10-Q 1 d338618d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 001-15951

 

 

AVAYA INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   22-3713430

(State or other jurisdiction

of incorporation or organization)

  (I.R.S. Employer Identification No.)

211 Mount Airy Road

Basking Ridge, New Jersey

  07920
(Address of principal executive offices)   (Zip Code)

(908) 953-6000

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

*See Explanatory Note in Part II, Item 5

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated

filer  ¨

 

Accelerated

filer  ¨

 

Non-accelerated

filer  x

  Smaller Reporting Company  ¨
   

(Do not check if a smaller

reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of May 14, 2012, 100 shares of Common Stock, $.01 par value, of the registrant were outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Item

 

Description

   Page  
  PART I—FINANCIAL INFORMATION   

1.

  Financial Statements      1   

2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      38   

3.

  Quantitative and Qualitative Disclosures About Market Risk      65   

4.

  Controls and Procedures      65   
  PART II—OTHER INFORMATION   

1.

  Legal Proceedings      66   

1A.

  Risk Factors      66   

2.

  Unregistered Sales of Equity Securities and Use of Proceeds      66   

3.

  Defaults Upon Senior Securities      66   

4.

  Mine Safety Disclosures      66   

5.

  Other Information      66   

6.

  Exhibits      66   
  Signatures      67   

This Quarterly Report on Form 10-Q contains trademarks, service marks and registered marks of Avaya Inc. and its subsidiaries and other companies, as indicated. Unless otherwise provided in this Quarterly Report on Form 10-Q, trademarks identified by ® and ™ are registered trademarks or trademarks, respectively, of Avaya Inc. or its subsidiaries. All other trademarks are the properties of their respective owners.


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

Avaya Inc.

Consolidated Statements of Operations (Unaudited)

(In millions)

 

     Three months
ended
March 31,
    Six months
ended
March 31,
 
     2012     2011     2012     2011  

REVENUE

        

Products

   $ 637      $ 757      $ 1,386      $ 1,479   

Services

     620        633        1,258        1,277   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,257        1,390        2,644        2,756   
  

 

 

   

 

 

   

 

 

   

 

 

 

COSTS

        

Products:

        

Costs (exclusive of amortization of technology intangible assets)

     280        343        591        675   

Amortization of technology intangible assets

     49        66        99        133   

Services

     315        339        637        687   
  

 

 

   

 

 

   

 

 

   

 

 

 
     644        748        1,327        1,495   
  

 

 

   

 

 

   

 

 

   

 

 

 

GROSS MARGIN

     613        642        1,317        1,261   
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES

        

Selling, general and administrative

     414        470        847        931   

Research and development

     117        121        228        236   

Amortization of intangible assets

     56        56        112        112   

Restructuring charges, net

     90        42        111        64   

Acquisition-related costs

     2        —          3        4   
  

 

 

   

 

 

   

 

 

   

 

 

 
     679        689        1,301        1,347   
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING (LOSS) INCOME

     (66     (47     16        (86

Interest expense

     (108     (113     (217     (240

Loss on extinguishment of debt

     —          (246     —          (246

Other (expense) income, net

     (12     (7     (13     1   
  

 

 

   

 

 

   

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

     (186     (413     (214     (571

(Benefit from) provision for income taxes

     (24     19        (26     41   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS

   $ (162   $ (432   $ (188   $ (612
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

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Avaya Inc.

Consolidated Balance Sheets (Unaudited)

(In millions, except per share and shares amounts)

 

     March 31,
2012
    September 30,
2011
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 355      $ 400   

Accounts receivable, net

     745        755   

Inventory

     274        280   

Deferred income taxes, net

     7        8   

Other current assets

     330        274   
  

 

 

   

 

 

 

TOTAL CURRENT ASSETS

     1,711        1,717   
  

 

 

   

 

 

 

Property, plant and equipment, net

     364        397   

Deferred income taxes, net

     30        28   

Intangible assets, net

     1,939        2,129   

Goodwill

     4,093        4,079   

Other assets

     194        196   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 8,331      $ 8,546   
  

 

 

   

 

 

 

LIABILITIES

    

Current liabilities:

    

Debt maturing within one year

   $ 37      $ 37   

Accounts payable

     472        465   

Payroll and benefit obligations

     265        323   

Deferred revenue

     643        639   

Business restructuring reserve, current portion

     141        130   

Other current liabilities

     342        352   
  

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

     1,900        1,946   
  

 

 

   

 

 

 

Long-term debt

     6,102        6,120   

Pension obligations

     1,590        1,636   

Other postretirement obligations

     488        502   

Deferred income taxes, net

     176        168   

Business restructuring reserve, non-current portion

     46        56   

Other liabilities

     507        496   
  

 

 

   

 

 

 

TOTAL NON-CURRENT LIABILITIES

     8,909        8,978   
  

 

 

   

 

 

 

Commitments and contingencies

    

DEFICIENCY

    

Common stock, par value $.01 per share; 100 shares authorized, issued and outstanding

     —          —     

Additional paid-in capital

     2,728        2,692   

Accumulated deficit

     (4,080     (3,892

Accumulated other comprehensive loss

     (1,126     (1,178
  

 

 

   

 

 

 

TOTAL DEFICIENCY

     (2,478     (2,378
  

 

 

   

 

 

 

TOTAL LIABILITIES AND DEFICIENCY

   $ 8,331      $ 8,546   
  

 

 

   

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

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Avaya Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In millions)

 

     Six months ended
March  31,
 
         2012             2011      

OPERATING ACTIVITIES:

    

Net loss

   $ (188   $ (612

Adjustments to reconcile net loss to net cash used for operating activities:

    

Depreciation and amortization

     286        335   

Share-based compensation

     5        6   

Amortization of debt issuance costs

     11        11   

Accretion of debt discount

     1        17   

Repayment of B-2 term loans related to cumulative accretion of debt discount

     —          (50

Non-cash charge for debt issuance costs upon redemption of incrementatl B-2 term loans

     —          5   

Third-party fees expensed in connection with the debt modification

     —          9   

Provision for uncollectible receivables

     2        2   

Deferred income taxes, net

     5        8   

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

     3        (1

Unrealized loss (gain) on foreign currency exchange

     11        (29

Changes in operating assets and liabilities:

    

Accounts receivable

     25        62   

Inventory

     8        (73

Accounts payable

     5        52   

Payroll and benefit obligations

     (69     3   

Business restructuring reserve

     4        (28

Deferred revenue

     (8     (9

Other assets and liabilities

     (70     (57
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES

     31        (349
  

 

 

   

 

 

 

INVESTING ACTIVITIES:

    

Capital expenditures

     (38     (35

Capitalized software development costs

     (19     (14

Acquisition of businesses, net of cash acquired

     (4     (14

Return of funds held in escrow from the NES acquisition

     —          6   

Proceeds from sale of long-lived assets and investments

     8        3   

Restricted cash

     —          24   

Advance to Parent

     (8     —     

Other investing activities, net

     (2     —     
  

 

 

   

 

 

 

NET CASH USED FOR INVESTING ACTIVITIES

     (63     (30
  

 

 

   

 

 

 

FINANCING ACTIVITIES:

    

Repayment of B-2 term loans

     —          (696

Debt issuance and modification costs

     —          (42

Proceeds from senior secured notes

     —          1,009   

Repayment of long-term debt

     (19     (22

Other financing activities, net

     (1     (1
  

 

 

   

 

 

 

NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES

     (20     248   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     7        5   
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (45     (126

Cash and cash equivalents at beginning of period

     400        579   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 355      $ 453   
  

 

 

   

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

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AVAYA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Background, Merger and Basis of Presentation

Background

Avaya Inc. together with its consolidated subsidiaries (collectively, the “Company” or “Avaya”) is a leading global provider of business collaboration and communications solutions. The Company’s solutions are designed to enable business users to work together more effectively as a team internally or with their customers and suppliers, increasing innovation, improving productivity and accelerating decision-making and business outcomes.

Avaya conducts its business operations in three segments. Two of those segments, Global Communications Solutions and Avaya Networking, make up Avaya’s product portfolio. The third segment contains Avaya’s services portfolio and is called Avaya Global Services.

At the core of the Company’s business is a large and diverse global installed customer base which includes large enterprises, small- and medium-sized businesses and government organizations. Avaya provides solutions in five key business collaboration and communications product and related services categories:

 

   

Unified Communications Software, Infrastructure and Endpoints

 

   

Real Time Video Collaboration

 

   

Contact Center

 

   

Data Networking

 

   

Applications, including their Integration and Enablement

Avaya sells solutions directly and through its channel partners. As of March 31, 2012, Avaya had approximately 10,700 channel partners worldwide, including system integrators, service providers, value-added resellers and business partners that provide sales and service support.

Merger

On June 4, 2007, Avaya entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Avaya Holdings Corp. (formerly Sierra Holdings Corp.), a Delaware corporation (“Parent”), and Sierra Merger Corp., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub was merged with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of Parent (the “Merger”). Parent was formed by affiliates of two private equity firms, Silver Lake Partners (“Silver Lake”) and TPG Capital (“TPG”) (collectively, the “Sponsors”), solely for the purpose of entering into the Merger Agreement and consummating the Merger. The Merger Agreement provided for a purchase price of $8.4 billion for Avaya’s common stock and was completed on October 26, 2007 pursuant to the terms of the Merger Agreement.

Acquisition of the Enterprise Solutions Business of Nortel Networks Corporation

On December 18, 2009, Avaya acquired certain assets and assumed certain liabilities of the enterprise solutions business (“NES”) of Nortel Networks Corporation (“Nortel”), including all the shares of Nortel Government Solutions Incorporated, for $943 million in cash consideration (the “Acquisition”). The Company and Nortel were required to determine the final purchase price post-closing based upon the various purchase price adjustments included in the acquisition agreements. During the first quarter of fiscal 2011, the Company and Nortel agreed on a final purchase price of $933 million, and the Company received $6 million, representing all remaining amounts due to Avaya from funds held in escrow. The terms of the acquisition did not include any significant contingent consideration arrangements.

 

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Basis of Presentation

The consolidated financial statements include the accounts of Avaya Inc. and its subsidiaries. The accompanying unaudited interim consolidated financial statements as of March 31, 2012 and for the three and six months ended March 31, 2012 and 2011 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial statements, and should be read in conjunction with the consolidated financial statements and other financial information for the fiscal year ended September 30, 2011, which were included in the Company’s Annual Report on Form 10-K filed with the SEC on December 9, 2011. The condensed balance sheet as of September 30, 2011 was derived from the Company’s audited financial statements. The significant accounting policies used in preparing these unaudited interim consolidated financial statements are the same as those described in Note 2 to those audited consolidated financial statements except for recently adopted accounting guidance as discussed in Note 2 “Recent Accounting Pronouncements” of these unaudited interim consolidated financial statements. In management’s opinion, these unaudited interim consolidated financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair statement of the financial condition, results of operations and cash flows for the periods indicated.

Certain prior period amounts have been reclassified to conform to the current period’s presentation. The consolidated results of operations for the interim periods reported are not necessarily indicative of the results to be experienced for the entire fiscal year.

2. Recent Accounting Pronouncements

New Accounting Guidance Recently Adopted

Disclosure of Supplementary Pro Forma Information for Business Combinations

In December 2010, the Financial Accounting Standards Board (“FASB”) issued revised guidance which requires that if a company presents pro forma comparative financial statements for business combinations, the company should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This accounting guidance became effective for the Company for business combinations for which the acquisition date was on or after October 1, 2011. The adoption of this guidance did not have a material impact on the Company’s financial statement disclosures.

Goodwill Impairment Test

In December 2010, the FASB issued revised guidance on when a company should perform step two of the goodwill impairment test for reporting units with zero or negative carrying amounts. This guidance requires that for reporting units with zero or negative carrying amounts, a company is required to perform step two of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. This accounting guidance became effective for the Company beginning October 1, 2011 and did not have a material impact on the Company’s consolidated financial statements or financial statement disclosures.

Fair Value Measures

In May 2011, the FASB issued revised guidance which is intended to achieve common fair value measurement and disclosure guidance in GAAP and International Financial Reporting Standards. The majority of the changes represent a clarification to existing GAAP. Additionally, the revised guidance includes expanded disclosure requirements. This accounting guidance became effective for the Company beginning in the second quarter of fiscal year 2012 and did not have a material impact on the Company’s consolidated financial statements or financial statement disclosures.

 

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Recent Accounting Guidance Not Yet Effective

In June 2011, the FASB issued revised guidance on the presentation of comprehensive income and its components in the financial statements. As a result of the guidance, companies will now be required to present net income and other comprehensive income either in a single continuous statement or in two separate, but consecutive statements. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The standard does not, however, change the items that must be reported in other comprehensive income or the determination of net income. This new guidance is to be applied retrospectively. This accounting guidance is effective for the Company beginning in fiscal year 2013 and is only expected to impact the presentation of the Company’s consolidated financial statements.

In September 2011, the FASB issued revised guidance intended to simplify how an entity tests goodwill for impairment. As a result of the guidance, an entity will be allowed to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The accounting guidance is effective for the Company beginning in fiscal year 2013 and early adoption is permitted. This accounting guidance is not expected to have a material impact on the consolidated financial statements or financial statement disclosures.

In September 2011, the FASB issued revised guidance which requires additional disclosure about an employer’s participation in a multiemployer pension plan. The accounting guidance is effective for the Company as of September 30, 2012 and is to be applied retrospectively for all prior periods presented. This accounting guidance is not expected to have a material impact on the Company’s financial statement disclosures.

In December 2011, the FASB issued guidance which requires additional disclosures about financial instruments and derivative instruments that are either (1) offset in accordance with FASB Accounting Standards Codification (“ASC”) 210-20 “Balance Sheet - Offsetting” or (2) subject to an enforceable master netting arrangement or similar agreement. This accounting guidance is effective for the Company beginning in fiscal year 2014 and is not expected to have a material impact on the Company’s financial statement disclosures.

3. Business Combinations

RADVISION Ltd.

