    

Proceeds

to Avaya

Per Share

     $               $               $         

Total

     $                          $                          $                    

 

We have granted the underwriters the right to purchase up to an additional          shares of common stock for a period of 30 days.

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares to purchasers on                    , 2013.

 

 

 

MORGAN STANLEY   GOLDMAN, SACHS & CO.           J.P. MORGAN
CITI                        DEUTSCHE BANK SECURITIES                    
BofA MERRILL LYNCH   BARCLAYS                  UBS INVESTMENT  BANK   CREDIT SUISSE

 

                    , 2013

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.


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We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we file with the Securities and Exchange Commission, or the SEC. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

Until                     , 2013 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

For investors outside the United States: we have not and the underwriters have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.

 

When we use the terms “we,” “us,” “our,” “Avaya” or the “Company,” we mean Avaya Holdings Corp., a Delaware corporation, and its consolidated subsidiaries, including Avaya Inc., our principal U.S. operating subsidiary, taken as a whole, unless the context otherwise indicates.

 

Avaya Aura®, Avaya Flare®, AvayaLive®, Radvision Scopia® and other trademarks or service marks of Avaya are the property of Avaya Holdings Corp. and/or its affiliates. This prospectus also contains additional tradenames, trademarks or service marks belonging to us and to other companies. We do not intend our use or display of other parties’ trademarks, tradenames or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

 

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PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the “Risk Factors” section of this prospectus and our Consolidated Financial Statements and related notes appearing at the end of this prospectus, before making an investment decision. This summary contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements as a result of certain factors, including those set forth in “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

 

Our Company

 

We are a leading global provider of real-time business collaboration and communications solutions that bring people together with the right information at the right time in the right context, enabling businesses to improve their efficiency and quickly solve critical business challenges. Our solutions are designed to enable business users to work together more effectively internally and with their customers and suppliers, to accelerate decision-making and achieve business outcomes. These industry leading solutions are also designed to be flexible, reliable and secure, enabling simplified management and cost reduction while providing a platform for next-generation collaboration from Avaya.

 

We are highly focused on serving our core business collaboration and communications markets with open and unifying, fit-for-purpose solutions and distributed software services and support models. We shape our portfolio to meet the demands of customers today and in the future.

 

Our solutions and services are aimed at large enterprises, small- and mid-sized businesses and government organizations. We offer solutions in three key business collaboration and communications categories:

 

   

Real-Time Collaboration, Video and Unified Communications Software, Infrastructure and Endpoints for an increasingly mobile workforce

 

   

Customer Experience Management, including Contact Center applications

 

   

Networking for data center, campus, branch, and wireless access to complement our business collaboration, unified communications and contact center portfolios

 

These three categories are supported by Avaya’s portfolio of services including product support, integration, and professional and managed services. These services enable customers to optimize and manage their communications networks worldwide and achieve enhanced business results.

 

Our solutions are designed to be highly scalable, reliable, secure, flexible and easy to manage. They can be deployed in numerous ways including on a customer’s own premise, in the cloud and in a virtualized environment. We believe that delivering solutions in a cloud environment, either private or public, will be the deployment mode of choice for many customers in the near future. Further, our research and development investments are focused on solutions across the user experience and business application layers, the infrastructure layer, and endpoints. In addition, we are investing in software for monitoring, troubleshooting and managing distributed communications architectures that we believe will reduce the total cost of ownership and improve end-to-end serviceability of our solutions versus our competitors.

 

Significant industry trends, such as the Bring Your Own Device (BYOD) and the blurring of consumer and enterprise, called the “Consumerization of IT,” are driving the overall move toward enterprise mobility. Enterprises seek 24x7 device and location agnostic collaboration and communications solutions to increase employee effectiveness, reduce costs and gain competitive advantages in the marketplace. In addition, we believe

 

 

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many businesses today have grown through acquisition or lack central controls on infrastructure and are left with inefficient, disparate communications infrastructure that may benefit financially from consolidation. As a result of these trends, we believe that enterprises require a holistic, flexible business solution that is designed to facilitate collaboration, and incorporates enterprise-class stability, scalability and security. Additionally, we believe that the market will evolve to require secure collaboration between enterprises including video, desktop sharing, presence and directory updates.

 

Through our innovative collaboration and communications solutions, we are reshaping our product portfolio to address these trends and continue to grow our business. The foundation for our ongoing innovation is our Avaya Aura platform, our Session Initiation Protocol (SIP) standards-based software suite that brings together voice, video and data into a single, integrated communications and collaboration platform.

 

Our portfolio of business collaboration and communications solutions is designed to deliver a simple and intuitive user experience, seamlessly integrating various modes of communications and collaboration, including real-time voice, video, instant messaging, presence, and conferencing, and non-real-time email, voicemail and social networking. In addition, we have decoupled solutions from the user’s location and allowed consolidation of infrastructure in the data center. Our solutions take the critical step of replacing voice-centric call control used by traditional Voice over Internet Protocol (VoIP) solutions with standards-based SIP session management. This allows communications applications to operate freely from the underlying infrastructure and supports both multiple media (voice, video, text) and modes (call, conference, instant messaging/chat, and email) of communication over the same session. Our Avaya Aura Contact Center also leverages our session management architecture and applies these collaboration principles to customer interactions.

 

These solutions target high growth market segments and we believe expand our addressable markets and accelerate our sales cycle as customers more frequently augment their solutions to take advantage of our ongoing product innovation and to deploy our user experience across an array of endpoints, including our own and those of other vendors. Detailed information on the trends impacting our industry can be found in the next section, Our Industry.

 

We have further enhanced our business through acquisitions that have amplified our innovation and growth strategy. A key example of this is Radvision Ltd., which we acquired in June 2012 and which enhances Avaya’s position with industry leading video collaboration and communications solutions.

 

We leverage our sales and distribution channels to speed new solutions to market and accelerate customer adoption. We have strategic initiatives in place to grow our partner community while supporting our partners’ profitability and success. We also fully leverage the diversity of the partner community for the Avaya portfolio, engaging with value added resellers, systems integrators, service providers, and application developers. Please see the section titled, Customers; Sales, Partners and Distribution for more details.

 

Our solutions address the needs of a diverse range of customers, including large multinational enterprises, small and medium-sized businesses and government organizations. As of September 30, 2012, we had over 300,000 customers, including more than 95% of the Fortune 500 companies, with installations in over one million customer locations worldwide. Our customers operate in a broad range of industries, including financial services, manufacturing, retail, transportation, energy, media and communications, healthcare, education and government, and include, among others, Morgan Stanley & Co. LLC, Progressive Casualty Insurance Company, Whirlpool Corporation, The Hewlett-Packard Company, or HP, Home Depot, Inc., United Air Lines, Inc., Marriott International, Inc., the Blue Cross and Blue Shield Association, Australia National University and the FDIC. We employ a flexible go-to-market strategy with direct and indirect presence in over 170 countries. As of March 31, 2013, we had approximately 10,800 channel partners and for fiscal 2012, our product revenue from indirect sales represented approximately 75% of our total product revenue.

 

 

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For fiscal 2012 and 2011, we generated revenue of $5,171 million and $5,547 million, respectively. For fiscal 2012, product revenue represented 52% of our total revenue and services revenue represented 48%. For fiscal 2011, product revenue represented 54% of our total revenue and services revenue represented 46%. Revenue generated in the United States for fiscal 2012 and 2011 represented 54% of our total revenue. For fiscal 2012 we had operating income of $115 million as opposed to an operating loss of $94 million in fiscal 2011. For fiscal 2012 and 2011, we had net losses of $354 million and $863 million, respectively. For each of fiscal 2012 and 2011, we had Adjusted EBITDA of $971 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations: EBITDA and Adjusted EBITDA” for a definition and explanation of Adjusted EBITDA and a reconciliation of net loss to Adjusted EBITDA.

 

Our Industry

 

Enterprises are increasingly focused on deploying collaboration solutions in order to increase productivity, reduce costs and complexity and gain competitive advantages. The requirements of enterprises have evolved over the past few years in response to the following trends:

 

Increasingly Mobile and Connected Workforce Needs Anytime/Anywhere Collaboration Tools. As enterprises move toward a more geographically dispersed, 24x7 workforce, they need tools to quickly solve business challenges while improving their efficiency. To do this, enterprises need collaboration technology that can bring people together with the right information at the right time in the right context to make critical business decisions.

 

Proliferation of Devices and Applications Expanding the Number of Points of Integration. The number and types of endpoints are growing rapidly. Whereas in the past, business users communicated primarily via desk-phones, today they continue to use desk-based devices, but also various mobile devices such as laptops, smartphones and tablets. In order to communicate seamlessly and securely across these devices, applications and endpoints must be integrated into the communications infrastructure and provide a way for IT professionals to have a consolidated view of these devices and applications so that the environment can be managed effectively and reliably.

 

Consumerization of the Enterprise has Changed Expectations of Business Users and Put More Pressure on IT Departments. With the proliferation of consumer devices such as the Apple iPhone and Apple iPad, Google Android smartphones and tablets and business and social networking applications, business users are increasingly using consumer-focused products and applications for business tasks, particularly in the areas of collaboration and communication. Business users expect their enterprise IT solutions to support these devices and mimic these applications and expect enterprise vendors to design their products so that they are easier to use.

 

Customer Expectations of Contact Centers and Customer Service are Changing. Customer interactions are evolving from voice-centric, point-in-time, contact center transactions to persistent customer conversations over multiple interactions and across multiple media and modes of communication. Customers expect enterprises to know about the history of their interactions, even when they occur across a mix of self-service and agent assisted communications methods including voice, video, email and chat.

 

Business Leaders are Increasingly Challenged to Deliver New Business Capabilities to Support Growth While Facing Tight IT Budgets. Due to continued macro-economic uncertainty, businesses are closely managing overall spending while at the same time making strategic IT investments to gain competitive advantage. As a result, they are seeking solutions that cost-effectively scale with their businesses. Increasingly, to help manage costs and efficiencies businesses are exploring a shift to operating expense models, where they pay a fee for business collaboration and communications services but the underlying solutions, infrastructure and headcount are owned and managed by the vendor, as opposed to capital expenditure models that require them to invest in and own the solutions, infrastructure and headcount.

 

 

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The Benefits of Our Solutions

 

The key benefits of our solutions include:

 

Innovative Real-Time, Multimedia, Multi-Platform Collaboration Tools that Promote Business Collaboration. Our next-generation business collaboration and communications solutions are designed to provide our customers with the software and infrastructure needed to bring together the right people with the right information at the right time in the right context regardless of the communications technology, devices or location.

 

Fit-for-Purpose Solutions that Offer an Enhanced User Experience, Productivity Benefits and Lower Total Cost of Ownership. We deliver comprehensive, fit-for-purpose solutions that are designed for the needs of today’s distributed, collaborative workforce, while addressing what we believe are the three key performance challenges for an enterprise-class communications environment: resiliency, efficiency and scalability. We believe our solutions are specifically designed to address these needs, require less hardware and perform better than our competitors.

 

Open Standards-Based Architecture that Enables Flexible and Extensible Collaboration. Our open standards-based solutions, including our Avaya Aura platform, accommodate customers with multi-vendor environments seeking to leverage their existing investments and supplement what they have with the specific collaboration products and/or services they need, and rapidly create and deploy applications. Providing enterprises with strong integration capabilities gives them the flexibility to take advantage of new collaboration and contact center tools and devices as they are introduced, rather than being confined to a single vendor and having to compromise on functionality.

 

Enterprise-Class Solutions that are Scalable, Secure, Reliable and Backed by Our Award-Winning Services. Our product portfolio has been designed to be highly reliable, secure and scalable, and is backed by our award-winning global services. Avaya Global Services, or AGS, is a leading provider of support services relating to business collaboration and communications solutions, offering services support tools to help our customers monitor, troubleshoot and manage their infrastructure. In addition, AGS delivers managed and professional services, providing the integration expertise necessary to help customers migrate from their current communications environment to next-generation business collaboration and communications environments.

 

Centralized Application Integration and Management that Makes it Easier to Integrate, Deploy and Manage. Our solutions provide enterprises with the ability to perform integration and management tasks as part of a central service rather than from individual platforms, reducing the amount of time required to perform integration activities and to support and manage unified communications services.

 

Our Competitive Strengths

 

In addition to the strengths of our solutions, we believe the following competitive strengths position us well to capitalize on the opportunities created by the market trends affecting our industry.

 

Leading Position Across Our Key End Markets. We are a leader in business collaboration and communications, with leading market share in worldwide unified communications, contact center infrastructure, voice support services and enterprise messaging.

 

Large, Diverse and Global Customer Installed Base. Our solutions address the needs of a diverse range of customers from large multinational enterprises to small- and medium-sized businesses in various industries. We believe our large and diverse customer base provides us with recurring revenue and the opportunity to further expand within our customer base.

 

 

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History of Innovation with Large Pipeline of New Products and Differentiated Approach to Commercialization. We continue to innovate rapidly. As of September 30, 2012, we had approximately 5,900 patents and pending patent applications, including foreign counterparts that cover a wide range of products and services. Since the beginning of fiscal 2010, we have introduced more than 130 new offerings across our portfolio, the largest product pipeline in our history. These new offerings include our Avaya Aura platform, Avaya Aura Contact Center, Avaya Flare Experience and Avaya Virtual Enterprise Network Architecture. We believe that our approach to commercialization results in new products with broad appeal and accelerates the timeline for development and adoption.

 

Acquisitions Have Further Amplified Our Innovation and Growth Strategy. Key examples of this include Radvision Ltd., acquired in June 2012, and Sipera Systems, Inc., acquired in October 2011. Radvision enhances Avaya’s position with industry leading video collaboration and communications solutions. The Sipera portfolio brings best-in-class Session Border Controller (SBC) security and management solutions.

 

Flexible Go-to-Market Strategy Expands Reach of Our Products and Services. We sell our solutions both directly and through an indirect sales channel, tailoring our go-to-market strategy to our target market. With the acquisition of the enterprise solutions business of Nortel Networks Corporation, or NES, we significantly expanded our channel coverage and deepened our vertical expertise.

 

Global End-to-End Services Capability Provides Large Recurring Revenue Stream. Avaya Global Services is uniquely positioned to deploy, support and manage Avaya solutions as a result of joint planning between R&D and service planning in advance of new products being released. Avaya Global Services has direct access to our research and development teams necessary to quickly resolve customer issues. This allows Avaya to provide quality service for Avaya products.

 

Experienced Management Team with Track Record of Execution. We have an experienced team of senior executives that has demonstrated an ability to identify critical trends in the technology and communications sectors and develop a comprehensive strategic vision to enable businesses to capitalize on those trends.

 

Our Strategy

 

We believe we are well-positioned worldwide and have a multi-faceted strategy that builds upon our brand, strong client relationships and ability to continue to be on the cutting edge of innovation. Our vision is to be the preeminent provider of business collaboration and communications solutions with a commitment to open standards and innovative products, services and solutions. Key elements of our strategy include:

 

Leverage our Leading Market Positions to Drive the Adoption of our Next-Generation Collaboration Solutions. We believe that our market leadership, global scale and extensive customer interaction creates a strong platform from which to drive and shape the evolution of enterprise communications toward greater business collaboration.

 

Capture Additional Market Share Across our Portfolio of Products and Services. While we have leading market presence in the majority of the markets we serve, most of our markets still have numerous competitors of varying size. Changes in business communications needs will challenge many of these competitors to innovate and allow us to gain share with our broader portfolio of products and services. We also believe that scale and service capability become increasingly important as the complexity and importance of communications grows within the enterprise. As potential customers look to migrate to our solutions, our open architecture can integrate with competitor systems and provide a path for gradual transition while still achieving cost savings and improved functionality. We also believe there is significant opportunity to sell support contracts to customers acquired in the NES acquisition.

