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As filed with the Securities and Exchange Commission on June 9, 2011

Registration No. 333-            

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

AVAYA HOLDINGS CORP.

(Exact name of registrant as specified in its charter)

Delaware   3661   26-1119726
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

 

211 Mount Airy Road

Basking Ridge, New Jersey 07920

(908) 953-6000

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

 

Pamela F. Craven, Esq.

Chief Administrative Officer

Avaya Holdings Corp.

211 Mount Airy Road

Basking Ridge, New Jersey 07920

(908) 953-6000

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

 

With copies to:

Julie H. Jones, Esq.
Ropes & Gray LLP
Prudential Tower

800 Boylston St.
Boston, MA 02199
Telephone (617) 951-7000
Fax (617) 951-7050

 

Daniel J. Zubkoff, Esq.

Douglas S. Horowitz, Esq.

Cahill Gordon & Reindel LLP

80 Pine Street

New York, NY 10005

Telephone (212) 701-3000

Fax (212) 269-5420

 

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

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

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

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

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

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

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

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate Offering
Price(1)(2)

 

Amount of

Registration Fee

Common Stock, $0.001 par value per share

  $1,000,000,000   $116,100
 
 
(1)   Includes shares to be sold upon exercise of the underwriters’ option to purchase additional shares. See “Underwriters.”
(2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.

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

 

 


Table of Contents

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

 

PROSPECTUS (Subject to Completion)

Issued June 9, 2011

 

            Shares

 

LOGO

 

COMMON STOCK

 

 

 

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

 

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

 

 

 

We have applied to list our common stock on the             under the symbol “             .”

 

 

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 17.

 

 

 

PRICE $             A SHARE

 

 

 

       Public Offering
Price
    

Underwriting
Discounts and
Commissions

    

Proceeds
to Avaya

Per Share

     $               $               $         

Total

     $                          $                          $                    

 

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

 

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

 

The underwriters expect to deliver the shares to purchasers on                    , 2011.

 

 

 

MORGAN STANLEY   GOLDMAN, SACHS & CO.           J.P. MORGAN
CITI                       DEUTSCHE BANK SECURITIES            

BofA MERRILL LYNCH

  BARCLAYS CAPITAL              UBS INVESTMENT BANK   CREDIT SUISSE

 

                    , 2011


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     17   

Special Note Regarding Forward-Looking Statements

     31   

Use of Proceeds

     33   

Dividend Policy

     34   

Capitalization

     35   

Dilution

     37   

Selected Historical Consolidated Financial Data

     39   

Unaudited Pro Forma Combined Financial Statements

     45   

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

     57   

Business

     112   

Market, Ranking and Other Industry Data

     134   

Management

     135   
        
     Page  

Executive Compensation

     144   

Certain Relationships and Related Party Transactions

     173   

Principal Stockholders

     177   

Description of Certain Outstanding Indebtedness

     181   

Description of Capital Stock

     190   

Shares Eligible For Future Sale

     193   

Certain Material U.S. Federal Income Tax Considerations For Non-U.S. Holders Of Common Stock

     195   

Underwriters

     199   

Legal Matters

     206   

Experts

     206   

Where You Can Find Additional Information

     206   

Index to Consolidated and Combined Financial Statements 

     F-1   
 

 

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

 

Until                     , 2011 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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

 

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

 

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

 

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PROSPECTUS SUMMARY

 

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

 

Our Company

 

We are a leading global provider of 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 have a long track record of innovation and our customers historically have relied on us to deliver mission critical communications solutions. The markets for areas associated with our business collaboration and communications solutions are expected to represent a $77 billion market in 2011 in the aggregate.

 

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 target large enterprises, small- and medium-sized businesses and government organizations in five key business collaboration and communications product categories:

 

   

Unified Communications Software, Infrastructure and Endpoints

 

   

Real Time Video Collaboration

 

   

Contact Center

 

   

Data Communications

 

   

Applications, including their Integration and Enablement

 

Our next-generation business collaboration solutions are architected to be highly scalable, flexible and easy to manage, and support a variety of deployment models, including on-premise, public and private cloud, virtualized and mobile delivery. Our research and development investments are focused on software at the user experience and business application layers, and software and hardware at the infrastructure layer and endpoints. In addition, we are investing in software for monitoring, troubleshooting and managing distributed communications architectures that we believe will reduce the total cost of ownership and improve end-to-end serviceability of our solutions versus our competitors.

 

We are executing on two critical strategic initiatives related to the transition of our product portfolio and the enhancement of our sales coverage model in order to continue to grow our business. Our product portfolio has been reshaped to drive revenue growth and business model cash cycle time. In addition, our portfolio of business collaboration and communications solutions is designed to deliver an intuitive and personalized user experience, seamlessly integrating various modes of communications and collaboration, including real-time voice, video, instant messaging and conferencing, and non real-time email, voicemail and social networking. These solutions target high growth market segments and we believe accelerate our sales cycle as customers more frequently upgrade their solutions to take advantage of our ongoing product innovation and to deploy our user experience across an array of endpoints, including our own and those of other vendors.

 

 

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With our product portfolio poised for the future, we are now seeking to leverage our sales and distribution channels to accelerate customer adoption and generate an increasing percentage of our revenue from these new high value software solutions and user experience-centric applications. We are expanding our sales coverage model, including both partners and direct sales, while supporting our customers’ channel preference. In December 2009, we acquired the enterprise solutions business of Nortel Networks Corporation, or NES, which expanded our customer base, broadened and strengthened our indirect sales channel, enhanced our technology portfolio, established our leading presence in data communications and enhanced our ability to compete globally.

 

Over the past several years, we have invested significantly in research and development, introducing more than 60 new product offerings to the market since the beginning of fiscal year 2010. For example, we recently released our Avaya Flare Experience, a real-time, enterprise video communications and collaboration solution helping to break down the barriers commonly seen in today’s communications and collaboration tools with a distinctive user interface for quick, easy access to voice and video, social media, presence, instant messaging, audio/video/web conferencing, a consolidated view of multiple directories and context history. In addition, we have further enhanced our business through acquisitions and by restructuring or divesting businesses that dilute our focus from our principal markets.

 

Our market leadership in next-generation business collaboration is due in part to our long-standing heritage of delivering mission critical unified communications, contact center and voice communications solutions. As a market leader in enterprise voice telephony and messaging for more than 10 years and in unified communications for the past four years, we believe that our Voice over Internet Protocol, or VoIP, solutions have enabled customers to centralize communications applications and hardware to serve geographically dispersed users, significantly reducing management cost, complexity, and annual spend to telecommunication service providers. Leveraging this experience, we have now developed innovative, next-generation unified communications and contact center solutions that focus on business collaboration, and, unlike earlier solutions, are designed from the ground up to support multiple media and modes of communication, reducing cost and complexity while improving collaboration effectiveness. At the core of our next-generation collaboration solutions is Avaya Aura, our Session Initiation Protocol, or SIP, based architecture, which enables multiple people, media and resources to be brought together into an integrated communications session with the ability to access the communication context across different media and modes. The Avaya Aura architecture makes software applications easier to develop, deploy and manage than traditional Computer Telephone Integration, or CTI, based unified communications and contact center applications. Since our SIP-based architecture requires much less specialized communications programming skill than traditional solutions, we expect it to attract a broader community of developers and accelerate innovation and application development.

 

Our solutions address the needs of a diverse range of customers, including large multinational enterprises, small- and medium-sized businesses and government organizations. As of March 31, 2011, we had over 400,000 customers, including more than 85% of the Fortune 500 companies and one million customer locations worldwide. Our customers operate in a broad range of industries, including financial services, manufacturing, retail, transportation, energy, media and communications, health care, education and government, and include, among others, Morgan Stanley & Co. LLC, Progressive Casualty Insurance Company, Whirlpool Corporation, The Hewlett-Packard Company, Home Depot, Inc., United Air Lines, Inc., Marriott International, Inc., the Blue Cross and Blue Shield Association, Australia National University and the Federal Deposit Insurance Corporation, or the FDIC. We employ a flexible go-to-market strategy with direct and indirect presence in over 100 countries. As of March 31, 2011, we had approximately 9,900 channel partners and for the six months ended March 31, 2011, our product revenue from indirect sales represented approximately 77% of our total product revenue.

 

For the twelve months ended September 30, 2010 and the six months ended March 31, 2011, we generated revenue of $5,060 million and $2,756 million, respectively. For the twelve months ended September 30, 2010, product revenue represented 51% of our total revenue and services revenue represented 49%. For the six months

 

 

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ended March 31, 2011, product revenue represented 54% of our total revenue and services revenue represented 46%. For the twelve months ended September 30, 2010, approximately 55% of our revenue was generated in the United States. For the twelve months ended September 30, 2010 and the six months ended March 31, 2011, we had a net loss of $871 million and $612 million, respectively, and Adjusted EBITDA of $795 million and $442 million, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures and Supplemental Disclosure—EBITDA and Adjusted EBITDA” for a definition and explanation of Adjusted EBITDA and a reconciliation of net loss to Adjusted EBITDA.

 

Our Industry

 

Trends Driving Business Collaboration Spending

 

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

 

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

 

Proliferation of Devices and Applications Expanding the Number of Points of Integration. The number and types of endpoints are growing rapidly. In order to communicate seamlessly across these devices and applications, collaboration solutions must integrate them into the communications infrastructure and allow IT professionals to manage them effectively and reliably.

 

Consumerization of the Enterprise has Changed Expectations of Business Users and Put More Pressure on IT Departments. Business users are increasingly using consumer-focused products and applications for business tasks, particularly in the areas of collaboration and communication. This has put a significant strain on IT departments to support and secure these devices and applications within the enterprise.

 

Customer Expectations of Contact Centers and Customer Service Are Changing. Customer expectations are changing as interactions with contact centers evolve from voice-centric to multimedia and multi-modal communications. Customers increasingly expect enterprises to know the history of the interaction regardless of the method of communication.

 

Business Leaders are Increasingly Challenged to Deliver New Business Capabilities to Support Growth While Facing Tight IT Budgets. Business leaders continue to manage their overall spending closely due to continued macro-economic uncertainty. At the same time, business leaders are focused on strategic IT investments to gain competitive advantage and improve productivity, while expecting acceptable levels of return on their investment.

 

 

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Competitors’ Solutions are Inadequate

 

Together these trends add to the complexity of enabling business collaboration, and drive business leaders to seek a more simple, holistic solution that is easy-to-use, scalable and cost-effective. We believe that competitors’ solutions fall short of delivering a seamless real-time collaboration experience due to the following limitations:

 

Most Collaboration Solutions Today are One-size-fits-all and Often Cannot Accommodate Customers’ Specific Needs. Competitors’ collaboration solutions are not designed for the demands of unified communications. Many collaboration vendors see the demand for unified communications as an opportunity to sell more of their core products by bundling their products with other communication systems and loosely tying the systems together with a single user interface. The resulting solutions are poorly architected, difficult to deploy and manage and do not deliver a seamless, real-time business collaboration experience.

 

Competitors’ Solutions Were Built from an Email or Data Networking Focus, Not for Real-time Collaboration. Many traditional collaboration tools simply aggregate different modes of communication around their core competency (email or data) with a single interface without integrating the underlying architectures. As a result, users have a disjointed experience and do not realize the many benefits of next-generation business collaboration solutions such as simultaneous conversations across different media or the ability to access the context of their conversations across various modes and media.