On March 14, 2012, the Company entered into an agreement to acquire RADVISION Ltd. (“Radvision”), a leading provider of videoconferencing and telepresence technologies over IP and wireless networks, for approximately $230 million in cash. The acquisition is expected to be completed during the Company’s third quarter of fiscal 2012, and will allow Avaya to provide customers a highly integrated and interoperable suite of cost-effective, easy to use, high-definition video collaboration products with the ability to plug and play multiple mobile devices.

The Company entered into a Merger Agreement (the “Radvision Merger Agreement”), by and among the Company, Sonic Acquisition Ltd., an Israeli corporation (“Radvision Merger Sub”), and Radvision Ltd. (the “Acquiree”), an Israeli corporation, whereby Radvision Merger Sub will merge with and into the Acquiree (the “Radvision Merger”) on the terms and subject to the conditions set forth in the Radvision Merger Agreement.

Under the terms and conditions of the Radvision Merger Agreement, at the effective time and as a result of the Radvision Merger, (i) each ordinary share of the Acquiree, nominal value of ten Israeli Agorot (NIS 0.10) per share (the “Shares”), issued and outstanding immediately prior to the effective time and not owned by the Company, Radvision Merger Sub or the Acquiree will be converted into the right to receive $11.85 in cash (the “Radvision Merger Consideration”) and (ii) each option to purchase Shares that is outstanding, vested and exercisable immediately prior to the effective time will be converted into the right to receive an amount in cash

 

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equal to the Radvision Merger Consideration less the exercise price of such option. The Company anticipates paying aggregate consideration of approximately $230 million to holders of the Acquiree’s shares and options. The consummation of the Radvision Merger is subject to various conditions, including but not limited to, (i) the representations and warranties with respect to certain matters (including with respect to organization, standing and power of Radvision and its subsidiaries, share capital of Radvision and Radvision’s subsidiaries, and authority, execution, delivery and enforceability of the Radvision Merger Agreement) being true and correct as of the closing date of the Radvision Merger without any exceptions for materiality, certain other representations and warranties (including representations with respect to taxes and extensive representations with respect to intellectual property) being true and correct as of the closing date of the Radvision Merger in all material respects and the remaining representations and warranties being true and correct as of the closing date of the Radvision Merger, subject to other materiality exceptions, (ii) receipt of certain regulatory approvals, and (iii) approval of Radvision Merger by the Acquiree’s shareholders. The Radvision Merger Agreement also contains a “no solicitation” provision regarding the Acquiree and its representatives limiting in certain circumstances their ability to seek competing proposals. In addition, it contains customary termination rights in the favor of each of the Company and the Acquiree, which provide for the payment of termination fees in certain circumstances.

On April 30, 2012, the Acquiree issued a press release announcing that its shareholders had approved the Radvision Merger. The purchase price of the acquisition and the payment of the related fees and expenses (including integration expenses that are anticipated to be incurred) are expected to be funded with a capital contribution from Parent and Avaya’s existing cash.

Other Acquisitions

During fiscal years 2012 and 2011, the Company completed several other acquisitions primarily to enhance the Company’s technology portfolio. In October 2011, Parent completed a $31 million acquisition and immediately merged the acquired entity with and into the Company, with the Company surviving the merger. In connection with this acquisition, the Company advanced $8 million to Parent in exchange for a note receivable due October 2014 with interest at 1.63% per annum. The Company recognized $31 million of contributed capital associated with this merger. The aggregate purchase price of the acquisitions completed by the Company and Parent was $36 million during the six months ended March 31, 2012. On January 3, 2011, the Company acquired all outstanding shares of Konftel AB (“Konftel”), for $14 million in cash consideration, inclusive of a working capital adjustment.

Konftel is a Swedish-based vendor of conference room terminals, offering analog, internet protocol, soft, cellular, and session initiation protocol terminals.

The acquisitions have been accounted for under the acquisition method, which requires an allocation of the purchase price of the acquired entity to the assets acquired and liabilities assumed based on their estimated fair values from a market-participant perspective at the date of acquisition. The allocation of the purchase price for the acquisitions completed during the six months ended March 31, 2012 as reflected within these consolidated financial statements is based on the best information available to management at the time these consolidated financial statements were issued and is provisional pending the completion of the valuation analysis of the assets and liabilities of each acquisition. During the measurement period (which is not to exceed one year from the acquisition date), the Company will be required to retrospectively adjust the provisional amounts recognized to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Further, during the measurement period, the Company is also required to recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets or liabilities as of that date.

The fair values of the assets acquired and liabilities assumed were preliminarily determined using the income and market approaches. The fair value of acquired technologies was estimated using the income approach which

 

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values the subject asset using the projected cash flows to be generated by the asset, discounted at a required rate of return that reflects the relative risk of achieving the cash flow and the time value of money. The market approach was utilized in combination with the income approach to estimate the fair values of most working capital accounts.

A preliminary allocation of the purchase price to the assets acquired and the liabilities assumed in the acquisitions was performed based on their estimated fair values. As additional information becomes available, differences between the allocation of the purchase price and the allocation of the purchase price when finalized, particularly as it pertains to intangible assets, deferred income taxes and goodwill, may be identified.

Intangible assets include acquired technologies of $20 million during the six months ended March 31, 2012. The acquired technologies are being amortized over a weighted average useful life of five years, on a straight-line basis. No in-process research and development was acquired in the acquisitions.

The excess of the purchase price over the preliminary assessment of the net tangible and intangible assets acquired during the six months ended March 31, 2012 resulted in goodwill of $16 million. The premiums paid by the Company and Parent in the transactions are largely attributable to the acquisition of assembled workforces and the synergies and economies of scale provided to a market participant, particularly as it pertains to marketing efforts and customer base. None of the goodwill is deductible for tax purposes.

These unaudited consolidated financial statements include the operating results of the acquired entities as of their respective acquisition dates. The revenues and expenses specific to these businesses and their pro forma results are not material to these unaudited consolidated financial statements.

4. Goodwill and Intangible Assets

Goodwill

Goodwill is not amortized but is subject to periodic testing for impairment in accordance with GAAP at the reporting unit level which is one level below the Company’s operating segments. The test for impairment is conducted annually each September 30th or more frequently if events occur or circumstances change indicating that the fair value of a reporting unit may be below its carrying amount.

March 31, 2012

During the three months ended March 31, 2012, the Company experienced a decline in revenue as compared to the same period of the prior year and sequential quarters. This revenue decline has impacted the Company’s forecasts for the remainder of fiscal 2012. As a result of these events, the Company determined that an interim impairment test of its long-lived assets and goodwill should be performed.

The impairment test for goodwill is a two-step process. Step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to that reporting unit. The Company estimated the fair value of each reporting unit using an income approach which values the unit based on the future cash flows expected from that reporting unit. Future cash flows are based on forward-looking information regarding market share and costs for each reporting unit and are discounted using an appropriate discount rate. Future discounted cash flows can be affected by changes in industry or market conditions or the rate and extent to which anticipated synergies or cost savings are realized with newly acquired entities. In step one of the test, a market approach was used as a reasonableness test but was not given significant weighting in the final determination of fair value. The discounted cash flow model used in the Company’s income approach relies on assumptions regarding revenue growth rates, gross margin percentages, projected working capital needs, selling, general and administrative expenses, research and development expenses, business restructuring costs, capital expenditures, income tax rates, discount rates and terminal growth rates. To estimate fair value, the Company

 

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discounts the expected cash flows of each reporting unit. The discount rate Avaya uses represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in its reporting unit operations and the rate of return an outside investor would expect to earn. To estimate cash flows beyond the final year of its model, Avaya uses a terminal value approach. Under this approach, Avaya uses the estimated cash flows in the final year of its models and applies a perpetuity growth assumption and discount by a perpetuity discount factor to determine the terminal value. Avaya incorporates the present value of the resulting terminal value into its estimate of fair value.

The Company forecasted cash flows for each of its reporting units and took into consideration the then current economic conditions and trends, estimated future operating results, Avaya’s view of growth rates and anticipated future economic conditions. Revenue growth rates inherent in this forecast were based on input from internal and external market intelligence research sources that compare factors such as growth in global economies, regional trends in the telecommunications industry and product evolution from a technological segment basis. Economic factors such as changes in economies, product evolutions, industry consolidations and other changes beyond Avaya’s control could have a positive or negative impact on achieving its targets.

These valuations reflect the additional market risks, lower discount rates and the updated sales forecasts for the Company’s reporting units based off of the current quarter results. Specifically, the valuations at March 31, 2012 and September 30, 2011, were prepared assuming, among other things, discount rates of 11.5% and 12% and long-term growth rates of 3% and 3%, respectively. These key assumptions, along with other assumptions for lower short-term revenue growth rates, increased restructuring charges and changes in other operating costs and expenses resulted in lower estimated values for the Company’s reporting units. The adverse effect of these changes in assumptions was further compounded for the remainder of fiscal year 2012 and beyond, as the growth rate assumptions were applied to the Company’s actual results through March 31, 2012, which were below the levels estimated in September 2011. The Company does not believe that the historical results for the six months ended March 31, 2012 are indicative of its future operating results.

Using the revised valuations at March 31, 2012 and the valuation approach described above, the results of step one of the goodwill impairment test indicated that although the estimated fair values of each reporting unit were lower at March 31, 2012 when compared to September 30, 2011, their respective book values did not exceed their estimated fair values and therefore no impairment existed. However, if market conditions continue to deteriorate, or if the Company is unable to execute on its cost reduction efforts and other strategies, it may be necessary to record impairment charges in the future.

March 31, 2011

The Company determined that no events occurred or circumstances changed during the six months ended March 31, 2011 that would indicate that the fair value of a reporting unit may be below its carrying amount.

Intangible Assets

Intangible assets include acquired technology, customer relationships, trademarks and trade-names and other intangibles. Intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from five to fifteen years.

Acquired technology and patents do not include capitalized software development costs. Unamortized capitalized software developments costs of $59 million and $58 million at March 31, 2012 and September 30, 2011, respectively, are included in other assets.

Long-lived assets, including intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Intangible assets determined to have indefinite useful lives are not amortized but are tested for impairment annually, or more frequently if events or changes in circumstances indicate the asset may be impaired.

 

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The Company’s trademarks and trade names are expected to generate cash flow indefinitely. Consequently, these assets are classified as indefinite-lived intangibles.

March 31, 2012

Prior to the goodwill testing discussed above, the Company tested its intangible assets with indefinite lives and other long-lived assets as of March 31, 2012. Using the revised forecasts as of March 31, 2012, the Company performed step one of the impairment test of long-lived assets with finite lives. Although the revised forecasts provided for lower cash flows, in each case the revised undiscounted cash flows for each asset group were in excess of their respective net book values and therefore no impairment was identified. GAAP requires that the fair value of intangible assets with indefinite lives be compared to the carrying value of those assets. In situations where the carrying value exceeds the fair value of the intangible asset, an impairment loss equal to the difference is recognized. The Company estimates the fair value of its indefinite-lived intangible assets using an income approach; specifically, based on discounted cash flows. Although the estimated fair values of the Company’s tradenames and trademarks were lower at March 31, 2012 when compared to September 30, 2011, their respective book values did not exceed their estimated fair values and therefore no impairment existed. However, if market conditions continue to deteriorate, it may be necessary to record impairment charges in the future.

March 31, 2011

The Company determined that no events occurred or circumstances changed during the six months ended March 31, 2011 that would indicate that its intangible assets with indefinite lives and other long-lived assets may be impaired.

5. Supplementary Financial Information

Consolidated Statements of Operations Information

 

      Three months ended
March 31,
    Six months ended
March 31,
 

In millions

       2012             2011             2012             2011      

OTHER (EXPENSE) INCOME, NET

        

Interest income

   $ 1      $ 1      $ 2      $ 2   

(Loss) gain on foreign currency transactions

     (11     1        (12     9   

Costs incurred in connection with debt modification

     —          (9     —          (9

Other, net

     (2     —          (3     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income, net

   $ (12   $ (7   $ (13   $ 1   
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE LOSS

        

Net loss

   $ (162   $ (432   $ (188   $ (612

Other comprehensive income (loss):

        

Pension, postretirement and postemployment benefit-related items, net of tax of $9 and $18 for the three and six months ended March 31, 2012 and $13 for the three and six months ended March 31, 2011

     14        2        28        18   

Cumulative translation adjustment

     2        (16     15        (21

Unrealized gain (loss) on term loan interest rate swap, net of tax of $0 and $4 for the three and six months ended March 31, 2012 and $12 for the three and six months ended March 31, 2011

     —          (4     6        18   

Unrealized loss on investments reclassified into earnings, net of tax of $1 and $2 for the three and six months ended March 31, 2012 and $0 for the three and six months ended March 31, 2011

     1        1        3        1   

Net gain on investments reclassified into earnings

     (1     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss

   $ (146   $ (449   $ (136   $ (596
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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6. Business Restructuring Reserves and Programs

Fiscal 2012 Restructuring Program

During the first six months of fiscal 2012, the Company continued to identify opportunities to streamline operations and generate cost savings which include exiting facilities and eliminating employee positions. Restructuring charges recorded during fiscal year 2012 associated with these initiatives include employee separation costs primarily associated with employee severance actions in Germany, as well as the US, Europe, Middle East and Africa (“EMEA”) excluding Germany and Canada. Employee separation charges include $80 million of severance and employee benefits related to the proposal the Company presented to the German works council to eliminate 327 positions. Although the headcount reductions identified in this action have not been completed, the Company expects the reductions to be completed by December 2012 and related payments to be completed in fiscal 2013. The payments related to the headcount reductions for the other action taken, globally, excluding Germany, are expected to be completed in 2014. As the Company continues to evaluate and identify additional operational synergies, additional cost saving opportunities may be identified.