 

 

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Grow Avaya Managed Services. With Communications Outsourcing Solutions, Avaya provides custom managed services for multi-vendor applications and infrastructure. Avaya offers end-to-end management for any stage of the network lifecycle to help extend the potential of aging communications environments and enable customers to adopt new technology easily. Avaya takes a vendor-agnostic approach to managing communications and day-to-day operations. We help design, implement, and manage technology upgrades, working in existing environments and offering flexible financial models to meet budget and business needs.

 

Expand Margins and Profitability. We have multiple initiatives to increase our profit margins worldwide, including expanding gross profits and reducing operating expenses. From fiscal 2007 to fiscal 2012 we increased our gross margin, excluding the amortization of technology intangible assets and the impact of purchase accounting adjustments, from 47% to 54% and we are pursuing the following initiatives to further expand our gross profits:

 

   

Driving lower material cost through our increased scale as a result of the NES acquisition, improved supplier mix and increased component commonality.

 

   

Greater use of low cost regions for supplier sourcing, contract manufacturing and provisioning of some support services.

 

   

Optimizing design of products to drive material and supply chain efficiencies.

 

   

Increasing the percentage of our revenue represented by higher-margin software.

 

   

Generating service productivity improvements through methodology and diagnostic tools as well as promoting greater web-based self-service tools.

 

We also have the following initiatives to reduce operating expenses as a percentage of revenues:

 

   

Cost savings initiatives associated with the integration of NES and other acquisitions.

 

   

Other restructuring activities including exiting facilities and reducing the workforce or relocating positions to lower cost geographies.

 

   

Sales productivity improvements and distribution channel optimization.

 

Continue to Develop Innovative Products and Services Around Our Next Generation Business Collaboration Solutions to Drive Revenue and Shorten Sales Cycles. We intend to extend our industry-leading position through continued focus on product innovation and substantial investment in research and development for new products and services. Evidence of this focus is our 130 new product offerings since the beginning of fiscal 2010. We also plan to continue to embrace the opportunity presented by cloud computing and seek new ways to leverage the Virtual Desktop Integration (VDI) trend to securely deliver business collaboration to users.

 

Continue to Invest in and Expand our Sales and Distribution Capabilities to Attack New Markets and Better Penetrate Existing Markets. Our continued investment in our channel partners and sales force is designed to help optimize their market focus, enter new geographies and provide our channel partners with compelling business incentives and discounts, along with training, marketing programs and technical support through Avaya Connect, our business partner program. We also plan to leverage our sales and distribution channels to accelerate customer adoption and generate an increasing percentage of our revenue from our new high value software solutions and user experience-centric applications.

 

 

 

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Pursue Strategic Relationships, Alliances and Acquisitions. We plan to continue to establish relationships and alliances and selectively acquire capability-enhancing businesses as key elements in our strategy going forward. We believe we have one of the largest communications-focused developer and technology partner ecosystems. This is evidenced by the Avaya DevConnect program, which promotes the development, compliance-testing and co-marketing of innovative third-party products that are compatible with Avaya’s standards-based solutions and has more than 20,000 registered companies as of September 30, 2012. We also maintain key relationships with large technology vendors such as International Business Machines Corporation (IBM), HP, and Oracle. Additionally, we will continue to make acquisitions when we find opportunities with compelling strategic and financial rationales.

 

Retain, Recruit and Develop Talent Globally. We are focused on developing a workforce that has both exceptional technical capabilities and the leadership skills that are required to support our technological and geographical growth. Building and nurturing a committed, diverse and engaged workforce with the highest levels of ethics and integrity is at the heart of our strategy. We have dramatically reshaped our workforce throughout our entire organization and have an executive team with significant experience in operating leading technology companies. Our transformation to being the leader in business collaboration and communications will be fueled by developing new workforce capabilities and building upon our talented team in place today.

 

Risks Associated with Our Company

 

Our business is subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully in the “Risk Factors” section of this prospectus immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

   

Our revenues are dependent on general economic conditions and the willingness of enterprises to make capital investments. The impact of economic conditions on the willingness of enterprises to make capital investments, particularly in business collaboration technology and related services can significantly affect our operating results and we believe that enterprises continue to be cautious about sustained economic growth.

 

   

The market opportunity for advanced communications products and services, including our next-generation business collaboration solutions may not develop in the ways that we anticipate. The demand for our offerings can change quickly and in ways that we may not anticipate because 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 demand.

 

   

We are dependent on our intellectual property. As a leader in technology and innovation in business collaboration and communications, we are dependent on the maintenance of our current intellectual property rights and the establishment of new intellectual property rights. If we are not able to protect our intellectual property rights or if those rights are invalidated or circumvented, our business may be adversely affected.

 

   

Our degree of leverage could adversely affect our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry. Our degree of leverage could have important consequences, including making it more difficult for us to make payments on our indebtedness and increasing our vulnerability to general economic and industry conditions.

 

   

We face formidable competition from providers of unified communications, contact center and networking solutions and related services; as these markets evolve, we expect competition to intensify. In addition to the competition we face from traditional enterprise voice communications

 

 

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solutions and providers of technology related to business collaboration and contact center solutions, we expect competition to intensify and expand to include companies that do not currently compete directly against us.

 

   

The Sponsors have significant influence over corporate transactions. Following the completion of this offering, funds affiliated with TPG Global LLC, or, together with its affiliates, TPG, and Silver Lake Partners, or Silver Lake, which are collectively referred to as our Sponsors, will have the ability to control the outcome of matters submitted for stockholder approval and may have interests that differ from those of our other stockholders.

 

   

We expect to be a “controlled company” within the meaning of the rules of the New York Stock Exchange. After completion of this offering, the Sponsors will continue to control a majority of the voting power of our outstanding common stock. As a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.

 

Company Information and Corporate Structure

 

Our principal executive offices are located at 4655 Great America Parkway, Santa Clara, CA 95054. Our telephone number is (908) 953-6000. Our website address is www.avaya.com. Information contained in, and that can be accessed through, our website is not incorporated into and does not form a part of this prospectus.

 

Avaya Holdings Corp., formerly known as Sierra Holdings Corp., was incorporated under the laws of the State of Delaware on June 1, 2007 by affiliates of the Sponsors. The Sponsors, through a subsidiary holding company, acquired Avaya Inc., our principal U.S. operating subsidiary, and each of its subsidiaries in a merger transaction that was completed on October 26, 2007, which we refer to in this prospectus as the Merger. Despite the fact that Avaya Inc.’s obligation to file periodic and current reports with the SEC ended on October 1, 2010, it voluntarily files such reports with the SEC to comply with the terms of the indenture governing its senior secured notes. Avaya Holdings Corp. is a holding company with no stand-alone operations and has no material assets other than its ownership interest in Avaya Inc. and its subsidiaries. All of Avaya Holdings Corp.’s operations are conducted through its various subsidiaries, which are organized and operated according to the laws of their jurisdiction of incorporation, and consolidated by Avaya Holdings Corp.

 

As of March 31, 2013, our total outstanding indebtedness was $6,103 million (excluding capital lease obligations and $18 million of debt discount due upon settlement of our indebtedness), of which $5,094 million was attributable to financing associated with the Merger and $1,009 million was attributable to financing associated with the acquisition of NES. For a complete discussion of our financing see Note 7, “Financing Arrangements,” to our unaudited Consolidated Financial Statements included elsewhere in this prospectus.

 

 

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The following chart shows our organizational structure immediately following the consummation of this offering:

 

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(1)   Represents         %,         % and         % of the total voting power in our company, respectively.
(2)   Substantially all of our domestic 100% owned subsidiaries as of September 30, 2012 guarantee our notes and our credit facilities. Other subsidiaries, including non-U.S. subsidiaries, do not guarantee our notes or our credit facilities. See “Description of Certain Outstanding Indebtedness” for more information.

 

 

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THE OFFERING

 

Common stock we are offering

  

            Shares

Common stock to be outstanding after this offering

  

            Shares

Option to purchase additional shares offered to underwriters

  

            Shares

Use of proceeds

   We intend to use the net proceeds received by us in connection with this offering for the following purposes:
  

• to repay a portion of our long-term indebtedness;

  

• to redeem all of our outstanding Series A Preferred Stock; and

  

• to pay certain amounts in connection with the termination of our management services agreement with affiliates of our Sponsors pursuant to its terms.

  

See “Use of Proceeds.”

Risk factors

   You should carefully read the “Risk Factors” section of this prospectus beginning on page 17 for a discussion of factors to consider carefully before deciding whether to purchase shares of our common stock.

Proposed NYSE symbol

  

“AVYA”

 

As of March 31, 2013, we had 488,662,389 shares of common stock outstanding. This excludes the following numbers of shares of our common stock issuable in connection with the exercise of warrants outstanding as of March 31, 2013, the conversion of our Series B Convertible Preferred Stock and equity awards under our Amended and Restated 2007 Equity Incentive Plan, or the 2007 Plan:

 

   

100,000,000 shares of common stock issuable upon the exercise of warrants held by affiliates of our Sponsors, which warrants are subject to the lock-up agreements described under “Underwriters” and exercisable at any time prior to December 18, 2019 at an exercise price of $3.25 per share (see “Description of Capital Stock—Warrants”);

 

   

24,500,000 shares of common stock issuable upon the exercise of warrants held by affiliates of our Sponsors, which warrants are subject to the lock-up agreements described under “Underwriters” and exercisable at any time prior to May 29, 2022 at an exercise price of $4.00 per share (see “Description of Capital Stock—Warrants”);

 

   

429,761 Continuation Options that were awarded by the Company to executive officers prior to the Merger that were permitted to be rolled over into equity awards issued by us upon consummation of the Merger, each with an exercise price of $1.25 per share;

 

   

         shares of common stock issuable upon conversion of the Series B Convertible Preferred Stock held by affiliates of our Sponsors, and convertible at any time as such Series B Convertible Preferred Stock is outstanding at a conversion price equal to the lesser of (1) $4.00 per share (subject to certain anti-dilution provisions) or (2) the offering price per share in this offering, which such shares if converted are subject to the lock-up agreements described under “Underwriters” (see “Description of Capital Stock—Preferred Stock—Series B Convertible Preferred Stock”);

 

 

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36,262,394 shares of common stock issuable upon the exercise of options with exercise prices ranging from $3.00 to $5.00 per share and a weighted average exercise price of $3.28 per share;

 

   

1,719,808 shares of common stock issuable on the vesting and distribution of RSUs; and

 

   

9,748,283 additional shares of common stock as of March 31, 2013 reserved for future grants under the 2007 Plan.

 

This also excludes              additional shares of common stock reserved for future equity incentive plans to be effective upon the completion of this offering.

 

Unless otherwise indicated, all information in this prospectus:

 

   

assumes the adoption of our amended and restated certificate of incorporation and our amended and restated bylaws to be effective upon the closing of this offering;

 

   

assumes no exercise by the underwriters of their option to purchase up to              additional shares of our common stock in this offering; and

 

   

reflects, for all prior periods, a          for          of our common stock to be effected prior to the consummation of this offering.

 

 

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SUMMARY HISTORICAL FINANCIAL DATA

 

The following table sets forth our summary historical consolidated financial data at the dates and for the periods indicated. Avaya Holdings Corp. was incorporated on June 1, 2007 by affiliates of the Sponsors. Avaya Holdings Corp., through a subsidiary holding company, entered into a merger agreement with Avaya Inc., or the Predecessor, pursuant to which the holding company merged with and into Avaya Inc., with Avaya Inc. continuing as the surviving entity and a wholly owned subsidiary of Avaya Holdings Corp., in a transaction that was completed on October 26, 2007. Avaya Holdings Corp. is a holding company and has no material assets or stand-alone operations other than its ownership in Avaya Inc. and its subsidiaries. The summary historical consolidated financial data set forth below are those of Avaya Holdings Corp. and its consolidated subsidiaries, or the Successor, from its inception on June 1, 2007 through March 31, 2013 and those of its predecessor, Avaya Inc., for the period October 1, 2007 through October 26, 2007, the closing date of the Merger.

 

The Predecessor summary historical consolidated financial data set forth below for the period October 1, 2007 through October 26, 2007 have been derived from our Predecessor’s audited Consolidated Financial Statements and related notes, which are not included in this prospectus. The Successor summary historical consolidated financial data set forth below as of September 30, 2011 and 2012 and for the years ended September 30, 2010, 2011 and 2012 have been derived from our audited Consolidated Financial Statements and related notes included elsewhere in this prospectus. The Successor summary historical consolidated financial data set forth below for the year ended September 30, 2008 and 2009 has been derived from our audited Consolidated Financial Statements and related notes, which are not included in this prospectus. The Successor summary historical consolidated financial data set forth below for the period June 1, 2007 through September 30, 2007 has been derived from our Consolidated Financial Statements, which are not included in this prospectus. The Successor had no operations prior to the Merger. As part of the Merger on October 26, 2007, we entered into various financing arrangements and, as a result, had a different capital structure following the Merger. Accordingly, the results of operations for periods subsequent to the Merger will not necessarily be comparable to the prior period.

 

The data for the six months ended March 31, 2013 and 2012 has been derived from unaudited financial statements also appearing herein and which, in the opinion of management, include all adjustments consisting only of normal recurring adjustments, necessary for a fair statement of the financial condition, results of operations and cash flows for the unaudited interim periods.

 

The following summary should be read together with our Consolidated Financial Statements and the related notes appearing elsewhere in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus.

 

 

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Table of Contents
    Predecessor          Successor  
    Period from
October 1,
2007
through
October 26,
2007
         Period from
June 1,
2007
through
September 30,
2007
    Fiscal year ended
September 30,
    Six months
ended
March 31,
 
             2008(1)     2009     2010     2011     2012     2012     2013  
               (in millions, except per share amounts)  

STATEMENT OF OPERATIONS DATA:

                     

REVENUE

                     

Products

  $ 96          $      $ 2,595      $ 1,923      $ 2,602      $ 2,976      $ 2,672      $ 1,386      $ 1,160   

Services

    150                   2,328        2,227        2,458        2,571        2,499        1,258        1,198   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    246                   4,923        4,150        5,060        5,547        5,171        2,644        2,358   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

COSTS

                     

Products:

                     

Costs (exclusive of amortization of intangible assets)

    56                   1,256        872        1,243        1,314        1,145        591        497   

Amortization of technology intangible assets

    1                   231        248        291        257        192        99        36   

Services

    100                   1,403        1,164        1,354        1,344        1,248        637        573   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    157                   2,890        2,284        2,888        2,915        2,585        1,327        1,106   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

GROSS MARGIN

    89                   2,033        1,866        2,172        2,632        2,586        1,317        1,252   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

OPERATING EXPENSES

                     

Selling, general and administrative

    111                   1,456        1,272        1,721        1,845        1,630        847        765   

Research and development

    29                   376        309        407        461        464        228        231   

Amortization of intangible assets

    4                   187        207        218        226        226        112        114   

Impairment of long-lived assets

                      10        2        16                               

Impairment of indefinite-lived intangible assets

                      130        60                                      

Goodwill impairment

                      899        235                                    89   

Restructuring charges, net

    1                          160        171        189        147        111        102   

In-process research and development charge

                      112        12                                      

Acquisition-related costs

                             29        20        5        4        3          

Merger-related costs

    57                   1                                             
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    202                   3,171        2,286        2,553        2,726        2,471        1,301        1,301   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

OPERATING (LOSS) INCOME

    (113                (1,138     (420     (381     (94     115        16        (49
 

Interest expense

                      (377     (409     (487     (460     (432     (217     (224

Loss on extinguishment of debt

                                           (246                   (6

Other income (expense), net

    1                   27        14        15        5        (29     (16     4   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

    (112                (1,488     (815     (853     (795     (346     (217     (275
 

Benefit from (provision for) income taxes

    24                   183        (30     (18     (68     (8     26        6   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS

    (88                (1,305     (845     (871     (863     (354     (191     (269
 

Less net income attributable to noncontrolling interests

                      2        2        3                               
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS ATTRIBUTABLE TO AVAYA HOLDINGS CORP.

