UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________ 

FORM 10-Q

________________________________________________ 

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

For the quarterly period ended December 31, 2013

or

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

For the transition period from              to             

Commission File Number 001-15951

________________________________________________ 

AVAYA INC.

(Exact name of registrant as specified in its charter)

________________________________________________ 

Delaware	22-3713430
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
4655 Great America Parkway Santa Clara, California	95054
(Address of principal executive offices)	(Zip Code)

(908) 953-6000

(Registrant’s telephone number, including area code)

None

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

________________________________________________

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

*See Explanatory Note in Part II, Item 5

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

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

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

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

As of February 14, 2014, 100 shares of Common Stock, $.01 par value, of the registrant were outstanding.

TABLE OF CONTENTS

Item	Description	Page
	PART I—FINANCIAL INFORMATION
1.	Financial Statements	1
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
3.	Quantitative and Qualitative Disclosures About Market Risk	53
4.	Controls and Procedures	53
	PART II—OTHER INFORMATION
1.	Legal Proceedings	54
1A.	Risk Factors	54
2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
3.	Defaults Upon Senior Securities	54
4.	Mine Safety Disclosures	54
5.	Other Information	54
6.	Exhibits	55
	Signatures	56

When we use the terms “we,” “us,” “our,” “Avaya” or the “Company,” we mean Avaya Inc., a Delaware corporation, and its consolidated subsidiaries taken as a whole, unless the context otherwise indicates.

This Quarterly Report on Form 10-Q contains the registered and unregistered Avaya Aura^®, Avaya Flare^®, Avaya Scopia^® and other trademarks or service marks of Avaya and are the property of Avaya Inc. and/or its affiliates. This Quarterly Report on Form 10-Q 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.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Avaya Inc.

Consolidated Statements of Operations (Unaudited)

(In millions)

	Three months ended December 31,
	2013			2012
REVENUE
Products	$	574		$	631
Services	584			609
	1,158			1,240
COSTS
Products:
Costs (exclusive of amortization of acquired technology intangible assets)	228			261
Amortization of acquired technology intangible assets	14			22
Services	271			291
	513			574
GROSS PROFIT	645			666
OPERATING EXPENSES
Selling, general and administrative	395			384
Research and development	95			118
Amortization of intangible assets	57			57
Restructuring charges, net	7			84
	554			643
OPERATING INCOME	91			23
Interest expense	(119		)	(108		)
Loss on extinguishment of debt	—			(3		)
Other income (expense), net	1			(6		)
LOSS BEFORE INCOME TAXES	(27		)	(94		)
(Provision for) benefit from income taxes	(27		)	9
NET LOSS	$	(54	)	$	(85	)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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Avaya Inc.

Consolidated Statements of Comprehensive Loss (Unaudited)

(In millions)

	Three months ended December 31,
	2013			2012
Net loss	$	(54	)	$	(85	)
Other comprehensive loss:
Pension, postretirement and postemployment benefit-related items, net of tax of $0 and $9 for the three months ended December 31, 2013 and 2012, respectively	11			14
Cumulative translation adjustment	(15		)	(12		)
Change in interest rate swaps, net of tax of $2 for the three months ended December 31, 2012	—			2
Income tax benefit reclassified into earnings upon the expiration of certain interest rate swaps	—			(17		)
Other comprehensive loss	(4		)	(13		)
Comprehensive loss	$	(58	)	$	(98	)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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Avaya Inc.

Consolidated Balance Sheets (Unaudited)

(In millions, except per share and shares amounts)

	December 31, 2013			September 30, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	300		$	288
Accounts receivable, net	686			716
Inventory	226			245
Deferred income taxes, net	62			52
Other current assets	266			253
TOTAL CURRENT ASSETS	1,540			1,554
Property, plant and equipment, net	326			334
Deferred income taxes, net	26			34
Intangible assets, net	1,426			1,486
Goodwill	4,103			4,092
Other assets	168			172
TOTAL ASSETS	$	7,589		$	7,672
LIABILITIES
Current liabilities:
Debt maturing within one year	$	35		$	35
Accounts payable	436			408
Payroll and benefit obligations	221			256
Deferred revenue	666			671
Business restructuring reserve, current portion	74			92
Other current liabilities	259			257
TOTAL CURRENT LIABILITIES	1,691			1,719
Long-term debt	6,042			6,051
Pension obligations	1,494			1,510
Other postretirement obligations	284			290
Deferred income taxes, net	251			243
Business restructuring reserve, non-current portion	74			78
Other liabilities	474			450
TOTAL NON-CURRENT LIABILITIES	8,619			8,622
Commitments and contingencies
STOCKHOLDER'S DEFICIENCY
Common stock, par value $.01 per share; 100 shares authorized, issued and outstanding	—			—
Additional paid-in capital	2,943			2,937
Accumulated deficit	(4,654		)	(4,600		)
Accumulated other comprehensive loss	(1,010		)	(1,006		)
TOTAL STOCKHOLDER'S DEFICIENCY	(2,721		)	(2,669		)
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY	$	7,589		$	7,672

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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Avaya Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In millions)

	Three months ended December 31,
	2013			2012
OPERATING ACTIVITIES:
Net loss	$	(54	)	$	(85	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	118			114
Share-based compensation	6			2
Amortization of debt issuance costs	4			5
Accretion of debt discount	—			1
Non-cash charge for debt issuance costs upon redemption of term loans	—			2
Third-party fees expensed in connection with the debt modification	—			4
Deferred income taxes, net	2			(14		)
Unrealized loss (gain) on foreign currency exchange	2			(13		)
Changes in operating assets and liabilities:
Accounts receivable	31			19
Inventory	19			(2		)
Accounts payable	29			8
Payroll and benefit obligations	(57		)	(32		)
Business restructuring reserve	(24		)	64
Deferred revenue	(1		)	11
Other assets and liabilities	(11		)	(78		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	64			6
INVESTING ACTIVITIES:
Capital expenditures	(32		)	(23		)
Capitalized software development costs	(1		)	(7		)
Acquisition of businesses, net of cash acquired	(11		)	(1		)
Proceeds from sale of long-lived assets	—			9
Proceeds from sale of investments	1			1
Advance to Parent	—			(10		)
NET CASH USED FOR INVESTING ACTIVITIES	(43		)	(31		)
FINANCING ACTIVITIES:
Proceeds from 9% senior secured notes	—			290
Repayment of term B-5 loans	—			(284		)
Debt issuance and third-party debt modification costs	—			(22		)
Repayment of long-term debt	(9		)	(9		)
Other financing activities, net	(1		)	(1		)
NET CASH USED FOR FINANCING ACTIVITIES	(10		)	(26		)
Effect of exchange rate changes on cash and cash equivalents	1			(1		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	12			(52		)
Cash and cash equivalents at beginning of period	288			337
Cash and cash equivalents at end of period	$	300		$	285

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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AVAYA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Background, Merger and Basis of Presentation

Background

Avaya Inc. together with its consolidated subsidiaries (collectively, the “Company” or “Avaya”) is a global provider of business collaboration and communications products and services. The Company’s products and services are designed to enable business users to work together more effectively internally and with their customers and suppliers, to accelerate decision-making and achieve enhanced business outcomes.

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

The Company's products are aimed at large enterprises, midmarket businesses and government organizations. Avaya offers products in three key business collaboration and communications categories:

• Real-Time Collaboration, Video and Unified Communications Software, Infrastructure and Endpoints for a mobile workforce;

• Customer Experience Management, including Contact Center applications; and

• Networking.

These three categories are supported by Avaya's portfolio of services including product support, integration, professional services and Cloud and managed services.

Avaya sells its products and services directly through its worldwide sales force and through its global network of channel partners. As of December 31, 2013, Avaya had approximately 11,300 channel partners worldwide, including distributors, service providers, dealers, value-added resellers, system integrators and business partners that provide sales and service support.

Merger

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

Acquisition of the Enterprise Solutions Business of Nortel Networks Corporation

On December 18, 2009, Avaya acquired certain assets and assumed certain liabilities of the enterprise solutions business (“NES”) of Nortel Networks Corporation (“Nortel”) out of bankruptcy court proceedings, for an adjusted purchase price of $933 million. The terms of the acquisition did not include any significant contingent consideration arrangements.

Acquisition of RADVISION Ltd.

On June 5, 2012, Avaya acquired RADVISION Ltd. (“Radvision”) for $230 million in cash. Radvision is a global provider of videoconferencing and telepresence technologies over internet protocol (“IP”) and wireless networks. The terms of the acquisition did not include any significant contingent consideration arrangements.

Basis of Presentation

The Consolidated Financial Statements include the accounts of Avaya Inc. and its subsidiaries. The accompanying unaudited interim Consolidated Financial Statements as of December 31, 2013 and for the three months endedDecember 31, 2013 and 2012 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial statements, and should be read in conjunction with the Consolidated Financial Statements and other financial information for the fiscal year ended September 30, 2013, which were included in the Company’s Annual Report on Form 10-K filed with the

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SEC on November 22, 2013. The Consolidated Balance Sheet as of September 30, 2013 was derived from the Company’s audited Consolidated Financial Statements. The significant accounting policies used in preparing these unaudited interim Consolidated Financial Statements are the same as those described in Note 2 to those audited Consolidated Financial Statements except for recently adopted accounting guidance as discussed in Note 2 “Recent Accounting Pronouncements” of these unaudited interim Consolidated Financial Statements. In management’s opinion, these unaudited interim Consolidated Financial Statements reflect all adjustments, consisting of only normal and recurring adjustments, necessary for a fair statement of the financial condition, results of operations and cash flows for the periods indicated.

The consolidated results of operations for the interim periods reported are not necessarily indicative of the results to be experienced for the entire fiscal year.

2. Recent Accounting Pronouncements

New Accounting Guidance Recently Adopted

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

In the first quarter of fiscal 2014, the Company adopted new guidance on the reporting of amounts reclassified out of accumulated other comprehensive income. The guidance requires presentation, either in a single note or parenthetically on the face of the financial statements, of the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. The relevant presentation and disclosures have been applied retrospectively for all periods presented.