 

In millions

   Employee
Separation
Costs
    Lease
Obligations
    Total  

2012 restructuring charges

   $ 106      $ 3      $ 109   

Cash payments

     (16     (1     (17
  

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

   $ 90      $ 2      $ 92   
  

 

 

   

 

 

   

 

 

 

Fiscal 2011 Restructuring Program

During fiscal 2011, the Company identified opportunities to streamline operations and generate cost savings which included exiting facilities and eliminating employee positions. Restructuring charges recorded during fiscal 2011 associated with these initiatives included employee separation costs primarily associated with employee severance actions in Germany, as well as other EMEA countries and the U.S. Employee separation charges included $56 million associated with an agreement reached with the German Works Council representing employees of certain of Avaya’s German subsidiaries for the elimination of 210 employee positions. Severance and employment benefits payments associated with this program are expected to be completed in fiscal 2014, and 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. Future rental payments, net of estimated sublease income, related to operating lease obligations for unused space in connection with the closing or consolidation of facilities are expected to continue through fiscal year 2020.

The following table summarizes the components of the fiscal 2011 restructuring program during the six months ended March 31, 2012:

 

In millions

   Employee
Separation
Costs
    Lease
Obligations
    Total  

Balance as of October 1, 2011

   $ 101      $ 24      $ 125   

Cash payments

     (71     (4     (75

Adjustments (1)

     (1     1        —     

Impact of foreign currency fluctuations

     —          (2     (2
  

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

   $ 29      $ 19      $ 48   
  

 

 

   

 

 

   

 

 

 

 

(1) Included in adjustments are changes in estimates, whereby all increases and decreases in costs related to the fiscal 2011 restructuring program are recorded to the restructuring charges line item in operating expenses in the period of the adjustment.

 

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Fiscal 2010 Restructuring Program

During fiscal 2010, in response to the global economic climate and in anticipation of the acquisition of NES, the Company began implementing initiatives designed to streamline the operations of the Company and generate cost savings and developed initiatives to eliminate overlapping processes and expenses associated with that acquisition. During the second and third quarters of fiscal 2010, the Company exited certain facilities and separated or relocated certain employees. Restructuring charges recorded during fiscal 2010 included employee separation costs associated with involuntary employee severance actions primarily in EMEA and the U.S., as well as costs associated with closing and consolidating facilities. The payments related to headcount reductions identified in this program are expected to be completed in fiscal 2013. Future rental payments, net of estimated sublease income, related to operating lease obligations for unused space in connection with the closing or consolidation of facilities are expected to continue through fiscal 2020.

The following table summarizes the components of the fiscal 2010 restructuring program during the six months ended March 31, 2012:

 

In millions

   Employee
Separation
Costs
    Lease
Obligations
    Total  

Balance as of October 1, 2011

   $ 5      $ 14      $ 19   

Cash payments

     (5     (4     (9

Adjustments (1)

     1        —          1   

Impact of foreign currency fluctuations

     1        1        2   
  

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

   $ 2      $ 11      $ 13   
  

 

 

   

 

 

   

 

 

 

 

(1) Included in adjustments are changes in estimates, whereby all increases and decreases in costs related to the fiscal 2010 restructuring program are recorded to the restructuring charges line item in operating expenses in the period of the adjustment.

Fiscal 2009 Restructuring Program

During fiscal 2009, as a response to the global economic downturn, the Company began implementing initiatives designed to streamline the operations of the Company and generate cost savings, which include exiting facilities and separating or relocating employees. Restructuring charges recorded during fiscal 2009 associated with these initiatives included employee separation costs primarily associated with involuntary personnel reductions in Germany, as well as other EMEA countries and the U.S. The payments related to headcount reductions identified in this program are expected to be completed in fiscal 2018. Future rental payments, net of estimated sublease income, related to operating lease obligations for unused space in connection with the closing or consolidation of facilities are expected to continue through fiscal 2020.

The following table summarizes the components of the fiscal 2009 restructuring program during the six months ended March 31, 2012:

 

In millions

   Employee
Separation
Costs
    Lease
Obligations
    Total  

Balance as of October 1, 2011

   $ 3      $ 3      $ 6   

Cash payments

     (2     (1     (3

Adjustments (1)

     1        —          1   

Impact of foreign currency fluctuations

     (1     —          (1
  

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

   $ 1      $ 2      $ 3   
  

 

 

   

 

 

   

 

 

 

 

(1) Included in adjustments are changes in estimates, whereby all increases and decreases in costs related to the fiscal 2009 restructuring program are recorded to the restructuring charges line item in operating expenses in the period of the adjustment.

 

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Fiscal 2008 Restructuring Reserve

In connection with the Merger, Avaya’s management and board of directors developed various plans and initiatives designed to streamline the operations of the Company and generate cost savings, which included exiting facilities and separating or relocating employees. As a result, the Company recorded $251 million of liabilities associated with involuntary employee severance actions and $79 million established for future lease payments on properties expected to be closed or consolidated as part of these initiatives. These amounts include the remaining payments associated with the restructuring reserves of periods prior to the Merger. The payments related to the headcount reductions associated with this restructuring reserve are expected to be completed in fiscal 2018. Cash payments associated with the lease obligations, net of sub-lease income, are expected to continue through 2020.

The following table summarizes the components of this reserve during the six months ended March 31, 2012:

 

In millions

   Employee
Separation
Costs
    Lease
Obligations
    Total  

Balance as of October 1, 2011

   $ 6      $ 30      $ 36   

Cash payments

     —          (2     (2

Adjustments (1)

     (1     (2     (3

Impact of foreign currency fluctuations

     (1     1        —     
  

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

   $ 4      $ 27      $ 31   
  

 

 

   

 

 

   

 

 

 

 

(1) Included in adjustments are changes in estimates, whereby all increases in costs related to the fiscal 2008 restructuring program are recorded to the restructuring charges line item in operating expenses in the period of the adjustment and decreases in costs are recorded as adjustments to goodwill, as these reserves relate to actions taken prior to the Company’s adoption of ASC 805, “Business Combinations.”

7. Financing Arrangements

In connection with the Merger, on October 26, 2007, the Company entered into financing arrangements consisting of a senior secured credit facility, a senior unsecured credit facility, which later became senior unsecured notes, and a senior secured multi-currency asset-based revolving credit facility. On February 11, 2011, the Company amended and extended its senior secured credit facility and issued senior secured notes, the proceeds of which were used to repay the senior secured incremental term B-2 loans in full under the Company’s senior secured credit facility and related fees and expenses. Long-term debt consists of the following:

 

In millions

   March 31,
2012
    September 30,
2011
 

Senior secured term B-1 loans

   $ 1,442      $ 1,449   

Senior secured term B-3 loans

     2,154        2,165   

Senior secured notes

     1,009        1,009   

9.75% senior unsecured cash pay notes due 2015

     700        700   

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

     834        834   
  

 

 

   

 

 

 
     6,139        6,157   

Debt maturing within one year

     (37     (37
  

 

 

   

 

 

 

Long-term debt

   $ 6,102      $ 6,120   
  

 

 

   

 

 

 

Senior Secured Credit Facility

Prior to refinancing on February 11, 2011, the senior secured credit facility consisted of (a) a senior secured multi-currency revolver allowing for borrowings of up to $200 million, (b) a $3,800 million senior secured term

 

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loan (the “term B-1 loans”), which was drawn in full on the closing date of the Merger, and (c) a $1,000 million incremental senior secured term loan (the “incremental term B-2 loans”), which was drawn in full at an original issue discount of 20.0% on December 18, 2009, the date of the Acquisition.

On February 11, 2011, the Company amended and restated the senior secured credit facility to reflect modifications to certain provisions thereof. The modified terms of the senior secured credit facility include (1) an amendment which allowed the Company to extend the maturity of a portion of the term B-1 loans representing outstanding principal amounts of $2.2 billion from October 26, 2014 to October 26, 2017 (potentially springing to July 26, 2015, under the circumstances described below) by converting such loans into a new tranche of senior secured B-3 loans (the “term B-3 loans”); (2) permission, at the election of the Company, to apply prepayments of term loans to the incremental term B-2 loans prior to the term B-1 loans and term B-3 loans and thereafter to the class of term loans with the next earliest maturity; (3) permission to issue indebtedness (including the senior secured notes described below) to refinance a portion of the term loans under the senior secured credit facility and to secure such indebtedness (including the senior secured notes) on a pari passu basis with the obligations under the senior secured credit facility, (4) permission for future refinancing of the term loans under the senior secured credit facility, and (5) permission for future extensions of the term loans and revolving credit commitments (including, in the case of the revolving credit commitments, by obtaining new revolving credit commitments) under the senior secured credit facility.

The new tranche of term B-3 loans bears interest at a rate per annum equal to either a base rate or a LIBOR rate, in each case plus an applicable margin. The base rate is determined by reference to the higher of (1) the prime rate of Citibank, N.A. and (2) the federal funds effective rate plus  1/2 of 1%. The applicable margin for borrowings of term B-3 loans is 3.50% per annum with respect to base rate borrowings and 4.50% per annum with respect to LIBOR borrowings. No changes were made to the maturity date or interest rates payable with respect to the non-extended term B-1 loans described above.

The maturity of the term B-3 loans will automatically become due July 26, 2015 unless (i) the total net leverage ratio as tested on that date based upon the most recent financial statements provided to the lenders under the senior secured credit facility is no greater than 5.0 to 1.0 or (ii) on or prior to such date, either (x) an initial public offering of Parent shall have occurred or (y) at least $750 million in aggregate principal amount of the Company’s senior unsecured cash-pay notes and/or senior unsecured paid-in-kind (“PIK”) toggle notes have been repaid or refinanced or their maturity has been extended to a date no earlier than 91 days after October 26, 2017.

The amendment and restatement of the senior secured credit facility represents a debt modification for accounting purposes. Accordingly, third party expenses of $9 million incurred in connection with the transaction were expensed as incurred and included in other income, net during the three months ended March 31, 2011. Avaya’s financing sources that held term B-1 loans and/or revolving credit commitments under the senior secured credit facility and consented to the amendment and restatement of the senior secured credit facility received in aggregate a consent fee of $10 million. Fees paid to or on behalf of the creditors in connection with the modification were recorded as a discount to the face value of the debt and are being accreted over the term of the debt as interest expense.

Additionally, as discussed more fully below, on February 11, 2011, the Company completed a private placement of $1,009 million of senior secured notes, the proceeds of which were used to repay in full the incremental term B-2 loans outstanding under the Company’s senior secured credit facility.

Funds affiliated with Silver Lake and TPG were holders of incremental term B-2 loans. Similar to other holders of senior secured incremental term B-2 loans, those senior secured incremental term B-2 loans held by affiliates of TPG and Silver Lake were repaid in connection with the issuance of the senior secured notes.

The senior secured multi-currency revolver, which allows for borrowings of up to $200 million, was not impacted by the refinancing. The senior secured multi-currency revolver includes capacity available for letters of credit and for short-term borrowings, and is available in euros in addition to dollars. Borrowings are guaranteed

 

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by Parent and substantially all of the Company’s U.S. subsidiaries. The senior secured facility, consisting of the term loans and the senior secured multi-currency revolver referenced above, is secured by substantially all assets of Parent, the Company and the subsidiary guarantors.

On August 8, 2011, the Company amended the terms of the senior secured multi-currency revolver to extend the final maturity from October 26, 2013 to October 26, 2016. All other terms and conditions of the senior secured credit facility remain unchanged. As of March 31, 2012 there were no amounts outstanding under the senior secured multi-currency revolver.

As a result of the refinancing transaction, the term loans outstanding under the senior secured credit facility include term B-1 loans and term B-3 loans with remaining face values as of March 31, 2012 (after all principal payments to date) of $1,442 million and $2,162 million, respectively. The Company is required to make scheduled quarterly principal payments under the term B-1 loans and the term B-3 loans, equal to $10 million in the aggregate.

As of March 31, 2012 affiliates of Silver Lake held $49 million and $123 million in outstanding principal amounts of term B-1 loans and term B-3 loans, respectively. As of September 30, 2011 affiliates of Silver Lake held $54 million and $123 million in outstanding principal amounts of term B-1 loans and term B-3 loans, respectively.

As of March 31, 2012 affiliates of TPG held $68 million in outstanding principal amounts of term B-1 loans. As of September 30, 2011 affiliates of TPG held $119 million in outstanding principal amounts of term B-1 loans.

Senior Unsecured Notes

The Company has issued $700 million of senior unsecured cash-pay notes and $750 million of senior unsecured PIK toggle notes, each due November 1, 2015. The interest rate for the cash-pay notes is fixed at 9.75% and the interest rates for the cash interest and PIK interest portions of the PIK-toggle notes are fixed at 10.125% and 10.875%, respectively. The Company may prepay the senior unsecured notes commencing November 1, 2011 at 104.875% of the cash pay note and at 105.0625% of PIK toggle note principal amount, which decreases to 102.4375% and 102.5313%, respectively, on November 1, 2012 and to 100% of each on or after November 1, 2013. Upon the occurrence of specific kinds of changes of control, the Company will be required to make an offer to purchase the senior unsecured notes at 101% of their principal amount. If the Company or any of its restricted subsidiaries engages in certain asset sales, under certain circumstances the Company will be required to use the net proceeds to make an offer to purchase the senior unsecured notes at 100% of their principal amount. Substantially all of the Company’s U.S. 100%-owned subsidiaries are guarantors of the senior unsecured notes.

For the periods May 1, 2009 through October 31, 2009 and November 1, 2009 through April 30, 2010, the Company elected to pay interest in kind on its senior PIK toggle notes. PIK interest of $41 million and $43 million was added, for these periods, respectively, to the principal amount of the senior unsecured notes effective November 1, 2009 and May 1, 2010, respectively, and will be payable when the senior unsecured notes become due. For the periods of May 1, 2010 through October 31, 2010, November 1, 2010 through April 30, 2011, and May 1, 2011 to October 31, 2011 the Company elected to make such payments in cash interest. Under the terms of these notes, after November 1, 2011 the Company is required to make all interest payments on the senior unsecured PIK toggle notes entirely in cash.