    (88                (1,307     (847     (874     (863     (354     (191     (269
 

Less: Accretion and accrued dividends on Series A and Series B preferred stock

                                    (62     (7     (71     (3     (21
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS ATTRIBUTABLE TO AVAYA HOLDINGS CORP. COMMON STOCKHOLDERS

  $ (88       $      $ (1,307   $ (847   $ (936   $ (870   $ (425   $ (194   $ (290
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SHARE DATA:

                     

Net loss per share attributable to common stockholders—basic

  $ (0.19       $      $ (2.87   $ (1.74   $ (1.92   $ (1.78   $ (0.87   $ (0.40   $ (0.59

Weighted average shares outstanding—basic

    462.9                   455.9        488.1        488.6        489.0        489.6        489.3        489.3   

Net loss per share attributable to common stockholders—diluted

  $ (0.19       $      $ (2.87   $ (1.74   $ (1.92   $ (1.78   $ (0.87   $ (0.40   $ (0.59

Weighted average shares outstanding—diluted

    462.9                   455.9        488.1        488.6        489.0        489.6        489.3        489.3   

 

 

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    Predecessor          Successor  
    Period from
October 1,
2007
through
October 26,
2007
         Period from
June 1,
2007
through
September 30,
2007
    Fiscal year ended
September 30,
    Six months
ended
March 31,
 
             2008(1)     2009     2010     2011     2012     2012     2013  
               (in millions)  

BALANCE SHEET DATA (at end of period):

                     

Cash and cash equivalents

        $      $ 594      $ 582      $ 594      $ 415      $     338      $     356      $    303   

Intangible assets, net

                 3,154        2,636        2,603        2,129        1,775        1,939        1,625   

Goodwill

                 3,956        3,695        4,075        4,079        4,188        4,093        4,093   

Total assets

                 10,010        8,665        9,276        8,561        8,184        8,321        7,830   

Total debt (excluding capital lease obligations)

                 5,222        5,150        5,928        6,157        6,121        6,139        6,103   

Preferred stock, Series B

                                             227               245   

Preferred stock, Series A

                               130        137        144        140        147   

Total Avaya Holdings Corp. stockholders’ equity (deficiency)

                 1,063        (682     (1,543     (2,500     (2,843     (2,637     (3,133
 

STATEMENT OF CASH FLOWS DATA:

                     
 

Net cash provided by (used in)

                     

Operating activities

  $ 133          $      $ 304      $ 242      $ 42      $ (300   $ 44      $ 31      $ 88   

Investing activities

    (16                (7,205     (155     (864     (101     (283     (75     (59

Financing activities

    11                   7,512        (101     853        228        155        (22     (59
 

OTHER FINANCIAL DATA:

                     
 

EBITDA

  $ (94       $      $ (515   $ 240      $ 320      $ 313      $ 647      $ 284      $ 169   

Adjusted EBITDA(2)

    (27                859        753        795        971        971        479        423   

Capital expenditures, net

    8                   120        76        79        83        92        38        47   

Capitalized software development costs

    7                   74        43        43        42        35        19        10   

 

(1)   The summary historical consolidated financial data above as of and for the year ended September 30, 2008 reflect the results of Avaya Holdings Corp. for the entire fiscal year and includes the results of Avaya Inc. and its consolidated subsidiaries subsequent to October 26, 2007, the date of the Merger.
(2)   Adjusted EBITDA is calculated in accordance with Avaya Inc.’s debt agreements entered into in connection with the Merger.

 

EBITDA is defined as net income (loss) before income taxes, interest and depreciation and amortization. EBITDA provides us with a measure of operating performance that excludes items that are outside the control of management, which can differ significantly from company to company depending on capital structure, the tax jurisdictions in which companies operate and capital investments. Under Avaya Inc.’s debt agreements, its ability to draw on its revolving credit facilities or engage in activities such as incurring additional indebtedness, making investments and paying dividends is tied in part to ratios based on Adjusted EBITDA. EBITDA and Adjusted EBITDA are non-GAAP measures. GAAP is a reference to generally accepted accounting principles in the United States of America. As defined in Avaya Inc.’s debt agreements, Adjusted EBITDA is a measure of EBITDA further adjusted to exclude certain charges and other adjustments permitted in calculating covenant compliance under Avaya Inc.’s debt agreements. We believe that including supplementary information concerning Adjusted EBITDA is appropriate to provide additional information to investors to demonstrate compliance with Avaya Inc.’s debt agreements and because it serves as a basis for determining management compensation. In addition, we believe Adjusted EBITDA provides more comparability between our historical results and results that reflect purchase accounting and our new capital structure following the Merger. Accordingly, Adjusted EBITDA measures our financial performance based on operational factors that management can impact in the short-term, namely the Company’s pricing strategies, volume, costs and expenses of the organization.

 

 

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EBITDA and Adjusted EBITDA have limitations as analytical tools. Adjusted EBITDA does not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we consider not to be indicative of our ongoing operations. In particular, the definition of Adjusted EBITDA in Avaya Inc.’s debt agreements allows us to add back certain non-cash charges that are deducted in calculating net income (loss). Avaya Inc.’s debt agreements also allows us to add back restructuring charges, Sponsor monitoring fees and other specific cash costs and expenses as defined in the agreements and that portion of our pension costs, other post-employment benefit costs, and non-retirement post-employment benefit costs representing the amortization of prior service costs and net actuarial gains/losses associated with these employment benefits. However, these are expenses that may recur, may vary and are difficult to predict. Further, Avaya Inc.’s debt agreements require that Adjusted EBITDA be calculated for the most recent four fiscal quarters. As a result, the measure can be disproportionately affected by a particularly strong or weak quarter. Further, it may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year.

 

 

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Table of Contents

The unaudited reconciliation of net (loss) income, which is a GAAP measure, to EBITDA and Adjusted EBITDA is presented below:

 

    Predecessor          Successor  
    Period from
October 1,
2007
through
October 26,
2007
         Period from
June 1,
2007
through
September  30,
2007
    Fiscal year ended
September 30,
    Six months
ended
March 31,
 
             2008(1)     2009     2010     2011     2012     2012     2013  
               (in millions)  

Net loss

  $ (88       $      $ (1,305   $ (845   $ (871   $ (863   $ (354   $ (191   $ (269

Interest expense

                      377        409        487        460        432        217        224   

Interest income

    (5                (20     (6     (5     (5     (3     (2     (1

(Benefit from) provision for income taxes

    (24                (183     30        18        68        8        (26     (6

Depreciation and amortization

    23                   616        652        691        653        564        286        221   
 

 

 

   

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    (94                (515     240        320        313        647        284        169   

Impact of purchase accounting adjustments(2)

                      230        (1     5               3        1          

Restructuring charges, net

    1                          160        171        189        142        111        102   

Sponsors’ fees(3)

                      6        7        7        7        7        4        4   

Merger-related costs(4)

    57                   1                                             

Acquisition-related costs(5)

                             29        20        5        4        3          

Integration-related costs(6)

                             5        208        132        19        8        9   

Debt registration fees

                                    1                               

Loss on extinguishment of debt(7)

                                           246                      6   

Third-party fees expensed in connection with debt modification(8)

                                           9                      18   

Strategic initiative costs(9)

                      27        21        6                               

Non-cash share-based compensation

                      21        10        19        12        8        5        3   

Write-down of held for sale assets to net realizable value

                                           1        5                 

Loss (gain) on investments and sale of long-lived assets

                      1        1        (4     1        3        3          

Impairment of long-lived assets

                      140        62        16               6                 

Goodwill impairment

                      899        235                                    89   

Reversal of contingent liability related to acquisition

                                                  (1              

Change in fair value of Preferred Series B embedded derivative(10)

                                                  6               (8

Venezuela hyperinflationary and devaluation charges

                                                                1   

Securities registration fees(11)

                                                  3        3          

Net loss (income) of unrestricted subsidiaries, net of dividends received

    2                   (5     (4     (6                            

Loss (gain) on foreign currency transactions

    1                   (15     (8     1        (12     21        12        (15

Pension/OPEB/nonretirement postemployment benefits and long-term disability costs(12)

    6                   69        (4     31        68        98        45        45   
 

 

 

   

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ (27       $      $ 859      $ 753      $ 795      $ 971      $ 971      $ 479      $ 423   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)   The summary historical consolidated financial data above as of and for the year ended September 30, 2008 reflect the results of Avaya Holdings Corp. for the entire fiscal year and includes the results of Avaya Inc. and its consolidated subsidiaries subsequent to October 26, 2007, the date of the Merger.
(2)  

For fiscal 2012, 2011 and 2010, represents adjustments to eliminate the impact of certain purchase accounting adjustments recorded as a result of the acquisitions of NES, Radvision and Konftel AB, or Konftel, and the Merger, including the recognition of the amortization of business partner commissions, which were eliminated in purchase accounting, the recognition of revenue and costs that were deferred in prior periods and eliminated in purchase accounting and the elimination of the impact of estimated fair value

 

 

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  adjustments for certain assets and liabilities, such as inventory. For fiscal 2009, represents the recognition of the amortization of business partner commissions which were eliminated in purchase accounting, partially offset by the recognition of revenues and costs that were deferred in prior years and eliminated in purchase accounting as a result of the Merger. For fiscal 2008, represents adjustments to eliminate the impact of certain purchase accounting adjustments recorded as a result of the Merger, including: the recognition of the amortization of business partner commissions, which were eliminated in purchase accounting; elimination of certain deferred revenues and deferred costs and expenses; elimination of previously capitalized software development costs; write-off of in-process research and development, or IPRD, costs and adjustment to estimated fair values of certain assets and liabilities, such as inventory.
(3)   Sponsors’ fees represent monitoring fees payable to affiliates of the Sponsors pursuant to a management services agreement entered into at the time of the Merger. See “Certain Relationships and Related Party Transactions.”
(4)   Merger-related costs are costs directly attributable to the Merger and include investment banking, legal and other third-party costs.
(5)   Acquisition-related costs include legal and other costs related to the acquisition of NES, Radvision and other acquisitions.
(6)   Integration-related costs primarily represent third-party consulting fees and other administrative costs associated with consolidating and coordinating the operations of Avaya and NES and Radvision. These costs were incurred in connection with, among other things, the on-boarding of NES and Radvision personnel, developing compatible IT systems and internal processes and developing and implementing a strategic operating plan to help enable a smooth transition with minimal disruption to NES customers. Integration-related costs also include fees paid to certain Nortel-controlled entities for logistics and other support functions being performed on a temporary basis pursuant to a transition services agreement.
(7)   In fiscal 2013, loss on extinguishment of debt represents the loss recognized in connection with the repayment of $284 million of term B-5 loans and $584 million of term B-1 loans and was measured as the difference between the reacquisition price and the carrying value (including unamortized debt costs) of the debt as discussed in Note 7, “Financing Arrangements,” to our unaudited Consolidated Financial Statements located elsewhere in this prospectus. In fiscal 2012 the loss on extinguishment of debt represents the loss recognized in connection with the payment in full of the senior secured incremental term B-2 loans and was measured as the difference between the reacquisition price and the carrying value of the senior secured incremental term B-2 loans as discussed in Note 9, “Financing Arrangements,” to our audited Consolidated Financial Statements located elsewhere in this prospectus.
(8)   In fiscal 2013, the third-party fees expensed in connection with debt modification represents fees paid to third-parties in connection with the modification of the senior secured credit facility and the exchange of $1,384 million of senior unsecured notes for senior secured notes as discussed in Note 7, “Financing Arrangements,” to our unaudited Consolidated Financial Statements located elsewhere in this prospectus. In fiscal 2011, includes fees paid to third parties in connection with the modification of the senior secured credit facility as discussed in Note 9, “Financing Arrangements,” to our audited Consolidated Financial Statements located elsewhere in this prospectus.
(9)   Strategic initiative costs represent consulting fees in connection with management’s cost-savings actions, which commenced subsequent to the Merger.
(10)   Represents the loss (gain) on changes in the fair value of certain embedded derivative features of the Company’s Series B Convertible Preferred Stock. Under GAAP, these embedded derivative features must be recognized at fair value at each balance sheet date with the changes in the fair value recognized in operations. See Note 15, “Capital Stock,” to our audited Consolidated Financial Statements located elsewhere in this prospectus.
(11)   Represents third party fees incurred in connection with the Company’s registration statement.
(12)   Represents that portion of our pension costs, other post-employment benefit costs, non-retirement post-employment benefit costs representing the amortization of prior service costs and net actuarial gains/losses associated with these employment benefits. For the fiscal year ended September 30, 2011, the amount includes a curtailment charge of $7 million associated with workforce reductions in Germany.

 

 

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RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding to invest in our common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations or prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

 

Risks Associated with Our Company

 

Our solutions may fail to keep pace with rapidly changing technology and evolving industry standards.

 

The market in which we operate is characterized by rapid, and sometimes disruptive, technological developments, evolving industry standards, frequent new product introductions and enhancements and changes in customer requirements. In addition, both traditional and new competitors are investing heavily in this market and competing for customers. As next-generation business collaboration technology continues to evolve, we must keep pace in order to maintain or expand our market leading position. We recently introduced a significant number of new product offerings and are increasingly focused on new, high value software solutions, as a revenue driver. If we are not able to successfully develop and bring these new solutions to market in a timely manner, achieve market acceptance of our solutions or identify new market opportunities for our solutions, our business and results of operations may be materially and adversely affected.

 

The market opportunity for business collaboration solutions and other products and services may not develop in the ways that we anticipate.

 

The demand for our offerings can change quickly and in ways that we may not anticipate because 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 operating results may be adversely affected if the market opportunity for our products and services does not develop in the ways that we anticipate or if other technologies become more accepted or standard in our industry or disrupt our technology platforms.

 

We face formidable competition from providers of unified communications, contact center and networking solutions and related services; as these markets evolve, we expect competition to intensify and expand to include companies that do not currently compete directly against us.

 

Our unified communications solutions compete with Cisco Systems, Inc., or Cisco, Microsoft Corporation, or Microsoft, NEC Corporation, or NEC, Siemens Enterprise Communications Group, or SEN, Alcatel-Lucent and Huawei Technologies Co., Ltd, or Huawei, in the enterprise segment; with ShoreTel, Inc., or ShoreTel, and Mitel Networks Corp., or Mitel, in the small and medium enterprise segment; and with Cisco, Broadsoft Inc., or Broadsoft, Microsoft, 8x8, Inc., or 8x8, and ShoreTel in cloud solutions. Our video solutions compete with Cisco, Polycom Inc. and LifeSize (now a division of Logitech International S.A.).

 

Our contact center solutions compete with Genesys Telecommunications Laboratories, Inc., or Genesys, Cisco and Huawei in the enterprise segment and with Cisco and Interactive Intelligence, Inc., or Interactive Intelligence, in the small and medium enterprise segment and cloud solutions.

 

Our networking solutions compete with Cisco, Hewlett-Packard Company, or HP, Huawei and Juniper Networks, Inc., or Juniper, primarily with respect to L2/L3 ethernet switching.