Recent Accounting Guidance Not Yet Effective

In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-11 "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists". The standard requires the netting of unrecognized tax benefits (“UTBs”) against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. UTBs are required to be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs. This accounting guidance is effective for the Company beginning in the first quarter of fiscal 2015.  The Company is currently evaluating the impact the adoption of this accounting guidance may have on its Consolidated Financial Statements.

3. Business Combinations

On October 1, 2013, Avaya acquired IT Navigator, Ltd. ("IT Navigator"), a global provider of Cloud, social media and management products and services. The integration of the Avaya and IT Navigator portfolios is expected to add key management reporting and social media capabilities and enhance Avaya's Cloud as well as its unified communication and contact center products. These unaudited Consolidated Financial Statements include the operating results of IT Navigator since October 1, 2013. There were no significant acquisitions in the three months ended December 31, 2012.

4. Goodwill and Intangible Assets

Goodwill

Goodwill is not amortized but is subject to periodic testing for impairment in accordance with GAAP at the reporting unit level which is one level below the Company’s operating segments.

The test for impairment is conducted annually each September 30th or more frequently if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

The Company determined that no events occurred or circumstances changed during the three months ended December 31, 2013 and 2012 that would more likely than not reduce the fair value of any of the Company's reporting units below their respective carrying amounts. However, if market conditions deteriorate, it may be necessary to record impairment charges in the future.

Intangible Assets

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

Acquired technology and patents do not include capitalized software development costs. Unamortized capitalized software developments costs of $24 million at December 31, 2013 and $30 million at September 30, 2013 are included in other assets in the Company's Consolidated Balance Sheets.

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

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

The Company determined that no events had occurred or circumstances changed during the three months ended December 31, 2013 and 2012 that would indicate that its long-lived assets, including intangible assets with finite lives, may not be recoverable or that it is more likely than not that its intangible assets with indefinite lives are impaired. However, if market conditions deteriorate, it may be necessary to record impairment charges in the future.

5. Supplementary Financial Information

Consolidated Statements of Operations Information

	Three months ended December 31,
In millions	2013			2012
OTHER INCOME (EXPENSE), NET
Interest income	$	—		$	1
Gain (loss) on foreign currency transactions	2			(2		)
Third party fees incurred in connection with debt modifications	—			(4		)
Other, net	(1		)	(1		)
Total other income (expense), net	$	1		$	(6	)

6. Business Restructuring Reserve and Programs

Fiscal 2014 Restructuring Program

During fiscal 2014, the Company continued to identify opportunities to streamline operations and generate costs savings which included exiting facilities and eliminating employee positions. During the three months ended December 31, 2013, the Company recognized restructuring charges of $7 million, net. These charges included employee separation costs of $5 million, primarily associated with employee severance actions in the U.S. and Germany. As the Company continues to evaluate and identify additional operational synergies, additional cost saving opportunities may exist.

The following table summarizes the components of the fiscal 2014 restructuring program during the three months ended December 31, 2013:

In millions	Employee Separation Costs			Lease Obligations		Total
2014 restructuring charges	$	5		$	—	$	5
Cash payments	(3		)	—		(3		)
Balance as of December 31, 2013	$	2		$	—	$	2

Fiscal 2013 Restructuring Program

During fiscal 2013, the Company continued to identify opportunities to streamline operations and generate cost savings which included exiting facilities and eliminating employee positions. Restructuring charges recorded during fiscal 2013 associated with these initiatives, net of adjustments to previous periods, were $200 million and include separation costs primarily associated with employee severance actions in Europe, the Middle East and Africa (“EMEA”) and the U.S. In EMEA an approved plan provided for the elimination of 234 positions and resulted in a charge of $48 million. The elimination of employee positions identified in this action and the related payments are expected to be completed in fiscal 2015. The separation charges include, but are not limited to, social pension fund payments and health care and unemployment insurance costs to be paid to or on behalf of the impacted employees. Enhanced separation plans were offered to certain management employees in the U.S. in the first and third quarters of fiscal 2013 and resulted in the elimination of 196 and 447 positions, respectively, and restructuring charges of $9 million and $20 million, respectively, for which the related payments are expected to be completed in fiscal 2014.

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Restructuring charges also included $52 million of future lease obligations, which includes $32 million of lease obligations associated with the Frankfurt, Germany facility vacated during fiscal 2013. The Company also recorded restructuring charges related to facilities vacated in the United Kingdom and the U.S. The future rental payments, net of estimated sublease income, related to operating lease obligations for unused space in connection with vacating or consolidating facilities during fiscal 2013 are expected to continue through fiscal 2021.

The following table summarizes the components of the fiscal 2013 restructuring program during the three months ended December 31, 2013:

In millions	Employee Separation Costs			Lease Obligations			Total
Balance as of October 1, 2013	$	64		$	46		$	110
Cash payments	(20		)	(3		)	(23		)
Adjustments (1)	—			1			1
Impact of foreign currency fluctuations	1			—			1
Balance as of December 31, 2013	$	45		$	44		$	89

⁽¹⁾ Included in adjustments are changes in estimates, whereby all increases and decreases in costs related to the fiscal 2013 restructuring program are recorded to the restructuring charges line item in operating expenses in the period of the adjustment.

Fiscal 2008 through 2012 Restructuring Programs

During fiscal years 2008 through 2012, the Company identified opportunities to streamline operations and generate cost savings which included exiting facilities and eliminating employee positions. The payments related to the headcount reductions identified in those programs are expected to be completed in fiscal 2018. Future rental payments, net of estimated sublease income, related to operating lease obligations for unused space in connection with the closing or consolidation of facilities are expected to continue through fiscal 2021.

The following table aggregates the remaining components of the fiscal 2008 through 2012 restructuring programs during the three months ended December 31, 2013:

In millions	Employee Separation Costs			Lease Obligations			Total
Balance as of October 1, 2013	$	9		$	51		$	60
Cash payments	(2		)	(4		)	(6		)
Adjustments (1)	—			1			1
Impact of foreign currency fluctuations	1			1			2
Balance as of December 31, 2013	$	8		$	49		$	57

⁽¹⁾  Included in adjustments are changes in estimates, whereby all increases and decreases in costs related to the fiscal 2009 through 2012 restructuring programs are recorded to the restructuring charges line item in operating expenses in the period of the adjustment. Included in adjustments are changes in estimates whereby all increases in costs related to the fiscal 2008 restructuring reserve are recorded in the restructuring charges line item in operating expenses in the period of the adjustments and decreases in costs are recorded as adjustments to goodwill.

In furtherance of the restructuring programs noted above and cost saving initiatives to consolidate facilities, on January 14, 2014, the Company completed the sale of its Westminster, Colorado facility. Under a separate agreement, the Company has agreed to lease a portion of this facility upon the closing of the sale. In connection with the sale of the facility, in December 2013, the Company changed its estimate of the salvage value and the useful life of the building to reflect the expected sales price and closing date for the sale, respectively. The changes to the estimated salvage value and the useful life resulted in $16 million of additional depreciation expense for the three months ended December 31, 2013, which is included in selling, general, and administrative expenses.

7. Financing Arrangements

In connection with the Merger, on October 26, 2007, the Company entered into financing arrangements consisting of a senior secured credit facility, a senior unsecured credit facility, which later became senior unsecured notes, and a senior secured multi-

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currency asset-based revolving credit facility, certain of which arrangements were amended on December 18, 2009 in connection with the acquisition of NES and amended on February 11, 2011 in connection with a debt refinancing. During fiscal 2013, the Company completed a series of transactions which allowed the Company to refinance term loans under its senior secured credit facility that originally matured October 26, 2014 and to refinance $1,384 million of senior unsecured notes that originally matured on November 1, 2015.

During the three months ended December 31, 2012, the Company completed three transactions to refinance $848 million of term loans under its senior secured credit facility, which were (1) an amendment and restatement of the senior secured credit facility and the senior secured multi-currency asset-based revolving credit facility on October 29, 2012 along with the extension of the maturity date of $135 million aggregate principal amount of senior secured term B-1 loans (the "term B-1 loans") by converting such loans into a new tranche of senior secured term B-4 loans (the "term B-4 loans"), (2) an amendment and restatement of the senior secured credit facility on December 21, 2012 along with the extension of the maturity date of $713 million aggregate principal amount of term B-1 loans and $134 million aggregate principal amount of term B-4 loans, in each case, by converting such loans into a new tranche of senior secured term B-5 loans (the "term B-5 loans") and (3) the issuance on December 21, 2012 of $290 million of 9% senior secured notes due April 2019, the net proceeds of which were used to repay $284 million of term B-5 loans.

During the three months ended March 31, 2013, the Company refinanced the remaining $584 million of term B-1 loans outstanding under its senior secured credit facility with cash proceeds from the issuance of $589 million aggregate principal amount of term B-5 loans under the senior secured credit facility.

Additionally, during the three months ended March 31, 2013, the Company refinanced $1,384 million of senior unsecured notes, through (1) amendments to the senior secured credit facility and the senior secured multi-currency asset-based revolving credit facility permitting the refinancing of the 9.75% senior unsecured notes due 2015 and 10.125%/10.875% senior unsecured paid-in-kind ("PIK") toggle notes due 2015 (collectively, the “Old Notes”) with indebtedness secured by a lien on certain collateral on a junior-priority basis and (2) the exchange of $1,384 million of Old Notes for $1,384 million of 10.50% senior secured notes due 2021.