Senior Secured Asset-Based Credit Facility

The Company’s senior secured multi-currency asset-based revolving credit facility allows for borrowings of up to $335 million, subject to availability under a borrowing base, of which $150 million may be in the form of letters of credit. The borrowing base at any time equals the sum of 85% of eligible accounts receivable plus 85% of the net orderly liquidation value of eligible inventory, subject to certain reserves and other adjustments. The Company and substantially all of its U.S. subsidiaries are borrowers under this facility, and borrowings are

 

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guaranteed by Parent, the Company and substantially all of the Company’s U.S. subsidiaries. The facility is secured by substantially all assets of Parent, the Company and the subsidiary guarantors. The senior secured multi-currency asset- based revolving credit facility also provides the Company with the right to request up to $100 million of additional commitments under this facility.

On August 8, 2011, the Company amended the terms of its senior secured multi-currency asset-based revolving credit facility to extend its final maturity from October 26, 2013 to October 25, 2016. All other terms and conditions of the senior secured multi-currency asset-based revolving credit facility remain unchanged.

At March 31, 2012 and September 30, 2011, there were no borrowings under this facility. At both March 31, 2012 and September 30, 2011 there were $75 million of letters of credit issued in the ordinary course of business under the senior secured asset-based credit facility resulting in remaining availability of $252 million.

Senior Secured Notes

On February 11, 2011, the Company 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 senior secured notes were sold through a private placement to qualified institutional buyers pursuant to Rule 144A (and outside the United States in reliance on Regulation S) under the Securities Act of 1933, as amended (the “Securities Act”) and have not been, and will not be, registered under the Securities Act or applicable state securities laws.

The Company may redeem the senior secured notes commencing April 1, 2015 at 103.5% of the principal amount redeemed, which decreases to 101.75% on April 1, 2016 and to 100% on or after April 1, 2017. The Company may redeem all or part of the notes at any time prior to April 1, 2015 at 100% of the principal amount redeemed plus a “make-whole” premium. In addition, the Company may redeem up to 35% of the original aggregate principal balance of the senior secured notes at any time prior to April 1, 2014 with the net proceeds of certain equity offerings at 107% of the aggregate principal amount of senior secured notes redeemed. Upon the occurrence of specific kinds of changes of control, the Company will be required to make an offer to purchase the senior secured notes at 101% of their principal amount. If the Company or any of its restricted subsidiaries engages in certain asset sales, under certain circumstances the Company will be required to use the net proceeds to make an offer to purchase the senior secured notes at 100% of their principal amount.

Substantially all of the Company’s U.S. 100%-owned subsidiaries are guarantors of the senior secured notes. The senior secured notes are secured by substantially all of the assets of the Company and the subsidiary guarantors.

The proceeds from the senior secured notes were used to repay in full the senior secured incremental term B-2 loans outstanding under the Company’s 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 expenses.

The issuance of the senior secured notes and repayment of the incremental term B-2 loans was accounted for as an extinguishment of the incremental term B-2 loans and issuance of new debt. Accordingly, the difference between the reacquisition price of the incremental term B-2 loans (including consent fees paid by Avaya to the holders of the incremental term B-2 loans that consented to the amendment and restatement of the senior secured credit facility of $1 million) and the carrying value of the incremental term B-2 loans (including unamortized debt discount and debt issue costs) of $246 million was recognized as a loss upon debt extinguishment during the three months ended March 31, 2011. In connection with the issuance of the senior secured notes, the Company capitalized financing costs of $23 million during fiscal 2011 and is amortizing these costs over the term of the senior secured notes.

The Company’s senior secured credit facility, senior secured multi-currency asset-based revolving credit facility, and indentures governing its senior secured notes, senior unsecured cash-pay notes and senior unsecured PIK toggle notes contain a number of covenants that, among other things and subject to certain exceptions, restrict the

 

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Company’s ability and the ability of certain of its subsidiaries to: (a) incur or guarantee additional debt and issue or sell certain preferred stock; (b) pay dividends on, redeem or repurchase capital stock; (c) make certain acquisitions or investments; (d) incur or assume certain liens; (e) enter into transactions with affiliates; (f) merge or consolidate with another company; (g) transfer or otherwise dispose of assets; (h) redeem subordinated debt; (i) incur obligations that restrict the ability of the Company’s subsidiaries to make dividends or other payments to the Company or Parent; and (j) create or designate unrestricted subsidiaries. They also contain customary affirmative covenants and events of default.

As of March 31, 2012 and September 30, 2011, the Company was not in default under its senior secured credit facility, the indenture governing its senior secured notes, the indenture governing its senior unsecured notes or its senior secured multi-currency asset-based revolving credit facility.

The weighted average interest rate of the Company’s outstanding debt as of March 31, 2012 was 6.1% excluding the impact of the interest rate swaps described in Note 8, “Derivatives and Other Financial Instruments”.

Annual maturities of long-term debt for the next five years ending September 30 and thereafter consist of:

 

In millions

      

Remainder of fiscal 2012

   $ 19   

2013

     38   

2014

     38   

2015

     1,442   

2016

     1,542   

2017 and thereafter

     3,068   
  

 

 

 

Total

   $ 6,147   
  

 

 

 

Capital Lease Obligations

Included in other liabilities at March 31, 2012 is $22 million of capital lease obligations, primarily associated with an office facility assumed in the acquisition of NES.

8. Derivatives and Other Financial Instruments

Interest Rate Swaps

The Company uses interest rate swaps to manage the amount of its floating rate debt in order to reduce its exposure to variable rate interest payments associated with certain borrowings under the senior secured credit facility. The interest rate swaps presented below are designated as cash flow hedges. The fair value of each interest rate swap is reflected as an asset or liability in the Consolidated Balance Sheets, reported as a component of other comprehensive loss and reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on derivative instruments representing hedge ineffectiveness are recognized in current earnings. The fair value of each interest rate swap is estimated as the net present value of their projected cash flows at the balance sheet date.

The details of these swaps are as follows:

 

In millions

   Effective Date      Maturity Date      Notional
Amount
     Floating Rate
Received by Avaya
     Fixed Rate
Paid by Avaya
 

5-year swap

     November 26, 2007         November 26, 2012       $ 300         3-month LIBOR         4.591

3-year swap

     August 26, 2010         August 26, 2013         750         3-month LIBOR         1.160

3-year swap

     August 26, 2010         August 26, 2013         750         3-month LIBOR         1.135
        

 

 

       

Notional amount—Total

  

      $ 1,800         
        

 

 

       

 

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The following table summarizes the (gains) and losses of the interest rate contracts qualifying and designated as cash flow hedging instruments:

 

      Three months ended
March 31,
    Six months ended
March  31,
 

In millions

       2012              2011             2012             2011      

Loss on interest rate swaps

         

Recognized in other comprehensive loss

   $ —         $ (8   $ (10   $ (30
  

 

 

    

 

 

   

 

 

   

 

 

 

Reclassified from accumulated other comprehensive loss into interest expense

   $ 5       $ 9      $ 13      $ 25   
  

 

 

    

 

 

   

 

 

   

 

 

 

Recognized in operations (ineffective portion)

   $ —         $ —        $ —        $ —     
  

 

 

    

 

 

   

 

 

   

 

 

 

The Company expects to reclassify approximately $18 million from accumulated other comprehensive loss into expense in the next twelve months related to the Company’s interest rate swaps based on the projected borrowing rates as of March 31, 2012.

Foreign Currency Forward Contracts

The Company utilizes foreign currency forward contracts primarily to manage short-term exchange rate exposures on certain receivables, payables and intercompany loans residing on foreign subsidiaries’ books, which are denominated in currencies other than the subsidiary’s functional currency. When those items are revalued into the subsidiaries’ functional currencies at the month-end exchange rates, the fluctuations in the exchange rates are recognized in the Consolidated Statements of Operations as other income (expense), net. Changes in the fair value of the Company’s foreign currency forward contracts used to offset these exposed items are also recognized in the Consolidated Statements of Operations as other income (expense), net in the period in which the exchange rates change.

The gains and (losses) of the foreign currency forward contracts included in other income (expense), net were less than $1 million and $5 million for the three months ended March 31, 2012 and 2011, respectively, and $(5) million and $(3) million for the six months ended March 31, 2012 and 2011, respectively.

The following table summarizes the estimated fair value of derivatives:

 

In millions

   March 31, 2012     September 30, 2011  

Balance Sheet Location

   Total     Foreign
Currency
Forward
Contracts
    Interest
Rate
Swaps
    Total     Foreign
Currency
Forward
Contracts
    Interest
Rate
Swaps
 

Other current assets

   $ 1      $ 1      $ —        $ 1      $ 1      $ —     

Other current liabilities

     (20     (1     (19     (26     (2     (24

Other non-current liabilities

     (4     —          (4     (10     —          (10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Liability

   $ (23   $ —        $ (23   $ (35   $ (1   $ (34
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

9. Fair Value Measures

Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

 

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Fair Value Hierarchy

The accounting guidance for fair value measurement also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The inputs are prioritized into three levels that may be used to measure fair value:

Level 1: Inputs that reflect quoted prices for identical assets or liabilities in active markets that are observable.

Level 2: Inputs that reflect quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3: Inputs that are unobservable to the extent that observable inputs are not available for the asset or liability at the measurement date.

Asset and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and September 30, 2011 were as follows:

 

     March 31, 2012  
     Fair Value Measurements Using  

In millions

   Total      Quoted Prices
in Active Markets
for Identical
Instruments
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Other Current Assets:

           

Foreign currency forward contracts

   $ 1       $ —         $ 1       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Non-Current Assets:

           

Investments

   $ 7       $ 5       $ 2       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Current Liabilities:

           

Foreign currency forward contracts

   $ 1       $ —         $ 1       $ —     

Interest rate swaps

     19         —           19         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 20       $ —         $ 20       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Non-Current Liabilities:

           

Interest rate swaps

   $ 4       $ —         $ 4       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     September 30, 2011  
     Fair Value Measurements Using  

In millions

   Total      Quoted Prices in
Active Markets
for Identical
Instruments
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Other Current Assets:

           

Foreign currency forward contracts

   $ 1       $ —         $ 1       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Non-Current Assets:

           

Investments

   $ 11       $ 9       $ 2       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Current Liabilities:

           

Foreign currency forward contracts

   $ 2       $ —         $ 2       $ —     

Interest rate swaps

     24         —           24         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 26       $ —         $ 26       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Non-Current Liabilities:

           

Interest rate swaps

   $ 10       $ —         $ 10       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Interest Rate Swaps

Interest rate swaps classified as Level 2 assets and liabilities are priced using discounted cash flow techniques which are corroborated by using non-binding market prices. Significant inputs to the discounted cash flow model include projected future cash flows based on projected 3-month LIBOR rates, and the average margin for companies with similar credit ratings and similar maturities. These are classified as Level 2 as they are not actively traded and are valued using pricing models that use observable market inputs.

Foreign Currency Forward Contracts

Foreign currency forward contracts classified as Level 2 assets and liabilities are priced using quoted market prices for similar assets or liabilities in active markets.

Investments

Investments classified as Level 2 assets and liabilities are priced using quoted market prices for identical assets which are subject to infrequent transactions (i.e. a less active market).

Fair Value of Financial Instruments

The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, to the extent the underlying liability will be settled in cash, approximate carrying values because of the short-term nature of these instruments.

In connection with an acquisition completed by Parent in October 2011, the Company advanced $8 million to Parent in exchange for a note receivable. The note receivable is due October 2014 with interest at 1.63% per annum and is included in other assets in the Company’s Consolidated Balance Sheet. The estimated fair value of the note receivable at March 31, 2012 was $7 million and was determined based on a Level 2 input using discounted cash flow techniques.

The estimated fair values of the amounts borrowed under the Company’s financing arrangements at March 31, 2012 and September 30, 2011 were estimated based on a Level 2 input using quoted market prices for the Company’s debt which is subject to infrequent transactions (i.e. a less active market).

The estimated fair values of the amounts borrowed under the Company’s credit agreements at March 31, 2012 and September 30, 2011 are as follows:

 

     March 31, 2012      September 30, 2011  

In millions

   Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Senior secured term B-1 loans

   $ 1,442       $ 1,399       $ 1,449       $ 1,298   

Senior secured term B-3 loans

     2,154         2,083         2,165         1,833   

Senior secured notes

     1,009         1,009         1,009         854   

9.75% senior unsecured cash pay notes due 2015

     700         693         700         511   

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

     834         830         834         612   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,139       $ 6,014       $ 6,157       $ 5,108   
  

 

 

    

 

 

    

 

 

    

 

 

 

10. Income Taxes

The benefit from income taxes for the three months ended March 31, 2012 was $24 million, as compared to the provision for income taxes of $19 million for the three months ended March 31, 2011. The effective rate for the three months ended March 31, 2012 was 12.9% as compared to the effective tax rate of 4.6% for the three

 

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months ended March 31, 2011, and differs from the U.S. Federal tax rate primarily due to the effect of taxable income in non-U.S. jurisdictions and due to the valuation allowance established against the Company’s U.S. deferred tax assets.

The benefit from income taxes for the six months ended March 31, 2012 was $26 million, as compared to the provision for income taxes of $41 million for the six months ended March 31, 2011. The effective rate for the six months ended March 31, 2012 was 12.1% as compared to the effective tax rate of 7.2% for the six months ended March 31, 2011, and differs from the U.S. Federal tax rate primarily due to the effect of taxable income in non-U.S. jurisdictions and due to the valuation allowance established against the Company’s U.S. deferred tax assets.

To arrive at its effective income tax rate for interim financial statement purposes, the Company applied the guidance in ASC 740-270-25, which includes consideration of the effect of projected taxable income and loss in the U.S. and non-U.S. jurisdictions applied to each jurisdiction’s statutory rate and the effect of valuation allowances in each jurisdiction.