 

We face competition in certain geographies with companies that have a particular strength and focus in these regions, such as Huawei in China, Intelbras S.A., or Intelbras, in Latin America and Matsushita Electric Corporation of America, or Panasonic, in Asia.

 

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While we believe our global, in-house end-to-end services organization provides us with a competitive advantage, it faces competition from companies like those above offering services, either directly or indirectly through their channel partners, with respect to their own product offerings, as well as many value-added resellers, consulting and systems integration firms and network service providers.

 

In addition, because the business collaboration market continues to evolve and technology continues to develop rapidly, we may face competition in the future from companies that do not currently compete against us, but whose current business activities may bring them into competition with us in the future. In particular, this may be the case as business, information technology and communications applications deployed on converged networks become more integrated to support business collaboration. We may face increased competition from current leaders in information technology infrastructure, information technology, consumer products, personal and business applications and the software that connects the network infrastructure to those applications. With respect to services, we may also face competition from companies that seek to sell remotely hosted services or software as a service directly to the end customer. Competition from these potential market entrants may take many forms, including offering products and applications similar to those we offer as part of another offering. In addition, these technologies continue to move from a proprietary environment to an open standards-based environment.

 

Several of our existing competitors have, and many of our future competitors may have, greater financial, personnel, technical, 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. Other competitors may have deeper expertise in a particular stand-alone technology that develops more quickly than we anticipate. 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. 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 revenues are dependent on general economic conditions and the willingness of enterprises to make capital investments.

 

Given the current state of the economy, we believe that enterprises continue to be cautious about sustained economic growth and have tried to maintain or improve profitability through cost control and constrained capital spending and may delay or reject capital projects, including implementing our solutions resulting in continued pressure on our ability to increase our revenue as well as creating competitive pricing pressures and price erosion. If these or other conditions limit our ability to grow revenue or cause our revenue to decline our operating results may be materially and adversely affected.

 

Our strategy depends in part on our ability to rely on our indirect sales channel.

 

An important element of our go-to-market strategy to expand sales coverage and increase market absorption of new products is our global network of alliance partners, distributors, dealers, value-added resellers,

 

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telecommunications service providers and system integrators. Certain of our contractual agreements with our largest distributors and resellers generally permit termination of the relationship by either party for convenience upon prior notice of 30 to 180 days. See “Our Business-Avaya Connect” for more information on our global business partner program and the standard terms of our program agreements. 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 our support pricing or other services strategies conflict with those of our channel partners, if any of our competitors were to enter into strategic relationships with or acquire a significant channel partner, if channel partners do not become enabled to sell new products 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 or market share.

 

We are dependent on our intellectual property. If we are not able to protect our proprietary rights or if those rights are invalidated or circumvented, our business may be adversely affected.

 

As a leader in technology and innovation in business collaboration and communications, we generally protect our intellectual property through patents, trademarks, trade secrets, copyrights, confidentiality and nondisclosure agreements and other measures. There can be no assurance that patents will be issued from pending applications that we have filed or that our patents will be sufficient to protect our key technology from misappropriation or falling into the public domain, nor can assurances be made that any of our patents, patent applications or our other intellectual property or proprietary rights will not be challenged, invalidated or circumvented. For example, our business is global and the level of protection of our proprietary technology will vary by country, particularly in countries that do not have well developed judicial systems or laws that adequately protect intellectual property rights. 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. 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.

 

If we fail to retain or attract key employees, our business may be harmed.

 

The success of our business depends on the skill, experience and dedication of our employee base. If we are unable to retain and recruit sufficiently experienced and capable personnel, especially in the key areas of product development, sales, services and management, our business and financial results may suffer. Experienced and capable personnel in the technology industry remain in high demand, and there is continual competition for their talents. When talented employees leave, we may have difficulty replacing them and our business may suffer. While we strive to maintain our competitiveness in the marketplace, there can be no assurance that we will be able to successfully retain and attract the personnel that we need to achieve our business objectives.

 

We rely on third-party manufacturers and component suppliers, as well as warehousing and distribution logistics providers.

 

We have outsourced substantially all of our manufacturing operations to several electronic manufacturing services, or EMS, providers. Our EMS providers produce the vast majority of products in facilities located in southern China, with other products manufactured in facilities located in Israel, Mexico, Malaysia, Taiwan, Germany, Indonesia, the United Kingdom and the U.S. All manufacturing of our products is performed in accordance with detailed specifications and product designs furnished or approved by us and is subject to rigorous quality control standards. We periodically review our product manufacturing operations and consider changes we believe may be necessary or appropriate. Although we closely manage the transition process when manufacturing changes are required, we could experience disruption to our operations during any such transition. Any such disruption could negatively affect our reputation and our results of operations. We also purchase certain hardware components and license certain software components and resell them separately or as part of our products under the Avaya brand. In some cases, certain components are available only from a single source

 

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or from a limited source of suppliers. Delays or shortages associated with these components could cause significant disruption to our operations. We have also outsourced substantially all of our warehousing and distribution logistics operations to several providers of such services on a global basis, and any delays or material changes in such services could cause significant disruption to our operations.

 

As our business and operations related relationships have expanded globally in the last few years, certain operational and logistical challenges as well as changes in economic or political conditions and natural disasters, in a specific country or region, could negatively affect our revenue, costs, expenses and financial condition or those of our channel partners and distributors.

 

We conduct significant sales and customer support operations and increasing amounts of our research and development activities in countries outside of the U.S. and also depend on non-U.S. operations of our contract manufacturers and our channel partners. For fiscal 2012 we derived 46% of our revenue from sales outside the U.S. The vast majority of our contract manufacturing also takes place outside the U.S., primarily in southern China. The transition of even a portion of our operations or functions to a foreign country involves a number of logistical and technical challenges, including:

 

   

challenges in effectively managing operations in jurisdictions with lower cost structures as a result of several factors, including time zone differences and regulatory, legal, employment, cultural and logistical issues;

 

   

the potential negative impact on our existing employees as a result of the relocation of workforce resources;

 

   

an inability to predict the extent of government support;

 

   

the availability of qualified workers and the level of competition in offshore markets for qualified personal, including skilled design and technical personnel, as companies expand their operations offshore; and

 

   

future monetary and economic conditions in any specific offshore location

 

If we are unable to effectively manage our offshore operations, we may be unable to produce the expected cost savings from any shifts of operations to offshore jurisdictions and our business and results of operations could be adversely affected.

 

In addition, our future operating results, including our ability to import our products from, export our products to, or sell our products in, various countries, could be adversely affected by a variety of uncontrollable and changing factors such as political conditions, economic conditions, legal and regulatory constraints, protectionist legislation, difficulty in enforcing intellectual property rights such as against counterfeiting of our products, relationships with employees and works councils, unfavorable tax and currency regulations, health or similar issues, natural disasters and other matters in any of the countries or regions in which we and our contract manufacturers and business partners currently operate or intend to operate in the future. Our prospective effective tax rate could be adversely affected by, among others, an unfavorable geographical distribution of our earnings and losses, by changes in the valuation of our deferred tax assets or liabilities or by changes in tax laws, regulations, accounting principles, or interpretations thereof. The various risks inherent in doing business in the U.S. generally also exist when doing business outside of the U.S., and may be exaggerated by the difficulty of doing business in numerous sovereign jurisdictions due to differences in culture, laws and regulations.

 

Fluctuations in foreign currency exchange rates could negatively impact our operating results.

 

Foreign currency exchange rates and fluctuations may have an impact on our revenue, costs or cash flows from our international operations, which could adversely affect our financial performance. Our primary currency exposures are to the euro, British pound, Indian rupee, Canadian dollar and Brazilian real. These exposures may change over time as business practices evolve and as the geographic mix of our business changes. From time to

 

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time we enter into foreign exchange forward contracts to reduce the short-term impact of foreign currency fluctuations. However, any attempts to hedge against foreign currency fluctuation risks may be unsuccessful and result in an adverse impact to our operating results.

 

If we are unable to integrate acquired businesses into ours effectively, our operating results may be adversely affected.

 

From time to time, we seek to expand our business through acquisitions. For example, during fiscal 2012 we completed three acquisitions including the acquisition of Radvision Ltd. We may not be able to successfully integrate acquired businesses and, where desired, their product portfolios, into ours, and therefore we may not be able to realize the intended benefits from an acquisition. If we fail to successfully integrate acquisitions, or product portfolios, or if they fail to perform as we anticipate, our existing businesses and our revenue and operating results could be adversely affected. If the due diligence of the operations of acquired businesses performed by us and by third parties on our behalf is inadequate or flawed, or if we later discover unforeseen financial or business liabilities, acquired businesses and their assets may not perform as expected. Additionally, acquisitions could result in difficulties assimilating acquired operations and, where deemed desirable, transitioning overlapping products to be a single product line and the diversion of capital and management’s attention away from other business issues and opportunities. We may fail to retain employees acquired through acquisitions, which may negatively impact the integration efforts. For all the reasons set forth above, the failure to integrate acquired businesses effectively may adversely impact Avaya’s business, results of operations or financial condition.

 

We may be subject to litigation and infringement claims, which could cause us to incur significant expenses or prevent us from selling our products or services.

 

From time to time, we receive notices and claims from third parties asserting that our proprietary or licensed products, systems and software infringe their intellectual property rights. The number of such claims has increased recently and there can be no assurance that the number of these notices and claims will not increase in the future or that we do not in fact infringe those intellectual property rights. Irrespective of the merits of these claims, any resulting litigation could be costly and time consuming and could divert the attention of management and key personnel from other business issues. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. These matters may result in any number of outcomes for us, including entering into licensing agreements, redesigning our products to avoid infringement, being enjoined from selling products that are found to infringe, paying damages if products are found to infringe and indemnifying customers from infringement claims as part of our contractual obligations. Royalty or license agreements may be very costly and we may be unable to obtain royalty or license agreements on terms acceptable to us or at all. Such agreements may cause operating margins to decline. In addition, some of our employees previously have been employed at other companies that provide integrated communications solutions. We may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. These claims and other successful claims of patent or other intellectual property infringement against us could materially adversely affect our operating results. We have made and will likely continue to make investments to license and/or acquire the use of third-party intellectual property rights and technology as part of our strategy to manage this risk, but there can be no assurance that we will be successful or that any costs relating to such activity will not be material. We may also be subject to additional notice, attribution and other compliance requirements to the extent we incorporate open source software into our applications. In addition, third parties have claimed, and may in the future claim, that a customer’s use of our products, systems or software infringes the third party’s intellectual property rights. Under certain circumstances, we may be required to indemnify our customers for some of the costs and damages related to such an infringement claim. Any indemnification requirement could have a material adverse effect on our business and our operating results. See Note 15, “Commitments and Contingencies,” to our unaudited Consolidated Financial Statements for the six months ended March 31, 2013 and Note 19, “Commitments and Contingencies,” to our audited Consolidated Financial Statements for the fiscal year ended September 30, 2012 for a description of certain legal proceedings regarding intellectual property.

 

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A breach of the security of our information systems or those of our third party providers could adversely affect our operating results.

 

We rely on the security of our information systems and, in certain circumstances, those of our third party providers, such as vendors, consultants and contract manufacturers, to protect our proprietary information and information of our customers. In addition, the growth of BYOD programs has heightened the need for enhanced security measures. Information technology system failures, including a breach of our or our third party providers’ data security, could disrupt our ability to function in the normal course of business by potentially causing, among other things, delays in the fulfillment or cancellation of customer orders, disruptions in the manufacture or shipment of products or, delivery of services or an unintentional disclosure of customer, employee or our information. Additionally, despite our security procedures or those of our third party providers, information systems may be vulnerable to threats such as computer hacking, cyber-terrorism or other unauthorized attempts by third parties to access, modify or delete our or our customers’ proprietary information. Any such breach could have a material adverse effect on our operating results and our reputation as a provider of mission critical business collaboration and communications solutions. Such consequences could be exacerbated if we or our third party providers are unable to adequately recover critical systems following a systems failure.

 

We may be adversely affected by environmental, health and safety, laws, regulations, costs and other liabilities.

 

We are subject to a wide range of governmental requirements relating to safety, health and environmental protection. If we violate or fail to comply with these requirements, we could be fined or otherwise sanctioned by regulators, lose customers and damage our reputation, which could have an adverse effect on our business. We are subject to environmental laws governing the cleanup of soil and groundwater contamination that may impose joint and several liability for the costs of investigating and remediating releases of regulated materials at currently or formerly owned or operated sites and at third-party waste disposal sites. We are also subject to various local, federal and international laws and regulations regarding the material content and electrical design of our products that require us to be financially responsible for the collection, treatment, recycling and disposal of those products. For example, the European Union (EU) has adopted the Restriction on Hazardous Substances (RoHS) and Waste Electrical and Electronic Equipment (WEEE Directive) with similar laws and regulations being enacted in other regions. Effective in May 2014, the United States requires companies to begin publicly disclosing their use of conflict minerals that originated in the Democratic Republic of the Congo (DRC) or an adjoining country. Additionally, requirements such as the EU Energy Using Product (EuP Directive) are being imposed to address the operating characteristics of our products. Our failure or the undetected failure of our supply chain to comply with existing or future environmental, health and safety requirements could subject us to liabilities exceeding our reserves or adversely affect our business, results of operations or financial condition.

 

In addition, a number of climate change regulations and initiatives are either in force or pending at the local, federal and international levels. Our operations and our supply chain could face increased climate change-related regulations, modifications to transportation to meet lower emission requirements and changes to types of materials used for products and packaging to reduce emissions, increased utility costs to address cleaner energy technologies, increased costs related to severe weather events, and emissions reductions associated with operations, business travel or products. These yet-to-be defined costs and changes to operations could have a financial impact on our business.

 

Business collaboration solutions are complex, and design defects, errors, failures or “bugs” may be difficult to detect and correct.

 

Business collaboration solutions are complex, integrating hardware, software and many elements of a customer’s existing network and communications infrastructure. Despite testing conducted prior to the release of products to the market and quality assurance programs, hardware may malfunction and software may contain “bugs” that are difficult to detect and fix. Any such issues could interfere with the expected operation of a solution, which might negatively impact customer satisfaction, reduce sales opportunities or affect gross margins.

 

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Depending upon the size and scope of any such issue, remediation may have a material impact on our business. Our inability to cure an application or product defect, should one occur, could result in the failure of an application or product line, the temporary or permanent withdrawal from an application, product or market, damage to our reputation, inventory costs, an increase in warranty claims, lawsuits by customers or customers’ or channel partners’ end users, or application or product reengineering expenses. Our insurance may not cover or may be insufficient to cover claims that are successfully asserted against us.

 

Pension and postretirement healthcare and life insurance liabilities could impair our liquidity or financial condition.