 

Traditional Solutions are Closed and Proprietary, Forcing Customers to Use a Single Vendor and Abandon Existing IT Investments. Many of our competitors’ collaboration solutions use proprietary, closed architectures, which do not integrate well with those of other vendors. This forces customers to choose a platform that does not offer all of the desired features and functionality and makes it difficult to integrate third party applications to address broader enterprise requirements. As a result, customers either have to abandon their existing infrastructure investments or accept additional complexity and costs in order to deploy new infrastructure equipment or applications.

 

Limited Consumer Device Support. We believe that because of their proprietary nature, competitors’ solutions do not easily lend themselves to enabling the integration of new consumer devices with seamless, real-time collaborations applications. These solutions lack the infrastructure to reliably integrate, support and secure these consumer devices and therefore inhibit the potential benefits these devices can bring to the enterprise.

 

Most Collaboration Solutions Vendors Lack an In-house Global Services Organization to Support Customers and Partners Through Implementation and Maintenance. Most collaboration vendors lack a full scale in-house services organization to help customers and partners deploy business collaboration solutions or the integration expertise to help customers migrate from their current communications environment. As a result, customers are forced to contract with third-party service providers, which adds to the overall cost and complexity of deployment.

 

High Total Cost of Ownership. Traditional solutions require a significant investment in new infrastructure and customized integration. In addition, they are difficult to deploy and manage and require significant professional services support upfront and ongoing IT costs to manage and maintain.

 

Addressable Market for Business Collaboration Solutions is Large and Growing

 

We believe that the trend toward a more mobile workforce and the proliferation of devices and applications creates a significant market opportunity for business collaboration. In addition, we believe that the limitations of traditional collaboration solutions present an opportunity for differentiated vendors to gain market share. We believe that the business collaboration market includes spending on unified communications, contact center applications and data networking equipment, as well as spending on support and maintenance services to support these tools. Industry analysts project that in 2011, these markets will grow to $77 billion in aggregate.

 

 

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Our Solutions

 

We are a leader in the business collaboration market and have created next-generation solutions that offer an innovative approach, delivering our customers fit-for-purpose, open solutions that we believe enable them to experience enhanced levels of productivity at a lower total cost of ownership than our competitors. The key benefits of our solutions include:

 

Innovative Real-Time, Multimedia, Multi-Platform Collaboration Tools that Unleash the Power of Teamwork. We help our customers unleash the power of collaboration by providing them with the software and infrastructure to bring people together with the right information at the right time in the right context regardless of the communications technology, devices or location.

 

Fit-for-Purpose Solutions that Offer An Enhanced User Experience, Productivity Benefits and Lower Total Cost of Ownership. Our solutions are specifically designed to address the needs of today’s unified communications environment. As a result, we believe our solutions require less hardware and perform better than our competitors.

 

Open Standards-Based Architecture that Enables Flexible and Extensible Collaboration. Our next-generation solutions are based on an open SIP architecture, accommodating customers with multi-vendor environments seeking to leverage their existing investments, supplement their existing solutions with specific collaboration products that they need, as well as rapidly create and deploy applications.

 

Enterprise-Class Solutions that are Scalable, Secure and Reliable. Enterprises and governments across the world depend on us for their collaboration needs, knowing that we can deliver mission critical dependability. Our product portfolio has been designed to be highly reliable, secure and scalable, and is backed by an award-winning global services organization with services support tools to help our customers monitor, troubleshoot and manage their infrastructure.

 

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

 

Our Competitive Strengths

 

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

 

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

 

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

 

History of Innovation with Large Pipeline of New Products and Unique Approach to Commercialization. As of March 31, 2011, we had over 5,700 patents and pending patent applications, including foreign counterparts. Since the beginning of fiscal year 2010, we have introduced more than 60 new offerings across our portfolio. We have a unique commercialization approach which we believe results in new products with broad appeal and accelerates the timeline for development and adoption.

 

 

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Flexible Go-to-Market Strategy Expands Reach of Our Products and Services. We sell our solutions both directly and through an indirect sales channel, enabling us to reach customers across industries and globally. With the acquisition of NES, we significantly expanded our channel coverage and deepened our vertical expertise.

 

Global End-to-End Services Organization Provides Large Recurring Revenue Stream. We maintain an award-winning, global, in-house services organization that provides us with a key advantage over many of our competitors who lack such an organization. Our services contracts tend to be multi-year arrangements, have high renewal rates and have provided us with a large recurring revenue base and significant visibility into our customers’ future collaboration needs.

 

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

 

Our Growth Strategy

 

We intend to be the preeminent provider of business collaboration solutions with a commitment to open standards and innovative products, services and solutions. Key elements of our strategy include:

 

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

 

Capture Additional Market Share Across our Portfolio of Products and Services. Most of our markets have numerous competitors of varying size, who will find it challenging to keep pace with the changing business collaboration needs. Our open architecture integrates with competitor systems and provides a path for gradual transition, while still achieving cost savings and improved functionality. In addition, we believe there is significant opportunity to further monetize the NES installed base by increasing the services attach rate for customers acquired in the NES acquisition.

 

Expand Margins and Profitability. Drive profitable growth worldwide and have multiple initiatives to further increase our profit margins, including increasing our focus on higher-margin software revenue, optimizing design of products and services productivity to drive efficiencies, executing on certain cost-savings initiatives and achieving greater economies of scale.

 

Continue to Develop Products and Services Around Our Next Generation Business Collaboration Solutions. Extend our industry-leading position through continued focus on product innovation and substantial investment in research and development for new products and services in high growth areas. We believe our ability to develop innovative solutions is advanced by feedback gathered from our extensive customer relationships and our customer focus, which allow us to better meet our customers’ needs and anticipate market demand.

 

Continue to Invest in and Expand our Sales and Distribution Capabilities to Attack New Markets and Better Penetrate Existing Markets. Continue to invest in our channel partners and sales force to optimize their market focus, improve segmentation, enter new geographies and provide our channel partners with compelling business incentives and discounts, along with training, marketing programs and technical support through our Avaya Connect program.

 

Pursue Strategic Relationships, Alliances and Acquisitions. Continue to establish relationships and alliances and selectively acquire capability-enhancing businesses to continue our global growth.

 

 

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Retain, Recruit and Develop Talent Globally. Develop a workforce that has both exceptional technical capabilities and the leadership skills that are required to support our technological and geographical growth.

 

Risks Associated with Our Company

 

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

 

   

Our revenues are dependent on general economic conditions and the willingness of enterprises to make capital investments;

 

   

The market opportunity for advanced communications products and services, including our next-generation business collaboration solutions may not develop in the ways that we anticipate;

 

   

We depend on third-party providers to manufacture, warehouse and distribute our products;

 

   

If we are not able to protect our intellectual property rights or if those rights are invalidated or circumvented, our business may be adversely affected;

 

   

Our degree of leverage could adversely affect our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry;

 

   

We face formidable competition from numerous established firms that provide both traditional enterprise voice communications solutions as well as providers of technology related to business collaboration and contact center solutions; as these markets evolve, we expect competition to intensify and expand to include companies that do not currently compete directly against us;

 

   

Following the completion of this offering, funds affiliated with TPG Capital, or TPG, and Silver Lake, which are collectively referred to as our Sponsors, will have the ability to control the outcome of matters submitted for stockholder approval and may have interests that differ from those of our other stockholders; and

 

   

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

 

Company Information and Corporate Structure

 

Our principal executive offices are located at 211 Mt. Airy Road, Basking Ridge, NJ 07920. Our telephone number is (908) 953-6000. Our website address is www.avaya.com. Information contained in, and that can be accessed through, our website is not incorporated into and does not form a part of this prospectus.

 

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

 

 

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

 

LOGO

 

(1)   Represents         %,         % and         % of the total voting power in our company, respectively.
(2)   Substantially all of our domestic 100% owned subsidiaries as of June 1, 2011 guarantee our notes and our credit facilities. Other subsidiaries, including non-U.S. subsidiaries, do not guarantee our notes or our credit facilities. See “Description of Certain Outstanding Indebtedness” for more information.

 

 

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THE OFFERING

 

Common stock we are offering

  

            Shares

Common stock to be outstanding after this offering

  

            Shares

Option to purchase additional shares offered to underwriters

  

            Shares

Use of proceeds

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

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

  

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

  

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

  

See “Use of Proceeds.”

Risk factors

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

Proposed symbol

  

“            ”

 

As of March 31, 2011, we had 487,389,017 shares of common stock outstanding. This excludes the following numbers of shares of our common stock issuable in connection with the exercise of warrants outstanding as of March 31, 2011 and equity awards under our Amended and Restated 2007 Equity Incentive Plan, or the 2007 Plan:

 

   

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

 

   

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

 

   

972,341 shares of common stock issuable on the distribution of units that were awarded to executive officers prior to the Merger and were permitted to be rolled over into equity awards issued by us upon consummation of the Merger, or Continuation Units;

 

   

44,072,956 shares of common stock issuable upon the exercise of options with exercise prices ranging from $3.00 to $5.00 per share and a weighted average exercise price of $3.03 per share;

 

 

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1,370,000 shares of common stock issuable on the vesting and distribution of restricted stock units, or RSUs; and

 

   

4,405,201 additional shares of common stock as of March 31, 2011 reserved for future grants under the 2007 Plan.

 

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

 

Unless otherwise indicated, all information in this prospectus:

 

   

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

 

   

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

 

   

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

 

 

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SUMMARY HISTORICAL FINANCIAL DATA

 

The following table sets forth our summary historical consolidated financial data at the dates and for the periods indicated. Avaya Holdings Corp. was incorporated on June 1, 2007 by affiliates of the Sponsors. Avaya Holdings Corp., through a subsidiary holding company, entered into a merger agreement with Avaya Inc., or the Predecessor, pursuant to which the holding company merged with and into Avaya Inc., with Avaya Inc. continuing as the surviving entity and a wholly owned subsidiary of Avaya Holdings Corp., in a transaction that was completed on October 26, 2007. Avaya Holdings Corp. is a holding company and has no material assets or stand-alone operations other than its ownership in Avaya Inc. and its subsidiaries. The summary historical consolidated financial data set forth below are those of Avaya Holdings Corp. and its consolidated subsidiaries, or the Successor, from its inception on June 1, 2007 through March 31, 2011 and those of its predecessor, Avaya Inc., for all prior periods through the closing date of the Merger.

 

The Predecessor summary historical consolidated financial data set forth below as of and for the years ended September 30, 2006 and September 30, 2007 have been derived from our Predecessor’s audited consolidated financial statements and related notes, which are not included in this prospectus. The Predecessor summary historical consolidated financial data set forth below for the period October 1, 2007 through October 26, 2007 has been derived from our Predecessor’s audited consolidated financial statements and related notes included elsewhere in this prospectus. The Successor summary historical consolidated financial data set forth below as of and for the years ended September 30, 2008, 2009 and 2010 have been derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The Successor summary historical consolidated financial data set forth below as of and for the period June 1, 2007 through September 30, 2007 has been derived from our unaudited consolidated financial statements, which are not included in this prospectus. The Successor had no operations prior to the Merger. The Successor summary historical consolidated financial data set forth below as of and for the six months ended March 31, 2011 and 2010 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our unaudited consolidated financial statements for the six months ended March 31, 2011 and 2010 have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of our management, include all adjustments, which include only normal recurring adjustments, necessary for a fair statement of this data. As part of the Merger on October 26, 2007, we entered into various financing arrangements and, as a result, had a different capital structure following the Merger. Accordingly, the results of operations for periods subsequent to the Merger will not necessarily be comparable to prior periods.