11. Benefit Obligations

The Company sponsors non-contributory defined benefit pension plans covering a portion of its U.S. employees and retirees, and postretirement benefit plans for U.S. retirees that include healthcare benefits and life insurance coverage. The Company froze benefit accruals and additional participation in the pension and postretirement plan for its U.S. management employees effective December 31, 2003. Effective October 12, 2011 and November 18, 2011, the Company entered into a two-year contract extension of its collective bargaining agreements with the Communications Workers of America (“CWA”) and the International Brotherhood of Electrical Workers (“IBEW”), respectively. With the contract extension, the contracts with the CWA and IBEW now terminate on June 7, 2014. The contract extension did not affect the level of pension and postretirement benefits available to U.S. employees of the Company who are represented by the CWA or IBEW (“represented employees”).

Certain non-U.S. operations 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.

 

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The components of the pension and postretirement net periodic benefit cost for the three and six months ended March 31, 2012 and 2011 are provided in the table below:

 

     Pension Benefits  -
U.S.
    Pension Benefits -
Non-U.S.
    Postretirement
Benefits - U.S.
 
     Three months
ended March 31,
    Three months
ended March 31,
    Three months ended
March 31,
 

In millions

       2012             2011             2012              2011             2012             2011      

Components of Net Periodic Benefit Cost

             

Service cost

   $ 1      $ 1      $ 1       $ 3      $ —        $ 1   

Interest cost

     38        37        6         5        7        8   

Expected return on plan assets

     (43     (43     —           (1     (2     (3

Amortization of unrecognized prior service cost

     1        1        —           —          1        1   

Amortization of previously unrecognized net actuarial loss

     24        16        —           1        2        1   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 21      $ 12      $ 7       $ 8      $ 8      $ 8   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

     Pension Benefits -
U.S.
    Pension Benefits -
Non-U.S.
    Postretirement
Benefits - U.S.
 
     Six months
ended March 31,
    Six months
ended March 31,
    Six months
ended March 31,
 

In millions

       2012             2011             2012             2011             2012             2011      

Components of Net Periodic Benefit Cost

            

Service cost

   $ 3      $ 3      $ 3      $ 5      $ 1      $ 2   

Interest cost

     75        75        12        11        15        16   

Expected return on plan assets

     (86     (87     (1     (1     (5     (6

Amortization of unrecognized prior service cost

     1        1        —          —          1        2   

Amortization of previously unrecognized net actuarial loss

     49        32        —          1        4        1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 42      $ 24      $ 14      $ 16      $ 16      $ 15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s general funding policy with respect to its U.S. qualified pension plans is to contribute amounts at least sufficient to satisfy the minimum amount required by applicable law and regulations. For the six month period ended March 31, 2012, the Company made contributions of $30 million to satisfy minimum statutory funding requirements. Estimated payments to satisfy minimum statutory funding requirements for the remainder of fiscal 2012 are $65 million.

The Company provides certain pension benefits for U.S. employees, which are not pre-funded, and certain pension benefits for non-U.S. employees, the majority of which are not pre-funded. Consequently, the Company makes payments as these benefits are disbursed or premiums are paid. For the six month period ended March 31, 2012, the Company made payments for these U.S. and non-U.S. pension benefits totaling $3 million and $17 million, respectively. Estimated payments for these U.S. and non-U.S. pension benefits for the remainder of fiscal 2012 are $4 million and $9 million, respectively.

During the first six months of fiscal 2012, the Company contributed $26 million to the represented employees’ post-retirement health trust to fund current benefit claims and costs of administration in compliance with the terms of the agreements between the Company and the CWA and IBEW, as extended through June 7, 2014. Estimated contributions under the terms of the agreements are $24 million in the aggregate for the remainder of fiscal 2012.

 

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The Company also provides certain retiree medical benefits for U.S. employees, which are not pre-funded. Consequently, the Company makes payments as these benefits are disbursed. For the six month period ended March 31, 2012, the Company made payments totaling $5 million for these retiree medical benefits. Estimated payments for these retiree medical benefits for the remainder of fiscal 2012 are $6 million.

12. Share-based Compensation

Avaya Holdings Corp.’s Amended and Restated 2007 Equity Incentive Plan (“2007 Plan”) governs the issuance of equity awards, including restricted stock units (“RSUs”) and stock options, to eligible plan participants. Key employees, directors, and consultants of the Company may be eligible to receive awards under the 2007 Plan. Each stock option, when vested and exercised, and each RSU, when vested, entitles the holder to receive one share of Parent’s common stock, subject to certain restrictions on their transfer and sale as defined in the 2007 Plan and related award agreements. As of March 31, 2012, Parent had authorized the issuance of up to 49,848,157 shares of its common stock under the 2007 Plan, in addition to 2,924,125 shares of common stock underlying certain continuation awards that were permitted to be issued at the time of the Merger. There remained 3,554,241 shares available for grant under the 2007 Plan as of March 31, 2012.

Option Awards

During the six months ended March 31, 2012, 1,925,464 time-based and 1,036,789 multiple-of-money options were granted in the ordinary course of business. All of the options have an exercise price of $4.40 per share and expire ten years from the date of grant or upon cessation of employment, in which event there are limited exercise provisions allowed for vested options.

Time-based options granted during the six months ended March 31, 2012 vest over their performance periods, generally four years. Compensation expense equal to the fair value of the option measured on the grant date is recognized utilizing graded attribution over the requisite service period.

Multiple-of-money options vest upon the achievement of defined returns on the Sponsors’ initial investment in Parent. Because vesting of the multiple-of-money market-based options is outside the control of the Company and the award recipients, compensation expense relative to the multiple-of-money options must be recognized upon the occurrence of a triggering event (e.g., sale or initial public offering of Parent).

The fair value of option awards is determined at the date of grant utilizing the Cox-Ross Rubinstein (“CRR”) binomial option pricing model which is affected by the fair value of Parent’s common stock as well as a number of complex and subjective assumptions. Expected volatility is based primarily on a combination of the Company’s peer group’s historical volatility and estimates of implied volatility of the Company’s peer group. The risk-free interest rate assumption was derived from reference to the U.S. Treasury Spot rates for the expected term of the stock options. The dividend yield assumption is based on Parent’s current intent not to issue a dividend under its dividend policy. The expected holding period assumption was estimated based on the Company’s historical experience.

For the three months ended March 31, 2012 and 2011, the Company recognized share-based compensation associated with options issued under the 2007 Plan of $1 million and $2 million, respectively, which is included in costs and operating expenses. For the six months ended March 31, 2012 and 2011, the Company recognized share-based compensation associated with options issued under the 2007 Plan of $3 million and $5 million, respectively, which is included in costs and operating expenses.

Restricted Stock Units

The Company has issued RSUs each of which represents the right to receive one share of Parent’s common stock when fully vested. The fair value of the RSUs is estimated by the Board of Directors on the respective dates of grant.

 

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During the six months ended March 31, 2012, 1,079,320 RSUs were awarded in the ordinary course of business. The fair market value (as defined in the 2007 Plan) of these awards at the date of grant was $4.40 per share.

In addition, in December 2011, Parent and the Company appointed Mr. Gary Smith as an independent director to serve on their respective boards of directors and on Parent’s Audit and Compensation Committees. Upon his election, he received an initial grant of 79,546 RSUs, representing an inaugural grant of 45,455 RSUs and an annual equity grant of 34,091 RSUs. In addition, of his total annual retainer worth $120,000, based on his service on the board and his appointment as a member of the Audit and Compensation Committees, Mr. Smith elected to receive that retainer $60,000 in cash and $60,000 in RSUs (equaling 13,636 RSUs). All RSUs were awarded to Mr. Smith based upon the fair market value of Parent’s common stock on December 6, 2011, the date of grant, which was $4.40 per share. The RSUs were granted pursuant to the terms of the 2007 Plan and were fully vested on the date of grant. The shares underlying the RSUs will not be distributed to him until he ceases to serve on the board of directors.

On December 5, 2011, the Compensation Committee approved a plan to provide incentives to certain executive officers of the Company to continue to grow revenue in fiscal year 2012 (the “2012 Sales Incentive Program”). Under the terms of the 2012 Sales Incentive Program, effective December 6, 2011 the committee approved a grant to each program participant of the conditional right to receive a number of RSUs under Parent’s 2007 Plan upon the achievement of certain revenue objectives. All RSUs awarded under the 2012 Sales Incentive Program will be based upon the fair market value of Parent’s common stock on the date of grant. During the six months ended March 31, 2012 certain executive officers have been granted the opportunity to receive up to 329,545 RSUs under the 2012 Sales Incentive Program.

The number of RSUs that a participating employee in the 2012 Sales Incentive Program will have the right to receive (subject to vesting requirements and the other terms and conditions of the applicable award agreement) will be determined based upon achievement of both of the following: (i) revenue targets for specific sales territories/divisions/product units (each, a “Performance Gateway”) and (ii) an overall revenue target for the Company. Achievement of targets under the 2012 Sales Incentive Program will be measured twice in fiscal year 2012, with a participating employee being able to earn half of his total opportunity based on results for the first half of fiscal year 2012 and the second half of his total opportunity based on results for the second half of fiscal year 2012. All RSU awards granted under the 2012 Sales Incentive Program will vest on December 6, 2013 for each program participant who achieves the performance objectives.

On February 16, 2012, the Compensation Committee approved amendments to the 2012 Sales Incentive Program with respect to all participants to set certain revenue targets and to reduce certain other revenue targets previously established. All other terms and conditions of the 2012 Sales Incentive Program remain unchanged.

At March 31, 2012, there were 2,983,411 awarded RSUs outstanding under the 2007 Plan, of which 1,045,682 were fully vested. For each of the three months ended March 31, 2012 and 2011, the Company recognized share-based compensation associated with RSUs granted under the 2007 Plan of $1 million. For the six months ended March 31, 2012 and 2011, the Company recognized share-based compensation associated with RSUs granted under the 2007 Plan of $2 million and $1 million, respectively.

13. Reportable Segments

Avaya conducts its business operations in three segments. Two of those segments, Global Communications Solutions (“GCS”) and Avaya Networking (“Networking”), make up Avaya’s Enterprise Collaboration Solutions (“ECS”) product portfolio. The third segment contains Avaya’s services portfolio and is called Avaya Global Services (“AGS”).

The GCS segment primarily develops, markets, and sells unified communications and contact center solutions by integrating multiple forms of communications, including telephone, e-mail, instant messaging and video. Avaya’s Networking segment’s portfolio of products offers integrated networking solutions which are scalable

 

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across customer enterprises. The AGS segment develops, markets and sells comprehensive end-to-end global service offerings that allow customers to evaluate, plan, design, implement, monitor, manage and optimize complex enterprise communications networks.

For internal reporting purposes the Company’s chief operating decision maker makes financial decisions and allocates resources based on segment margin information obtained from the Company’s internal management systems. Management does not include in its segment measures of profitability selling, general, and administrative expenses, research and development expenses, amortization of intangible assets, and certain discrete items, such as charges relating to restructuring actions, impairment charges, and merger-related costs as these costs are not core to the measurement of segment management’s performance, but rather are controlled at the corporate level.

Summarized financial information relating to the Company’s reportable segments is shown in the following table:

 

      Three months ended
March 31,
    Six months ended
March 31,
 

In millions

       2012             2011             2012             2011      

REVENUE

        

Global Communications Solutions

   $ 574      $ 681      $ 1,241      $ 1,326   

Avaya Networking

     64        76        146        154   
  

 

 

   

 

 

   

 

 

   

 

 

 

Enterprise Collaboration Solutions

     638        757        1,387        1,480   

Avaya Global Services

     620        634        1,258        1,279   

Unallocated Amounts (1)

     (1     (1     (1     (3
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,257      $ 1,390      $ 2,644      $ 2,756   
  

 

 

   

 

 

   

 

 

   

 

 

 

GROSS MARGIN

        

Global Communications Solutions

   $ 318      $ 379      $ 718      $ 737   

Avaya Networking

     27        35        64        66   
  

 

 

   

 

 

   

 

 

   

 

 

 

Enterprise Collaboration Solutions

     345        414        782        803   

Avaya Global Services

     296        296        609        599   

Unallocated Amounts (1)

     (28     (68     (74     (141
  

 

 

   

 

 

   

 

 

   

 

 

 
     613        642        1,317        1,261   

OPERATING EXPENSES

        

Selling, general and administrative

     414        470        847        931   

Research and development

     117        121        228        236   

Amortization of intangible assets

     56        56        112        112   

Restructuring charges, net

     90        42        111        64   

Acquisition-related costs

     2        —          3        4   
  

 

 

   

 

 

   

 

 

   

 

 

 
     679        689        1,301        1,347   
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING (LOSS) INCOME

     (66     (47     16        (86

INTEREST EXPENSE, LOSS ON EXTINGUISHMENT OF DEBT AND OTHER (EXPENSE) INCOME, NET

     (120     (366     (230     (485
  

 

 

   

 

 

   

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

   $ (186   $ (413   $ (214   $ (571
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Unallocated Amounts in Gross Margin include the effect of the amortization of acquired technology intangibles related to the acquisition of NES and the Merger and costs that are not core to the measurement of segment management’s performance, but rather are controlled at the corporate level. Unallocated Amounts in Revenue and Gross Margin also include the impacts of certain fair value adjustments recorded in purchase accounting in connection with the Merger.

 

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14. Commitments and Contingencies

Legal Proceedings

In the ordinary course of business, the Company is involved in litigation, claims, government inquiries, investigations and proceedings, including, but not limited to, those identified below, relating to intellectual property, commercial, employment, environmental and regulatory matters.

Other than as described below, the Company believes there is no litigation pending or environmental and regulatory matters against the Company that could have, individually or in the aggregate, a material adverse effect on the Company’s financial position, results of operations or cash flows.