 

We sponsor non-contributory defined benefit pension plans covering a portion of our U.S. employees and retirees, and postretirement benefit plans for U.S. retirees that include healthcare benefits and life insurance coverage. We froze benefit accruals and additional participation in our plans for our U.S. management employees effective December 31, 2003. Certain of our non-U.S. operations also have various retirement benefit programs covering substantially all of their employees. Some of these programs are considered to be defined benefit pension plans for accounting purposes. If one or more of our U.S. pension plans were to be terminated without being fully funded on a termination basis, the Pension Benefit Guaranty Corporation, or PBGC, could obtain a lien on our assets for the amount of our liability, which would result in an event of default under each of our credit facilities. As a result, any such liens would have a material adverse effect on the Company, including our liquidity and financing arrangements. The measurement of our obligations, costs and liabilities associated with benefits pursuant to our pension and postretirement benefit plans requires that we estimate the present value of projected future payments to all participants, including assumptions related to discount rates, investment returns on designated plan assets, health care cost trends, and demographic experience. If future economic or demographic trends and results are different from our assumptions, then our obligations could be higher than we currently estimate. If our cash flows and capital resources are insufficient to meet required minimal funding of our U.S. defined benefit plans or to fund our other pension or postretirement healthcare and life insurance obligations, or if we are required or elect to fund any material portion of these obligations now or in the future, we could be forced to reduce or delay investments and capital expenditures, seek additional capital, or restructure or refinance our indebtedness. In addition, if our operating results and available cash are insufficient to meet our pension or postretirement healthcare and life insurance obligations, we could face substantial liquidity problems and may be required to dispose of material assets or operations in order to meet our obligations. We may not be able to consummate those dispositions or to obtain any proceeds on terms acceptable to us or at all, and any such proceeds may not be adequate to meet any such obligations then due. The PBGC has the authority under certain circumstances to petition a court to terminate an underfunded pension plan upon the occurrence of an event with respect to which the PBGC determines that the possible long-term loss of the PBGC with respect to the plan may reasonably be expected to increase unreasonably if the plan is not terminated. If our U.S. defined benefit pension plans were to be terminated, we would incur a liability to the plans or the PBGC equal to the amount by which the liabilities of the plans, calculated on a termination basis, exceed the assets of the plans, which amount would likely exceed the amount that we have estimated to be the underfunded amount as of September 30, 2012.

 

See Note 15, “Commitments and Contingencies,” to our unaudited Consolidated Financial Statements for the six months ended March 31, 2013 and Note 13, “Benefit Obligations,” to our audited Consolidated Financial Statements for the year ended September 30, 2012 for further details on our pension and postretirement benefit plans, including funding status.

 

We may incur liabilities as a result of our obligation to indemnify, and to share certain liabilities with, Lucent Technologies Inc., or Lucent, in connection with our spin-off from Lucent in September 2000.

 

Pursuant to the Contribution and Distribution Agreement between Avaya Inc. and Lucent, a predecessor to Alcatel-Lucent, Lucent contributed to Avaya Inc. substantially all of the assets, liabilities and operations associated with its enterprise networking businesses and distributed all of the outstanding shares of Avaya Inc.’s common stock to its stockholders. The Contribution and Distribution Agreement, among other things, provides that, in general, Avaya Inc. will indemnify Lucent for all liabilities including certain pre-distribution tax

 

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obligations of Lucent relating to our businesses and all contingent liabilities accruing pre-distribution primarily relating to Avaya Inc.’s businesses or otherwise assigned to Avaya Inc. In addition, the Contribution and Distribution Agreement provides that certain contingent liabilities not directly identifiable with one of the parties accruing pre-distribution will be shared in the proportion of 90% by Lucent and 10% by Avaya Inc. The Contribution and Distribution Agreement also provides that contingent liabilities accruing pre-distribution in excess of $50 million that are primarily related to Lucent’s businesses shall be borne 90% by Lucent and 10% by Avaya Inc. and contingent liabilities accruing pre-distribution in excess of $50 million that are primarily related to Avaya Inc.’s businesses shall be borne equally by the parties. See Note 19, “Commitments and Contingencies,” to our audited Consolidated Financial Statements for the fiscal year ended September 30, 2012 and Note 15, “Commitments and Contingencies,” to our unaudited Consolidated Financial Statements for the six months ended March 31, 2013 for a description of certain matters involving Lucent for which Avaya Inc. has assumed responsibility under the Contribution and Distribution Agreement. We cannot assure you that Lucent will not submit a claim for indemnification or cost sharing to us in connection with any future matter. In addition, our ability to assess the impact of matters for which Avaya Inc. may have to indemnify or share the cost with Lucent is made more difficult by the fact that we do not control the defense of these matters.

 

In addition, in connection with the distribution, Avaya Inc. and Lucent entered into a Tax Sharing Agreement that governs the parties’ respective rights, responsibilities and obligations after the distribution with respect to taxes for the periods ending on or before the distribution. Generally, pre-distribution taxes that are clearly attributable to the business of one party will be borne solely by that party, and other pre-distribution taxes will be shared by the parties based on a formula set forth in the Tax Sharing Agreement. Costs borne by Avaya under the Tax Sharing Agreement could have an adverse impact on our business, results of operations or financial condition.

 

Risks Related to Our Debt

 

Our degree of leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting obligations on our indebtedness.

 

The significant terms of our financing agreements can be found in Note 9, “Financing Arrangements,” and Note 22, “Subsequent Events,” in each case to the audited Consolidated Financial Statements for the fiscal year ended September 30, 2012 and Note 7, “Financing Arrangements,” to the unaudited Consolidated Financial Statements for the six months ended March 31, 2013. As of March 31, 2013, our total indebtedness was $6,103 million (excluding capital lease obligations). The Avaya Inc. senior secured multi-currency asset-based revolving credit facility allows for senior secured borrowings of up to $335 million and the right to request up to $100 million of additional commitments. As of March 31, 2013, there were no borrowings and $76 million of undrawn letters of credit outstanding under this facility. In addition, the senior secured multi-currency revolver available under the Avaya Inc. senior secured credit facility allows for senior secured borrowings of up to $200 million, and as of March 31, 2013, there were no borrowings under the senior secured multi-currency revolver. Our degree of leverage could have important consequences, including:

 

   

making it more difficult for us to make payments on our indebtedness;

 

   

increasing our vulnerability to general economic and industry conditions;

 

   

requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;

 

   

exposing us to the risk of increased interest rates as borrowings under the senior secured multi-currency asset-based revolving credit facility and the senior secured credit facility are at variable rates of interest;

 

   

limiting our ability to make strategic acquisitions;

 

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limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; and

 

   

limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.

 

Our debt agreements contain restrictions that limit in certain respects our flexibility in operating our business.

 

Avaya Inc.’s credit facilities, the indenture governing its senior unsecured cash-pay notes (the “cash pay notes”) and its senior unsecured payment-in-kind, or PIK, toggle notes (the “PIK toggle notes,” and together with the cash pay notes, the “senior unsecured notes”), each due November 1, 2015, the indentures governing its senior secured notes due April 1, 2019 (the “2019 senior secured notes”) and the indenture governing its senior secured notes due 2021 (the “2021 senior secured notes” and, together with the 2019 senior secured notes, the “senior secured notes,” and together with the senior unsecured notes, the “notes”) contain various covenants that limit our ability to engage in specific types of transactions. These covenants limit Avaya Inc.’s and its restricted subsidiaries’ ability to:

 

   

incur or guarantee additional debt and issue or sell certain preferred stock;

 

   

pay dividends on, redeem or repurchase our capital stock;

 

   

make certain acquisitions or investments;

 

   

incur or assume certain liens;

 

   

enter into transactions with affiliates; and

 

   

sell assets to, or merge or consolidate with, another company.

 

A breach of any of these covenants could result in a default under one or both of the credit facilities and/or the indentures governing the notes. In the event of any default under either of the credit facilities, the applicable lenders could elect to terminate borrowing commitments and declare all borrowings and loans outstanding, together with accrued and unpaid interest and any fees and other obligations, to be due and payable, which would be an event of default under the indentures governing the notes.

 

If we were unable to repay or otherwise refinance these borrowings and loans when due, the applicable secured lenders could proceed against the collateral granted to them to secure that indebtedness, which could force us into bankruptcy or liquidation. In the event our lenders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness.

 

We may not be able to generate sufficient cash to service all of our indebtedness and our other ongoing liquidity needs, and we may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

 

Our ability to make scheduled payments on or to refinance our debt obligations and to fund our planned capital expenditures, acquisitions and other ongoing liquidity needs depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. There can be no assurance that we will maintain a level of cash flow from operating activities or that future borrowings will be available to us under either of our credit facilities or otherwise in an amount sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our credit facilities and the indentures governing the notes restrict the ability of Avaya Inc. and its restricted subsidiaries to dispose of assets and use the proceeds from the disposition.

 

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Accordingly, we may not be able to consummate those dispositions or to obtain any proceeds on terms acceptable to us or at all, and any such proceeds may not be adequate to meet any debt service obligations then due.

 

Despite our level of indebtedness, we and our subsidiaries may be able to incur additional indebtedness. This could further exacerbate the risks associated with our degree of leverage.

 

We and our subsidiaries may be able to incur additional indebtedness in the future. Although the credit facilities and the indentures governing the notes contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and any indebtedness incurred in compliance with these restrictions could be substantial. To the extent new debt is added to our and our subsidiaries’ currently anticipated debt levels, the related risks that we and our subsidiaries face could intensify.

 

A ratings downgrade of Avaya Inc. or other negative action by a ratings organization could adversely affect the trading price of the shares of our common stock.

 

Credit rating agencies continually revise their ratings for companies they follow. The condition of the financial and credit markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. In addition, developments in our business and operations could lead to a ratings downgrade for Avaya Inc. Any such fluctuation in the rating of Avaya Inc. may impact Avaya Inc.’s ability to access debt markets in the future or increase its cost of future debt which could have a material adverse effect on the operations and financial condition of Avaya Inc., which in return may adversely affect the trading price of shares of our common stock.

 

Risks Related to this Offering and Ownership of Our Common Stock

 

An active trading market for our common stock may not develop.

 

Prior to this offering, there has been no public market for our common stock. Although we have applied to list our common stock on the New York Stock Exchange, an active trading market for our shares may never develop or be sustained following this offering. If the market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you or at all. In addition, an inactive market may impair our ability to raise capital by selling shares and may impair our ability to acquire other companies by using our shares as consideration, which, in turn, could materially adversely affect our business.

 

The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for investors purchasing shares in this offering.

 

The initial public offering price for the shares of our common stock sold in this offering will be determined by negotiation between the representatives of the underwriters and us. This price may not reflect the market price of our common stock following this offering. In addition, the market price of our common stock is likely to be highly volatile and may fluctuate substantially due to the following factors (in addition to the other risk factors described in this section):

 

   

actual or anticipated fluctuations in our results of operations;

 

   

variance in our financial performance from the expectations of equity research analysts;

 

   

conditions and trends in the markets we serve;

 

   

announcements of significant new services or products by us or our competitors;

 

   

additions or changes to key personnel;

 

   

changes in market valuation or earnings of our competitors;

 

   

the trading volume of our common stock;

 

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future sale of our equity securities;

 

   

changes in the estimation of the future size and growth rate of our markets;

 

   

legislation or regulatory policies, practices or actions; and

 

   

general economic conditions.

 

In addition, the stock markets in general have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. These broad market and industry factors may materially harm the market price of our common stock irrespective of our operating performance. As a result of these factors, you might be unable to resell your shares at or above the initial public offering price after this offering.

 

The Sponsors will have the ability to control the outcome of matters submitted for stockholder approval and may have interests that differ from those of our other stockholders.

 

After the completion of this offering, the Sponsors will own approximately     % of our common stock, or     % on a fully diluted basis. The Sponsors have significant influence over corporate transactions. So long as investment funds associated with or designated by the Sponsors continue to own a significant amount of the outstanding shares of our common stock, even if such amount is less than 50%, the Sponsors will continue to be able to strongly influence or effectively control our decisions, regardless of whether or not other stockholders believe that the transaction is in their own best interests. Such concentration of voting power could also have the effect of delaying, deterring or preventing a change of control or other business combination that might otherwise be beneficial to our stockholders.

 

In addition, the Sponsors and their affiliates are in the business of making investments in companies and may, from time to time in the future, acquire interests in businesses that directly or indirectly compete with certain portions of our business. To the extent the Sponsors invest in such other businesses, the Sponsors may have differing interests than our other stockholders. The Sponsors may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us.

 

We are a “controlled company” within the meaning of the rules of the New York Stock Exchange and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.

 

After completion of this offering, the Sponsors will continue to control a majority of the voting power of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the corporate governance rules of the New York Stock Exchange. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

   

the requirement that a majority of the board of directors consist of independent directors;

 

   

the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors;

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors; and

 

   

the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees.

 

Following this offering, we intend to utilize some or all of those exemptions. As a result, we may not have a majority of independent directors, our nominating and corporate governance committee and compensation committee may not consist entirely of independent directors and, while we may choose to do so, such committees will not be required to conduct annual performance evaluations.

 

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Accordingly, you will not be similarly situated to stockholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange.

 

New investors in our common stock will experience immediate and substantial book value dilution after this offering.

 

The initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value, or deficit, per share of the outstanding shares immediately after the offering. Based on an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, and our as-adjusted deficit at September 30, 2012, if you purchase our shares in this offering, you will suffer immediate dilution in net tangible book value per share of approximately $         per share. See “Dilution” included elsewhere in this prospectus.

 

Upon expiration of lock-up arrangements between the underwriters and our officers, directors and certain holders of our common stock, a substantial number of shares of our common stock could be sold into the public market shortly after this offering, which could depress our stock price.

 

Our officers, directors and certain holders of our common stock, options and warrants, holding substantially all of our outstanding shares of common stock prior to completion of this offering, have entered into lock-up agreements with our underwriters which prohibit, subject to certain limited exceptions, the disposal or pledge of, or the hedging against, any of their common stock or securities convertible into or exchangeable for shares of common stock for a period through the date 180 days after the date of this prospectus, subject to extension in certain circumstances. Our management stockholders’ agreement also restricts the parties thereto from transferring their shares of common stock or any securities convertible into or exchangeable or exercisable for shares of common stock (other than shares acquired in the public market subsequent to this offering and other than certain transfers to their affiliates) until 180 days after the effective date of the registration statement. The market price of our common stock could decline as a result of sales by our existing stockholders in the market after this offering and after the expiration of these lock-up periods, or the perception that these sales could occur. If a trading market develops for our common stock, and after these lock-up periods expire, many of our stockholders will have an opportunity to sell their stock for the first time. These factors could also make it difficult for us to raise additional capital by selling stock. Please see the section titled “Shares Eligible for Future Sale” for additional information regarding these factors. In addition, in the future, we may issue securities to raise additional capital or to acquire interests in other companies or technologies. As a result, your interest in our company may be further diluted and the market price of our common stock could decline.

 

We are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries to meet our obligations.

 

We have no direct operations and derive all of our cash flow from our subsidiaries. Because we conduct our operations through our subsidiaries, we depend on those entities for dividends and other payments or distributions to meet our obligations. The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could limit or impair their ability to pay dividends or other distributions to us.

 

We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

 

Following the completion of this offering, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend on results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock. Please see the section titled “Dividend Policy” for additional information.

 

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Anti-takeover provisions in our certificate of incorporation and bylaws could prevent or delay a change in control of our company.

 

Our certificate of incorporation and our bylaws contain certain provisions that may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable, including the following, some of which may only become effective when the Sponsors collectively beneficially own less than 40% of our outstanding shares of common stock:

 

   

the division of our board of directors into three classes and the election of each class for three-year terms;

 

   

the sole ability of the board of directors to fill a vacancy created by the expansion of the board of directors;

 

   

advance notice requirements for stockholder proposals and director nominations;

 

   

limitations on the ability of stockholders to call special meetings and to take action by written consent;

 

   

the approval of holders of at least two-thirds of the shares entitled to vote generally on the making, alteration, amendment or repeal of our certificate of incorporation or bylaws, will be required to adopt, amend or repeal our bylaws, or amend or repeal certain provisions of our certificate of incorporation;

 

   

the required approval of holders of at least two-thirds of the shares entitled to vote at an election of the directors to remove directors and, following the classification of the board of directors, removal only for cause; and

 

   

the ability of our board of directors to designate the terms of and issue new series of preferred stock, without stockholder approval, which could be used to institute a rights plan, or a poison pill, that would work to dilute the stock ownership or a potential hostile acquirer, likely preventing acquisitions that have not been approved by our board of directors.