 

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

 

 

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    Predecessor           Successor  
    Fiscal year  ended
September 30,
    Period from
October 1,

2007
through
October 26,

2007
          Period from
June 1,

2007
through
September 30,

2007(1)
    Fiscal year ended
September 30,
    For the Six Months
Ended March 31,
 
  2006     2007           2008(2)     2009     2010        2010           2011     
    (in millions, except per share amounts)  

STATEMENT OF OPERATIONS DATA:

                     
 

REVENUE

                     

Products

  $ 2,790      $ 2,875      $ 96          $      $ 2,595      $ 1,923      $ 2,602      $ 1,193      $ 1,479   

Services

    2,358        2,403        150                   2,328        2,227        2,458        1,187        1,277   
                                                                           
    5,148        5,278        246                   4,923        4,150        5,060        2,380        2,756   

COSTS

                     

Products:

                     

Costs (exclusive of amortization of intangible assets)

    1,224        1,295        56                   1,256        872        1,243        548        675   

Amortization of technology intangible assets

    15        20        1                   231        248        291        142        133   

Services

    1,534        1,512        100                   1,403        1,164        1,354        644        687   
                                                                           
    2,773        2,827        157                   2,890        2,284        2,888        1,334        1,495   
                                                                           

GROSS MARGIN

    2,375        2,451        89                   2,033        1,866        2,172        1,046        1,261   
 

OPERATING EXPENSES

                     

Selling, general and administrative

    1,532        1,552        111                   1,456        1,272        1,721        833        931   

Research and development

    428        444        29                   376        309        407        197        236   

Amortization of intangible assets

    48        48        4                   187        207        218        107        112   

Impairment of long-lived assets

                                    10        2        16        16          

Impairment of indefinite-lived intangible assets

                                    130        60                        

Goodwill impairment

                                    899        235                        

Restructuring charges, net

    104        36        1                          160        171        83        64   

In-process research and development charge

                                    112        12                        

Acquisition-related costs

                                           29        20        19        4   

Merger-related costs

           105        57                   1                               
                                                                               
    2,112        2,185        202                   3,171        2,286        2,553        1,255        1,347   
                                                                           

OPERATING INCOME (LOSS)

    263        266        (113                (1,138     (420     (381     (209     (86

Interest expense

    (3     (1                       (377     (409     (487     (229     (240

Loss on extinguishment of debt

                                                                (246

Other income, net

    24        43        1                   27        14        15        5        1   
                                                                           

INCOME (LOSS) BEFORE INCOME TAXES

    284        308        (112                (1,488     (815     (853     (433     (571

Provision for (benefit from) income taxes

    83        93        (24                (183     30        18        (16     41   
                                                                           

NET INCOME (LOSS)

    201        215        (88                (1,305     (845     (871     (417     (612

Less net income attributable to noncontrolling interests

           3                          2        2        3        2          
                                                                           

NET INCOME (LOSS) ATTRIBUTABLE TO AVAYA HOLDINGS CORP.

    201        212        (88                (1,307     (847     (874     (419     (612

Less: Accretion and accrued dividends on Series A preferred stock

                                                  (62     (2     (3
                                                                           

NET INCOME (LOSS) ATTRIBUTABLE TO AVAYA HOLDINGS CORP. COMMON STOCKHOLDERS

  $ 201      $ 212      $ (88       $      $ (1,307   $ (847   $ (936   $ (421   $ (615
                                                                           

SHARE DATA:

                     

Net income (loss) per share attributable to common stockholders—basic

  $ 0.43      $ 0.47      $ (0.19       $      $ (2.87   $ (1.74   $ (1.92   $ (0.86   $ (1.26

Weighted average shares outstanding—basic

    462.6        454.2        462.9                   455.9        488.1        488.6        488.5        488.9   

Net income (loss) per share attributable to common stockholders—diluted

  $ 0.43      $ 0.46      $ (0.19       $      $ (2.87   $ (1.74   $ (1.92   $ (0.86   $ (1.26

Weighted average shares outstanding—diluted

    468.6        461.3        462.9                   455.9        488.1        488.6        488.5        488.9   

 

 

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    Predecessor           Successor  
     Fiscal year
ended September 30,
    Period from
October 1,
2007
through
October 26,

2007
          Period from
June 1,

2007
through
September 30,

2007(1)
    Fiscal year ended
September 30,
    Six months
ended March 31,
 
      2006             2007               2008(2)     2009     2010       2010         2011    
                            (in millions)                          

BALANCE SHEET DATA (at end of period):

                   
 

Cash and cash equivalents

  $ 899      $ 1,270            $      $ 594      $ 582      $ 594      $ 591      $ 468   

Intangible assets, net

    263        248                     3,154        2,636        2,603        2,878        2,367   

Goodwill

    941        1,157                     3,956        3,695        4,075        4,113        4,080   

Total assets

    5,200        5,933                     10,010        8,665        9,276        9,691        8,920   

Total debt (excluding capital lease obligations)

                               5,222        5,150        5,928        5,887        6,176   

Preferred stock, Series A

                                             130        127        133   

Total Avaya Holdings Corp. stockholders’ equity (deficiency)

    2,086        2,586                     1,063        (682     (1,543     (907     (2,136
 

STATEMENT OF CASH FLOWS DATA:

                     
 

Net cash provided by (used in)

                     

Operating activities

  $ 647      $ 637      $ 133          $      $ 304      $ 242      $ 42      $ (2   $ (349

Investing activities

    (189     (360     (16                (7,205     (155     (864     (850     (30

Financing activities

    (315     54        11                   7,512        (101     853        878        248   

OTHER FINANCIAL DATA:

                     
 

EBITDA

  $ 520      $ 557      $ (94       $      $ (515   $ 240      $ 320      $ 135      $ 2   

Adjusted EBITDA(3)

    654        832        (27                859        753        795        367        442   

Capital expenditures, net

    117        120        8                   120        76        79        30        35   

Capitalized software development costs

    71        93        7                   74        43        43        23        14   

 

(1)   Avaya Holdings Corp. is a holding company formed on June 1, 2007 by affiliates of the Sponsors for the purpose of consummating the Merger. Avaya Holdings Corp. has no material assets or stand-alone operations other than its ownership in Avaya Inc. and its subsidiaries. The summary historical consolidated financial data above as of September 30, 2007 and for the period from June 1, 2007 through September 30, 2007 reflects the results of Avaya Holdings Corp., which did not have assets or operations prior to the Merger.
(2)   The summary historical consolidated financial data above as of and for the year ended September 30, 2008 reflect the results of Avaya Holdings Corp. for the entire fiscal year and includes the results of Avaya Inc. and its consolidated subsidiaries subsequent to October 27, 2007, the date of the Merger.
(3)   Adjusted EBITDA is calculated in accordance with our debt agreements entered into in connection with the Merger. For the fiscal year ended September 30, 2007, Adjusted EBITDA is calculated in accordance with the debt agreements for comparative purposes. For the fiscal year ended September 30, 2006, Adjusted EBITDA is calculated as net income before interest expense, interest income, income tax expense, depreciation and amortization, restructuring charges and non-cash share-based compensation.

 

EBITDA is defined as net income (loss) before income taxes, interest and depreciation and amortization. EBITDA provides us with a measure of operating performance that excludes items that are outside the control of management, which can differ significantly from company to company depending on capital structure, the tax jurisdictions in which companies operate and capital investments. Under Avaya Inc.’s debt agreements, its ability to draw on its revolving credit facilities or engage in activities such as incurring additional indebtedness, making investments and paying dividends is tied in part to ratios based on Adjusted EBITDA. EBITDA and Adjusted EBITDA are non-GAAP measures. GAAP is a reference to generally accepted accounting principles in the United States of America. As defined in our debt agreements, Adjusted EBITDA is a measure of EBITDA further adjusted to exclude certain charges and other adjustments permitted in calculating covenant compliance under our debt agreements. We believe that including

 

 

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supplementary information concerning Adjusted EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our debt agreements and because it serves as a basis for determining management compensation. In addition, we believe Adjusted EBITDA provides more comparability between our historical results and results that reflect purchase accounting and our new capital structure following the Merger. Accordingly, Adjusted EBITDA measures our financial performance based on operational factors that management can impact in the short-term, namely the Company’s pricing strategies, volume, costs and expenses of the organization.

 

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

 

 

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

 

    Predecessor           Successor  
  Fiscal year
ended
September 30,

2007
    October 1,
2007
through
October 26,

2007
          June  1,
2007
through
September  30,

2007
    Fiscal year ended
September 30,
    Six months
ended March 31,
 
          2008     2009     2010       2010         2011    
                            (in millions)                          

Net income (loss)

  $ 215      $ (88       $      $ (1,305   $ (845   $ (871   $ (417   $ (612

Interest expense

    1                          377        409        487        229        240   

Interest income

    (49     (5                (20     (6     (5     (3     (2

Income tax (benefit) expense

    93        (24                (183     30        18        (16     41   

Depreciation and amortization

    297        23                   616        652        691        342        335   
                                                                   

EBITDA

    557        (94                (515     240        320        135        2   

Impact of purchase accounting adjustments(a)

                             230        (1     5        2        (2

Restructuring charges, net

    36        1                          160        171        83        64   

Sponsors’ fees(b)

                             6        7        7        4        4   

Merger-related costs(c)

    105        57                   1                               

Acquisition-related costs(d)

                                    29        20        19        4   

Integration-related costs(e)

                                    5        208        83        87   

Strategic initiative costs(f)

                             27        21        6        4          

Debt registration fees

                                           1        1          

Loss on extinguishment of debt(g)

                                                         246   

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

                                                         9   

Non-cash share-based compensation

    39                          21        10        19        11        6   

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

                                                         1   

(Gain) loss on sale of long-lived assets

    (8                       1        1        (4            (1

Impairment of long-lived assets

    8                          140        62        16        16          

Goodwill impairment

                             899        235                        

Bank fees

    7                                                        

Loss (gain) on foreign currency transactions

           1                   (15     (8     1        (2     (9

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

    (6     2                   (5     (4     (6     (4       

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

    94        6                   69        (4     31        15        31   
                                                                   

Adjusted EBITDA

  $ 832      $ (27       $      $ 859      $ 753      $ 795      $ 367      $ 442   
                                                                       

 

(a)   For fiscal year 2008, represents adjustments to eliminate the impact of certain purchase accounting adjustments recorded as a result of the Merger, including: elimination of certain deferred revenues and deferred costs and expenses; elimination of previously capitalized software development costs; write-off of in-process research and development, or IPRD, costs and adjustment to estimated fair values of certain assets and liabilities, such as inventory. For fiscal year 2009, represents the recognition of the amortization of business partner commissions which were eliminated in purchase accounting, partially offset by the recognition of revenues and costs that were deferred in prior years and eliminated in purchase accounting as a result of the Merger. For fiscal year 2010 and the six months ended March 31, 2011 and 2010, represents adjustments to eliminate the impact of certain purchase accounting adjustments recorded as a result of the acquisition of NES and the Merger, including the recognition of the amortization of business partner commissions, which were eliminated in purchase accounting, the recognition of revenue and costs that were deferred in prior periods and eliminated in purchase accounting and the elimination of the impact of estimated fair value adjustments for certain assets and liabilities, such as inventory.