Antitrust Litigation

In 2006, the Company instituted an action in the U.S. District Court, District of New Jersey, against defendants Telecom Labs, Inc., TeamTLI.com Corp. and Continuant Technologies, Inc. and subsequently amended its complaint to include certain individual officers of these companies as defendants. Defendants purportedly provide maintenance services to customers who have purchased or leased the Company’s communications equipment. The Company asserts in its amended complaint that, among other things, defendants, or each of them, have engaged in tortious conduct and/or violated federal intellectual property laws by improperly accessing and utilizing the Company’s proprietary software, including passwords, logins and maintenance service permissions, to perform certain maintenance services on the Company’s customers’ equipment. Defendants have filed counterclaims against the Company, alleging a number of tort claims and alleging that the Company has violated the Sherman Act’s prohibitions against anticompetitive conduct through the manner in which the Company sells its products and services. Defendants seek to recover the profits they claim they would have earned from maintaining Avaya’s products, and ask for injunctive relief prohibiting the conduct they claim is anticompetitive. Under the federal antitrust laws, defendants could be entitled to three times the amount of any actual damages awarded for lost profits plus attorney’s fees and costs. The parties have engaged in extensive discovery and motion practice to, among other things, amend and dismiss pleadings and compel and oppose discovery requests. A trial date originally set for September 2011 has been adjourned and no new date has been set by the court. In January 2012, Avaya’s motions to dismiss defendants’ counterclaims were granted in part and denied in part. In February 2012, the parties filed motions for reconsideration of certain aspects of the Court’s ruling and Avaya filed a motion for certification of an interlocutory appeal. The parties’ motions were denied on April 26, 2012. At this point in the proceedings, expert discovery on the Company’s claims and the defendants’ surviving counter-claims continues. Therefore, at this time an outcome cannot be predicted and, as a result, the Company cannot be assured that this case will not have a material adverse effect on the manner in which it does business, its financial position, results of operations, or cash flows.

Intellectual Property

In the ordinary course of business, the Company is involved in litigation alleging it has infringed upon third parties’ intellectual property rights, including patents; some litigation may involve claims for infringement against customers by third parties relating to the use of Avaya’s products, as to which the Company may provide indemnifications of varying scope to certain customers. These matters are on-going and the outcomes are subject to inherent uncertainties. As a result, the Company cannot be assured that any such matter will not have a material adverse effect on its financial position, results of operations or cash flows. However, management does provide for estimated losses if and when it believes the facts and circumstances indicate that a loss is probable and the loss can be reasonably estimated. While it is not possible at this time to determine with certainty the ultimate outcome of these cases, the Company believes there are no such infringement matters that could have, individually or in aggregate, a material adverse effect on the Company’s financial position, results of operations or cash flows.

Other

In October 2009, a group of former employees of Avaya’s former Shreveport, Louisiana manufacturing facility brought suit in Louisiana state court, naming as defendants Alcatel-Lucent USA, Inc., Lucent Technologies

 

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Services Company, Inc., and AT&T Technologies, Inc. The former employees allege hearing loss due to hazardous noise exposure from the facility dating back over forty years, and stipulate that the total amount of each individual’s damages does not exceed fifty thousand dollars. In February 2010 plaintiffs amended their complaint to add the Company as a named defendant. There are 100 plaintiffs in the case. Defendants’ motion to dismiss plaintiffs’ complaint was denied on April 30, 2012. At this time an outcome cannot be predicted however, because the amount of the claims are not material, the Company believes the outcome of this matter will not have a material adverse effect on the manner in which it does business, its financial position, results of operations, or cash flows.

General

The Company records accruals for legal contingencies to the extent that it has concluded it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described above because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes.

Product Warranties

The Company recognizes a liability for the estimated costs that may be incurred to remedy certain deficiencies of quality or performance of the Company’s products. These product warranties extend over a specified period of time generally ranging up to two years from the date of sale depending upon the product subject to the warranty. The Company accrues a provision for estimated future warranty costs based upon the historical relationship of warranty claims to sales. The Company periodically reviews the adequacy of its product warranties and adjusts, if necessary, the warranty percentage and accrued warranty reserve, which is included in other current liabilities in the Consolidated Balance Sheets, for actual experience.

 

In millions

      

Balance as of October 1, 2011

   $ 24   

Reductions for payments and costs to satisfy claims

     (11

Accruals for warranties issued during the period

     5   
  

 

 

 

Balance as of March 31, 2012

   $ 18   
  

 

 

 

Guarantees of Indebtedness and Other Off-Balance Sheet Arrangements

Letters of Credit

The Company has uncommitted credit facilities that vary in term totaling $47 million, of which the Company had entered into letters of credit totaling $45 million, as of March 31, 2012 for the purpose of obtaining third party financial guarantees, such as letters of credit which ensure the Company’s performance or payment to third parties. As of March 31, 2012, the Company had outstanding an aggregate of $120 million in irrevocable letters of credit under its committed and uncommitted credit facilities (including $75 million under its $535 million committed revolving credit facilities).

Surety Bonds

The Company arranges for the issuance of various types of surety bonds, such as license, permit, bid and performance bonds, which are agreements under which the surety company guarantees that the Company will perform in accordance with contractual or legal obligations. These bonds vary in duration although most are

 

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issued and outstanding from three months to three years. These bonds are backed by $12 million of the Company’s letters of credit. If the Company fails to perform under its obligations, the maximum potential payment under these surety bonds is $21 million as of March 31, 2012. Historically, no surety bonds have been drawn upon.

Purchase Commitments and Termination Fees

The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing services for its products. During the normal course of business, in order to manage manufacturing lead times and to help assure adequate component supply, the Company enters into agreements with contract manufacturers and suppliers that allow them to produce and procure inventory based upon forecasted requirements provided by the Company. If the Company does not meet these specified purchase commitments, it could be required to purchase the inventory, or in the case of certain agreements, pay an early termination fee. Historically, the Company has not been required to pay a charge for not meeting its designated purchase commitments with these suppliers, but has been obligated to purchase certain excess inventory levels from its outsourced manufacturers due to actual sales of product varying from forecast and due to transition of manufacturing from one vendor to another.

The Company’s outsourcing agreements with its two most significant contract manufacturers expire in July and September 2013. After the initial term, the outsourcing agreements are automatically renewed for successive periods of twelve months each, subject to specific termination rights for the Company and the contract manufacturers. All manufacturing of the Company’s products is performed in accordance with either detailed requirements or specifications and product designs furnished by the Company, and is subject to rigorous quality control standards.

Product Financing Arrangements

The Company sells products to various resellers that may obtain financing from certain unaffiliated third-party lending institutions. For the Company’s product financing arrangement with resellers outside the U.S., in the event participating resellers default on their payment obligations to the lending institution, the Company is obligated under certain circumstances to guarantee repayment to the lending institution. The repayment amount fluctuates with the level of product financing activity. The guaranteed repayment amount was approximately $4 million as of March 31, 2012. The Company reviews and sets the maximum credit limit for each reseller participating in this financing arrangement. Historically, there have not been any guarantee repayments by the Company. The Company has estimated the fair value of this guarantee as of March 31, 2012, and has determined that it is not significant. There can be no assurance that the Company will not be obligated to repurchase inventory under this arrangement in the future.

Long-Term Cash Incentive Bonus Plan

The Parent has established a long-term incentive cash bonus plan (“LTIP”). Under the LTIP, the Parent will make cash awards available to compensate certain key employees upon the achievement of defined returns on the Sponsors’ initial investment in the Parent (a “triggering event”). The Parent has authorized LTIP awards covering a total of $60 million, of which $46 million in awards were outstanding as of March 31, 2012. The Company will begin to recognize compensation expense relative to the LTIP awards upon the occurrence of a triggering event (e.g., a sale or initial public offering). As of March 31, 2012, no compensation expense associated with the LTIP has been recognized.

Credit Facility Indemnification

In connection with its obligations under the credit facilities described in Note 7, “Financing Arrangements,” the Company has agreed to indemnify the third-party lending institutions for costs incurred by the institutions related

 

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to changes in tax law or other legal requirements. While there have been no amounts paid to the lenders pursuant to this indemnity in the past, there can be no assurance that the Company will not be obligated to indemnify the lenders under this arrangement in the future.

Transactions with Alcatel-Lucent

Pursuant to the Contribution and Distribution Agreement effective October 1, 2000, Lucent Technologies, Inc. (now Alcatel-Lucent) contributed to the Company substantially all of the assets, liabilities and operations associated with its enterprise networking businesses (the “Company’s Businesses”) and distributed the Company’s stock pro-rata to the shareholders of Lucent (“distribution”). The Contribution and Distribution Agreement, among other things, provides that, in general, the Company will indemnify Alcatel-Lucent for all liabilities including certain pre-distribution tax obligations of Alcatel-Lucent relating to the Company’s Businesses and all contingent liabilities primarily relating to the Company’s Businesses or otherwise assigned to the Company. In addition, the Contribution and Distribution Agreement provides that certain contingent liabilities not allocated to one of the parties will be shared by Alcatel-Lucent and the Company in prescribed percentages. The Contribution and Distribution Agreement also provides that each party will share specified portions of contingent liabilities based upon agreed percentages related to the business of the other party that exceed $50 million. The Company is unable to determine the maximum potential amount of other future payments, if any, that it could be required to make under this agreement.

The Tax Sharing Agreement governs Alcatel-Lucent’s and the Company’s 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 or benefits that are clearly attributable to the business of one party will be borne solely by that party, and other pre-distribution taxes or benefits will be shared by the parties based on a formula set forth in the Tax Sharing Agreement. The Company may be subject to additional taxes or benefits pursuant to the Tax Sharing Agreement related to future settlements of audits by state and local and foreign taxing authorities for the periods prior to the Company’s separation from Alcatel-Lucent.

15. Guarantor—Non Guarantor financial information

Borrowings by Avaya Inc. under the senior secured credit facility are jointly and severally, fully, and unconditionally guaranteed (subject to certain customary release provisions) by substantially all wholly owned U.S. subsidiaries of Avaya Inc. (collectively, the “Guarantors”) and Parent. The senior secured notes, the senior unsecured cash-pay notes and the senior unsecured PIK toggle notes issued by Avaya Inc. are jointly and severally, fully and unconditionally guaranteed by the Guarantors. None of the other subsidiaries of Avaya Inc., either directly or indirectly, guarantees the senior secured credit facility, the senior secured notes, the senior unsecured cash-pay notes or the senior unsecured PIK toggle notes (“Non-Guarantors”).

Avaya Inc. and each of the Guarantors are authorized to borrow under the senior secured asset-based credit facility. Borrowings under that facility are jointly and severally, fully, and unconditionally guaranteed by Avaya Inc. and the Guarantors (subject to certain customary release provisions). Additionally these borrowings are fully and unconditionally guaranteed by Parent.

The senior secured notes and the related guarantees are secured equally and ratably (other than with respect to real estate) with the senior secured credit facility and any future first lien obligations by (i) a first-priority lien on substantially all of the Avaya Inc.’s and the Guarantors’ assets, other than (x) any real estate and (y) collateral that secures the senior secured multi-currency asset based revolving credit facility on a first-priority basis (the “ABL Priority Collateral”), and (ii) a second-priority lien on the ABL Priority Collateral, subject to certain limited exceptions.

The following tables present for Avaya Inc., the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and Intercompany Eliminations the results of operations for the three and six months ended March 31, 2012 and 2011, financial position as of March 31, 2012 and September 30, 2011 and cash flows for the six months ended March 31, 2012 and 2011 to arrive at the information for Avaya Inc. on a consolidated basis.

 

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Supplemental Condensed Consolidating Schedule of Operations

 

     Three months ended March 31, 2012  

In millions

   Avaya
Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Intercompany
Eliminations
    Consolidated  

REVENUE

   $ 706      $ 102      $ 687      $ (238   $ 1,257   

COST

     450        64        368        (238     644   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

GROSS MARGIN

     256        38        319        —          613   

OPERATING EXPENSES

          

Selling, general and administrative

     147        26        241        —          414   

Research and development

     64        3        50        —          117   

Amortization of intangible assets

     52        1        3        —          56   

Restructuring charges, net

     9        1        80        —          90   

Acquistion-related costs

     2        —          —          —          2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     274        31        374        —          679   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING (LOSS) INCOME

     (18     7        (55     —          (66

Interest expense

     (101     (7     —          —          (108

Other expense, net

     (1     —          (11     —          (12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

     (120     —          (66     —          (186

Benefit from income taxes

     (3     —          (21     —          (24

Equity in net loss of consolidated subsidiaries

     (45     —          —          45        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS

   $ (162   $ —        $ (45   $ 45      $ (162
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Supplemental Condensed Consolidating Schedule of Operations

 

     Three months ended March 31, 2011  

In millions

   Avaya
Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Intercompany
Eliminations
    Consolidated  

REVENUE

   $ 751      $ 107      $ 659      $ (127   $ 1,390   

COST

     414        93        368        (127     748   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

GROSS MARGIN

     337        14        291        —          642   

OPERATING EXPENSES

          

Selling, general and administrative

     197        25        248        —          470   

Research and development

     71        4        46        —          121   

Amortization of intangible assets

     53        1        2        —          56   

Restructuring charges, net

     7        (1     36        —          42   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     328        29        332        —          689   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME (LOSS)

     9        (15     (41     —          (47

Interest expense

     (109     (4     —          —          (113

Loss on extinguishment of debt

     (246     —          —          —          (246

Other income (expense), net

     3        1        (11     —          (7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

     (343     (18     (52     —          (413

(Benefit from) provision for income taxes

     (14     —          33        —          19   

Equity in net loss of consolidated subsidiaries

     (103     —          —          103        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS

   $ (432   $ (18   $ (85   $ 103      $ (432
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Supplemental Condensed Consolidating Schedule of Operations

 

     Six months ended March 31, 2012  

In millions

   Avaya
Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Intercompany
Eliminations
    Consolidated  

REVENUE

   $ 1,497      $ 198      $ 1,332      $ (383   $ 2,644   

COST

     826        131        753        (383     1,327   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

GROSS MARGIN

     671        67        579        —          1,317   

OPERATING EXPENSES

          

Selling, general and administrative

     346        49        452        —          847   

Research and development

     126        7        95        —          228   

Amortization of intangible assets

     103        2        7        —          112   

Restructuring charges, net

     16        1        94        —          111   

Acquistion-related costs

     3        —          —          —          3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     594        59        648        —          1,301   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME (LOSS)

     77        8        (69     —          16   

Interest expense

     (206     (10     (1     —          (217

Other expense, net

     —          —          (13     —          (13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