 

The existence of the foregoing provisions and other anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition. For more information, please see the section titled “Description of Capital Stock.”

 

If securities or industry analysts do not publish research or reports or publish unfavorable research or reports about our business, our stock price and trading volume could decline.

 

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. We may not obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock could be negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us publishes unfavorable research or reports or downgrades our stock, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to regularly publish reports on us, interest in our stock could decrease, which could cause our stock price or trading volume to decline.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains “forward-looking statements.” In some cases, these statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “our vision,” “plan,” “potential,” “predict,” “should,” “will” or “would” or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition, or state trends and known uncertainties or other forward-looking information. You are cautioned that forward-looking statements are inherently uncertain. Each forward-looking statement contained in this prospectus is subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statement. We refer you to the section entitled “Risk Factors” in this prospectus for identification of important factors with respect to these risks and uncertainties. We caution readers not to place considerable reliance on such statements. Our business is subject to substantial risks and uncertainties, including those identified in this prospectus. The information contained in this prospectus is provided by us as of the date of this prospectus, and we do not undertake any obligation to update any forward-looking statements contained in this document as a result of new information, future events or otherwise. Forward-looking statements include, without limitation, statements regarding:

 

   

our expectations regarding our revenue, cost of revenue, selling, general and administrative expenses, research and development expenses, amortization of intangible assets and interest expense;

 

   

our expectations regarding the demand for our next-generation business collaboration solutions and the market trends contributing to such demand;

 

   

our strategy for worldwide growth, including our ability to develop and sell business collaboration and communications solutions;

 

   

the strength of our current intellectual property portfolio and our intention to obtain patents and other intellectual property rights used in connection with our business;

 

   

our anticipated competition as the business collaboration market evolves;

 

   

the product sales to be generated by our backlog;

 

   

our future cash requirements, including our primary cash requirements for the period April 1, 2013 through September 30, 2013;

 

   

our intention to use the net proceeds of the initial public offering to repay certain of our existing indebtedness and to redeem our Series A Preferred Stock;

 

   

our future sources of liquidity, including any future refinancing of our existing debt or issuance of additional securities;

 

   

the uncertainties regarding our liquidity, including our ability to generate revenue, reduce costs, make future acquisitions and defend against litigation;

 

   

the impact of new accounting pronouncements; and

 

   

our expectations regarding the impact of legal proceedings, including antitrust, intellectual property or employment litigation.

 

Many factors could cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:

 

   

the ability of our solutions to keep pace with rapidly changing technology and evolving industry standards;

 

   

our ability to remain competitive in the markets we serve;

 

   

the market for our business collaboration and communications solutions;

 

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economic conditions and the willingness of enterprises to make capital investments;

 

   

our reliance on our indirect sales channel;

 

   

our ability to protect our intellectual property and avoid claims of infringement;

 

   

our ability to retain and attract key employees;

 

   

our reliance on third-party manufacturers and component suppliers, as well as warehousing and distribution logistics providers;

 

   

risks relating to the transaction of business internationally, including fluctuations in foreign currency exchange rates;

 

   

our ability to integrate acquired businesses;

 

   

an adverse result in any significant litigation, including antitrust, intellectual property or employment litigation;

 

   

our ability to maintain adequate security over our information systems;

 

   

environmental, health and safety laws, regulations, costs and other liabilities;

 

   

the complexity of business collaboration solutions, which may make it difficult for us to detect errors, failures or “bugs”;

 

   

pension and post-retirement healthcare and life insurance liabilities;

 

   

our degree of leverage and its effect on our ability to raise additional capital and to react to changes in the economy or our industry; and

 

   

liquidity and our access to capital markets.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds of the sale of the common stock that we are offering will be approximately $             million after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. This assumes an initial public offering price of $     per share, which is the midpoint of the range listed on the cover page of this prospectus.

 

We currently expect to use the net proceeds to us from this offering for the following purposes and in the following amounts:

 

   

approximately $             million will be used to repay a portion of our long-term indebtedness;

 

   

approximately $             million will be used to redeem all of our outstanding Series A Preferred Stock of which $             million and $             million will be used to redeem the Series A Preferred Stock held by Silver Lake and TPG, respectively. See “Certain Relationships and Related Party Transactions.” For more information on our Series A Preferred Stock, including the terms of redemption, see “Description of Capital Stock—Preferred Stock—Series A Preferred Stock”; and

 

   

approximately $             million will be used to pay certain amounts in connection with the termination of our management services agreement with affiliates of our Sponsors as described under “Certain Relationships and Related Party Transactions”, of which $     million and $     million will be paid to Silver Lake and TPG, respectively, pursuant to the terms of the agreement.

 

While we currently anticipate that we will use the net proceeds of this offering as described above, we may reallocate the net proceeds from time to time depending upon market and other conditions in effect at the time. To the extent the net proceeds of this offering are greater or less than the estimated amount, because either the offering does not price at the midpoint of the estimated price range or the size of the offering changes, the difference will increase or decrease the amount of net proceeds available for the purposes set forth above. Pending their application, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities.

 

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DIVIDEND POLICY

 

Our payment of dividends on our common stock in the future will be determined by our board of directors in its sole discretion and will depend on business conditions, our financial condition, earnings, liquidity and capital requirements, the covenants in agreements governing our indebtedness and other factors. We have no current plans to pay dividends on our common stock.

 

As disclosed above under “Use of Proceeds,” we intend to use a portion of the net proceeds from this offering to redeem all of our outstanding Series A Preferred Stock. Subject to the rights of holders of our Series B Convertible Preferred Stock as described below, the certificate of designations for the Series A Preferred Stock grants holders of our Series A Preferred Stock the right to receive, as, when and if declared by our board of directors and in preference to the holders of any and all other series or classes of capital stock, payable either in cash or, at our option, by issuance of additional shares of Series A Preferred Stock, cumulative annual dividends at a rate of 5% per annum on $1,000 per share (which value is to be proportionately adjusted to reflect any stock dividend, stock split, combination of shares, reclassification, reorganization, recapitalization or other similar event affecting the Series A Preferred Stock), compounded quarterly from and after the date of issuance of such shares of Series A Preferred Stock. As of March 31, 2013, the carrying value of our Series A Preferred Stock was $147 million which includes $22 million of accumulated and unpaid dividends as well as $57 million of discount accretion. The $57 million of discount accretion was recorded to the carrying amount of the Series A Preferred Stock at the date of issuance so that the carrying amount was equal to the redemption amount at that date of $125 million.

 

The certificate of designations for the Series B Convertible Preferred Stock grants holders of our Series B Convertible Preferred Stock the right to receive, as, when and if declared by our board of directors and in preference to the holders of any and all other series or classes of capital stock, payable either in cash or, at our option, by issuance of additional shares of Series B Convertible Preferred Stock, cumulative annual dividends at a rate of 8% per annum on $4,000 per share (which value is to be proportionately adjusted to reflect any stock dividend, stock split, combination of shares, reclassification, reorganization, recapitalization or other similar event affecting the Series B Convertible Preferred Stock), compounded annually from and after the date of issuance of such shares of Series B Convertible Preferred Stock. Additionally, holders of Series B Convertible Preferred Stock participate in any dividends payable on shares of the Company’s common stock on an as converted basis. As of March 31, 2013, the carrying value of our Series B Convertible Preferred Stock was $245 million which includes $13 million of accumulated and unpaid dividends, $36 million of accretion to the redemption price, as well as $33 million of discount accretion at the date of issuance.

 

So long as any share of our Series A Preferred Stock and Series B Convertible Preferred Stock remain outstanding, no dividend or distribution may be declared or paid on our common stock unless all accrued and unpaid dividends have been paid on our Series A Preferred Stock and Series B Convertible Preferred Stock and dividends paid on our common stock may not be paid at a rate greater than the rate paid on Series A Preferred Stock or Series B Convertible Preferred Stock.

 

In addition, because Avaya Holdings Corp. is a holding company, its ability to pay cash dividends on its common stock may be limited by restrictions on its ability to obtain sufficient funds through dividends from subsidiaries, including restrictions under the terms of the agreements governing Avaya Inc.’s indebtedness. Refer to the section of this prospectus entitled “Description of Certain Outstanding Indebtedness” for a more detailed discussion of the agreements governing our indebtedness and the section of this prospectus entitled “Description of Capital Stock” for a more detailed description of the terms of our Series A Preferred Stock and our Series B Convertible Preferred Stock.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of March 31, 2013:

 

   

on an actual basis; and

 

   

on a pro forma basis after giving effect to (i) the sale by us of              shares of common stock at an assumed initial public offering price of $             per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and (ii) the application of such net proceeds as described under “Use of Proceeds.” For purpose of this table, the assumed initial public offering price is $             per share, which is the midpoint of the range listed on the cover page of this prospectus.

 

You should read the following table in conjunction with our Consolidated Financial Statements and related notes, “Selected Historical Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all included elsewhere in this prospectus.

 

     As of March 31, 2013
     Actual     Pro Forma(1)
     (in millions, except share
amounts)

Cash and cash equivalents

   $ 303     
  

 

 

   

 

Debt:(2)

    

Senior secured term B-3 loans

   $ 2,139     

Senior secured term B-4 loans

     1     

Senior secured term B-5 loans

     1,148     

7% senior secured notes

     1,009     

9% senior secured notes

     290     

10.50% senior secured notes

     1,384     

9.75% senior unsecured cash-pay notes due 2015

     58     

10.125%/10.875% senior unsecured PIK toggle notes due 2015

     92     

Unaccreted discount

     (18  
  

 

 

   

 

Total debt

     6,103     
  

 

 

   

 

Preferred stock, par value $.001 per share; authorized 250,000 shares

    

Series B, 48,921 and 48,921 shares issued and outstanding on an actual and pro forma basis, respectively(3)

     245     

Series A, 125,000 and nil shares issued and outstanding on an actual and pro forma basis, respectively

     147     

Deficiency:

    

Common stock, par value $.001 per share; authorized 750 million shares, outstanding 488,662,389 and              shares on an actual and pro forma basis, respectively

         

Additional paid-in capital

     2,510     

Accumulated deficit

     (4,514  

Accumulated other comprehensive loss

     (1,129  
  

 

 

   

 

Total deficiency

     (3,133  
  

 

 

   

 

Total capitalization

   $ 3,362     
  

 

 

   

 

 

(1)  

Assumes the net proceeds from this offering, together with cash on hand, are used on the closing date to redeem all outstanding shares of our Series A Preferred Stock for $147 million, which includes accumulated and accrued unpaid dividends of $22 million, as well as the discount accretion recorded at the date of

 

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  issuance of $57 million; to repay $             million of long-term indebtedness; and to make a payment to affiliates of our Sponsors in connection with the termination of the management services agreement as described under “Certain Relationships and Related Party Transactions” and to pay certain fees and expenses relating to this offering. The pro forma amounts do not give effect to any accounting charges that may be recorded as a result of such payment. A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the mid-point of the estimated price range set forth on the cover page of this prospectus and the application of the net proceeds therefrom, would (i) increase (decrease) the net proceeds to us by $     million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and (ii) would increase (decrease) our total long-term debt reduction by $             million and decrease (increase) our stockholders’ deficiency by $     million.
(2)   For additional information regarding our outstanding indebtedness, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities,” “Description of Certain Outstanding Indebtedness” and Note 7, “Financing Arrangements,” to our unaudited Consolidated Financial Statements included elsewhere in this prospectus.
(3)   Includes accumulated and unpaid dividends of $13 million, $36 million of accretion to the redemption price, as well as the discount accretion recorded at the date of issuance of $33 million. Please refer to Note 15, “Capital Stock,” to our audited Consolidated Financial Statements included elsewhere in this prospectus.

 

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DILUTION

 

If you invest in shares of our common stock in this offering, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the as-adjusted net tangible book value, or deficit, per share of our common stock after this offering. The deficit is calculated as the liabilities in excess of our net tangible book value. The deficit per share is determined by dividing the numerator of total liabilities plus the book value of our Series A Preferred Stock less total tangible assets (total assets less intangible assets) by the denominator of the number of outstanding shares of common stock. Our deficit value at March 31, 2013 was $8,606 million or $17.61 per share of common stock.

 

Our as-adjusted deficit at March 31, 2013, after giving effect to the sale by us of      shares of common stock at an assumed initial public offering price of $             per share, which is the midpoint of the range listed on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, would have been approximately $             million, or $             per share. This represents an immediate increase in as-adjusted deficit of $             per share to existing stockholders and an immediate dilution of $             per share to new investors, or approximately     % of the assumed initial public offering price of $             per share. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

     $                

Deficit per share as of March 31, 2013, before giving effect to this offering

   $ (8,606  

Decrease in deficit per share attributable to investors purchasing shares in this offering

    

As adjusted deficit per share, after giving effect to this offering

    

 

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would decrease (increase) our as-adjusted deficit by $             million, the as-adjusted deficit per share after this offering by $             per share and the dilution in as-adjusted deficit per share to investors in this offering by $             per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and estimated offering expenses payable by us.

 

The following table summarizes, as of March 31, 2013, the number of shares of common stock purchased from us since inception, the total consideration paid to us and the average price per share paid by existing shareholders and by new investors purchasing shares of common stock in this offering at an assumed initial public offering price of $             per share, before deducting underwriting discount and estimated offering expenses payable by us.

 

     Shares Purchased    Total Consideration    Average Price
Per Share
 
     Number    Percent    Amount    Percent   

Existing shareholders

         $                          $                

New investors

                 
  

 

  

 

  

 

 

    

 

  

 

  

Total

                 
  

 

  

 

  

 

 

    

 

  

 

  

 

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by $             million, $             million and $             per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The above discussion and table are based on 488,662,389 shares of common stock outstanding as of March 31, 2013. This excludes the following numbers of shares of our common stock issuable in connection with the exercise of warrants outstanding as of March 31, 2013, the conversion of our Series B Convertible Preferred Stock and equity awards under our Amended and Restated 2007 Equity Incentive Plan:

 

   

100,000,000 shares of common stock issuable upon the exercise of warrants held by affiliates of our Sponsors, which warrants are subject to the lock-up agreements described under “Underwriters” and exercisable at any time prior to December 18, 2019 at an exercise price of $3.25 per share (see “Description of Capital Stock—Warrants”);

 

   

24,500,000 shares of common stock issuable upon the exercise of warrants held by affiliates of our Sponsors, which warrants are subject to the lock-up agreements described under “Underwriters” and exercisable at any time prior to May 29, 2022 at an exercise price of $4.00 per share (see “Description of Capital Stock—Warrants”);

 

   

429,761 Continuation Options that were awarded by the Company to executive officers prior to the Merger that were permitted to be rolled over into equity awards issued by us upon consummation of the Merger, each with an exercise price of $1.25 per share;

 

   

     shares of common stock issuable upon conversion of the Series B Convertible Preferred shares held by affiliates of our Sponsors, and convertible at any time as such Series B Convertible Preferred Stock is outstanding at a conversion price equal to the lesser of (1) $4.00 per share (subject to certain anti-dilution provisions) and (2) the offering price per share in this offering, which such shares if converted are subject to the lock-up agreements described under “Underwriters” (see “Description of Capital Stock—Preferred Stock—Series B Convertible Preferred Stock”);

 

   

36,262,394 shares of common stock issuable upon the exercise of options with exercise prices ranging from $3.00 to $5.00 per share and a weighted average exercise price of $3.28 per share;

 

   

1,719,808 shares of common stock issuable on the vesting and distribution of RSUs; and

 

   

9,748,283 additional shares of common stock as of March 31, 2013 reserved for future grants under the 2007 Plan.