Long-term debt consists of the following:

In millions	December 31, 2013			September 30, 2013
Variable rate senior secured term B-3 loans due October 26, 2017	$	2,121		$	2,127
Variable rate senior secured term B-4 loans due October 26, 2017	1			1
Variable rate senior secured term B-5 loans due March 31, 2018	1,138			1,141
9.75% senior unsecured cash pay notes due November 1, 2015	58			58
10.125%/10.875% senior unsecured PIK toggle notes due November 1, 2015	92			92
7% senior secured notes due April 1, 2019	1,009			1,009
9% senior secured notes due April 1, 2019	290			290
10.50% senior secured notes due March 1, 2021	1,384			1,384
Unaccreted discount	(16		)	(16		)
	6,077			6,086
Debt maturing within one year	(35		)	(35		)
Long-term debt	$	6,042		$	6,051

Senior Secured Credit Facility

Prior to the fiscal 2013 refinancing transactions, the senior secured credit facility consisted of (a) a senior secured multi-currency revolver allowing for borrowings of up to $200 million, (b) term B-1 loans with an outstanding principal amount as of September 30, 2012 of $1,434 million, and (c) senior secured term B-3 loans (the "term B-3 loans") with an outstanding principal amount as of September 30, 2012 of $2,152 million.

On October 29, 2012, Avaya Inc., Citibank, N.A. and the lenders party thereto entered into Amendment No. 4 to Credit Agreement pursuant to which the senior secured credit facility was amended and restated in its entirety (as so amended and restated, the "Cash Flow Credit Agreement"). The modified terms of the Cash Flow Credit Agreement included (1) an amendment which allowed the Company to extend the maturity of a portion of the term B-1 loans representing outstanding principal amounts of $135 million from October 26, 2014 to October 26, 2017 by converting such loans into a new tranche of term B-4 loans, (2) permission to issue Incremental Replacement Secured Notes and Junior Secured Debt as described below under the heading “Senior Secured Asset-Based Credit Facility” (except, pursuant to the Cash Flow Credit Agreement, such

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Incremental Replacement Secured Notes and Junior Secured Debt must be secured by a lien on the Collateral (as defined in the Cash Flow Credit Agreement) ranking junior to the lien securing the obligations under the Cash Flow Credit Agreement) and (3) permission to issue indebtedness to refinance a portion of the term loans outstanding under the Cash Flow Credit Agreement and to secure such indebtedness by a lien on the Collateral (as defined in the Cash Flow Credit Agreement) ranking junior to the lien securing the obligations under the Cash Flow Credit Agreement, subject to certain other conditions and limitations set forth in the Cash Flow Credit Agreement.

On December 21, 2012, Avaya Inc., Citibank, N.A. and the lenders party thereto entered into Amendment No. 5 to Credit Agreement, pursuant to which the Cash Flow Credit Agreement was amended and restated in its entirety. The modified terms of the Cash Flow Credit Agreement included (1) an amendment which allowed the Company to extend the maturity of $713 million aggregate principal amount of the outstanding term B-1 loans from October 26, 2014 to March 31, 2018 and $134 million aggregate principal amount of the outstanding term B-4 loans from October 26, 2017 to March 31, 2018, in each case, by converting such loans into a new tranche of term B-5 loans; and (2) permission to apply net proceeds from Credit Agreement Refinancing Indebtedness (as defined in the Cash Flow Credit Agreement) incurred or issued on December 21, 2012 to refinance, at the Company's election, any class or classes of senior secured term loans, including the new term B-5 loans.

Additionally, as discussed more fully below, on December 21, 2012, the Company completed a private placement of $290 million of senior secured notes, the net proceeds of which were used to repay $284 million of term B-5 loans outstanding under the Cash Flow Credit Agreement. Funds affiliated with TPG were holders of $22 million of term B-5 loans repaid with the proceeds of the senior secured notes.

On February 13, 2013, Avaya Inc. and Citibank, N.A. and the lenders party thereto entered into Amendment No. 6 to Credit Agreement pursuant to which the Cash Flow Credit Agreement was amended. The modified terms of the Cash Flow Credit Agreement permitted the Company to refinance all of the Company's outstanding Old Notes with indebtedness secured by a lien on the Collateral (as defined in the Cash Flow Credit Agreement) ranking junior to the lien on the Collateral securing the obligations under the Cash Flow Credit Agreement, subject to certain other conditions and limitations set forth in the Cash Flow Credit Agreement.

On March 12, 2013, Avaya Inc., Citibank, N.A. and the lenders party thereto entered into Amendment No. 7 to Credit Agreement pursuant to which the Cash Flow Credit Agreement was amended. Pursuant to the amendment, the Company refinanced in full all the outstanding term B-1 loans with the cash proceeds from the issuance of $589 million aggregate principal amount of term B-5 loans under the Cash Flow Credit Agreement.

Subsequent to the fiscal 2013 refinancing transactions and prior to February 5, 2014, the Cash Flow Credit Agreement consisted of (a) a senior secured multi-currency revolver allowing for borrowings of up to $200 million, (b) term B-3 loans with an outstanding principal amount as of December 31, 2013 of $2,121 million, (c) term B-4 loans with an outstanding principal amount as of December 31, 2013 of $1 million, and (d) term B-5 loans with an outstanding principal amount as of December 31, 2013 of $1,138 million.

The term B-3 loans and term B-4 loans bear, and term B-5 loans bore interest at a rate per annum equal to either a base rate (subject to a floor of 2.25% in the case of the term B-4 loans and term B-5 loans) or a LIBOR rate (subject to a floor of 1.25% in the case of the term B-4 loans and term B-5 loans), in each case plus an applicable margin. Subject to the floor described in the immediately preceding sentence the base rate is determined by reference to the higher of (1) the prime rate of Citibank, N.A. and (2) the federal funds effective rate plus 1/2 of 1%. The applicable margin for borrowings of term B-3 loans and term B-4 loans is, and term B-5 loans was 3.50%, 5.25%, and 5.75% per annum, with respect to base rate borrowings and 4.50%, 6.25%, and 6.75% per annum, respectively, with respect to LIBOR borrowings. The applicable margin on the term B-4 loans is, and term B-5 loans was, subject to increase pursuant to the Cash Flow Credit Agreement in connection with the making of certain refinancing, extended or replacement term loans under the Cash Flow Credit Agreement with an Effective Yield (as defined in the Cash Flow Credit Agreement) greater than the applicable Effective Yield payable in respect of the applicable loans at such time plus 50 basis points.

The October 29, 2012, December 21, 2012, and February 13, 2013 amendments and restatements of the Cash Flow Credit Agreement represent debt modifications for accounting purposes. Accordingly, third party expenses of $4 million and $6 million incurred in connection with the transactions were expensed as incurred and included in other income, net during the three months ended December 31, 2012 and fiscal 2013, respectively. Avaya’s financing sources that held term B-1 loans, term B-3 loans, term B-5 loans and/or revolving credit commitments under the Cash Flow Credit Agreement and consented to each amendment and restatement of the Cash Flow Credit Agreement received in aggregate a consent fee of $15 million. Fees paid to or on behalf of the holders of term loans in connection with the modification were recorded as a discount to the face value of the respective debt and are being accreted over the term of the debt as interest expense. Fees paid to or on behalf of the holders of the revolving credit commitments in connection with the modification were recorded as deferred debt issuance costs and are being amortized over the term of the debt as interest expense.

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The March 12, 2013 amendment and restatement of the Cash Flow Credit Agreement was accounted for as a modification of debt to the extent the existing term B-1 loans were refinanced with term B-5 loans issued to the same creditor and an extinguishment of debt to the extent refinanced with term B-5 loans issued to a different creditor. Accordingly, for the portion accounted for as a debt extinguishment the difference between the reacquisition price and the carrying value of the term B-1 loans (including any unamortized discount and debt issue costs) of $3 million was recognized as a loss upon debt extinguishment during fiscal 2013. Third party expenses of $5 million associated with the issuance of the new term B-5 loans were capitalized and are being amortized over the term of the term B-5 loans. Third party expenses of $3 million associated with the modification of debt were expensed as incurred and included in other income, net during fiscal 2013.

The senior secured multi-currency revolver allows for borrowings of up to $200 million and has a final maturity of October 26, 2016. The senior secured multi-currency revolver includes capacity available for letters of credit and for short-term borrowings, and is available in euros in addition to dollars. Borrowings are guaranteed by Parent and substantially all of the Company’s U.S. subsidiaries. The Cash Flow Credit Agreement, consisting of the term loans and the senior secured multi-currency revolver, is secured by substantially all assets of Parent, the Company and the subsidiary guarantors.

As of December 31, 2013 and September 30, 2013 affiliates of Silver Lake and TPG held no outstanding principal amounts of term loans under the Cash Flow Credit Agreement.

See Note 17, "Subsequent Event" for a description of the refinancing transaction with respect to the term B-5 loans that occurred on February 5, 2014.

Senior Unsecured Notes

The Company has issued senior unsecured cash-pay notes and senior unsecured PIK toggle notes, each due November 1, 2015. The interest rate for the cash-pay notes is fixed at 9.75% and the interest rates for the cash interest and PIK interest portions of the PIK-toggle notes are fixed at 10.125% and 10.875%, respectively. The Company may prepay the senior unsecured notes at 100%. Upon the occurrence of specific kinds of changes of control, the Company will be required to make an offer to purchase the senior unsecured notes at 101% of their principal amount. If the Company or any of its restricted subsidiaries engages in certain asset sales, under certain circumstances the Company will be required to use the net proceeds to make an offer to purchase the senior unsecured notes at 100% of their principal amount. Substantially all of the Company’s U.S. 100%-owned subsidiaries are guarantors of the senior unsecured notes. At the time of their issuance, the Company had $700 million and $750 million of cash-pay and PIK-toggle notes, respectively. Immediately prior to March 7, 2013, the Company had $700 million and $834 million of cash-pay and PIK-toggle notes, respectively.

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

As discussed more fully below, on March 7, 2013, the Company completed an exchange offer (the “Exchange Offer”) in which $1,384 million of Old Notes (including $642 million of senior unsecured cash-pay notes and $742 million of senior unsecured PIK toggle notes) were exchanged for 10.50% senior secured notes due 2021. The Exchange Offer represents a debt modification for accounting purposes. Accordingly, third party expenses of $9 million incurred in connection with the transaction were expensed as incurred and included in other income, net during fiscal 2013. Avaya's financing sources that held the Old Notes that elected to exchange received a consent fee in aggregate of $4 million. Fees paid to or on behalf of the holders of the Old Notes in connection with the modification were recorded as a discount to the face value of the 10.50% senior secured notes due 2021 and are being accreted over the term of the debt as interest expense.