 

 

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(b)   Sponsors’ fees represent monitoring fees payable to affiliates of the Sponsors pursuant to a management services agreement entered into at the time of the Merger. See “Certain Relationships and Related Party Transactions.”
(c)   Merger-related costs are costs directly attributable to the Merger and include investment banking, legal and other third-party costs.
(d)   Acquisition-related costs include legal and other costs related to the acquisition of NES and other acquisitions.
(e)   Integration-related costs primarily represent third-party consulting fees and other administrative costs associated with consolidating and coordinating the operations of Avaya and NES. These costs were incurred in connection with, among other things, the on-boarding of NES personnel, developing compatible IT systems and internal processes and developing and implementing a strategic operating plan to help enable a smooth transition with minimal disruption to NES customers. Integration-related costs also include fees paid to certain Nortel-controlled entities for logistics and other support functions being performed on a temporary basis pursuant to a transition services agreement.
(f)   Strategic initiative costs represent consulting fees in connection with management’s cost-savings actions, which commenced subsequent to the Merger.
(g)   Loss on extinguishment of debt represents the loss recognized in connection with the payment in full of the senior secured incremental term B-2 loans. The loss is based on the difference between the reacquisition price and the carrying value of the senior secured incremental term B-2 loans. See Note 9, “Financing Arrangements,” to our consolidated financial statements located elsewhere in this prospectus.
(h)   The third-party fees expensed in connection with the modification of the senior secured credit facility are discussed in Note 9, “Financing Arrangements,” to our consolidated financial statements located elsewhere in this prospectus.
(i)   Represents that portion of our pension costs, other post-employment benefit costs, non-retirement post-employment benefit costs representing the amortization of prior service costs and net actuarial gains/losses associated with these employment benefits.

 

 

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RISK FACTORS

 

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

 

Risks Associated with Our Company

 

A key component of our strategy is to leverage our leading market positions to drive the adoption of our next-generation business collaboration solutions, and this strategy may not be successful.

 

Business collaboration technology continues to evolve. Both traditional and new competitors are investing heavily in this market and competing for customers.

 

In order to execute our strategy successfully, we must:

 

   

retain and expand our presence with existing customers by continuing to innovate around next-generation business collaboration solutions and continuing to grow our contact center and voice communications solutions;

 

   

capture additional market share across our portfolio of products and services;

 

   

continue to expand gross margins and reduce operating expense through current and future initiatives;

 

   

continue to invest in research and development, including in new software and platform development;

 

   

continue to invest in and expand our sales and distribution capabilities to attack new markets and better penetrate existing markets;

 

   

train our sales staff and distribution partners to sell new products and services including, but not limited to, the recently launched Avaya Flare Experience and our new video products;

 

   

acquire new technologies through licensing, development contracts, alliances and acquisitions;

 

   

train our services employees and channel partners to service new or enhanced products and applications and take other measures to ensure we can deliver consistent levels of service globally;

 

   

enhance our services organization’s ability to service complex, multi-vendor networks;

 

   

retain, recruit and develop qualified personnel globally, particularly in research and development, services and sales;

 

   

develop relationships with new types of channel partners who are capable of both selling advanced products and extending our reach into new and existing markets; and

 

   

establish or expand our presence in key geographic markets.

 

If we do not successfully execute our strategy, our operating results may be materially and adversely affected.

 

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

 

The demand for our offerings can change quickly and in ways that we may not anticipate because the market in which we operate is characterized by rapid, and sometimes disruptive, technological developments, evolving industry standards, frequent new product introductions and enhancements, changes in customer requirements and a limited ability to accurately forecast future customer orders. Our operating results may be adversely affected if the market opportunity for our products and services does not develop in the ways that we anticipate.

 

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We cannot predict whether:

 

   

our solutions will attract and retain customers and channel partners or that we can execute our sales strategy successfully;

 

   

the demand for our products and services, including Avaya Aura and the Avaya Flare Experience, will grow as quickly as we anticipate or current or future competitors or new technologies will cause the market to evolve in a manner different than we expect;

 

   

other technologies will become more accepted or standard in our industry or will disrupt our SIP-based technology platform; or

 

   

we will be able to maintain a leadership or profitable position as this opportunity develops.

 

We face formidable competition from numerous established firms that provide both traditional enterprise voice communications solutions as well as providers of technology related to business collaboration and contact center solutions; as these markets evolve, we expect competition to intensify and expand to include companies that do not currently compete directly against us.

 

We compete against providers of both traditional enterprise voice communications solutions as well as providers of technology related to business collaboration and contact center solutions. For example, we compete with Alcatel-Lucent (including Genesys), Aspect Software, Inc., or Aspect, Brocade Communications Systems, Inc., or Brocade, Cisco Systems, Inc., or Cisco, Juniper Networks, Inc., or Juniper, Microsoft Corporation, or Microsoft, NEC Corporation, or NEC, and Siemens Enterprise Communications Group, or SEN. Our video conferencing solutions both partner and compete with solutions offered by Polycom Inc., TANDBERG (now Cisco) and LifeSize (now a division of Logitech International S.A.). We also face competition in the small and medium enterprise market from many competitors, including Cisco, Alcatel-Lucent, NEC, Matsushita Electric Corporation of America, Mitel Networks Corp., or Mitel, and ShoreTel Inc., or ShoreTel, although the market for these products is more fragmented. We face competition in certain geographies with companies that have a particular strength and focus in these regions, such as Huawei Technologies Co., Ltd. in China and Intelbras S.A. in Latin America. Our services business competes with companies like those above in offering services, either directly or indirectly through their channel partners, with respect to their own product offerings, as well as with many value-added resellers, consulting and systems integration firms and network service providers.

 

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

 

Several of our existing competitors have, and many of our future competitors may have, greater financial, personnel, technical, research and development and other resources, more well-established brands or reputations and broader customer bases than we do and, as a result, these competitors may be in a stronger position to respond quickly to potential acquisitions and other market opportunities, new or emerging technologies and changes in customer requirements. Some of these competitors may have customer bases that are more geographically balanced than ours and, therefore, may be less affected by an economic downturn in a particular region. Other competitors may have deeper expertise in a particular stand-alone technology that develops more quickly than we anticipate. Competitors with greater resources also may be able to offer lower prices, additional

 

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products or services or other incentives that we cannot match or do not offer. Industry consolidations may also create competitors with broader and more geographic coverage and the ability to reach enterprises through communications service providers. Existing customers of data networking companies that compete against us may be inclined to purchase enterprise communications solutions from their current data networking or software vendors rather than from us. Also, as communications and data networks converge, we may face competition from systems integrators that traditionally have been focused on data network integration.

 

We cannot predict which competitors may enter our markets in the future, what form such competition may take or whether we will be able to respond effectively to the entry of new competitors into competition with us or the rapid evolution in technology and product development that has characterized our businesses. In addition, in order to effectively compete with any new market entrant, we may need to make additional investments in our business, use more capital resources than our business currently requires or reduce prices, any of which may materially and adversely affect our profitability.

 

Our revenues are dependent on general economic conditions and the willingness of enterprises to make capital investments.

 

One factor that significantly affects our operating results is the impact of economic conditions on the willingness of enterprises to make capital investments, particularly in business collaboration technology and related services. Given the current state of the economy, we believe that enterprises continue to be cautious about sustained economic growth and have tried to maintain or improve profitability through cost control and constrained capital spending, which places additional pressure on IT departments to demonstrate acceptable return on investment and may cause them to delay or reject capital projects, including implementing our solutions. Because it is not certain whether enterprises will increase spending on business collaboration technology significantly in the near term, we could experience continued pressure on our ability to increase our revenue. Our ability to grow revenue also may be affected by other factors, such as competitive pricing pressures, price erosion and our ability to effectively and consistently price new and existing offers in the marketplace. If these or other conditions limit our ability to grow revenue or cause our revenue to decline and we cannot reduce costs on a timely basis or at all, our operating results may be materially and adversely affected.

 

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

 

We continue to take steps to sell our products and services into new and expanded geographic markets and to a broader customer base. An important element of our go-to-market strategy, therefore, involves our indirect sales channel, which includes our global network of alliance partners, distributors, dealers, value-added resellers, telecommunications service providers and system integrators. For example, although we expanded our indirect channel network and gained relationships with new channel partners through our acquisition of NES, in order to be successful we must further monetize the NES installed base by increasing the services attach rate for the Nortel customers we acquired. Our relationships with channel partners are important elements of our marketing and sales efforts. Our financial results could be adversely affected if our contracts with channel partners were terminated, if our relationships with channel partners were to deteriorate, if our maintenance pricing or other services strategies conflict with those of our channel partners, if any of our competitors were to enter into strategic relationships with or acquire a significant channel partner or if the financial condition of our channel partners were to weaken. In addition, we may expend time, money and other resources on developing and maintaining channel relationships that are ultimately unsuccessful. There can be no assurance that we will be successful in maintaining, expanding or developing relationships with channel partners, including those obtained as a result of the acquisition of NES. If we are not successful, we may lose sales opportunities, customers and market share.

 

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

 

We believe that developing new products and technology is critical to our success. As a leader in technology and innovation in business collaboration, we are dependent on the maintenance of our current intellectual property rights and the establishment of new intellectual property rights. We generally protect our intellectual property through patents, trademarks, trade secrets, copyrights, confidentiality and nondisclosure agreements and other measures. There can be no assurance that patents will be issued from pending applications that we have filed or that our patents will be sufficient to protect our key technology. Although we have been granted and have acquired many patents, have obtained other intellectual property rights and continue to file new patent applications and seek additional proprietary rights, there can be no assurances made that any of our patents, patent applications or our other intellectual property or proprietary rights will not be challenged, invalidated or circumvented. In addition, our business is global and the level of protection of our proprietary technology will vary by country, particularly in countries that do not have well developed judicial systems or laws that adequately protect intellectual property rights. Any actions taken in these countries may have results that are different than if such actions were taken under the laws of the U.S. Patent litigation and other challenges to our patents and other proprietary rights are costly and unpredictable and may prevent us from marketing and selling a product in a particular geographic area. Patent filings by third parties, whether made before or after the date of our filings, could render our intellectual property less valuable. Competitors and others may also misappropriate our intellectual property, disputes as to ownership of intellectual property may arise and our intellectual property may otherwise fall into the public domain. If we are unable to protect our proprietary rights, we may be at a disadvantage to others who did not incur the substantial time and expense we incurred to create our products. In addition, our efforts to enforce or protect our proprietary rights may be ineffective, could result in substantial costs and diversion of resources and could substantially harm operating results.

 

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

 

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

 

We rely on third-party providers for the manufacture, warehousing and distribution logistics associated with our products.