 

This also excludes      additional shares of common stock reserved for future equity incentive plans to be effective upon the completion of this offering.

 

To the extent the options or warrants are exercised and awards are granted under these plans, there may be further economic dilution to our stockholders.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

 

The following table sets forth our selected historical consolidated financial data at the dates and for the periods indicated. Avaya Holdings Corp. was incorporated on June 1, 2007 by affiliates of the Sponsors. Avaya Holdings Corp., through a subsidiary holding company, entered into a Merger Agreement with Avaya Inc., or the Predecessor, pursuant to which the holding company merged with and into Avaya Inc., with Avaya Inc. continuing as the surviving entity and a wholly owned subsidiary of Avaya Holdings Corp., in a transaction that was completed on October 26, 2007. Avaya Holdings Corp. is a holding company and has no material assets or stand-alone operations other than its ownership in Avaya Inc. and its subsidiaries. The selected historical consolidated financial data set forth below are those of Avaya Holdings Corp. and its consolidated subsidiaries, or the Successor, from its inception on June 1, 2007 through March 31, 2013 and those of its Predecessor, Avaya Inc., for all prior periods through the closing date of the Merger.

 

The Predecessor selected historical consolidated financial data set forth below as of and for the period October 1, 2007 through October 26, 2007 have been derived from our Predecessor’s audited Consolidated Financial Statements and related notes which are not included in this prospectus. The Successor selected historical consolidated financial data set forth below as of and for the six months ended March 31, 2012 and 2013 have been derived from our unaudited Consolidated Financial Statements and related notes included elsewhere in this prospectus. The Successor selected historical consolidated financial data set forth below as of and for the fiscal years ended September 30, 2010, 2011, and 2012 have been derived from our audited Consolidated Financial Statements and related notes included elsewhere in this prospectus. The Successor selected historical consolidated financial data set forth below for the fiscal years ended September 30, 2008 and 2009 have been derived from our audited Consolidated Financial Statements and related notes, which are not included in this prospectus. The Successor selected historical consolidated financial data set forth below as of and for the period June 1, 2007 through September 30, 2007 has been derived from our Consolidated Financial Statements, which are not included in this prospectus. The Successor had no operations prior to the Merger. As part of the Merger on October 26, 2007, we entered into various financing arrangements and, as a result, had a different capital structure following the Merger. Accordingly, the results of operations for periods subsequent to the Merger will not necessarily be comparable to prior periods.

 

The following selected historical consolidated financial data should be read together with our Consolidated Financial Statements and the related notes appearing elsewhere in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus.

 

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    Predecessor         Successor  
    Period from
October 1,
2007
through
October 26,
2007
         Period from
June 1,
2007
through
September 30,
2007
    Fiscal year ended
September 30,
    Six months
ended March 31,
 
             2008(1)     2009     2010     2011     2012         2012             2013      
    (in millions, except per share amounts)  

STATEMENT OF OPERATIONS DATA:

                     

REVENUE

                     

Products

  $ 96          $      $ 2,595      $ 1,923      $ 2,602      $ 2,976      $ 2,672      $ 1,386      $ 1,160   

Services

    150                   2,328        2,227        2,458        2,571        2,499        1,258        1,198   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    246                   4,923        4,150        5,060        5,547        5,171        2,644        2,358   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COSTS

                     

Products:

                     

Costs (exclusive of amortization of intangible assets)

    56                   1,256        872        1,243        1,314        1,145        591        497   

Amortization of technology intangible assets

    1                   231        248        291        257        192        99        36   

Services

    100                   1,403        1,164        1,354        1,344        1,248        637        573   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    157                   2,890        2,284        2,888        2,915        2,585        1,327        1,106   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

GROSS MARGIN

    89                   2,033        1,866        2,172        2,632        2,586        1,317        1,252   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

OPERATING EXPENSES

                     

Selling, general and administrative

    111                   1,456        1,272        1,721        1,845        1,630        847        765   

Research and development

    29                   376        309        407        461        464        228        231   

Amortization of intangible assets

    4                   187        207        218        226        226        112        114   

Impairment of indefinite-lived intangible assets

                      130        60                                      

Goodwill impairment

                      899        235                                    89   

Restructuring and impairment charges, net

    1                   10        162        187        189        147        111        102   

In-process research and development charge

                      112        12                                      

Acquisition-related costs

                             29        20        5        4        3          

Merger-related costs

    57                   1                                             
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    202                   3,171        2,286        2,553        2,726        2,471        1,301        1,301   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME (LOSS)

    (113                (1,138     (420     (381     (94     115        16        (49
 

Interest expense

                      (377     (409     (487     (460     (432     (217     (224

Loss on extinguishment of debt

                                           (246                   (6

Other income (expense), net

    1                   27        14        15        5        (29     (16     4   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

    (112                (1,488     (815     (853     (795     (346     (217     (275

Benefit from (provision for) income taxes

    24                   183        (30     (18     (68     (8     26        6   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS

    (88                (1,305     (845     (871     (863     (354     (191     (269
 

Less: net income attributable to noncontrolling interests

                      2        2        3                               
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS ATTRIBUTABLE TO AVAYA HOLDINGS CORP.

    (88                (1,307     (847     (874     (863     (354     (191     (269
 

Less: Accretion and accrued dividends on Series A and Series B preferred stock

                                    (62     (7     (71     (3     (21
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS ATTRIBUTABLE TO AVAYA HOLDINGS CORP. COMMON STOCKHOLDERS

  $ (88       $      $ (1,307   $ (847   $ (936   $ (870   $ (425   $ (194   $ (290
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SHARE DATA:

                     

Net loss per share attributable to common stockholders—basic

  $ (0.19       $      $ (2.87   $ (1.74   $ (1.92   $ (1.78   $ (0.87   $ (0.40   $ (0.59

Weighted average shares outstanding—basic

    462.9                   455.9        488.1        488.6        489.0        489.6        489.3        489.3   

Net loss per share attributable to common stockholders—diluted

    (0.19                (2.87     (1.74     (1.92     (1.78     (0.87     (0.40     (0.59

Weighted average shares outstanding—diluted

    462.9                   455.9        488.1        488.6        489.0        489.6        489.3        489.3   

 

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    Predecessor    

 

  Successor  
    Period from
October 1,
2007
through
October  26,
2007
         Period from
June 1,
2007
through
September  30,
2007
    Fiscal year ended
September 30,
    Six months
ended March 31,
 
             2008(1)     2009     2010     2011     2012         2012             2013      
               (in millions)  

BALANCE SHEET DATA (at end of period):

                     
 

Cash and cash equivalents

        $      $ 594      $ 582      $ 594      $ 415      $     338      $     356      $     303   

Intangible assets, net

                 3,154        2,636        2,603        2,129        1,775        1,939        1,625   

Goodwill

                 3,956        3,695        4,075        4,079        4,188        4,093        4,093   

Total assets

                 10,010        8,665        9,276        8,561        8,184        8,321        7,830   

Total debt (excluding capital lease obligations)

                 5,222        5,150        5,928        6,157        6,121        6,139        6,103   

Preferred stock, Series B

                                             227               245   

Preferred stock, Series A

                               130        137        144        140        147   

Total Avaya Holdings Corp. stockholders’ equity (deficiency)

                 1,063        (682     (1,543     (2,500     (2,843     (2,637     (3,133
 

STATEMENT OF CASH FLOWS DATA:

                     

Net cash provided by (used in)

                     

Operating activities

  $ 133          $      $ 304      $ 242      $ 42      $ (300 )     $ 44      $ 31      $ 88   

Investing activities

    (16                (7,205     (155     (864     (101     (283     (75     (59

Financing activities

    11                   7,512        (101     853        228        155        (22     (59
 

OTHER FINANCIAL DATA:

                     

EBITDA

  $ (94       $      $ (515 )     $ 240      $ 320      $ 313      $ 647      $ 284      $ 169   

Adjusted EBITDA(3)

    (27                859        753        795        971        971        479        423   

Capital expenditures, net

    8                   120        76        79        83        92        38        47   

Capitalized software development costs

    7                   74        43        43        42        35        19        10   

 

(1)   The selected historical consolidated financial data above as of and for the year ended September 30, 2008 reflect the results of Avaya Holdings Corp. for the entire fiscal year and includes the results of Avaya Inc. and its consolidated subsidiaries subsequent to October 26, 2007, the date of the Merger.
(2)   Avaya Holdings Corp. is a holding company formed on June 1, 2007 by affiliates of the Sponsors for the purpose of consummating the Merger. Avaya Holdings Corp. has no material assets or stand-alone operations other than its ownership in Avaya Inc. and its subsidiaries. The selected historical consolidated financial data above as of September 30, 2007 and for the period from June 1, 2007 through September 30, 2007 reflects the results of Avaya Holdings Corp., which did not have assets or operations prior to the Merger.
(3)   Adjusted EBITDA is calculated in accordance with, and is disclosed herein to demonstrate compliance with, Avaya Inc.’s debt agreements. For the period October 1, 2007 through October 26, 2007, Adjusted EBITDA is calculated in accordance with the debt agreements for comparative purposes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures and Supplemental Disclosure—EBITDA and Adjusted EBITDA” for a definition and explanation of Adjusted EBITDA and reconciliation of net loss to Adjusted EBITDA.

 

The following are some of the items affecting the comparability of the selected historical consolidated financial data for the periods presented:

 

   

The Company remains focused on its efforts to streamline operations, generate cost savings and eliminate overlapping processes and expenses. Restructuring charges for the six months ended March 31, 2013 were $102 million and include employee separation costs and lease obligations. In December 2012, the Company approved a plan that provides for the elimination of 234 positions in Europe, the Middle East and Africa, or EMEA, and resulted in a charge of $47 million, including $34 million associated with the elimination of positions in Germany. The separation charges include, but are not limited to, social pension fund payments and health care and unemployment insurance costs to be paid to or on behalf of the affected employees. In addition, a voluntary program offered to certain management employees in the U.S. resulted in the elimination of 195 positions and a charge of $9 million.

 

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During the three months ended March 31, 2013, the Company recorded an impairment to goodwill associated with its IT professional services, or ITPS, reporting unit of $89 million. The ITPS reporting unit provides specialized information technology services exclusively to U.S. government customers and has experienced a decline in revenues as compared to previous periods and a reduction in its forecasts for the remainder of fiscal 2013. The reporting unit was impacted by reduced government spending in anticipation of sequestration and general budget cuts. See discussion in Note 4, “Goodwill and Intangible Assets,” to our unaudited Consolidated Financial Statements included elsewhere in this prospectus.

 

   

On August 8, 2011, Avaya Inc. amended the terms of the multi-currency revolvers available under its senior secured credit facility and its senior secured multi-currency asset-based revolving credit facility to extend the final maturity of each from October 26, 2013 to October 26, 2016. All other terms and conditions of the senior secured credit facility and the senior secured multi-currency asset-based revolving credit facility remain unchanged.

 

   

During the three months ended December 31, 2012, Avaya Inc. completed three transactions to refinance $848 million of term loans under the senior secured credit facility. On October 29, 2012 Avaya Inc. completed an amendment and restatement of the senior secured credit facility and senior secured multi-currency asset-based revolving credit facility along with the extension of the maturity date of $135 million aggregate principal amount of term B-1 loans from October 26, 2014 to October 26, 2017 by converting such loans into a new tranche of senior secured term B-4 loans (“term B-4 loans”). On December 21, 2012 Avaya Inc. completed an amendment and restatement of the senior secured credit facility along with the extension of the maturity date of $713 million aggregate principal amount of term B-1 loans from October 26, 2014 to October 26, 2017 and $134 million aggregate principal amount of term B-4 loans from October 26, 2017 to March 31, 2018 in each case by converting such loans into a new tranche of senior secured term B-5 loans (“term B-5 loans”). On December 21, 2012 Avaya Inc. issued $290 million of 9% senior secured notes due April 2019 (the “9% Senior Secured Notes”), the proceeds of which were used to repay $284 million principal amount of term B-5 loans and to pay related fees and expenses. See Note 7, “Financing Arrangements” to our unaudited Consolidated Financial Statements included elsewhere in this prospectus for further details.

 

   

During the three months ended March 31, 2013, the Company refinanced the $584 million of term B-1 loans outstanding under its senior secured credit facility and refinanced $1,384 million of senior unsecured notes. On March 7, 2013, Avaya Inc. completed an exchange offer in which $642 million of its 9.75% senior unsecured cash-pay notes due 2015 and $742 million of 10.125%/10.875% senior unsecured paid-in-kind (“PIK”) toggle notes due November 1, 2015 were exchanged for $1,384 million of 10.50% senior secured notes due March 1, 2021. In addition, on March 12, 2013, Avaya Inc. refinanced the remaining term B-1 loans due October 26, 2014, with the cash proceeds from the issuance of $589 million aggregate principal amount of term B-5 loans due October 26, 2017 under its senior secured credit facility. See Note 7, “Financing Arrangements” to our unaudited Consolidated Financial Statements included elsewhere in this prospectus for further details.

 

   

The Company recognized a loss on extinguishment of debt for the six months ended March 31, 2013 of $6 million in connection with (1) the issuance of Avaya Inc.’s 9% Senior Secured Notes and the payment of $284 million of term B-5 loans and (2) the refinancing of $584 million of outstanding term B-1 loans. The loss represents the difference between the reacquisition price and the carrying value (including unamortized discount and debt issue costs) of the debt. See Note 7, “Financing Arrangements” to our unaudited Consolidated Financial Statements included elsewhere in this prospectus for further details.

 

   

On February 11, 2011, Avaya Inc. completed a private placement of $1,009 million of senior secured notes. The senior secured notes were issued at par, bear interest at a rate of 7% per annum and mature on April 1, 2019. The proceeds from the notes were used to repay in full the senior secured incremental term B-2 loans outstanding under the senior secured credit facility (representing $988 million in aggregate principal amount and $12 million in accrued and unpaid interest) and to pay related fees and

 

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expenses. The issuance of the senior secured notes and repayment of the senior secured incremental term B-2 loans was accounted for as an extinguishment of the senior secured incremental term B-2 loans and issuance of new debt. Accordingly, the Company recognized a loss on extinguishment of debt of $246 million based on the difference between the reacquisition price and the carrying value of the incremental term B-2 loans (including unamortized debt discount and debt issue costs) during fiscal 2011.

 

   

As a result of the acquisitions of NES and Radvision, our operating results include the operations of the NES business and Radvision as of December 19, 2009 and June 5, 2012.

 

   

For the six months ended March 31, 2013 and fiscal 2012, we recognized a gain (loss) on the changes in the fair value of the Series B Convertible Preferred Stock (“preferred series B”) embedded derivative included in other income (expense) of $8 million and $(6) million, respectively. In order to partially fund the acquisition of Radvision, on May 29, 2012 the Company issued 48,921 shares of preferred series B which contain an embedded derivative that under GAAP must be recognized as a liability at fair value at each balance sheet date with the changes in the fair value recognized in operations. See Note 15 “Capital Stock” to our audited Consolidated Financial Statements included elsewhere in this prospectus for further discussion.

 

   

In connection with the acquisition of NES, we have incurred acquisition-related costs during fiscal 2009 and 2010 of $29 million and $20 million, respectively.