Senior Secured Asset-Based Credit Facility

The Company’s senior secured multi-currency asset-based revolving credit facility allows for borrowings of up to $335 million, subject to availability under a borrowing base, of which $150 million may be in the form of letters of credit. The borrowing base at any time equals the sum of 85% of eligible accounts receivable plus 85% of the net orderly liquidation value of eligible inventory, subject to certain reserves and other adjustments. The Company and substantially all of its U.S. subsidiaries are borrowers under this facility, and borrowings are guaranteed by Parent, the Company and substantially all of the Company’s U.S. subsidiaries. The facility is secured by substantially all assets of Parent, the Company and the subsidiary guarantors. The senior secured multi-currency asset-based revolving credit facility also provides the Company with the right to request up to $100 million of additional commitments under this facility.

On October 29, 2012 Avaya Inc., the several subsidiary borrowers (the “Subsidiary Borrowers”) party thereto, Citicorp USA, Inc. and the lenders party thereto entered into Amendment No. 2 to Credit Agreement, pursuant to which the senior secured

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multi-currency asset-based revolving credit facility was amended and restated in its entirety (as so amended and restated, the “ABL Credit Agreement”).

The modified terms of the ABL Credit Agreement include permission to issue or incur, as applicable, secured indebtedness in the form of (1) one or more series of secured notes in lieu of any Revolving Commitment Increases (as defined in the ABL Credit Agreement) in an aggregate principal amount not to exceed $100 million, plus the amount by which unused Commitments (as defined in the ABL Credit Agreement) have been previously reduced pursuant to the ABL Credit Agreement, less the amount of all Revolving Commitment Increases effected at or prior to the time of issuance of such notes (“Incremental Replacement Secured Notes”), and (2) one or more series of secured notes or secured loans in an aggregate principal amount not to exceed $750 million (“Junior Secured Debt”). Any such Incremental Replacement Secured Notes or Junior Secured Debt (a) must be (x) issued or incurred, as applicable, in connection with a modification, refinancing, refunding, renewal, replacement, exchange or extension of senior unsecured indebtedness and (y) secured by a lien on the Collateral (as defined in the ABL Credit Agreement) ranking junior to the lien securing the obligations under the ABL Credit Agreement and (b) will be subject to certain other conditions and limitations set forth in the ABL Credit Agreement.

On February 13, 2013, Avaya Inc., the Subsidiary Borrowers, Citicorp USA, Inc. and the lenders party thereto entered into Amendment No. 3 to Credit Agreement pursuant to which the ABL Credit Agreement was amended. The modified terms of the ABL Credit Agreement permitted the Company to refinance all of the Company's outstanding Old Notes with indebtedness secured by a lien on the Collateral (as defined in the ABL Credit Agreement) ranking junior to the lien on the Collateral securing the obligations under the ABL Credit Agreement, subject to certain other conditions and limitations set forth in the ABL Credit Agreement. Further, the terms of the amendment permit certain other obligations of the Company and certain of its subsidiaries to be secured by the ABL Priority Collateral (as defined in the ABL Credit Agreement) on a junior-priority basis.

Borrowings under the ABL Credit Agreement bear interest at a rate per annum equal to, at the Company's option, either (a) a LIBOR rate plus a margin of 1.75% or (b) a base rate plus a margin of 0.75%. Any principal amount outstanding under this facility is payable in full on October 26, 2016.

At December 31, 2013 and September 30, 2013, there were no borrowings under this facility. At December 31, 2013 and September 30, 2013 there were $106 million and $82 million, respectively, of letters of credit issued in the ordinary course of business under the ABL Credit Agreement resulting in remaining availability of $189 million and $228 million, respectively.

7% Senior Secured Notes

On February 11, 2011, the Company completed a private placement of $1,009 million of senior secured notes (the "7% Senior Secured Notes"). The 7% Senior Secured Notes bear interest at a rate of 7% per annum, mature on April 1, 2019 and were sold at par through a private placement to qualified institutional buyers pursuant to Rule 144A (and outside the United States in reliance on Regulation S) under the Securities Act of 1933, as amended (the “Securities Act”) and have not been, and will not be, registered under the Securities Act or applicable state or foreign securities laws.

The Company may redeem the 7% Senior Secured Notes commencing April 1, 2015 at 103.5% of the principal amount redeemed, which decreases to 101.75% on April 1, 2016 and to 100% on or after April 1, 2017. The Company may redeem all or part of the notes at any time prior to April 1, 2015 at 100% of the principal amount redeemed plus a “make-whole” premium. In addition, the Company may redeem up to 35% of the original aggregate principal balance of the 7% Senior Secured Notes at any time prior to April 1, 2014 with the net proceeds of certain equity offerings at 107% of the aggregate principal amount of 7% Senior Secured Notes redeemed. Upon the occurrence of specific kinds of changes of control, the Company will be required to make an offer to purchase the 7% Senior Secured Notes at 101% of their principal amount. If the Company or any of its restricted subsidiaries engages in certain asset sales, under certain circumstances the Company will be required to use the net proceeds to make an offer to purchase the 7% Senior Secured Notes at 100% of their principal amount.

Substantially all of the Company’s U.S. 100%-owned subsidiaries are guarantors of the 7% Senior Secured Notes. The 7% Senior Secured Notes are secured by substantially all of the assets of the Company and the subsidiary guarantors (other than with respect to real estate). The notes and the guarantees are secured equally and ratably with the Cash Flow Credit Agreement and any future first lien obligations by (i) a first-priority lien on substantially all of the Company’s and the guarantors’ assets, other than (x) any real estate and (y) collateral that secures the ABL Credit Agreement on a first-priority basis (the “ABL Priority Collateral”), and (ii) a second-priority lien on the ABL Priority Collateral, in each case, subject to certain customary exceptions.

9% Senior Secured Notes

On December 21, 2012, the Company completed a private placement of $290 million of senior secured notes (the "9% Senior Secured Notes"). The 9% Senior Secured Notes bear interest at a rate of 9% per annum, mature on April 1, 2019, and were sold at par through a private placement to qualified institutional buyers pursuant to Rule 144A (and outside the United States in reliance on Regulation S) under the Securities Act. The 9% Senior Secured Notes have not been, and will not be, registered

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under the Securities Act or applicable state or foreign securities laws and may not be offered or sold absent registration under the Securities Act or applicable state or foreign securities laws or applicable exemptions from registration requirements.

The 9% Senior Secured Notes are redeemable commencing April 1, 2015 at 104.5% of the principal amount redeemed, which decreases to 102.25% on April 1, 2016 and to 100% on or after April 1, 2017. The Company may redeem all or part of the notes at any time prior to April 1, 2015 at 100% of the principal amount redeemed plus a “make-whole” premium, as defined in the indenture governing the 9% Senior Secured Notes. In addition, the Company may redeem up to 35% of the original aggregate principal balance of the 9% Senior Secured Notes at any time prior to April 1, 2015 with the net proceeds of certain equity offerings at 109% of the aggregate principal amount redeemed. Upon the occurrence of specific kinds of changes of control, the Company will be required to make an offer to purchase the 9% Senior Secured Notes at 101% of their principal amount. If the Company or any of its restricted subsidiaries engages in certain asset sales, under certain circumstances the Company will be required to use the net proceeds to make an offer to purchase the 9% Senior Secured Notes at 100% of their principal amount.

The 9% Senior Secured Notes are secured by substantially all of the assets of the Company and substantially all of the Company’s U.S. 100%-owned subsidiaries (other than with respect to real estate). The notes and the guarantees are secured equally and ratably with the Cash Flow Credit Agreement, the 7% Senior Secured Notes due 2019 and any future first lien obligations by (i) a first-priority lien on substantially all of the Company’s and the guarantors’ assets, other than (x) any real estate and (y) collateral that secures the ABL Credit Agreement on a first-priority basis (the “ABL Priority Collateral”), and (ii) a second-priority lien on the ABL Priority Collateral, in each case, subject to certain customary exceptions.

The proceeds from the 9% Senior Secured Notes were used to repay $284 million aggregate principal amount of term B-5 loans and to pay related fees and expenses. In connection with the issuance of the 9% Senior Secured Notes, the Company capitalized financing costs of $7 million during fiscal 2013 and is amortizing these costs over the term of the 9% Senior Secured Notes.

The repayment of the term B-5 loans was accounted for as an extinguishment of debt. Accordingly the difference between the reacquisition price and the carrying value of the term B-5 loans (including unamortized debt issue costs) of $3 million was recognized as a loss upon debt extinguishment during the three months ended December 31, 2012.

10.50% Senior Secured Notes

On March 7, 2013, the Company completed an Exchange Offer in which $1,384 million of Old Notes were exchanged for $1,384 million of senior secured notes due 2021 (the “10.50% Senior Secured Notes”). The 10.50% Senior Secured Notes were issued at par, bear interest at a rate of 10.50% per annum and mature on March 1, 2021. The 10.50% Senior Secured Notes have not been, and will not be, registered under the Securities Act or applicable state or foreign securities laws and may not be offered or sold absent registration under the Securities Act or applicable state or foreign securities laws or applicable exemptions from registration requirements.

The 10.50% Senior Secured Notes are redeemable commencing March 1, 2017 at 107.875% of the principal amount redeemed, which decreases to 105.250% on March 1, 2018, to 102.625% on March 1, 2019 and to 100% on or after March 1, 2020. The Company may redeem all or part of the notes at any time prior to March 1, 2017 at 100% of the principal amount redeemed plus a “make-whole” premium. In addition, the Company may redeem up to 35% of the original aggregate principal balance of the notes at any time prior to March 1, 2016 with the net proceeds of certain equity offerings at 110.50% of the aggregate principal amount redeemed. Upon the occurrence of specific kinds of changes of control, the Company will be required to make an offer to purchase the 10.50% Senior Secured Notes at 101% of their principal amount. If the Company or any of its restricted subsidiaries engages in certain asset sales, under certain circumstances the Company will be required to use the net proceeds to make an offer to purchase the 10.50% Senior Secured Notes at 100% of their principal amount.