 

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

 

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

 

We conduct significant sales and customer support operations and increasing amounts of our research and development activities in countries outside of the U.S. and also depend on non-U.S. operations of our contract manufacturers and our distribution partners. For each of the fiscal years ended September 30, 2010 and 2009, we derived 45% of our revenue from sales outside the U.S. The vast majority of our contract manufacturing also takes place outside the U.S., primarily in China. Our future operating results, including our ability to import our products from, export our products to, or sell our products in various countries, could be adversely affected by a variety of uncontrollable and changing factors. These factors include political conditions, economic conditions, legal and regulatory constraints, protectionist legislation, relationships with employees and works councils, currency regulations, health or similar issues, natural disasters and other matters in any of the countries or regions in which we and our contract manufacturers and business partners currently operate or intend to operate in the future. Additional risks inherent in our global operations generally include, among other things, the costs and difficulties of managing international operations, adverse tax consequences, including imposition of withholding or other taxes on payments by subsidiaries, and greater difficulty in enforcing intellectual property rights (including the increased risk of counterfeiting of our products). Our prospective effective tax rate could be adversely affected by, among others, an unfavorable geographical distribution of our earnings and losses, by changes in the valuation of our deferred tax assets or liabilities or by changes in tax laws, regulations, accounting principles, or interpretations thereof. The various risks inherent in doing business in the U.S. generally also exist when doing business outside of the U.S., and may be exaggerated by the difficulty of doing business in numerous sovereign jurisdictions due to differences in culture, laws and regulations.

 

If we perform more of our operations outside the U.S., we may be exposed to increased operational and logistical risks associated with foreign operations, many of which are beyond our control and could affect our ability to operate successfully.

 

In order to enhance the cost-effectiveness of our operations, increasingly we have been shifting portions of certain of our operations to jurisdictions with lower cost structures than those available in certain of the countries in which we traditionally operate. This includes certain research and development, customer support and corporate infrastructure activities. We may encounter complications associated with the set-up, migration and operation of business systems and equipment in expanded or new facilities. The transition of even a portion of our research and development or customer support operations to a foreign country involves a number of logistical and technical challenges that could result in delays and other disruptions to our operations. If such delays or disruptions occur, they could damage our reputation and otherwise adversely affect our business and results of operations. To the extent that we shift any operations or functions outside of the U.S. to jurisdictions with lower cost structures, we may experience challenges in effectively managing those operations as a result of several factors, including time zone differences and regulatory, legal, employment, cultural and logistical issues. Additionally, the relocation of workforce resources may have a negative impact on our existing employees, which could negatively impact our operations. If we are unable to effectively manage our offshore operations, our business and results of operations could be adversely affected. We cannot be certain that any shifts in our operations to offshore jurisdictions will ultimately produce the expected cost savings. We cannot predict the extent of government support, availability of qualified workers, future labor rates or monetary and economic conditions in any offshore locations where we may operate. Although some of these factors may influence our decision to establish or increase our offshore operations, there are other inherent risks beyond our control, including issues such as political uncertainties and currency regulations as discussed above under “—As our business and operations related relationships have expanded globally in the last few years, changes in economic or political conditions, as well as natural disasters, in a specific country or region could negatively affect our revenue, costs, expenses and financial condition or those of our channel partners and distributors.” We are faced with competition in these offshore markets for qualified personnel, including skilled design and technical personnel, and we expect this competition to increase as companies expand their operations offshore, which

 

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could increase our costs and employee turnover rates. One or more of these factors or other factors relating to foreign operations could result in increased operating expenses and make it more difficult for us to manage our costs and operations, which could cause our operating results to decline and result in reduced revenues.

 

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

 

Foreign currency exchange rates and fluctuations may have an impact on our revenue, costs or cash flows from our international operations, which could adversely affect our financial performance. Our primary currency exposures are to the euro, British pound, Indian rupee and Canadian dollar. These exposures may change over time as business practices evolve and as the geographic mix of our business changes. From time to time we enter into foreign exchange forward contracts to reduce the short-term impact of foreign currency fluctuations. However, any attempts to hedge against foreign currency fluctuation risks may be unsuccessful and result in an adverse impact to our operating results.

 

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

 

From time to time, we seek to expand our business through acquisitions. We may not be able to successfully integrate acquired businesses into ours, and therefore we may not be able to realize the intended benefits from an acquisition. If we fail to successfully integrate acquisitions or if they fail to perform as we anticipate, our existing businesses and our revenue and operating results could be adversely affected. If the due diligence of the operations of these acquired businesses performed by us and by third parties on our behalf is inadequate or flawed, or if we later discover unforeseen financial or business liabilities, acquired businesses may not perform as expected. Additionally, acquisitions could result in difficulties assimilating acquired operations and products and the diversion of capital and management’s attention away from other business issues and opportunities. We may fail to retain employees acquired through acquisitions, which may negatively impact the integration efforts.

 

For all the reasons set forth above, the failure to integrate acquired businesses effectively may adversely impact Avaya’s business, results of operations or financial condition.

 

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

 

From time to time, we receive notices from third parties asserting that our proprietary or licensed products, systems and software infringe their intellectual property rights. There can be no assurance that the number of these notices will not increase in the future and that others will not claim that our proprietary or licensed products, systems and software are infringing their intellectual property rights or that we do not in fact infringe those intellectual property rights. We may be unaware of intellectual property rights of others that may cover some of our technology. Irrespective of the merits of these claims, if a third party claimed that our proprietary or licensed systems and software infringed their intellectual property rights, any resulting litigation could be costly and time consuming and could divert the attention of management and key personnel from other business issues. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. These matters may result in any number of outcomes for us, including entering into licensing agreements, redesigning our products to avoid infringement, being enjoined from selling products that are found to infringe, paying damages if products are found to infringe and indemnifying customers from infringement claims as part of our contractual obligations. Royalty or license agreements may be very costly and we may be unable to obtain royalty or license agreements on terms acceptable to us or at all. Such agreements may cause operating margins to decline. We also may be subject to significant damages or an injunction against us or our use of our proprietary or licensed systems or products. In addition, some of our employees previously have been employed at other companies that provide integrated communications solutions. We may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. These claims and other successful claims of patent or other intellectual property

 

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infringement against us could materially adversely affect our operating results. We have made and will likely continue to make investments to license and/or acquire the use of third-party intellectual property rights and technology as part of our strategy to manage this risk, but there can be no assurance that we will be successful or that any costs relating to such activity will not be material. We may also be subject to additional notice, attribution and other compliance requirements to the extent we incorporate open source software into our applications. In addition, third parties have claimed, and may in the future claim, that a customer’s use of our products, systems or software infringes the third party’s intellectual property rights. Under certain circumstances, we may be required to indemnify our customers for some of the costs and damages related to such an infringement claim. Any indemnification requirement could have a material adverse effect on our business and our operating results. For a description of certain legal proceedings regarding intellectual property, please see Note 19, “Commitments and Contingencies,” to our unaudited consolidated financial statements for the period ended March 31, 2011.

 

A breach of the security of our information systems could adversely affect our operating results.

 

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

 

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

 

We are subject to a wide range of governmental requirements relating to employee safety and health and to environmental protection. If we violate or fail to comply with these requirements, we could be fined or otherwise sanctioned by regulators. We are subject to certain provisions of environmental laws governing the cleanup of soil and groundwater contamination that may impose joint and several liability for the costs of investigating and remediating releases of regulated materials at currently or formerly owned or operated sites and at third-party waste disposal sites. In certain circumstances, this liability may also include the cost of cleaning up historical contamination, whether or not caused by us. We are currently involved in several remediations at currently or formerly owned or leased sites. We are also subject to various state, federal and international laws and regulations relating to the presence of certain substances in our products and making producers of certain electrical products financially responsible for the collection, treatment, recycling and disposal of those products. For example, the European Union, or the EU, has adopted the Restriction on Hazardous Substances, or RoHS, and Waste Electrical and Electronic Equipment, or WEEE, directives. Similar laws and regulations have been or may be enacted in other regions. Additionally, new requirements addressing the operating characteristics of our products are emerging, such as the EU Energy Using Product, or EuP, directive, which may necessitate reengineering of some products.

 

Environmental laws are complex, change frequently and have tended to become more stringent over time. It is often difficult to estimate the future impact of environmental matters, including potential liabilities. There can be no assurance that our costs of complying with current and future environmental and health and safety laws, including existing, pending and future environmental laws addressing climate change, and our liabilities arising from past or future releases of, or exposure to, regulated materials will not exceed any amounts reflected in our reserves or adversely affect our business, results of operations or financial condition.

 

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

 

Business collaboration solutions are complex, integrating hardware, software and many elements of a customers’ existing network and communications infrastructure. Despite pre-shipment testing and quality assurance programs, hardware may malfunction and software may contain “bugs” that are difficult to detect and fix. Any such issues could interfere with the expected operation of a solution, which might negatively impact customer satisfaction, reduce sales opportunities or affect gross margins. Depending upon the size and scope of any such issue, remediation may have a material impact on our business. Our inability to cure an application or product defect, should one occur, could result in the failure of an application or product line, the temporary or permanent withdrawal from an application, product or market, damage to our reputation, inventory costs, an increase in warranty claims, lawsuits by customers or customers’ or channel partners’ end users, or application or product reengineering expenses. Our insurance may not cover or may be insufficient to cover claims that are successfully asserted against us.

 

Integral aspects of our operations may be subject to climate change risks.

 

We recognize that climate change is an issue of global concern. In addition, a number of climate change regulations and initiatives are either in force or pending at the state, regional, Federal and international levels that focus on reducing greenhouse gas emissions. Integral aspects of our operations that may be subject to climate change risks include, but are not limited to, the following: increased regulations that have either been promulgated or may be promulgated in the future in jurisdictions in which we operate; the procurement and transport of raw materials and components used by our manufacturers and the use of those raw materials and components in the manufacturing process; manufacturing emissions; packaging and transport of finished goods; emissions and waste generated by our business operations; emissions associated with business travel (air, vehicular, fleet services); and emissions associated with business activities and emissions generated by our products. We continue to monitor those risks and will develop policies and processes designed to mitigate those risks where possible. We cannot assure you that our efforts to mitigate climate change risks will be successful or that risks associated with climate change will not have a negative impact on our business, results of operations or financial condition.

 

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

 

We sponsor non-contributory defined benefit pension plans covering a portion of our U.S. employees and retirees, and postretirement benefit plans for U.S. retirees that include healthcare benefits and life insurance coverage. We froze benefit accruals and additional participation in our plans for our U.S. management employees effective December 31, 2003. Certain of our non-U.S. operations also have various retirement benefit programs covering substantially all of their employees. Some of these programs are considered to be defined benefit pension plans for accounting purposes. If one or more of our U.S. pension plans were to be terminated without being fully funded on a termination basis, the Pension Benefit Guaranty Corporation, or PBGC, could obtain a lien on our assets for the amount of our liability, which would result in an event of default under each of our credit facilities. As a result, any such liens would have a material adverse effect on the Company, including our liquidity and financing arrangements. The measurement of our obligations, costs and liabilities associated with benefits pursuant to our pension and postretirement benefit plans requires that we estimate the present value of projected future payments to all participants, including assumptions related to discount rates, investment returns on designated plan assets, health care cost trends, and demographic experience. If future economic or demographic trends and results are different from our assumptions, then our obligations could be higher than we currently estimate. If our cash flows and capital resources are insufficient to fund our pension or postretirement healthcare and life insurance obligations, or if we are required or elect to fund any material portion of the liability now or in the future, we could be forced to reduce or delay investments and capital expenditures, seek additional capital, or restructure or refinance our indebtedness. In addition, if our operating results and available cash are insufficient to meet our pension or postretirement healthcare and life insurance obligations, we could face

 

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substantial liquidity problems and may be required to dispose of material assets or operations in order to meet our pension or postretirement healthcare and life insurance obligations. We may not be able to consummate those dispositions or to obtain any proceeds on terms acceptable to us or at all, and any such proceeds may not be adequate to meet any pension or postretirement healthcare and life insurance obligations then due. In addition, our U.S. defined benefit pension plans are subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, or ERISA. ERISA, along with certain provisions of the Internal Revenue Code of 1986, or the Code, requires minimum funding contributions and the PBGC has the authority under certain circumstances to petition a court to terminate an underfunded pension plan. One of those circumstances is the occurrence of an event with respect to which the PBGC determines that the possible long-term loss of the PBGC with respect to the plan may reasonably be expected to increase unreasonably if the plan is not terminated. If our U.S. defined benefit pension plans were to be terminated, we would incur a liability to the plans or the PBGC equal to the amount by which the liabilities of the plans, calculated on a termination basis, exceed the assets of the plans, which amount would likely exceed the amount that we have estimated to be the underfunded amount as of March 31, 2011.