 

   

We incurred integration costs with respect to the NES acquisition of $132 million and $208 million, for fiscal 2011 and fiscal 2010, respectively. Integration costs primarily represent third-party consulting fees and other administrative costs associated with consolidating and coordinating the operations of Avaya and NES. These costs were incurred in connection with, among other things, the on-boarding of NES personnel, developing compatible IT systems and internal processes and developing and implementing a strategic operating plan to help enable a smooth transition with minimal disruption to NES customers. Such costs also include fees paid to Nortel for logistics and other support functions being performed on a temporary basis according to a transition services agreement. In fiscal 2012 we incurred $19 million of integration costs which were primarily associated with consolidating and coordinating the operations of Avaya and Radvision and costs associated with NES, primarily related to developing compatible IT systems and internal processes.

 

   

During fiscal 2012 and 2011, we continued to identify opportunities to streamline operations and generate cost savings, which include exiting facilities and reducing headcount. Restructuring charges for fiscal 2012 and 2011 were $142 million and $189 million, respectively. In fiscal 2012 and 2011 the Company entered into agreements with the works council representing employees of certain of the Company’s German subsidiaries for the elimination of 327 and 210 positions, respectively. The charges associated with these agreements were $70 million and $56 million respectively and consisted of severance and employment benefit payments, including, but not limited to, social pension fund payments and healthcare and unemployment insurance costs to be paid to or on behalf of the affected employees. In addition, the Company incurred employee separation costs of $53 million and $97 million for fiscal 2012 and 2011, respectively, primarily related to the U.S. and EMEA, excluding Germany. The Company also recorded charges associated with partially or totally vacated facilities of $19 million and $36 million for fiscal 2012 and 2011, respectively.

 

   

On August 31, 2010, we sold our 59.13% ownership in AGC Networks Ltd., or AGC, (formerly Avaya GlobalConnect Ltd.), our reseller in India, and recognized a $7 million gain on the sale. AGC remains a key channel partner of Avaya serving customers in the India market and in Australia.

 

   

Impairment charges of $16 million were incurred in fiscal 2010 associated with certain technologies with overlapping functionality to technologies acquired with NES.

 

   

Amortization of intangible assets was $418 million, $483 million, $509 million and $455 million for the years ended September 30, 2012, 2011, 2010 and 2009, respectively. The fluctuations are

 

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attributable to amortization associated with intangible assets recorded in connection with our acquisition of NES partially offset by any impairment and fully amortized intangibles. In acquisition accounting, we recorded technologies, customer relationships and other intangibles of NES with an estimated fair value of $476 million. These assets are amortized over their estimated economic lives ranging from less than one year to thirteen years.

 

   

In connection with the financing of the acquisition of NES, cash proceeds of $783 million were received in exchange for senior secured incremental term B-2 loans with a face value of $1,000 million and the issuance of detachable warrants to purchase 61.5 million shares of common stock.

 

   

In connection with the financing of the acquisition of NES, we issued 125,000 shares of Series A Preferred Stock with detachable warrants to purchase 38.5 million shares of common stock for cash proceeds of $125 million.

 

   

During the period from December 19, 2009 through September 30, 2010, we incurred incremental interest expense from the financing associated with the acquisition of NES of $117 million, which includes non-cash interest expense of $34 million.

 

   

During the year ended September 30, 2010, we continued our focus on controlling costs. In response to the global economic climate and, in connection with the acquisition of NES, we began implementing additional initiatives designed to streamline our operations, generate cost savings and eliminate overlapping processes and expenses associated with the NES business. These initiatives include exiting facilities and reducing the workforce or relocating positions to lower cost geographies. Restructuring charges associated with these initiatives were $151 million for employee separation costs primarily associated with involuntary employee severance actions in EMEA and the U.S. and an additional $24 million in future net lease payments associated with the closing and consolidating of facilities.

 

   

The provision for income taxes was $8 million, $68 million, $18 million and $30 million for the years ended September 30, 2012, 2011, 2010 and 2009, respectively, and was substantially different from income taxes determined at the U.S. Federal statutory rate. For fiscal 2009, we were in a three-year cumulative U.S. book tax loss position and had determined that it is more likely than not that our U.S. net deferred tax assets would not be realized. Accordingly, we had provided a valuation allowance against our U.S. net deferred tax assets. As a result, we recorded a tax provision associated with earnings in certain profitable non-U.S. tax jurisdictions for the period offset by a minimal tax benefit relating to our U.S. pre-tax losses in fiscal 2009. In fiscal 2010, 2011 and 2012, we provided additional allowances associated with the U.S. valuation allowance and our income tax provision primarily relates to earnings of certain profitable non-U.S. tax jurisdictions. As of September 30, 2012, the Company changed its indefinite reinvestment of undistributed foreign earnings assertion with respect to its non-U.S. subsidiaries. As a result the Company recorded fiscal 2012 income tax expense of $17 million relating to non-U.S. taxes.

 

   

During the six months ended March 31, 2013, the Company recognized $17 million of income tax benefit related to the elimination of the tax effect of certain interest rate swaps in other comprehensive income and a tax charge of $16 million to other comprehensive income primarily relating to pension benefits. During the six months ended March 31, 2012, the Company recorded a tax charge of $6 million to other comprehensive income primarily relating to pension benefits.

 

   

During fiscal 2009, we recorded impairments to goodwill and trademark and trade name indefinite-lived intangible assets of $235 million and $60 million, respectively. The impairments are primarily attributable to lower expected future discounted cash flows as a result of the continued weakness in the global economy and changes in discount rates.

 

   

During fiscal 2009, as a response to the global economic downturn, we began implementing certain initiatives designed to further streamline our operations and generate cost savings. Restructuring charges associated with these initiatives were $160 million and include employee separation costs primarily related to workforce actions in the EMEA and U.S. regions.

 

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In connection with the Merger, we entered into financing arrangements on October 26, 2007 providing for $5,250 million in financing.

 

   

As a result of the Merger, all of the assets and liabilities of the Predecessor company were recorded at estimated fair values by the Successor company at October 27, 2007. The purchase price allocation resulted in significant changes to our balance sheet accounts including inventory, deferred income tax assets and liabilities, property, plant and equipment, intangible assets, goodwill, employee benefit obligations, deferred revenue and other assets, liabilities and stockholders’ equity accounts. These adjustments included increases to goodwill of $3,698 million and trademark and trade name indefinite-lived intangible assets of $545 million.

 

   

Amortization of intangible assets for fiscal 2008 was $418 million. The increase over fiscal 2007 is attributable to the amortization expense associated with significant intangible asset values recorded in connection with the Merger. In purchase accounting, we recorded technologies, patents, licenses, customer relationships and other intangibles with an estimated fair value of $3,157 million. These assets are amortized over their estimated economic lives ranging from five to ten years.

 

   

During fiscal 2008 we expensed IPRD of $112 million which represented certain technologies that, at the time of the Merger, were in the initial development stages and did not meet the technological feasibility standard necessary for capitalization at the time. Accordingly, these amounts were expensed at the date of the Merger.

 

   

As a result of the Merger, we increased the inventory of the Predecessor by $182 million to reflect its estimated fair value less costs to sell. This adjustment in value was fully expensed as cost of goods sold during fiscal 2008 as the inventory was sold.

 

   

During fiscal 2008, we recorded impairments as part of our annual impairment tests to goodwill and trademark and trade name indefinite-lived intangible assets of $899 million and $130 million, respectively. The impairments are primarily the result of lower expected future cash flows as a result of the weakness in the global economy.

 

   

The benefit from income taxes for fiscal 2008 was $183 million and reflects an effective benefit rate of 12.3%. The difference between our effective benefit rate and the U.S. federal statutory rate of 35% is primarily attributable to the non-deductible portions of the impairment of goodwill and the IPRD charge. The unrecognized tax benefits associated with the non-deductible portions of these charges is $334 million or 22% of pre-tax loss for fiscal 2008.

 

   

During the period October 1, 2007 through October 26, 2007 the Predecessor incurred $57 million of Merger-related costs. These costs included investment banking, legal and other third-party costs, as well as non-cash stock compensation expense resulting from the accelerated vesting of stock options and RSUs in connection with the Merger.

 

   

During the period October 1, 2007 through October 26, 2007, the Predecessor recorded $1 million of restructuring charges related to employee separation and lease termination costs in EMEA and the U.S. Restructuring actions taken during the period October 27, 2007 through September 30, 2008 were charged against the $330 million liability established in purchase accounting for employee separation costs and lease obligations, rather than impacting the Consolidated Statement of Operations.

 

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UNAUDITED PRO FORMA FINANCIAL STATEMENTS

 

The following presents the unaudited pro forma balance sheet as of March 31, 2013, and the unaudited pro forma statement of operations for the year ended September 30, 2012 and the six months ended March 31, 2013.

 

The following unaudited pro forma financial statements have been developed by applying pro forma adjustments to the historical Consolidated Balance Sheets and Statements of Operations of Avaya Holdings Corp. appearing elsewhere in this prospectus. The unaudited pro forma balance sheet as of March 31, 2013 gives effect to the sale of the common stock as contemplated in this offering and the use of the proceeds thereof as if they had occurred on March 31, 2013. The unaudited pro forma statement of operations for the fiscal year ended September 30, 2012 gives effect to the refinancing of certain debt that took place during the six months ended March 31, 2013 and the sale of the common stock as contemplated in this offering and the use of the proceeds thereof as if they had occurred on October 1, 2011. The unaudited pro forma statement of operations for the six months ended March 31, 2013 gives effect to the refinancing of certain debt that took place during the six months ended March 31, 2013 and the sale of the common stock as contemplated in this offering and the use of the proceeds thereof as if they had occurred on October 1, 2011. All pro forma adjustments and underlying assumptions are described more fully in the notes to the unaudited pro forma financial statements.

 

The pro forma information presented is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the use of the proceeds thereof were completed on the dates indicated, nor is it indicative of future operating results. The pro forma adjustments are based upon available information and certain assumptions that management believes to be reasonable.

 

The unaudited pro forma statement of operations does not include the effects of:

 

   

compensation expense relative to the market-based “multiple-of-money” options or cash awards under the Long-Term Incentive Cash Bonus Plan granted by the Company and recognized upon the completion of this offering; or

 

   

accounting charges that may be recorded as a result of the termination of the management services agreement with affiliates of the Sponsors pursuant to the terms of the agreement.

 

You should read this information in conjunction with the:

 

   

accompanying notes to the unaudited pro forma financial statements; and audited historical Consolidated Financial Statements of Avaya Holdings Corp. as of and for the year ended September 30, 2012, included elsewhere in this prospectus; and

 

   

unaudited historical Consolidated Financial Statements of Avaya Holdings Corp. as of and for the six months ended March 31, 2013, included elsewhere in this prospectus.

 

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Avaya Holdings Corp.

Unaudited Pro Forma Balance Sheet

March 31, 2013

 

     Historical     IPO
Pro Forma
Adjustments
(Note 2)
         Pro Forma  
     (in millions, except per share amounts)  

ASSETS

         

Current assets:

         

Cash and cash equivalents

   $ 303      $      (a), (b), (c), (d)    $                

Accounts receivable, net

     681               

Inventory

     255               

Deferred income taxes, net

     21               

Other current assets

     277             (c)   
  

 

 

   

 

 

      

 

 

 

TOTAL CURRENT ASSETS

     1,537               
  

 

 

   

 

 

      

 

 

 

Property, plant and equipment, net

     353               

Deferred income taxes, net

     44               

Intangible assets, net

     1,625               

Goodwill

     4,093               

Other assets

     178             (c)   
  

 

 

   

 

 

      

 

 

 

TOTAL ASSETS

   $ 7,830      $         $     
  

 

 

   

 

 

      

 

 

 

LIABILITIES

         

Current liabilities:

         

Debt maturing within one year

   $ 35      $         $     

Accounts payable

     409               

Payroll and benefit obligations

     247               

Deferred revenue

     689               

Business restructuring reserves, current portion

     103               

Other current liabilities

     261               
  

 

 

   

 

 

      

 

 

 

TOTAL CURRENT LIABILITIES

     1,744               
  

 

 

   

 

 

      

 

 

 

Long-term debt

     6,068             (c)   

Pension obligations

     1,708               

Other postretirement obligations

     343          

Deferred income taxes, net

     209               

Business restructuring reserves, non-current portion

     56               

Other liabilities

     443             (e)   
  

 

 

   

 

 

      

 

 

 

TOTAL NON-CURRENT LIABILITIES

     8,827               
  

 

 

   

 

 

      

 

 

 

Preferred stock, Series B

     245               

Preferred stock, Series A

     147             (b)   

TOTAL STOCKHOLDERS’ DEFICIENCY

     (3,133          (a), (c), (d), (e)   
  

 

 

   

 

 

      

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

   $ 7,830      $         $     
  

 

 

   

 

 

      

 

 

 

 

See accompanying notes to unaudited pro forma financial statements.

 

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Avaya Holdings Corp.

Unaudited Pro Forma Statement of Operations

Six Months Ended March 31, 2013

 

     Historical     Debt Refinancing
Pro Forma
Adjustments

(Note 3)
     IPO Pro
Forma
Adjustments
(Note 2)
         Pro Forma  
     (in millions, except per share amounts)  

REVENUE

            

Products

   $ 1,160      $       $         $            

Services

     1,198                       
  

 

 

   

 

 

    

 

 

      

 

 

 
     2,358                       
  

 

 

   

 

 

    

 

 

      

 

 

 

COSTS

            

Products:

            

Costs (exclusive of amortization of intangibles)

     497                       

Amortization of technology intangible assets

     36                       

Services

     573                       
  

 

 

   

 

 

    

 

 

      

 

 

 
     1,106                       
  

 

 

   

 

 

    

 

 

      

 

 

 

GROSS MARGIN

     1,252                       
  

 

 

   

 

 

    

 

 

      

 

 

 

OPERATING EXPENSES

            

Selling, general and administrative

     765                      (g),(i)  

Research and development

     231                       

Amortization of intangible assets

     114                       

Goodwill impairment

     89                       

Restructuring and impairment charges, net

     102                       
  

 

 

   

 

 

    

 

 

      

 

 

 

TOTAL OPERATING EXPENSES

     1,301                       
  

 

 

   

 

 

    

 

 

      

 

 

 

OPERATING LOSS

     (49                    

Interest expense

     (224                   (f)  

Loss on extinguishment of debt

     (6                    

Other income, net

     4                       
  

 

 

   

 

 

    

 

 

      

 

 

 

LOSS BEFORE INCOME TAXES

     (275                    

Benefit from income taxes

     6                       
  

 

 

   

 

 

    

 

 

      

 

 

 

NET LOSS

     (269                    

Less: Accretion and accrued dividends on Series A and Series B preferred stock

     (21                   (h)  
  

 

 

   

 

 

    

 

 

      

 

 

 

NET LOSS ATTRIBUTABLE TO AVAYA HOLDINGS CORP. COMMON STOCKHOLDERS

   $ (290   $       $         $     
  

 

 

   

 

 

    

 

 

      

 

 

 

SHARE DATA:

            

Net loss per share attributable to common stockholders

   $ (0.59           $     
  

 

 

           

 

 

 

Weighted average basic and diluted shares outstanding

     489.3             
  

 

 

           

 

 

 

 

See accompanying notes to unaudited pro forma financial statements.

 

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Avaya Holdings Corp.

Unaudited Pro Forma Statement of Operations

Year Ended September 30, 2012

 

     Historical     Debt Refinancing
Pro Forma
Adjustments

(Note 3)
     IPO Pro
Forma
Adjustments
(Note 2)
         Pro Forma  
     (in millions, except per share amounts)  

REVENUE

            

Products

   $ 2,672      $       $         $            

Services

     2,499