The 10.50% Senior Secured Notes are secured by substantially all of the assets of the Company and substantially all of the Company's U.S. 100%-owned subsidiaries (other than with respect to real estate). The notes and the corresponding guarantees are secured on a junior priority basis to the Company's ABL Credit Agreement, the Company's Cash Flow Credit Agreement, the Company's existing 7% Senior Secured Notes due 2019, the Company's existing 9% Senior Secured Notes due 2019 and any future senior obligations by a junior priority lien on substantially all of the Company's and the guarantors' assets, other than any real estate.

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

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affirmative covenants and events of default. As of December 31, 2013 and September 30, 2013, the Company was not in default under any of these agreements.

The weighted average interest rate of the Company’s outstanding debt as of December 31, 2013 was 7.4%.

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

In millions
Remainder of fiscal 2014	$	29
2015	53
2016	174
2017	38
2018	3,116
2019 and thereafter	2,683
Total	$	6,093

Capital Lease Obligations

Included in other liabilities at December 31, 2013 is $20 million of capital lease obligations, primarily associated with an office facility.

8. Derivatives and Other Financial Instruments

Interest Rate Swaps

From time to time, the Company has entered into interest rate swap agreements to manage the amount of its floating rate debt in order to reduce its exposure to variable rate interest payments associated with certain borrowings under the Cash Flow Credit Agreement. As of September 30, 2013 each of these agreements has reached maturity and there are no outstanding interest rate swap agreements.

The fair value of each interest rate swap that is designated and qualifies as a cash flow hedge under ASC 815 is reflected as an asset or liability in the Consolidated Balance Sheets, reported as a component of other comprehensive income (loss) and reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on derivative instruments representing hedge ineffectiveness are recognized in current earnings. The fair value of each interest rate swap is estimated as the net present value of their projected cash flows at the balance sheet date.

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

In millions	Three months ended December 31, 2012
(Gain) loss on interest rate swaps
Recognized in other comprehensive loss	$	(4	)
Reclassified from accumulated other comprehensive loss into interest expense	$	5
Recognized in operations (ineffective portion)	$	—

Foreign Currency Forward Contracts

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

The gains and (losses) of the foreign currency forward contracts included in other income (expense), net were less than $1 million and $(3) million for the three months ended December 31, 2013 and 2012, respectively.

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The following table summarizes the estimated fair value of the foreign currency forward contracts:

In millions
Balance Sheet Location	December 31, 2013			September 30, 2013
Other current assets	$	1		$	1
Other current liabilities	(1		)	—
Net asset (liability)	$	—		$	1

9. Fair Value Measures

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

Fair Value Hierarchy

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

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

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

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

Asset and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and September 30, 2013 were as follows:

	December 31, 2013
	Fair Value Measurements Using
In millions	Total		Quoted Prices in  Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Other Current Assets:
Foreign currency forward contracts	$	1	$	—	$	1	$	—
Other Non-Current Assets:
Investments	$	1	$	1	$	—	$	—
Other Current Liabilities:
Foreign currency forward contracts	$	1	$	—	$	1	$	—

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	September 30, 2013
	Fair Value Measurements Using
In millions	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Other Current Assets:
Foreign currency forward contracts	$	1	$	—	$	1	$	—
Other Non-Current Assets:
Investments	$	2	$	1	$	1	$	—

Foreign Currency Forward Contracts

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

Investments

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

Fair Value of Financial Instruments

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

On October 3, 2011 and October 3, 2012, the Company advanced $8 million and $10 million, respectively, to Parent in exchange for a note receivable. The proceeds of such notes were used by Parent to fund, in part, an acquisition of all outstanding shares of a unified communications solutions provider. Immediately upon completing the acquisition, Parent merged the acquired entity with and into Avaya Inc., with Avaya Inc. surviving the merger.

The principal amount of these notes plus any accrued and unpaid interest are due in full January 24, 2019 and October 3, 2015 with interest at the rate of 1.65% and 0.93% per annum, respectively. These notes are included in other assets in the Company's Consolidated Balance Sheets. The estimated fair value of the $8 million note receivable was $8 million and $8 million at December 31, 2013 and September 30, 2013, respectively. The estimated fair value of the $10 million note receivable was $9 million and $9 million at December 31, 2013 and September 30, 2013, respectively. The estimated fair value of each note was determined based on a Level 2 input using discounted cash flow techniques.

The estimated fair values of the amounts borrowed under the Company’s financing arrangements at December 31, 2013 and September 30, 2013 were estimated based on a Level 2 input using quoted market prices for the Company’s debt which is subject to infrequent transactions (i.e. a less active market).

The estimated fair values of the amounts borrowed under the Company’s credit agreements at December 31, 2013 and September 30, 2013 are as follows:

	December 31, 2013				September 30, 2013
In millions	Principal Amount		Fair Value		Principal Amount		Fair Value
Variable rate senior secured term B-3 loans due October 26, 2017	$	2,121	$	2,071	$	2,127	$	1,898
Variable rate senior secured term B-4 loans due October 26, 2017	1		1		1		1
Variable rate senior secured term B-5 loans due March 31, 2018	1,138		1,150		1,141		1,078
9.75% senior unsecured cash pay notes due November 1, 2015	58		57		58		57
10.125%/10.875% senior unsecured PIK toggle notes due November 1, 2015	92		92		92		91
7% senior secured notes due April 1, 2019	1,009		994		1,009		941
9% senior secured notes due April 1, 2019	290		305		290		281
10.50% senior secured notes due March 1, 2021	1,384		1,327		1,384		1,110
Total	$	6,093	$	5,997	$	6,102	$	5,457

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10. Income Taxes

The provision for income taxes for the three months ended December 31, 2013 was $27 million, as compared to the benefit from income taxes of $9 million for the three months ended December 31, 2012.

The effective income tax rate for the three months ended December 31, 2013 differs from the statutory U.S. Federal income tax rate primarily due to (1) the effect of tax rate differentials on foreign income/loss in the Consolidated Statements of Operations, and (2) changes in the valuation allowance established against the Company’s deferred tax assets.

The effective rate for the three months ended December 31, 2012 differs from the statutory U.S. Federal income tax rate primarily due to (1) the effect of tax rate differentials on foreign income/loss in the Consolidated Statements of Operations, (2) changes in the valuation allowance established against the Company’s deferred tax assets, (3) $17 million of income tax benefit recognized upon the expiration of certain interest rate swaps, and (4) the recognition of a $2 million income tax benefit as a result of net gains in other comprehensive income.

During the three months ended December 31, 2012, the Company recorded a tax charge of $2 million to other comprehensive income primarily relating to gains associated with the Company's pension benefits. As a result of the charge to other comprehensive income for this tax effect the Company recognized an income tax benefit in the Consolidated Statement of Operations and less current period valuation allowance was required against the Company's deferred tax assets.

During the three months ended December 31, 2012, the Company recognized $17 million of income tax benefit related to the elimination of the tax effect of certain interest rate swaps in other comprehensive income. The tax effect of such interest rate swaps was recognized in other comprehensive income prior to the establishment of a valuation allowance against the Company's U.S. net deferred tax assets and was eliminated following the expiration of the final interest rate swap upon which the tax effect was established.

For interim financial statement purposes, U.S. GAAP income tax expense related to ordinary income is determined by applying an estimated annual effective income tax rate against the Company's ordinary income. Income tax expense/benefit related to items not characterized as ordinary income is recognized as a discrete item when incurred. The estimation of the Company's annual effective income tax rate requires the use of management forecasts and other estimates, a projection of jurisdictional taxable income and losses, application of statutory income tax rates, and an evaluation of valuation allowances. The Company's estimated annual effective income tax rate may be revised, if necessary, in each interim period during the fiscal year.

11. Benefit Obligations

The Company sponsors non-contributory defined benefit pension plans covering a portion of its U.S. employees and retirees, and postretirement benefit plans covering a portion of its U.S. retirees that include healthcare benefits and life insurance coverage. Certain non-U.S. operations have various retirement benefit programs covering substantially all of their employees. Some of these programs are considered to be defined benefit pension plans for accounting purposes.

The Company froze benefit accruals and additional participation in the pension and postretirement plans for its U.S.

management employees effective December 31, 2003. The Company also amended the postretirement plan for its

U.S. management employees effective January 1, 2013, to terminate retiree dental coverage, and to cease providing

medical and prescription drug coverage to a retiree who has attained age 65 and to the spouse or dependent of such retiree.

Effective November 25, 2013, the Company entered into a two-year contract extension with the Communications Workers of

America (“CWA”). With the contract extension, the contract with the CWA now terminates on June 13, 2016. In January 2014,

the Company reached a tentative agreement for a two-year contract extension with the International Brotherhood of Electrical

Workers (“IBEW”). With the contract extension, the contract with the IBEW, which was previously extended to June 7, 2014,

would now expire on June 13, 2016. The agreement must be ratified by the union’s respective members which is expected to

occur during the second quarter. The contract extensions did not affect the level of pension and postretirement benefits

available to U.S. employees of the Company who are represented by the CWA or IBEW (“represented employees”).