     (129     (2     (83     —          (214

Benefit from income taxes

     (2     —          (24     —          (26

Equity in net loss of consolidated subsidiaries

     (61     —          —          61        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS

   $ (188   $ (2   $ (59   $ 61      $ (188
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Supplemental Condensed Consolidating Schedule of Operations

 

     Six months ended March 31, 2011  

In millions

   Avaya
Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Intercompany
Eliminations
    Consolidated  

REVENUE

   $ 1,497      $ 217      $ 1,270      $ (228   $ 2,756   

COST

     838        191        694        (228     1,495   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

GROSS MARGIN

     659        26        576        —          1,261   

OPERATING EXPENSES

          

Selling, general and administrative

     405        48        478        —          931   

Research and development

     140        7        89        —          236   

Amortization of intangible assets

     104        2        6        —          112   

Restructuring charges, net

     14        (1     51        —          64   

Acquistion-related costs

     1        —          3        —          4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     664        56        627        —          1,347   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING LOSS

     (5     (30     (51     —          (86

Interest expense

     (232     (9     —          1        (240

Loss on extinguishment of debt

     (246     —          —          —          (246

Other (expense) income, net

     (2     2        2        (1     1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

     (485     (37     (49     —          (571

(Benefit from) provision for income taxes

     (8     —          49        —          41   

Equity in net loss of consolidated subsidiaries

     (135     —          —          135        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS

   $ (612   $ (37   $ (98   $ 135      $ (612
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Supplemental Condensed Consolidating Balance Sheet

 

     March 31, 2012  

In millions

   Avaya
Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Intercompany
Eliminations
    Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 135      $ 15      $ 205      $ —        $ 355   

Accounts receivable, net—external

     301        32        412        —          745   

Accounts receivable—internal

     861        159        248        (1,268     —     

Inventory

     144        4        126        —          274   

Deferred income taxes, net

     —          —          7        —          7   

Other current assets

     115        53        162        —          330   

Internal notes receivable, current

     1,430        45        (16     (1,459     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL CURRENT ASSETS

     2,986        308        1,144        (2,727     1,711   

Property, plant and equipment, net

     215        25        124        —          364   

Deferred income taxes, net

     —          —          30        —          30   

Intangible assets, net

     1,727        34        178        —          1,939   

Goodwill

     4,083        —          10        —          4,093   

Other assets

     166        6        22        —          194   

Investment in consolidated subsidiaries

     (1,941     (3     27        1,917        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 7,236      $ 370      $ 1,535      $ (810   $ 8,331   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES

          

Current liabilities:

          

Debt maturing within one year—external

   $ 37      $ —        $ —        $ —        $ 37   

Debt maturing within one year—internal

     48        368        1,043        (1,459     —     

Accounts payable—external

     256        18        198        —          472   

Accounts payable—internal

     300        48        920        (1,268     —     

Payroll and benefit obligations

     93        14        158        —          265   

Deferred revenue

     534        26        83        —          643   

Business restructuring reserve, current portion

     13        5        123        —          141   

Other current liabilities

     234        4        104        —          342   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

     1,515        483        2,629        (2,727     1,900   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

     6,102        —          —          —          6,102   

Pension obligations

     1,179        —          411        —          1,590   

Other postretirement obligations

     488        —          —          —          488   

Deferred income taxes, net

     175        —          1        —          176   

Business restructuring reserve, non-current portion

     16        3        27        —          46   

Other liabilities

     239        21        247        —          507   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL NON-CURRENT LIABILITIES

     8,199        24        686        —          8,909   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL DEFICIENCY

     (2,478     (137     (1,780     1,917        (2,478
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND DEFICIENCY

   $ 7,236      $ 370      $ 1,535      $ (810   $ 8,331   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Supplemental Condensed Consolidating Balance Sheet

 

     September 30, 2011  

In millions

   Avaya
Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Intercompany
Eliminations
    Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 149      $ 12      $ 239      $ —        $ 400   

Accounts receivable, net—external

     303        33        419        —          755   

Accounts receivable—internal

     646        179        103        (928     —     

Inventory

     150        4        126        —          280   

Deferred income taxes, net

     —          —          8        —          8   

Other current assets

     98        68        108        —          274   

Internal notes receivable, current

     1,488        31        (16     (1,503     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL CURRENT ASSETS

     2,834        327        987        (2,431     1,717   

Property, plant and equipment, net

     243        26        128        —          397   

Deferred income taxes, net

     —          —          28        —          28   

Intangible assets, net

     1,893        36        200        —          2,129   

Goodwill

     4,072        —          7        —          4,079   

Other assets

     170        8        18        —          196   

Investment in consolidated subsidiaries

     (1,898     (9     25        1,882        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 7,314      $ 388      $ 1,393      $ (549   $ 8,546   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES

          

Current liabilities:

          

Debt maturing within one year—external

   $ 37      $ —        $ —        $ —        $ 37   

Debt maturing within one year—internal

     34        364        1,105        (1,503     —     

Accounts payable—external

     260        20        185        —          465   

Accounts payable—internal

     178        66        684        (928     —     

Payroll and benefit obligations

     123        14        186        —          323   

Deferred revenue

     528        31        80        —          639   

Business restructuring reserve, current portion

     13        4        113        —          130   

Other current liabilities

     244        4        104        —          352   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

     1,417        503        2,457        (2,431     1,946   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

     6,120        —          —          —          6,120   

Pension obligations

     1,219        —          417        —          1,636   

Other postretirement obligations

     502        —          —          —          502   

Deferred income taxes, net

     167        —          1        —          168   

Business restructuring reserve, non-current portion

     20        5        31        —          56   

Other liabilities

     247        22        227        —          496   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL NON-CURRENT LIABILITIES

     8,275        27        676        —          8,978   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL DEFICIENCY

     (2,378     (142     (1,740     1,882        (2,378
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND DEFICIENCY

   $ 7,314      $ 388      $ 1,393      $ (549   $ 8,546   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Supplemental Condensed Consolidating Schedule of Cash Flows

 

     Six months ended March 31, 2012  

In millions

   Avaya
Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Intercompany
Eliminations
    Consolidated  

OPERATING ACTIVITIES:

          

Net loss

   $ (188   $ (2   $ (59   $ 61      $ (188

Adjustments to reconcile net loss to net cash (used for) provided by operating activities

     257        6        61        —          324   

Changes in operating assets and liabilities

     (160     11        44        —          (105

Equity in net loss of consolidated subsidiaries

     61        —          —          (61     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES

     (30     15        46        —          31   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES:

          

Capital expenditures

     (14     (1     (23     —          (38

Capitalized software development costs

     (19     —          —          —          (19

Acquisition of businesses, net of cash acquired

     (1     —          (3     —          (4

Proceeds from sale of long-lived assets and investments

     8        —          —          —          8   

Restricted cash

     (1     —          1        —          —     

Advance to Parent

     (8     —          —          —          (8

Other investing activities, net

     (2     —          —          —          (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH USED FOR INVESTING ACTIVITIES

     (37     (1     (25     —          (63
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES:

          

Repayment of long-term debt

     (19     —          —          —          (19

Net borrowings (repayments) of intercompany debt

     72        (10     (62     —          —     

Other financing activities, net

     —          (1     —          —          (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES

     53        (11     (62     —          (20
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          —          7        —          7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (14     3        (34     —          (45

Cash and cash equivalents at beginning of period

     149        12        239        —          400   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 135      $ 15      $ 205      $ —        $ 355   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Supplemental Condensed Consolidating Schedule of Cash Flows

 

     Six months ended March 31, 2011  

In millions

   Avaya
Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Intercompany
Eliminations
    Consolidated  

OPERATING ACTIVITIES:

          

Net loss

   $ (612   $ (37   $ (98   $ 135      $ (612

Adjustments to reconcile net loss to net cash (used for) provided by operating activities

     251        6        56        —          313   

Changes in operating assets and liabilities

     (84     43        (9     —          (50

Equity in net loss of consolidated subsidiaries

     135        —          —          (135     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES

     (310     12        (51     —          (349
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES:

          

Capital expenditures

     (16     —          (19     —          (35

Capitalized software development costs

     (12     (2     —          —          (14

Return of funds held in escrow from the NES acquisition

     6        —          —          —          6   

Acquisition of businesses, net of cash acquired

     —          —          (14     —          (14

Proceeds from sale of long-lived assets and investments

     1        —          2        —          3   

Restricted cash

     —          —          24        —          24   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH USED FOR INVESTING ACTIVITIES

     (21     (2     (7     —          (30
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES:

          

Repayment of B-2 term loans

     (696     —          —          —          (696

Debt issuance and modification costs

     (42     —          —          —          (42

Proceeds from senior secured notes

     1,009        —          —          —          1,009   

Repayment of long-term debt

     (22     —          —          —          (22

Net (repayments) borrowings of intercompany debt

     (103     (16     119        —          —     

Other financing activities, net

     —          (1     —          —          (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES

     146        (17     119        —          248   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          —          5        —          5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (185     (7     66        —          (126

Cash and cash equivalents at beginning of period

     348        26        205        —          579   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 163      $ 19      $ 271      $ —        $ 453   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Unless the context otherwise indicates, as used in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the terms “we,” “us,” “our,” “the Company,” “Avaya” and similar terms refer to Avaya Inc. and its subsidiaries. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the unaudited interim consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. The matters discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See “Forward Looking Statements” at the end of this discussion.

Our accompanying unaudited interim consolidated financial statements as of March 31, 2012 and for the three and six months ended March 31, 2012 and 2011 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission, or the SEC, for interim financial statements, and should be read in conjunction with our consolidated financial statements and other financial information for the fiscal year ended September 30, 2011, which were included in our Annual Report on Form 10-K filed with the SEC on December 9, 2011. In our opinion, the unaudited interim consolidated financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair statement of the financial condition, results of operations and cash flows for the periods indicated.

Certain prior period amounts have been reclassified to conform to the current interim period presentation. The consolidated results of operations for the interim periods reported are not necessarily indicative of the results to be experienced for the entire fiscal year.

Overview

We are a leading global provider of next-generation business collaboration and communications solutions that bring people together with the right information at the right time in the right context, enabling business users to improve their efficiency and quickly solve critical business challenges. Our solutions are designed to enable business users to work together more effectively as a team internally or with their customers and suppliers, increasing innovation, improving productivity and accelerating decision-making and business outcomes.

We develop software and hardware products and offer related services that we market and sell directly and through our channel partners as part of our collaboration and communications solutions for large enterprises, small- and mid-sized businesses and government organizations. Our software delivers rich value-added applications for enterprise collaboration and communications, including messaging, telephony, voice, video and web conferencing, mobility and customer service. These applications operate on our own hardware, which includes a broad range of desk phones, servers and gateways, and LAN/WAN switching wireless access points and gateways, as well as on third-party devices, including desk phones, tablets and desktop PCs. In addition, our award-winning portfolio of services supports our products to help customers achieve enhanced business results both directly and indirectly through partners. We have a long track record of innovation and our customers historically have relied on us to deliver mission critical communications solutions. Market opportunities associated with our business collaboration and communications solutions include spending on unified communications (which includes, among others, enterprise telephony and messaging), contact center applications and data networking equipment, as well as spending on support and maintenance services to implement and support these tools.

We are highly focused on and structured to serve our core business collaboration and communications markets with fit-for-purpose products, targeted sales coverage, and distributed software services and support models. We offer solutions in five key business collaboration and communications product categories:

 

   

Unified Communications Software, Infrastructure and Endpoints;

 

   

Real Time Video Collaboration;

 

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Contact Center;

 

   

Data Networking; and

 

   

Applications, including their Integration and Enablement.

Initial Registration Statement of Parent

Avaya is a wholly owned subsidiary of Avaya Holdings Corp., a Delaware corporation (“Parent”). Parent was formed by affiliates of two private equity firms, Silver Lake Partners (“Silver Lake”) and TPG Capital (“TPG”) (collectively, the “Sponsors”). Silver Lake and TPG, through Parent, acquired Avaya in a transaction that was completed on October 26, 2007 (the “Merger”).

On June 9, 2011, Parent filed with the SEC a registration statement on Form S-1 (as it may be amended from time to time, the “registration statement”) relating to a proposed initial public offering of its common stock. As contemplated in the registration statement, the net proceeds of the proposed offering are expected to be used to repay a portion of our long-term indebtedness, redeem Parent’s Series A preferred stock and pay certain amounts in connection with the termination of our management services agreement with affiliates of our Sponsors pursuant to its terms. The registration statement remains under review by the SEC and shares of common stock registered there under may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Form 10-Q and the pending registration statement shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of those securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. Further, there is no way to predict whether or not Parent will be successful in completing the offering as contemplated and if it is successful, we cannot be certain if, or how much of, the net proceeds will be used for the purposes identified above.

Refinancing of Debt

On February 11, 2011, we successfully completed a debt refinancing that deferred the maturity of $3.18 billion of senior secured loans. As part of the transaction, $2.2 billion outstanding par value of the senior secured term B-1 loans were converted into a new tranche of senior secured term B-3 loans, essentially extending the maturity of that indebtedness from October 26, 2014 to October 25, 2017, and $988 million par value of senior secured incremental term B-2 loans were repaid with the proceeds from a private placement of $1,009 million of senior secured notes, essentially extending the maturity of that indebtedness from October 26, 2014 to April 1, 2019.

On August 8, 2011, the Company 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.

Acquisition of RADVISION Ltd.

On March 14, 2012, the Company entered into an agreement to acquire RADVISION Ltd. (“Radvision”), a leading provider of videoconferencing and telepresence technologies over internet protocol (“IP”) and wireless networks, for approximately $230 million in cash. The acquisition is subject to certain closing conditions and is expected to be completed during the Company’s third quarter of fiscal 2012. On April 30, 2012, Radvision issued a press release announcing that its shareholders had approved the sale.