 

Please see Note 13, “Benefit Obligations,” to our unaudited consolidated financial statements for the period ended March 31, 2011 for further details on our pension and postretirement benefit plans, including funding status.

 

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

 

Pursuant to the Contribution and Distribution Agreement between Avaya Inc. and Lucent, a predecessor to Alcatel-Lucent, Lucent contributed to Avaya Inc. substantially all of the assets, liabilities and operations associated with its enterprise networking businesses and distributed all of the outstanding shares of Avaya Inc.’s common stock to its stockholders. The Contribution and Distribution Agreement, among other things, provides that, in general, Avaya Inc. will indemnify Lucent for all liabilities including certain pre-distribution tax obligations of Lucent relating to our businesses and all contingent liabilities accruing pre-distribution primarily relating to Avaya Inc.’s businesses or otherwise assigned to Avaya Inc. In addition, the Contribution and Distribution Agreement provides that certain contingent liabilities not directly identifiable with one of the parties accruing pre-distribution will be shared in the proportion of 90% by Lucent and 10% by Avaya Inc. The Contribution and Distribution Agreement also provides that contingent liabilities accruing pre-distribution in excess of $50 million that are primarily related to Lucent’s businesses shall be borne 90% by Lucent and 10% by Avaya Inc. and contingent liabilities accruing pre-distribution in excess of $50 million that are primarily related to Avaya Inc.’s businesses shall be borne equally by the parties. Please see Note 19, “Commitments and Contingencies,” to our unaudited consolidated financial statements for the period ended March 31, 2011 for a description of certain matters involving Lucent for which Avaya Inc. has assumed responsibility under the Contribution and Distribution Agreement. We cannot assure you that Lucent will not submit a claim for indemnification or cost sharing to us in connection with any future matter. In addition, our ability to assess the impact of matters for which Avaya Inc. may have to indemnify or share the cost with Lucent is made more difficult by the fact that we do not control the defense of these matters.

 

In addition, in connection with the distribution, we and Lucent entered into a Tax Sharing Agreement that governs the parties’ respective rights, responsibilities and obligations after the distribution with respect to taxes for the periods ending on or before the distribution. Generally, pre-distribution taxes that are clearly attributable to the business of one party will be borne solely by that party, and other pre-distribution taxes will be shared by the parties based on a formula set forth in the Tax Sharing Agreement. In addition, the Tax Sharing Agreement addresses the allocation of liability for taxes that are incurred as a result of restructuring activities undertaken to implement the distribution. If the distribution fails to qualify as a tax-free distribution under Section 355 of the Code because of an acquisition of Avaya Inc.’s stock or assets, or some other actions of Avaya Inc., then Avaya Inc. will be solely liable for any resulting corporate taxes.

 

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Risks Related to Our Debt

 

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

 

A summary of the material terms of our financing agreements can be found in Note 9, “Financing Arrangements,” to the unaudited consolidated financial statements as of March 31, 2011. As of March 31, 2011, our total indebtedness was $6,176 million (excluding capital lease obligations).

 

Our degree of leverage could have important consequences, including:

 

   

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

 

   

increasing our vulnerability to general economic and industry conditions;

 

   

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

 

   

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

 

   

limiting our ability to make strategic acquisitions;

 

   

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

 

   

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

 

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

 

Avaya Inc.’s credit facilities, the indenture governing its senior unsecured cash-pay notes and its senior unsecured payment-in-kind, or PIK, toggle notes, each due 2015, and the indenture governing its 7.00% senior secured notes due 2019, contain various covenants that limit our ability to engage in specific types of transactions. These covenants limit our and our restricted subsidiaries’ ability to:

 

   

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

 

   

pay dividends on, redeem or repurchase our capital stock;

 

   

make certain acquisitions or investments;

 

   

incur or assume certain liens;

 

   

enter into transactions with affiliates; and

 

   

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Risks Related to this Offering and Ownership of Our Common Stock

 

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

 

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

 

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

 

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

 

   

actual or anticipated fluctuations in our results of operations;

 

   

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

 

   

conditions and trends in the markets we serve;

 

   

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

 

   

additions or changes to key personnel;

 

   

changes in market valuation or earnings of our competitors;

 

   

the trading volume of our common stock;

 

   

future sale of our equity securities;

 

   

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

 

   

legislation or regulatory policies, practices or actions; and

 

   

general economic conditions.

 

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

 

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

 

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

 

In addition, the Sponsors and their affiliates are in the business of making investments in companies and may, from time to time in the future, acquire interests in businesses that directly or indirectly compete with certain portions of our business. To the extent the Sponsors invest in such other businesses, the Sponsors may have differing interests than our other stockholders. The Sponsors may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. Also, as of March 31, 2011, the Sponsors hold approximately $198 million of Avaya Inc.’s senior secured term B-1 loans, approximately $124 million of Avaya Inc.’s senior secured term B-3 loans and 77,728.25 shares of our Series A Preferred Stock, although we intend to redeem all of the outstanding Series A Preferred Stock with the proceeds of this offering. As a result, their continued interests as creditors may conflict with the interests of our common stock holders.

 

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

 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

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

 

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

 

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

 

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

 

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Sale” for additional information regarding these factors. In addition, in the future, we may issue securities to raise additional capital or to acquire interests in other companies or technologies. As a result, your interest in our company may be further diluted and the market price of our common stock could decline.

 

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

 

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

 

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

 

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

 

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

 

Upon completion of this offering, our certificate of incorporation and our bylaws will contain certain provisions that may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. The existence of such provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in any such acquisition. For more information, please see the section titled “Description of Capital Stock.”

 

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

 

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

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

   

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

 

   

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

 

   

our strategy for worldwide growth, including our ability to develop and sell advanced communications products and services, including unified communications, data networking solutions and contact center solutions;

 

   

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

 

   

our anticipated competition as the business collaboration market evolves;

 

   

the product sales to be generated by our backlog;

 

   

our future cash requirements, including our primary cash requirements for the period April 1, 2011 through September 30, 2011;

 

   

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

 

   

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

 

   

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

 

   

the impact of new accounting pronouncements; and

 

   

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

 

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

 

   

our ability to develop and sell advanced communications products and services, including unified communications, data networking solutions and contact center solutions;

 

   

our reliance on our indirect sales channel;

 

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

 

   

the market for our products and services, including unified communications solutions;

 

   

our ability to remain competitive in the markets we serve;

 

   

the ability to retain and attract key employees;

 

   

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

 

   

our ability to manage our supply chain and logistics functions;

 

   

liquidity and our access to capital markets;

 

   

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

 

   

our ability to maintain adequate security over our information systems;

 

   

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

 

   

climate change risks;

 

   

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

 

   

risks relating to the transaction of business internationally; and

 

   

pension and post-retirement healthcare and life insurance liabilities.

 

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USE OF PROCEEDS

 

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

 

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

 

   

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

 

   

approximately $             million will be used to redeem all of our outstanding Series A Preferred Stock. For more information on our Series A Preferred Stock, including the terms of redemption, see “Description of Capital Stock—Preferred Stock”; and

 

   

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

 

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

 

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DIVIDEND POLICY

 

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

 

As disclosed above under “Use of Proceeds,” we intend to use a portion of the net proceeds from this offering to redeem all of our outstanding Series A Preferred Stock. The certificate of designations for the Series A Preferred Stock grants holders of our Series A Preferred Stock the right to receive, as, when and if declared by our board of directors and in preference to the holders of any and all other series or classes of capital stock, payable either in cash or, at our option, by issuance of additional shares of Series A Preferred Stock, cumulative annual dividends at a rate of 5% per annum on $1,000 per share (which value is to be proportionately adjusted to reflect any stock dividend, stock split, combination of shares, reclassification, reorganization, recapitalization or other similar event affecting the Series A Preferred Stock), compounded quarterly from and after the date of issuance of such shares of Series A Preferred Stock. So long as any share of our Series A Preferred Stock remains outstanding, no dividend or distribution may be declared or paid on our common stock unless all accrued and unpaid dividends have been paid on our Series A Preferred Stock and dividends paid on our common stock may not be paid at a rate greater than the rate paid on Series A Preferred Stock. As of March 31, 2011, there were accrued unpaid dividends totaling $8 million on our Series A Preferred Stock in addition to its redemption value of $125 million. In addition, because Avaya Holdings Corp. is a holding company, its ability to pay cash dividends on its common stock may be limited by restrictions on its ability to obtain sufficient funds through dividends from subsidiaries, including restrictions under the terms of the agreements governing Avaya Inc.’s indebtedness. Refer to the section of this prospectus entitled “Description of Certain Outstanding Indebtedness” for a more detailed discussion of the agreements governing our indebtedness and the section of this prospectus entitled “Description of Capital Stock” for a more detailed description of the terms of our Series A Preferred Stock.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of March 31, 2011:

 

   

on an actual basis; and

 

   

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

 

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

 

     As of March 31, 2011  
   Actual     Pro Forma(1)  
     (in millions, except share
amounts)
 

Cash and cash equivalents

   $ 468     
                

Debt:(2)

    

Senior secured term B-1 loans

   $ 1,457     

Senior secured term B-3 loans

     2,176     

Senior secured notes

     1,009     

Senior unsecured cash-pay notes

     700     

Senior unsecured PIK toggle notes

     834     
                

Total debt

     6,176     
                

Preferred stock, par value $.001 per share; authorized 250,000 shares, Series A, 125,000 and nil shares outstanding on an actual and pro forma basis, respectively

     133     

Deficiency:

    

Common stock, par value $.001 per share; authorized 750 million shares, outstanding 487,389,017 and              shares on an actual and pro forma basis, respectively

         

Additional paid-in capital

     2,569     

Accumulated deficit

     (3,640  

Accumulated other comprehensive loss

     (1,065  
                

Total deficiency

     (2,136  
                

Total capitalization

   $ 4,173     
                

 

(1)  

Assumes the net proceeds from this offering, together with cash on hand, are used on the closing date to redeem all outstanding shares of our Series A Preferred Stock for $133 million including accrued dividends of $8 million; to repay $             million of long-term indebtedness; and to make a payment to affiliates of our Sponsors in connection with the termination of the management services agreement as described under “Certain Relationships and Related Party Transactions” and to pay certain fees and expenses relating to this offering. The pro forma amounts do not give effect to any accounting charges that may be recorded as a result of such payment. A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the mid-point of the estimated price range set forth on the cover page of this prospectus and the application of the net proceeds therefrom, would (i) increase (decrease) the net proceeds to us by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus,

 

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remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and (ii) would increase (decrease) our total long-term debt reduction by $             million and decrease (increase) our stockholders’ deficiency by $             million.