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The components of the pension and postretirement net periodic benefit cost for the three months ended December 31, 2013 and 2012 are provided in the table below:

	Pension Benefits - U.S.						Pension Benefits - Non-U.S.					Postretirement Benefits - U.S.
	Three months ended December 31,						Three months ended December 31,					Three months ended December 31,
In millions	2013			2012			2013		2012			2013			2012
Components of Net Periodic Benefit Cost
Service cost	$	1		$	1		$	2	$	2		$	—		$	1
Interest cost	36			34			5		5			6			5
Expected return on plan assets	(42		)	(40		)	—		(1		)	(3		)	(3		)
Amortization of unrecognized prior service cost	—			—			—		—			(3		)	(4		)
Amortization of previously unrecognized net actuarial loss	21			32			1		1			1			2
Net periodic benefit cost	$	16		$	27		$	8	$	7		$	1		$	1

The Company's general funding policy with respect to its U.S. qualified pension plans is to contribute amounts at least sufficient to satisfy the minimum amount required by applicable laws and regulations. For the three month period ended December 31, 2013, the Company made contributions of $22 million to satisfy minimum statutory funding requirements. Estimated payments to satisfy minimum statutory funding requirements for the remainder of fiscal 2014 are $122 million.

The Company provides certain pension benefits for U.S. employees, which are not pre-funded, and certain pension benefits for non-U.S. employees, the majority of which are not pre-funded. Consequently, the Company makes payments as these benefits are disbursed or premiums are paid. For the three month period ended December 31, 2013, the Company made payments for these U.S. and non-U.S. pension benefits totaling $2 million and $5 million, respectively. Estimated payments for these U.S. and non-U.S. pension benefits for the remainder of fiscal 2014 are $5 million and $24 million, respectively.

During the three months ended December 31, 2013, the Company contributed $8 million to the represented employees’ post-retirement health trust to fund current benefit claims and costs of administration in compliance with the terms of the 2009 agreements between the Company and the CWA and IBEW, as extended through June 30, 2016 and June 7, 2014, respectively. Estimated contributions under the terms of the 2009 agreements are $32 million for the remainder of fiscal 2014.

The Company also provides certain retiree medical benefits for U.S. employees, which are not pre-funded. Consequently, the Company makes payments as these benefits are disbursed. For the three month period ended December 31, 2013, the Company made payments totaling $2 million for these retiree medical benefits. Estimated payments for these retiree medical benefits for the remainder of fiscal 2014 are $4 million.

12. Share-based Compensation

Parent’s Amended and Restated 2007 Equity Incentive Plan (“2007 Plan”) governs the issuance of equity awards, including restricted stock units (“RSUs”) and stock options, to eligible plan participants. Key employees, directors, and consultants of the Company may be eligible to receive awards under the 2007 Plan. Each stock option, when vested and exercised, and each RSU, when vested, entitles the holder to receive one share of Parent’s common stock, subject to certain restrictions on their transfer and sale as defined in the 2007 Plan and related award agreements. As of December 31, 2013, Parent had authorized the issuance of up to 49,848,157 shares of its common stock under the 2007 Plan, in addition to 2,924,125 shares of common stock underlying certain continuation awards that were permitted to be issued at the time of the Merger. There remained 9,254,931 shares available for grant under the 2007 Plan as of December 31, 2013.

Option Awards

During the three months ended December 31, 2013, 6,521,000 time-based options were granted in the ordinary course of business. All of the options have an exercise price of $2.25 per share and expire ten years from the date of grant or upon cessation of employment, in which event there are limited exercise provisions allowed for vested options. Time-based options granted during the three months ended December 31, 2013 vest over their performance periods, generally three years. Compensation expense equal to the fair value of the option measured on the grant date is recognized utilizing graded attribution over the requisite service period.

The fair value of option awards is determined at the date of grant utilizing the Cox-Ross Rubinstein (“CRR”) binomial option pricing model which is affected by the fair value of Parent’s common stock as well as a number of complex and subjective assumptions. Expected volatility is based primarily on a combination of the Company’s peer group’s historical volatility and

18

estimates of implied volatility of the Company’s peer group. The risk-free interest rate assumption was derived from reference to the U.S. Treasury Spot rates for the expected term of the stock options. The dividend yield assumption is based on Parent’s current intent not to issue a dividend under its dividend policy. The expected holding period assumption was estimated based on the Company’s historical experience.

For the three months ended December 31, 2013 and 2012, the Company recognized share-based compensation associated with options issued under the 2007 Plan of $2 million and $1 million, respectively, which is included in costs and operating expenses.

Restricted Stock Units

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

During the three months ended December 31, 2013, 3,785,454 RSUs were awarded. The fair market value (as defined in the 2007 Plan) of these awards at the date of grant was $2.25 per share.

2,713,333 of the RSUs awarded during the three months ended December 31, 2013 contain a performance condition that, if achieved, would result in additional RSU awards. If, at the end of each year during the vesting period it is determined that a performance target is achieved by the Company, then a multiplier of 1.5 times will be applied to the value of the RSU award. If the multiplier applies, the additional RSUs that will be granted on that date of determination, will be 100% vested at the date of grant and delivered in shares using the fair market value of a share of Parent's common stock on the date of grant.

At December 31, 2013, there were 11,497,961 awarded RSUs outstanding under the 2007 Plan, of which 5,330,275 were fully vested. For the three months ended December 31, 2013 and 2012, the Company recognized share-based compensation associated with RSUs granted under the 2007 Plan of $4 million and $1 million, respectively.

13. Reportable Segments

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

The GCS segment primarily develops, markets, and sells unified communications and contact center products by integrating multiple forms of communications, including telephone, e-mail, instant messaging and video. Avaya’s Networking segment’s portfolio of products offers integrated networking products which are scalable across customer enterprises. The AGS segment develops, markets and sells comprehensive end-to-end global service offerings that allow customers to evaluate, plan, design, implement, monitor, manage and optimize complex enterprise communications networks.

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

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

	Three months ended December 31,
In millions	2013			2012
REVENUE
Global Communications Solutions	$	507		$	573
Avaya Networking	67			58
Enterprise Collaboration Solutions	574			631
Avaya Global Services	584			609
	$	1,158		$	1,240
GROSS PROFIT
Global Communications Solutions	$	314		$	349
Avaya Networking	32			22
Enterprise Collaboration Solutions	346			371
Avaya Global Services	314			318
Unallocated Amounts (1)	(15		)	(23		)
	645			666
OPERATING EXPENSES
Selling, general and administrative	395			384
Research and development	95			118
Amortization of intangible assets	57			57
Restructuring charges, net	7			84
	554			643
OPERATING INCOME	91			23
INTEREST EXPENSE, LOSS ON EXTINGUISHMENT OF DEBT AND OTHER INCOME (EXPENSE), NET	(118		)	(117		)
LOSS BEFORE INCOME TAXES	$	(27	)	$	(94	)

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

14. Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive loss as of December 31, 2013 and 2012 are summarized as follows:

In millions	Change in unamortized pension, postretirement and postemployment benefit-related items			Foreign Currency Translation			Other			Accumulated Other Comprehensive Income (Loss)
Balance as of October 1, 2013	$	(949	)	$	(56	)	$	(1	)	$	(1,006	)
Other comprehensive loss before reclassifications	—			(15		)	—			(15		)
Amounts reclassified to earnings	11			—			—			11
Balance as of December 31, 2013	$	(938	)	$	(71	)	$	(1	)	$	(1,010	)

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In millions	Change in unamortized pension, postretirement and postemployment benefit-related items			Foreign Currency Translation			Unrealized loss on term loan interest rate swap			Other			Accumulated Other Comprehensive Income (Loss)
Balance as of October 1, 2012	$	(1,109	)	$	(13	)	$	(3	)	$	(1	)	$	(1,126	)
Other comprehensive loss before reclassifications	—			(12		)	(1		)	—			(13		)
Amounts reclassified to earnings	23			—			5			—			28
Benefit from income taxes	(9		)	—			(19		)	—			(28		)
Balance as of December 31, 2012	$	(1,095	)	$	(25	)	$	(18	)	$	(1	)	$	(1,139	)

The amounts reclassified out of accumulated other comprehensive income (loss) into the Consolidated Statements of Operations prior to the impact of income taxes, with line item location, during the three months ended December 31, 2013 and 2012 were as follows:

	Three months ended December 31,
In millions	2013		2012		Line item in Statements of Operations
Change in unamortized pension, postretirement and postemployment benefit-related items	$	3	$	6	Costs - Products
	3		6		Costs - Services
	4		9		Selling, general and administrative
	1		2		Research and development
	11		23
Unrealized loss on term loan interest rate swap	—		5		Interest expense
Total amounts reclassified to operations	$	11	$	28

15. Commitments and Contingencies

Legal Proceedings

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

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

Antitrust Litigation

In 2006, the Company instituted an action in the U.S. District Court, District of New Jersey, against defendants Telecom Labs, Inc., TeamTLI.com Corp. and Continuant Technologies, Inc. and subsequently amended its complaint to include certain individual officers of these companies as defendants. Defendants purportedly provide maintenance services to customers who have purchased or leased the Company's communications equipment. The Company asserts in its amended complaint that, among other things, defendants, or each of them, have engaged in tortious conduct and/or violated federal intellectual property laws by improperly accessing and utilizing the Company's proprietary software, including passwords, logins and maintenance service permissions, to perform certain maintenance services on the Company's customers' equipment. Defendants have filed counterclaims against the Company, alleging a number of tort claims and alleging that the Company has violated the Sherman Act's prohibitions against anticompetitive conduct through the manner in which the Company sells its products and services. Defendants seek to recover the profits they claim they would have earned from maintaining Avaya's products, and ask for injunctive relief prohibiting the conduct they claim is anticompetitive. 

The trial commenced on September 9, 2013. The Company rested its affirmative case on November 12, 2013, and the Defendants filed motions for judgment as a matter of law against the Company’s remaining claims. These motions were argued on November 18, 2013. The Court did not initially rule on the motions, indicating it would reserve a decision until later in the proceedings. On January 8, 2014, the Court issued an opinion dismissing the Company's affirmative claims which the

21

Company intends to appeal at the conclusion of the case. The defendants began to present their portion of the case on November 19, 2013, and the trial is expected to end in late February or early March early 2014. With respect to Defendants’ counterclaims, the Company cannot estimate the possible loss or range of possible loss, if any, as there are significant legal and factual issues to be resolved. In the event Defendants ultimately succeed at trial and in subsequent appeals, any potential loss could be material as Defendants are claiming substantial damages. Under the federal antitrust laws, defendants would be entitled to three times the amount of any actual damages awarded for lost profits, plus attorneys’ fees and costs. Defendants allege lost profit damages of up to $147 million before trebling, excluding attorneys’ fees and costs. The Company believes Defendants’ counterclaims, including its damages calculations, are without merit and unsupported by the facts. At this time an outcome cannot be predicted and, as a result, the Company cannot be assured that this case will not have a material adverse effect on the manner in which it does business, its financial position, results of operations, or cash flows.