Through this acquisition, Avaya will expand its technology portfolio and provide customers a highly integrated and interoperable suite of cost-effective, easy to use, high-definition video collaboration products, with the ability to plug and play multiple mobile devices including Apple iPad and Google Android. Upon closing we will

 

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begin to integrate Radvision’s enterprise video infrastructure and high value endpoints with Avaya’s award winning Avaya Aura Unified Communications (“UC”) platform to create a compelling and differentiated solution designed to accelerate the adoption of video collaboration. The Radvision portfolio includes a full range of videoconferencing products, technologies and expertise serving large enterprises, small businesses, and service providers. It includes standards-based applications, open infrastructure and endpoints for ad-hoc and scheduled videoconferencing with room-based systems, desktop, and mobile consumer devices. The integrated Avaya and Radvision portfolios will extend intra-company business to business and business to customer video communications, and also support internal “Bring Your Own Device” initiatives. See discussion in Note 3, “Business Combinations,” to our unaudited interim consolidated financial statements for further details.

Major Business Areas

Avaya conducts its business operations in three segments. Two of those segments, Global Communications Solutions (“GCS”) and Avaya Networking (“Networking”), make up Avaya’s Enterprise Collaboration Solutions (“ECS”) product portfolio. The third segment contains Avaya’s services portfolio and is called Avaya Global Services (“AGS”).

Our Products

Our key product portfolio includes our infrastructure solutions, unified communications applications, contact center applications and networking portfolios. These portfolios span a broad range of unified communications, collaboration, customer service, video and networking products designed to meet the diverse needs of small and mid-size businesses, as well as large enterprises. The majority of our portfolio comprises software products that reside on either a client or server. Client software resides on both our own and third-party devices, including desk phones, tablets, desktop PCs and mobile phones. Server-side software controls communication and collaboration for the enterprise, and delivers rich value-added applications such as messaging, telephony, voice, video and web conferencing, mobility and customer service. Hardware includes a broad range of desk phones, servers and gateways and LAN/WAN switching wireless access points and gateways. Highlights of our portfolio include:

Avaya Aura

At the core of our next-generation collaboration solutions is Avaya Aura, our software suite of collaboration applications, including voice, video, messaging, presence, web applications and more. Avaya Aura is part of our infrastructure solutions portfolio. The Avaya Aura architecture simplifies complex communications networks and reduces infrastructure costs. Using this architecture, organizations are able to rapidly and cost-effectively deploy applications from a centralized data center to users regardless of the device they are using or the network to which they are connected. Avaya Aura provides a simple means of connecting legacy, multi-vendor systems to new open standards SIP-based applications, helping enterprises to reduce costs and increase user productivity and choice simultaneously. We believe Avaya Aura is one of the most reliable, secure and comprehensive offerings in the industry and that our commitment to open, standards-based solutions helps provide our customers with the flexibility to be more efficient and successful.

At the heart of Avaya Aura is Session Manager, which provides multimedia communications control and management. Multi-vendor voice, video and data communications can all be managed and controlled from one centralized software platform. Avaya Aura uses virtualization technology across all applications to reduce the physical number of servers relative to existing offerings, reducing total cost of ownership for medium sized and large enterprises alike. Avaya Aura allows business users to work from any location, on any device, by providing collaboration and communication capabilities on a broad variety of operating systems, devices, desktop, laptop and tablet computers, smart phones, mobile devices and dedicated deskphones.

 

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Highlights of the Avaya Aura portfolio include the following:

 

   

Avaya Aura Messaging, an application which enables migration from traditional voice messaging systems to multimedia messaging with enterprise-class features, scalability and reliability.

 

   

Avaya Aura Presence Services, an application which provides contextual information and availability from across multiple devices and applications to users, delivering a richer collaboration experience. These capabilities are leveraged across the entire spectrum of communications applications, ranging from voice calls and instant messaging to customer services and business processes.

 

   

Avaya Aura Conferencing, which offers a rich set of scalable conferencing configurations and delivers audio conferencing, web conferencing, document-based collaboration and video-enabled web conferencing while letting users leverage familiar desktop applications and interfaces for increased conference control.

 

   

Avaya Aura Video Conferencing solutions, a robust suite of high-definition, low-bandwidth, video endpoints combined with software applications to enable rich video conferencing to serve individual desktop users and small workgroups as well as large conference rooms.

 

   

Avaya Aura supports communications and collaboration endpoints including telephones, speaker phones, personal video collaboration devices and client software designed to provide enterprise class communications and the Avaya Flare Experience on our own devices as well as laptops, smartphones and tablets.

Avaya Contact Centers

We have been a leader in the contact center market since our founding over a decade ago with our Avaya Call Center Elite solution, and have recently significantly expanded beyond our large call center origins. We have developed a scalable, communications-centric applications suite focused on enabling companies to optimize sales and service delivery across their entire value chain from small and medium businesses to large, global enterprises. Our Avaya Aura Contact Center, a SIP-based multimedia solution that forms the core of our SIP contact center application solutions portfolio, leverages session management to create a single integrated customer queue, regardless of the type of media or modality, including voice, video, email, chat or social media, and delivers a highly personalized customer experience. The tight integration of our contact center applications with Avaya Aura has allowed us to change the nature of a contact center from the previous approach of routing customers to agents and self-service applications, often with a loss of customer information or context, to a model where we use session management to bring customer service people and applications from around the enterprise to the customer. We believe this leads to a much better customer experience than traditionally seen, where customers are transferred around the enterprise and asked frequently to re-confirm their identity and other personal information. The capabilities of our contact center solutions include:

 

   

Assisted and Automated Experience Management, which provides intelligent routing of voice and multimedia contacts and a variety of applications for customer service agents, as well as outbound and self-service applications to manage collaboration and workflow between an enterprise and its customers;

 

   

Workforce Optimization, which includes call recording, quality monitoring and workforce management applications; and

 

   

Performance Management, which provides contact center reporting, analytics and operations performance management solutions, as well as agent performance management and scheduling to ensure optimal use of resources and improve customer satisfaction.

We believe these capabilities are imperative given, among other things, the adoption of social media, smartphones and cloud-based applications. For example, our solutions are designed to allow a social network post to be picked up by the enterprise, combined with intelligence about account history and previous

 

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conversations, and finished in an audio or video call from the customer’s browser to the contact center. This solution enables agents to respond to their customers’ feedback in a highly personal and efficient manner. This ability to meet a customer’s need, in the manner that is relevant to that customer at any given time, is critical to our customers’ success. Providing this type of multi-modal, multi-channel customer experience management capability allows us to deliver a unique experience for our customers’ end clients.

Avaya Flare Experience

In September 2010, we unveiled the Avaya Flare Experience, a real-time, enterprise video communications and collaboration solution. The Avaya Flare Experience is part of our Unified Communication Applications or UC Applications solutions portfolio and helps break down the barriers between today’s communications and

collaboration tools with a distinctive user interface for quick, easy access to voice and video, social media, presence and instant messaging and audio/video/web conferencing, a consolidated view of multiple directories, context history and more.

The Avaya Flare Experience features a central spotlight that highlights active or in-progress collaboration sessions. Initiating a communication session is as easy as moving one or more contacts from the directory into the spotlight. For text messages, a pop-up keyboard appears when a user taps a text-based icon under a contact’s photo. The Avaya Flare Experience combines contacts from multiple sources into a single “fan,” synchronizes email/calendars with Microsoft ActiveSync and integrates collaboration activity into a common interaction history, providing context to any session. We believe these capabilities deliver a simpler, more compelling experience to end-users using video, voice and text.

Currently, the Avaya Flare Experience runs on the Avaya Desktop Video Device, an Android-based, video-enabled desktop collaboration endpoint for executive desktops or power communicators that can also perform as a customer kiosk. In addition, in January 2012 we announced the availability of Avaya Flare Communicator for iPad tablets. We are adapting the Avaya Flare software for other devices and operating systems such as Google Android tablets, Windows laptops and other consumer device classes and platforms. Overall, we believe our software-centric solutions are helping to enable customers to be more productive and compete more effectively by changing the way users collaborate. The Avaya Flare Experience complements the widely deployed Avaya one-X product line that provides mobile applications for smartphones (Android, iPhone, BlackBerry, Symbian), or any phone using natural speech commands, as well as desktop-integrated Windows and Mac clients. Avaya one-X clients will evolve over time to incorporate Avaya Flare capabilities in a single software family. Avaya’s Avaya Flare and Avaya one-X Unified Collaboration and Communication clients provide flexibility allowing organizations to provide the right experience to the right users to drive faster decision-making, reduce costs and provide more streamlined communications.

Avaya Agile Communication Environment (ACE)

Avaya ACE is a multi-vendor application enablement framework that allows developers to integrate communications and collaboration applications into other business applications (such as CRM, ERP, BPM and social application frameworks). Avaya ACE is part of our infrastructure solutions portfolio and includes pre-packaged applications (such as integrations with mobile devices, click to call from web-based applications and real-time response applications to streamline time-dependent business processes), SOA-oriented web services and toolkits to enable rapid development of custom applications, which helps reduce costs and increase flexibility for enterprises. Programmers with limited communications expertise can readily embed real-time communications in business applications and workflows, expanding both the ability and opportunity to use Avaya collaboration capabilities. Avaya ACE provides a versatile platform for the members of DevConnect to build applications.

 

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Avaya IP Office

Avaya IP Office is our award-winning global flagship Small and Medium Enterprises, or SME communications, solution specially designed to meet communications challenges facing small and medium enterprises. Avaya IP Office is part of our infrastructure solutions portfolio. IP Office provides solutions that help simplify processes and streamline information exchange within systems. Communications capabilities can be added as needed, and IP Office connects to both traditional and the latest IP lines—to give growing companies flexibility and the ability to retain and leverage their existing investment. We recently unveiled the latest version of our communications solution for this market — Avaya IP Office 8.0 — which introduces a range of advancements for improving collaboration, and which we believe will drive improved savings, user experiences and collaboration for a new generation of entrepreneurs, early-stage companies and mid-size firms.

AvayaLive

AvayaLive is our overall Avaya-provided cloud solutions portfolio, allowing our customers to procure, provision, and deploy unified collaboration solutions without the need for on-premise equipment. The AvayaLive portfolio is focused on providing feature-rich, user deployable, collaboration platforms in a Communications As a Service (Caas) model, without requiring additional IT staffing or training.

AvayaLive Engage is a unique online, immersive conferencing and social collaboration environment that lets users collaborate as though they were face to face. AvayaLive Engage is part of our UC Applications solutions portfolio and replicates real life interactions using personalized avatars, which users control to navigate through an online, three-dimensional environment, with the ability to talk, chat, share, collaborate and present in real-time. Key to the experience is AvayaLive Engage’s spatial audio technology, which lets participants talk interactively and hear each other based on their relative position and distance, creating a more realistic and natural experience than traditional conference calls. A cloud-based solution requiring only a web browser plug-in, the product allows collaboration between users from any browser, inside or outside of the enterprise. The service can be purchased with standard templated environments through e-commerce and automatically provisioned, or customized environments can be created for larger customers. AvayaLive Engage has been used in various business use cases, including training, e-commerce, product launches and virtual tradeshows.

AvayaLive Connect is a single-source for a complete unified communication experience for entrepreneurial businesses. The entrepreneurial business is defined by agility, creativity, and the rapid access to technology and the AvayaLive Connect solution is hallmarked by all three. The solution provides voice, video, conferencing, chat and messaging solutions in a simple, cloud-based solution. These services are accessible from mobile devices, personal computers, “hard” phones and tablets to enable collaboration from nearly anywhere a network is available. AvayaLive Connect is billed on a per-user/per month basis allowing businesses to add users to meet the demands of their customers. Utilizing the Amazon Elastic Compute Cloud (EC2), AvayaLive Connect scales to meet these demands with ease and without expensive resource or administrative overhead.

Avaya Networking

In support of our data communications strategy, our networking product portfolio is designed to address and surpass competitors’ products with respect to three key requirements: resiliency, efficiency and performance.

Our networking portfolio is complementary to our business collaboration, unified communications and contact center portfolios based on the Avaya Aura architecture. We believe that customers today benefit from end-to-end solution design, testing and support. Over time we expect customers to benefit from development work in integrated provisioning, system management, quality of experience and bandwidth utilization.

Our networking portfolio includes:

 

   

Ethernet Switching—a range of Local Area Network switches for data center, core, edge and branch applications;

 

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Unified Branch—a range of routers and Virtual Private Network appliances that provide a secure connection for branches;

 

   

Wireless Networking—a cost-effective and scalable solution enabling enterprises to deploy wireless coverage;

 

   

Access Control—solutions that provide policy decision to enforce role-based access control to the network;

 

   

Unified Management—providing support for data and voice networks by simplifying the requirements associated across functional areas; and

 

   

Avaya VENA—an end-to-end virtualization strategy and architecture that helps simplify data center and campus networking and optimizes business applications and service deployments in and between data centers and campuses, while helping to reduce costs and improve time to service.

We sell our portfolio of data networking products globally into enterprises of all types, with particular strength in healthcare, education, hospitality, financial services and local and state government.

Our Services

AGS evaluates, plans, designs, implements, supports, manages and optimizes enterprise communications networks to help customers achieve enhanced business results both directly and through partners. Our award-winning portfolio of services includes product support, integration and professional and managed services that enable customers to optimize and manage their converged communications networks worldwide and achieve enhanced business results. AGS is supported by patented design and management tools and network operations and technical support centers around the world.

The portfolio of AGS services includes:

 

   

Avaya Client Services (“ACS”)—We monitor and improve customers’ communications network performance, helping to ensure network availability and keeping communications networks current with the latest software releases. This includes our managed and operations services in which we manage complex multi-vendor, multi-technology networks, help optimize network performance and manage customers’ communications environments and related assets. ACS contracts tend to be longer term in nature. For example, contracts for support services typically have terms that range from one to five years. Contracts for operations services typically have terms that range from one to seven years.

Included in ACS is the Avaya Operations Services (“AOS”) business, the managed services business. Avaya has crafted a highly differentiated managed services offer targeted at enterprises with legacy communications environments, enabling them to transform their infrastructure to a next generation solution in a highly efficient and effective manner. AOS has hundreds of cust