(2)   For additional information regarding our outstanding indebtedness, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities,” “Description of Certain Outstanding Indebtedness” and Note 9, “Financing Arrangements,” to our consolidated financial statements included elsewhere in this prospectus.

 

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DILUTION

 

If you invest in shares of our common stock in this offering, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the as-adjusted net tangible book value, or deficit, per share of our common stock after this offering. The deficit is calculated as the liabilities in excess of our net tangible book value. The deficit per share is determined by dividing the numerator of total liabilities plus the book value of our Series A Preferred Stock less total tangible assets (total assets less intangible assets) by the denominator of the number of outstanding shares of common stock. Our deficit value at March 31, 2011 was $8,583 million or $17.61 per share of common stock.

 

Our as-adjusted deficit at March 31, 2011, after giving effect to the sale by us of              shares of common stock at an assumed initial public offering price of $             per share, which is the midpoint of the range listed on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, would have been approximately $             million, or $             per share. This represents an immediate increase in as-adjusted deficit of $             per share to existing stockholders and an immediate dilution of $             per share to new investors, or approximately     % of the assumed initial public offering price of $             per share. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

     $                

Deficit per share as of March 31, 2011, before giving effect to this offering

   $ (8,583  

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

    

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

    

 

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

 

The following table summarizes, as of March 31, 2011, the number of shares of common stock purchased from us since inception, the total consideration paid to us and the average price per share paid by existing shareholders and by new investors purchasing shares of common stock in this offering at an assumed initial public offering price of $             per share, before deducting underwriting discount and estimated offering expenses payable by us.

 

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

Existing shareholders

         $                       $                

New investors

              
                                      

Total

              
                                      

 

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

 

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The above discussion and table are based on 487,389,017 shares of common stock outstanding as of March 31, 2011. This excludes the following numbers of shares of our common stock issuable in connection with the exercise of warrants outstanding as of March 31, 2011 and equity awards under our 2007 Plan:

 

   

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

 

   

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

 

   

972,341 Continuation Units that were awarded by the Company to executive officers prior to the Merger that were permitted to be rolled over into equity awards issued by us upon consummation of the Merger;

 

   

44,072,956 shares of common stock issuable upon the exercise of options with exercise prices ranging from $3.00 to $5.00 per share and a weighted average exercise price of $3.03 per share;

 

   

1,370,000 shares of common stock issuable on the vesting and distribution of RSUs; and

 

   

4,405,201 additional shares of common stock as of March 31, 2011 reserved for future grants under the 2007 Plan.

 

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

 

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

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

 

The following table sets forth our selected historical consolidated financial data at the dates and for the periods indicated. Avaya Holdings Corp. was incorporated on June 1, 2007 by affiliates of the Sponsors. Avaya Holdings Corp., through a subsidiary holding company, entered into a Merger Agreement with Avaya Inc., or the Predecessor, pursuant to which the holding company merged with and into Avaya Inc., with Avaya Inc. continuing as the surviving entity and a wholly owned subsidiary of Avaya Holdings Corp., in a transaction that was completed on October 26, 2007. Avaya Holdings Corp. is a holding company and has no material assets or stand-alone operations other than its ownership in Avaya Inc. and its subsidiaries. The selected historical consolidated financial data set forth below are those of Avaya Holdings Corp. and its consolidated subsidiaries, or the Successor, from its inception on June 1, 2007 through March 31, 2011 and those of its Predecessor, Avaya Inc., for all prior periods through the closing date of the Merger.

 

The Predecessor selected historical consolidated financial data set forth below as of and for the years ended September 30, 2006 and September 30, 2007 have been derived from our Predecessor’s audited consolidated financial statements and related notes which are not included in this prospectus. The Predecessor selected historical consolidated financial data set forth below for the period October 1, 2007 through October 26, 2007 has been derived from our Predecessor’s audited consolidated financial statements and related notes included elsewhere in this prospectus. The Successor selected historical consolidated financial data set forth below as of and for the years ended September 30, 2008, 2009 and 2010 have been derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The Successor selected historical consolidated financial data set forth below as of and for the period June 1, 2007 through September 30, 2007 has been derived from our unaudited consolidated financial statements, which are not included in this prospectus. The Successor had no operations prior to the Merger. The Successor selected historical consolidated financial data set forth below as of and for the six months ended March 31, 2011 and 2010 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our unaudited consolidated financial statements for the six months ended March 31, 2011 and March 31, 2010 have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of our management, include all adjustments, which include only normal recurring adjustments, necessary for a fair statement of this data. As part of the Merger on October 26, 2007, we entered into various financing arrangements and, as a result, had a different capital structure following the Merger. Accordingly, the results of operations for periods subsequent to the Merger will not necessarily be comparable to prior periods.

 

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

 

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     Predecessor           Successor  
     Fiscal year
ended
September 30,
    Period from
October 1,
2007

through
October 26,

2007
          Period from
June 1,

2007
through
September 30,

2007(1)
    Fiscal year ended
September 30,
    For the Six
Months

Ended
March 31,
 
           
  2006     2007           2008(2)     2009     2010     2010     2011  
    (in millions, except per share amounts)  

STATEMENT OF OPERATIONS DATA:

                     

REVENUE

                     

Products

  $ 2,790      $ 2,875      $ 96          $      $ 2,595      $ 1,923      $ 2,602      $ 1,193      $ 1,479   

Services

    2,358        2,403        150                   2,328        2,227        2,458        1,187        1,277   
                                                                           
    5,148        5,278        246                   4,923        4,150        5,060        2,380        2,756   
 

COSTS

                     

Products:

                     

Costs (exclusive of amortization of intangible assets)

    1,224        1,295        56                   1,256        872        1,243        548        675   

Amortization of technology intangible assets

    15        20        1                   231        248        291        142        133   

Services

    1,534        1,512        100                   1,403        1,164        1,354        644        687   
                                                                           
    2,773        2,827        157                   2,890        2,284        2,888        1,334        1,495   
                                                                           

GROSS MARGIN

    2,375        2,451        89                   2,033        1,866        2,172        1,046        1,261   
 

OPERATING EXPENSES

                     

Selling, general and administrative

    1,532        1,552        111                   1,456        1,272        1,721        833        931   

Research and development

    428        444        29                   376        309        407        197        236   

Amortization of intangible assets

    48        48        4                   187        207        218        107        112   

Impairment of long-lived assets

                                    10        2        16        16          

Impairment of indefinite-lived intangible assets

                                    130        60                        

Goodwill impairment

                                    899        235                        

Restructuring charges, net

    104        36        1                          160        171        83        64   

In-process research and development charge

                                    112        12                        

Acquisition-related costs

                                           29        20        19        4   

Merger-related costs

           105        57                   1                               
                                                                           
    2,112        2,185        202                   3,171        2,286        2,553        1,255        1,347   
                                                                           

OPERATING INCOME (LOSS)

    263        266        (113                (1,138     (420     (381     (209     (86
 

Interest expense

    (3     (1                       (377     (409     (487     (229     (240

Loss on extinguishment of debt

                                                                (246

Other income, net

    24        43        1                   27        14        15        5        1   
                                                                           

INCOME (LOSS) BEFORE INCOME TAXES

    284        308        (112                (1,488     (815     (853     (433     (571

Provision for (benefit from) income taxes

    83        93        (24                (183     30        18        (16     41   
                                                                           

NET INCOME (LOSS)

    201        215        (88                (1,305     (845     (871     (417     (612
 

Less net income attributable to noncontrolling interests

           3                          2        2        3        2          
                                                                           

NET INCOME (LOSS) ATTRIBUTABLE TO AVAYA HOLDINGS CORP.

    201        212        (88                (1,307     (847     (874     (419     (612
 

Less: Accretion and accrued dividends on Series A preferred stock

                                                  (62     (2     (3
                                                                           

NET INCOME (LOSS) ATTRIBUTABLE TO AVAYA HOLDINGS CORP. COMMON STOCKHOLDERS

  $ 201      $ 212      $ (88       $      $ (1,307   $ (847   $ (936   $ (421   $ (615
                                                                           

SHARE DATA:

                     

Net income (loss) per share attributable to common stockholders—basic

  $ 0.43      $ 0.47      $ (0.19       $      $ (2.87   $ (1.74   $ (1.92   $ (0.86   $ (1.26

Weighted average shares outstanding—basic

    462.6        454.2        462.9                   455.9        488.1        488.6        488.5        488.9   

Net income (loss) per share attributable to common stockholders—diluted

  $ 0.43      $ 0.46      $ (0.19       $      $ (2.87   $ (1.74   $ (1.92   $ (0.86   $ (1.26

Weighted average shares outstanding—diluted

    468.6        461.3        462.9                   455.9        488.1        488.6        488.5        488.9   

 

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     Predecessor           Successor  
  Fiscal year
ended
September 30,
    Period from
October 1,
2007
through
October 26,

2007
          Period from
June 1, 2007
through
September 30,

2007(1)
    Fiscal year ended
September 30,
    Six months
ended
March 31,
 
  2006     2007           2008(2)     2009     2010     2010     2011  
                                   (in millions)                          

BALANCE SHEET DATA (at end of period):

                     
 

Cash and cash equivalents

  $ 899      $ 1,270            $      $ 594      $ 582      $ 594      $ 591      $ 468   

Intangible assets, net

    263        248                     3,154        2,636        2,603        2,878        2,367   

Goodwill

    941        1,157                     3,956        3,695        4,075        4,113        4,080   

Total assets

    5,200        5,933                     10,010        8,665        9,276        9,691        8,920   

Total debt (excluding capital lease obligations)

                               5,222        5,150        5,928        5,887        6,176   

Preferred stock, Series A

                                             130        127        133   

Total Avaya Holdings Corp. stockholders’ equity (deficiency)

    2,086        2,586                     1,063        (682     (1,543     (907     (2,136
 

STATEMENT OF CASH FLOWS DATA:

                     
 

Net cash provided by (used in):

                     

Operating activities

  $ 647      $ 637      $ 133          $      $ 304      $ 242      $ 42      $ (2   $ (349

Investing activities

    (189     (360     (16                (7,205     (155     (864     (850     (30

Financing activities

    (315     54        11                   7,512        (101     853        878        248   
 

OTHER FINANCIAL DATA:

                     
 

EBITDA

  $ 520      $ 557      $ (94       $      $ (515   $ 240      $ 320      $ 135      $ 2   

Adjusted EBITDA(3)

    654        832        (27                859        753        795        367        442   

Capital expenditures, net

    117        120        8                   120        76        79        30        35   

Capitalized software development costs

    71        93        7                   74        43        43        23        14   

 

(1)   Avaya Holdings Corp. is a holding company formed on June 1, 2007 by affiliates of the Sponsors for the purpose of consummating the Merger. Avaya Holdings Corp. has no material assets or stand-alone operations other than its ownership in Avaya Inc. and its subsidiaries. The selected historical consolidated financial data above as of September 30, 2007 and for the period from June 1, 2007 through September 30, 2007 reflects the results of Avaya Holdings Corp.
(2)   The selected historical consolidated financial data above as of and for the year ended September 30, 2008 reflect the results of Avaya Holdings Corp. for the entire fiscal year and includes the results of Avaya Inc. and its consolidated subsidiaries subsequent to October 27, 2007, the date of the Merger.
(3)   Adjusted EBITDA is calculated in accordance with our debt agreements entered into in connection with the Merger and disclosed herein to demonstrate compliance with our debt agreements. For the fiscal year ended September 30, 2007, Adjusted EBITDA is calculated in accordance with the debt agreements for comparative purposes. For the fiscal year ended September 30, 2006, Adjusted EBITDA is calculated as net income before interest expense, interest income, income tax expense, depreciation and amortization, restructuring charges and non-cash share-based compensation. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures and Supplemental Disclosure—EBITDA and Adjusted EBITDA” for a definition and explanation of Adjusted EBITDA and reconciliation of net loss to Adjusted EBITDA.