Intellectual Property

In the ordinary course of business, the Company is involved in litigation alleging it has infringed upon third parties’ intellectual property rights, including patents; some litigation may involve claims for infringement against customers by third parties relating to the use of Avaya’s products, as to which the Company may provide indemnifications of varying scope to certain customers. These matters are on-going and the outcomes are subject to inherent uncertainties. As a result, the Company cannot be assured that any such matter will not have a material adverse effect on its financial position, results of operations or cash flows.

Other

In October 2009, a group of former employees of Avaya’s former Shreveport, Louisiana manufacturing facility brought suit in Louisiana state court, naming as defendants Alcatel-Lucent USA, Inc., Lucent Technologies Services Company, Inc., and AT&T Technologies, Inc. The former employees allege hearing loss due to hazardous noise exposure from the facility dating back over forty years, and stipulate that the total amount of each individual’s damages does not exceed fifty thousand dollars. In February 2010 plaintiffs amended their complaint to add the Company as a named defendant. There are 101 plaintiffs in the case. Defendants’ motion to dismiss plaintiffs’ complaint was denied on April 30, 2012. At this time an outcome cannot be predicted however, because the amounts of the claims individually and in the aggregate are not material, the Company believes the outcome of this matter will not have a material adverse effect on the manner in which it does business, its financial position, results of operations, or cash flows.

General

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

Product Warranties

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

In millions
Balance as of October 1, 2013	$	16
Reductions for payments and costs to satisfy claims	(3		)
Accruals for warranties issued during the period	2
Balance as of December 31, 2013	$	15

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Guarantees of Indebtedness and Other Off-Balance Sheet Arrangements

Letters of Credit

As of December 31, 2013, the Company had outstanding an aggregate of $151 million in irrevocable letters of credit which ensure the Company's performance or payment to third parties.  Included in this amount is $106 million issued underits $535 million committed revolving credit facilities, which facilities are available through October 26, 2016.  Also included is $45 million of letters of credit issued under uncommitted facilities.

Surety Bonds

The Company arranges for the issuance of various types of surety bonds, such as license, permit, bid and performance bonds, which are agreements under which the surety company guarantees that the Company will perform in accordance with contractual or legal obligations. These bonds vary in duration although most are issued and outstanding from 3 months to 3 years. These bonds are backed by $12 million of the Company’s letters of credit. If the Company fails to perform under its obligations, the maximum potential payment under these surety bonds is $12 million as of December 31, 2013. Historically, no surety bonds have been drawn upon.

Purchase Commitments and Termination Fees

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

The Company’s outsourcing agreements with its most significant contract manufacturers expire in July and August of 2014. After the initial term, the outsourcing agreements are automatically renewed for successive periods of twelve months each, subject to specific termination rights for the Company and the contract manufacturers. All manufacturing of the Company’s products is performed in accordance with either detailed requirements or specifications and product designs furnished by the Company, and is subject to rigorous quality control standards.

Product Financing Arrangements

The Company sells products to various resellers that may obtain financing from certain unaffiliated third-party lending institutions. For the Company’s product financing arrangement with resellers outside the U.S., in the event participating resellers default on their payment obligations to the lending institution, the Company is obligated under certain circumstances to guarantee repayment to the lending institution. The repayment amount fluctuates with the level of product financing activity. The guaranteed repayment amount was approximately $3 million as of December 31, 2013. The Company reviews and sets the maximum credit limit for each reseller participating in this financing arrangement. Historically, there have not been any guarantee repayments by the Company. The Company has estimated the fair value of this guarantee as of December 31, 2013, and has determined that it is not significant. There can be no assurance that the Company will not be obligated to repurchase inventory under this arrangement in the future.

Long-Term Cash Incentive Bonus Plan

Parent has established a long-term incentive cash bonus plan (“LTIP”). Under the LTIP, Parent will make cash awards available to compensate certain key employees upon the achievement of defined returns on the Sponsors’ initial investment in the Parent (a “triggering event”). Parent has authorized LTIP awards covering a total of $60 million, of which $35 million in awards were outstanding as of December 31, 2013. The Company will begin to recognize compensation expense relative to the LTIP awards upon the occurrence of a triggering event (e.g., a sale or initial public offering). As of December 31, 2013, no compensation expense associated with the LTIP has been recognized.

Credit Facility Indemnification

In connection with its obligations under the credit facilities described in Note 7, “Financing Arrangements,” the Company has agreed to indemnify the third-party lending institutions for costs incurred by the institutions related to changes in tax law or other legal requirements. While there have been no amounts paid to the lenders pursuant to this indemnity in the past, there can be no assurance that the Company will not be obligated to indemnify the lenders under this arrangement in the future. As of December 31, 2013, no amounts have been accrued pursuant to this indemnity.

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Transactions with Alcatel-Lucent

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

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

16. Guarantor—Non Guarantor financial information

The senior secured credit facility and senior unsecured cash pay and PIK toggle notes, discussed in Note 7, "Financing Arrangements" are jointly and severally, fully and unconditionally guaranteed subject to certain conditions by Avaya Inc. and all wholly owned U.S. subsidiaries of Avaya Inc. (with certain customary exceptions) (collectively, the “Guarantors”). Each of the Guarantors is 100% owned, directly or indirectly, by Avaya Inc. None of the other subsidiaries of Avaya Inc., either directly or indirectly, guarantee the senior secured credit facility or the senior unsecured cash pay or PIK toggle notes (“Non-Guarantors”). Avaya Inc. also unconditionally guarantees the senior secured asset-based credit facility described in Note 7, “Financing Arrangements.” In addition, all of Avaya Inc.’s wholly owned U.S. subsidiaries (with certain agreed-upon exceptions) act as co-borrowers and co-guarantors under the senior secured asset-based credit facility.

The following tables present the results of operations, financial position and cash flows of Avaya Inc., the Guarantor subsidiaries, the Non-Guarantor subsidiaries and Eliminations as of December 31, 2013 and September 30, 2013, and the three months ended December 31, 2013 and 2012 to arrive at the information for Avaya Inc. on a consolidated basis.

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Supplemental Condensed Consolidating Schedule of Operations and Comprehensive (Loss) Income

	Three Months Ended December 31, 2013
In millions	Avaya Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
REVENUE	$	669		$	61		$	555		$	(127	)	$	1,158
COST	306			50			284			(127		)	513
GROSS PROFIT	363			11			271			—			645
OPERATING EXPENSES
Selling, general and administrative	161			15			219			—			395
Research and development	53			2			40			—			95
Amortization of intangible assets	52			1			4			—			57
Restructuring charges, net	2			—			5			—			7
	268			18			268			—			554
OPERATING INCOME (LOSS)	95			(7		)	3			—			91
Interest expense	(119		)	—			—			—			(119		)
Other income (expense), net	86			—			(85		)	—			1
INCOME (LOSS) BEFORE INCOME TAXES	62			(7		)	(82		)	—			(27		)
Provision for income taxes	—			—			(27		)	—			(27		)
Equity in net loss of consolidated subsidiaries	(116		)	—			—			116			—
NET LOSS	$	(54	)	$	(7	)	$	(109	)	$	116		$	(54	)
Comprehensive loss	$	(58	)	$	(7	)	$	(123	)	$	130		$	(58	)

25

Supplemental Condensed Consolidating Schedule of Operations and Comprehensive Loss

	Three Months Ended December 31, 2012
In millions	Avaya Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
REVENUE	$	724		$	80		$	611		$	(175	)	$	1,240
COST	367			54			328			(175		)	574
GROSS PROFIT	357			26			283			—			666
OPERATING EXPENSES
Selling, general and administrative	144			26			214			—			384
Research and development	66			2			50			—			118
Amortization of intangible assets	52			1			4			—			57
Restructuring charges, net	17			2			65			—			84
	279			31			333			—			643
OPERATING INCOME (LOSS)	78			(5		)	(50		)	—			23
Interest expense	(105		)	(3		)	—			—			(108		)
Loss on extinguishment of debt	(3		)	—			—			—			(3		)
Other expense, net	(4		)	—			(2		)	—			(6		)
LOSS BEFORE INCOME TAXES	(34		)	(8		)	(52		)	—			(94		)
Benefit from (provision for) income taxes	19			—			(10		)	—			9
Equity in net loss of consolidated subsidiaries	(70		)	—			—			70			—
NET LOSS	$	(85	)	$	(8	)	$	(62	)	$	70		$	(85	)
Comprehensive loss	$	(98	)	$	(8	)	$	(74	)	$	82		$	(98	)