 

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

 

   

On February 11, 2011, Avaya Inc. completed a private placement of $1,009 million of senior secured notes. The senior secured notes were issued at par, bear interest at a rate of 7% per annum and mature on April 1, 2019. The proceeds from the notes were used to repay in full the senior secured incremental term B-2 loans outstanding under Avaya Inc.’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 senior secured incremental term B-2 loans was accounted for as an extinguishment of the senior secured incremental term B-2 loans and issuance of new debt. Accordingly, the Company recognized a loss on

 

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extinguishment of debt of $246 million based on the difference between the reacquisition price and the carrying value of the incremental term B-2 loans (including unamortized debt discount and debt issue costs) during the six months ended March 31, 2011.

 

   

As a result of the acquisition of NES, our operating results include the operations of the NES business as of December 19, 2009.

 

   

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

 

   

We incurred integration costs with respect to the NES acquisition of $208 million, $87 million and $83 million for fiscal year 2010 and the six months ended March 31, 2011 and 2010, respectively. Integration-related costs primarily represent third-party consulting fees and other administrative costs associated with consolidating and coordinating the operations of Avaya and NES. These costs were incurred in connection with, among other things, the on-boarding of NES personnel, developing compatible IT systems and internal processes and developing and implementing a strategic operating plan to help enable a smooth transition with minimal disruption to NES customers. Such costs also include fees paid to certain Nortel-controlled entities for logistics and other support functions being performed on a temporary basis according to a transition services agreement.

 

   

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

 

   

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

 

   

Amortization of intangible assets was $509 million and $455 million for the years ended September 30, 2010 and 2009, respectively. The increase of $54 million is attributable to amortization associated with intangible assets recorded in connection with our acquisition of NES. In acquisition accounting, we recorded technologies, customer relationships and other intangibles of NES with an estimated fair value of $476 million. These assets are amortized over their estimated economic lives ranging from less than one year to thirteen years.

 

   

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

 

   

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

 

   

During the period from December 19, 2009 through September 30, 2010, we incurred incremental interest expense from the financing associated with the acquisition of NES of $117 million, which includes non-cash interest expense of $33 million.

 

   

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

 

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The provision for income taxes for fiscal years 2009 and 2010 was $30 million and $18 million, respectively. The provision is substantially different from income taxes determined at the U.S. federal statutory rate. In fiscal year 2009, we were in a three-year cumulative U.S. book tax loss position and had determined that it is more likely than not that our U.S. net deferred tax assets would not be realized. Accordingly, we had provided a valuation allowance against our U.S. net deferred tax assets. As a result, we recorded a tax provision associated with earnings in certain profitable non-U.S. tax jurisdictions for the period offset by a minimal tax benefit relating to our U.S. pre-tax losses in fiscal year 2009. In fiscal year 2010, our tax provision related to earnings of certain profitable non-U.S. tax jurisdictions.

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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During fiscal year 2007 and the period October 1, 2007 through October 26, 2007 the Predecessor incurred approximately $105 million and $57 million, respectively, of Merger-related costs. These costs included investment banking, legal and other third-party costs, as well as $96 million of non-cash stock compensation expense resulting from the accelerated vesting of stock options and RSUs in connection with the Merger.

 

   

During fiscal years 2006 and 2007 and the period October 1, 2007 through October 26, 2007, respectively, the Predecessor recorded $104 million, $36 million and $1 million of restructuring charges related to employee separation and lease termination costs in EMEA and the U.S. Restructuring actions taken during the period October 27, 2007 through September 30, 2008 were charged against the $330 million liability established in purchase accounting for employee separation costs and lease obligations, rather than impacting the Consolidated Statement of Operations.

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 

The following presents the unaudited pro forma combined balance sheet as of March 31, 2011, and the unaudited pro forma combined statement of operations for the year ended September 30, 2010 and the six months ended March 31, 2011.

 

The following unaudited pro forma combined financial statements have been developed by applying pro forma adjustments to the historical consolidated statements of financial position and operations of Avaya Holdings Corp. appearing elsewhere in this prospectus. The unaudited pro forma combined balance sheet as of March 31, 2011 gives effect to the sale of the common stock as contemplated in this offering and the use of the proceeds thereof as if they had occurred on March 31, 2011. The unaudited pro forma combined statement of operations for the fiscal year ended September 30, 2010 gives effect to the acquisition of NES and its related financing, the refinancing of certain Company debt that took place on February 11, 2011, and the sale of the common stock as contemplated in this offering and the use of the proceeds thereof as if they had occurred on October 1, 2009. The unaudited pro forma combined statement of operations for the six months ended March 31, 2011 gives effect to the refinancing of certain Company debt that took place on February 11, 2011, and the sale of the common stock as contemplated in this offering and the use of the proceeds thereof as if they had occurred on October 1, 2009. All pro forma adjustments and underlying assumptions are described more fully in the notes to the unaudited pro forma combined financial statements.

 

The pro forma information presented is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisition of NES and its related financing, the refinancing of certain Company debt that took place on February 11, 2011, and the sale of the common stock as contemplated in this offering and the use of the proceeds thereof were completed on the dates indicated, nor is it indicative of future operating results. The pro forma adjustments are based upon available information and certain assumptions that management believes to be reasonable.

 

The unaudited pro forma combined statements of operations do not include the effects of:

 

   

forecasted operating efficiencies or cost savings;

 

   

forecasted savings as a result of planned restructuring actions;

 

   

any forecasted gross margin improvement due to scale and leveraging of our and NES’s supply chains; or

 

   

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

 

You should read this information in conjunction with the:

 

   

accompanying notes to the unaudited pro forma combined financial statements; audited historical consolidated financial statements of Avaya Holdings Corp. as of and for the year ended September 30, 2010, included elsewhere in this prospectus; and

 

   

unaudited historical consolidated financial statements of Avaya Holdings Corp. as of and for the six months ended March 31, 2011, included elsewhere in this prospectus.

 

The unaudited pro forma combined statement of operations for the fiscal year ended September 30, 2010 is presented as if the acquisition of NES and its related financing, the refinancing of certain Company debt that took place on February 11, 2011, and the sale of the common stock as contemplated in this offering and the use of the proceeds thereof had taken place on October 1, 2009. Due to the timing of the acquisition of NES, the unaudited pro forma combined statement of operations for the fiscal year ended September 30, 2010 includes the historical audited results of Avaya Holdings Corp. for the fiscal year ended September 30, 2010 and the historical unaudited results of NES for the period October 1, 2009 through December 18, 2009. There were no material transactions between Avaya Holdings Corp. and NES that require elimination during the period October 1, 2009 through December 18, 2009.

 

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Avaya Holdings Corp.

Unaudited Pro Forma Combined Balance Sheet

March 31, 2011

 

     Historical
Avaya
Holdings.
Corp
    IPO
Pro Forma
Adjustment
(Note 4)
         Pro Forma
Combined
 
     (in millions)  

ASSETS

         

Current assets:

         

Cash and cash equivalents

   $ 468      $      (e), (f), (g), (h)    $                

Accounts receivable, net

     734               

Inventory

     311               

Deferred income taxes, net

     4               

Other current assets

     307             (g)   
                           

TOTAL CURRENT ASSETS

     1,824               
                           

Property, plant and equipment, net

     423               

Deferred income taxes, net

     20               

Intangible assets, net

     2,367               

Goodwill

     4,080               

Other assets

     206             (g)   
                           

TOTAL ASSETS

   $ 8,920      $         $     
                           

LIABILITIES

         

Current liabilities:

         

Debt maturing within one year

   $ 37      $         $     

Accounts payable

     519               

Payroll and benefit obligations

     313               

Deferred revenue

     653               

Business restructuring reserves, current portion

     91               

Other current liabilities

     390               
                           

TOTAL CURRENT LIABILITIES

     2,003               
                           

Long-term debt

     6,139             (g)   

Pension obligations

     1,542               

Other postretirement obligations

     459          

Deferred income taxes, net

     163               

Business restructuring reserves, non-current portion

     49               

Other liabilities

     568               
                           

TOTAL NON-CURRENT LIABILITIES

     8,920               
                           

Preferred stock, Series A

     133             (f)   

TOTAL DEFICIENCY

     (2,136          (e), (g), (h)   
                           

TOTAL LIABILITIES AND DEFICIENCY

   $ 8,920      $         $     
                           

 

See accompanying notes to unaudited pro forma combined financial statements.

 

46


Table of Contents

Avaya Holdings Corp.

Unaudited Pro Forma Combined Statement of Operations

Year Ended September 30, 2010

 

    Historical     Acquisition
Pro Forma
Adjustments
(Note 2)
        Debt Refinancing
Pro Forma
Adjustments
(Note 3)
    IPO Pro
Forma
Adjustments
(Note 4)
        Pro Forma
Combined
 
     Avaya Holdings  Corp.
Year

Ended
September 30, 2010
    NES Period from
October 1, 2009
through
December 18, 2009
             
     (in millions, except per share amounts)  

REVENUE

               

Products

  $ 2,602      $ 294      $        $      $        $                

Services

    2,458        122                              
                                                   
    5,060        416                              
                                                   

COSTS

               

Products:

               

Costs (exclusive of amortization of intangibles)

    1,243        179        (4   (b)                  

Amortization of technology intangible assets

    291        2        9      (a)                  

Services

    1,354        96                              
                                                   
    2,888        277        5                       
                                                   

GROSS MARGIN

    2,172        139        (5                    
                                                   

OPERATING EXPENSES

               

Selling, general and administrative

    1,721        156        (3   (b)                 (j)  

Research and development

    407        64        (1   (b)                  

Amortization of intangible assets

    218        4        1      (a)                  

Impairment of long-lived assets

    16                                     

Restructuring charges, net

    171                                     

Acquisition-related costs

    20               (20   (c)                  

Other operating expense, net

           3                              
                                                   

TOTAL OPERATING EXPENSES

    2,553        227        (23                    
                                                   

OPERATING LOSS

    (381     (88     18                       

Interest expense

    (487            (32   (d)     43             (i)  

Other income, net

    15                                     
                                                   

LOSS BEFORE REORGANIZATION ITEMS AND INCOME TAXES

    (853     (88     (14       43              

Reorganization items

           9                              
                                                   

LOSS BEFORE INCOME TAXES

    (853     (79     (14       43              

Provision for income taxes

    18                                     
                                                   

NET LOSS

    (871     (79     (14       43              

Less net income attributable to non-controlling interests

    3                                     
                                                   

NET LOSS ATTRIBUTABLE TO AVAYA HOLDINGS CORP.

    (874     (79     (14       43              

Less: Accretion and accrued dividends on Series A preferred stock

    (62