26

Supplemental Condensed Consolidating Balance Sheet

	December 31, 2013
In millions	Avaya Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	94		$	18		$	188		$	—		$	300
Accounts receivable, net—external	296			30			360			—			686
Accounts receivable—internal	945			37			165			(1,147		)	—
Inventory	109			2			115			—			226
Deferred income taxes, net	29			—			33			—			62
Other current assets	108			19			139			—			266
Internal notes receivable, current	1,516			205			51			(1,772		)	—
TOTAL CURRENT ASSETS	3,097			311			1,051			(2,919		)	1,540
Property, plant and equipment, net	181			16			129			—			326
Deferred income taxes, net	3			—			23			—			26
Intangible assets, net	1,271			28			127			—			1,426
Goodwill	4,090			—			13			—			4,103
Other assets	143			4			21			—			168
Investment in consolidated subsidiaries	—			—			33			(33		)	—
TOTAL ASSETS	$	8,785		$	359		$	1,397		$	(2,952	)	$	7,589
LIABILITIES
Current liabilities:
Debt maturing within one year—external	$	35		$	—		$	—		$	—		$	35
Debt maturing within one year—internal	276			404			1,092			(1,772		)	—
Accounts payable—external	246			19			171			—			436
Accounts payable—internal	170			10			967			(1,147		)	—
Payroll and benefit obligations	106			7			108			—			221
Deferred revenue	518			6			142			—			666
Business restructuring reserve, current portion	6			—			68			—			74
Other current liabilities	170			3			86			—			259
TOTAL CURRENT LIABILITIES	1,527			449			2,634			(2,919		)	1,691
Long-term debt	6,042			—			—			—			6,042
Pension obligations	963			—			531			—			1,494
Other postretirement obligations	284			—			—			—			284
Deferred income taxes, net	230			—			21			—			251
Business restructuring reserve, non-current portion	18			1			55			—			74
Other liabilities	178			19			277			—			474
Deficiency in consolidated subsidiaries	2,264			14			—			(2,278		)	—
TOTAL NON-CURRENT LIABILITIES	9,979			34			884			(2,278		)	8,619
TOTAL DEFICIENCY	(2,721		)	(124		)	(2,121		)	2,245			(2,721		)
TOTAL LIABILITIES AND DEFICIENCY	$	8,785		$	359		$	1,397		$	(2,952	)	$	7,589

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Supplemental Condensed Consolidating Balance Sheet

	September 30, 2013
In millions	Avaya Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	72		$	13		$	203		$	—		$	288
Accounts receivable, net—external	312			30			374			—			716
Accounts receivable—internal	914			33			138			(1,085		)	—
Inventory	116			5			124			—			245
Deferred income taxes, net	29			—			23			—			52
Other current assets	90			29			134			—			253
Internal notes receivable, current	1,492			189			—			(1,681		)	—
TOTAL CURRENT ASSETS	3,025			299			996			(2,766		)	1,554
Property, plant and equipment, net	190			17			127			—			334
Deferred income taxes, net	2			—			32			—			34
Intangible assets, net	1,293			29			164			—			1,486
Goodwill	3,988			—			104			—			4,092
Other assets	147			4			21			—			172
Investment in consolidated subsidiaries	—			2			31			(33		)	—
TOTAL ASSETS	$	8,645		$	351		$	1,475		$	(2,799	)	$	7,672
LIABILITIES
Current liabilities:
Debt maturing within one year—external	$	35		$	—		$	—		$	—		$	35
Debt maturing within one year—internal	200			381			1,100			(1,681		)	—
Accounts payable—external	216			18			174			—			408
Accounts payable—internal	139			8			938			(1,085		)	—
Payroll and benefit obligations	115			11			130			—			256
Deferred revenue	540			8			123			—			671
Business restructuring reserve, current portion	12			1			79			—			92
Other current liabilities	168			3			86			—			257
TOTAL CURRENT LIABILITIES	1,425			430			2,630			(2,766		)	1,719
Long-term debt	6,051			—			—			—			6,051
Pension obligations	992			—			518			—			1,510
Other postretirement obligations	290			—			—			—			290
Deferred income taxes, net	226			—			17			—			243
Business restructuring reserve, non-current portion	21			1			56			—			78
Other liabilities	171			20			259			—			450
Deficiency in consolidated subsidiaries	2,138			—			—			(2,138		)	—
TOTAL NON-CURRENT LIABILITIES	9,889			21			850			(2,138		)	8,622
TOTAL DEFICIENCY	(2,669		)	(100		)	(2,005		)	2,105			(2,669		)
TOTAL LIABILITIES AND DEFICIENCY	$	8,645		$	351		$	1,475		$	(2,799	)	$	7,672

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Supplemental Condensed Consolidating Schedule of Cash Flows

	Three Months Ended December 31, 2013
In millions	Avaya Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
OPERATING ACTIVITIES:
Net loss	$	(54	)	$	(7	)	$	(109	)	$	116		$	(54	)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities	20			2			110			—			132
Changes in operating assets and liabilities	(27		)	4			9			—			(14		)
Equity in net loss of consolidated subsidiaries	116			—			—			(116		)	—
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES	55			(1		)	10			—			64
INVESTING ACTIVITIES:
Capital expenditures	(19		)	—			(13		)	—			(32		)
Capitalized software development costs	(1		)	—			—			—			(1		)
Acquisition of businesses, net of cash acquired	—			—			(11		)	—			(11		)
Proceeds from sale of investments	1			—			—			—			1
NET CASH USED FOR INVESTING ACTIVITIES	(19		)	—			(24		)	—			(43		)
FINANCING ACTIVITIES:
Repayment of long-term debt	(9		)	—			—			—			(9		)
Net (repayments) borrowings of intercompany debt	(5		)	7			(2		)	—			—
Other financing activities, net	—			(1		)	—			—			(1		)
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES	(14		)	6			(2		)	—			(10		)
Effect of exchange rate changes on cash and cash equivalents	—			—			1			—			1
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	22			5			(15		)	—			12
Cash and cash equivalents at beginning of period	72			13			203			—			288
Cash and cash equivalents at end of period	$	94		$	18		$	188		$	—		$	300

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Supplemental Condensed Consolidating Schedule of Cash Flows

	Three Months Ended December 31, 2012
In millions	Avaya Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
OPERATING ACTIVITIES:
Net loss	$	(85	)	$	(8	)	$	(62	)	$	70		$	(85	)
Adjustments to reconcile net loss to net cash provided by operating activities	87			3			11			—			101
Changes in operating assets and liabilities	(68		)	6			52			—			(10		)
Equity in net loss of consolidated subsidiaries	70			—			—			(70		)	—
NET CASH PROVIDED BY OPERATING ACTIVITIES	4			1			1			—			6
INVESTING ACTIVITIES:
Capital expenditures	(8		)	—			(15		)	—			(23		)
Capitalized software development costs	(6		)	(1		)	—			—			(7		)
Acquisition of businesses, net of cash acquired	(1		)	—			—			—			(1		)
Proceeds from sale of long-lived assets	5			—			4			—			9
Proceeds from sale of investments	—			—			1			—			1
Advance to Parent	(10		)	—			—			—			(10		)
NET CASH USED FOR INVESTING ACTIVITIES	(20		)	(1		)	(10		)	—			(31		)
FINANCING ACTIVITIES:
Proceeds from 9% senior secured notes	290			—			—			—			290
Repayment of term B-5 loans	(284		)	—			—			—			(284		)
Debt issuance and third-party debt modification costs	(22		)	—			—			—			(22		)
Repayment of long-term debt	(9		)	—			—			—			(9		)
Net borrowings (repayments) of intercompany debt	4			4			(8		)	—			—
Other financing activities, net	—			(1		)	—			—			(1		)
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES	(21		)	3			(8		)	—			(26		)
Effect of exchange rate changes on cash and cash equivalents	—			—			(1		)	—			(1		)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(37		)	3			(18		)	—			(52		)
Cash and cash equivalents at beginning of period	101			10			226			—			337
Cash and cash equivalents at end of period	$	64		$	13		$	208		$	—		$	285

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17. Subsequent Events

Sale of Facility

On January 14, 2014, the Company completed the sale of its facility in Westminster, Colorado for net cash of approximately $58 million after deducting applicable fees and expenses and an existing obligation to complete tenant improvements under a lease of the facility, which obligation of the Company was satisfied and discharged in the sale transaction.

Financing Arrangements

On February 5, 2014, the Company, Citibank, N.A., as Administrative Agent, and the lenders party thereto entered into Amendment No. 8 to Credit Agreement, pursuant to which the Cash Flow Credit Agreement was amended.

Pursuant to Amendment No. 8 to Credit Agreement, the Company refinanced in full all senior secured term B-5 loans outstanding under the Cash Flow Credit Agreement with the cash proceeds from the Company’s borrowing of approximately $1,138 million aggregate principal amount of senior secured term B-6 loans under the Cash Flow Credit Agreement.  In addition, the Company paid $15 million in cash for certain fees and expenses incurred in connection with the refinancing. The new senior secured term B-6 loans mature on March 31, 2018, which was the same date on which the senior secured term B-5 loans were scheduled to mature.

The new tranche of senior secured term B-6 loans bears interest at a rate per annum equal to either a base rate (subject to a floor of 2.00%) or a LIBOR rate (subject to a floor of 1.00%), in each case plus an applicable margin. Subject to the floor described in the immediately preceding sentence, the base rate is determined by reference to the higher of (1) the prime rate of Citibank, N.A. and (2) the federal funds effective rate plus one half of 1%. The applicable margin for borrowings of senior secured term B-6 loans is 4.50% per annum with respect to base rate borrowings and 5.50% per annum with respect to LIBOR borrowings, in each case, subject to increase pursuant to the Cash Flow Credit Agreement in connection with the making of certain refinancing, extended or replacement term loans under the Cash Flow Credit Agreement with an Effective Yield (as defined in the Cash Flow Credit Agreement) greater than the applicable Effective Yield payable in respect of the senior secured term B-6 loans at such time plus 50 basis points.

Any voluntary prepayment, and certain mandatory prepayments, of principal of the senior secured term B-6 loans, or any amendment to the terms of the senior secured term B-6 loans, the primary purpose of which is to effect a Term B-6 Repricing Transaction (as defined in the Cash Flow Credit Agreement), in each case, after February 5, 2014 and on or prior to August 5, 2014, will be subject to payment of a 1.0% premium on the aggregate principal amount of the senior secured term B-6 loans so prepaid or amended.

Held-for-Sale

Subsequent to December 31, 2013, the Company classified its government IT services reporting unit as held-for-sale.  The government IT services business provides specialized information technology services exclusively to government customers in the U.S.  

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

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

Our accompanying unaudited interim Consolidated Financial Statements as of December 31, 2013 and for the three months ended December 31, 2013 and 2012 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission, or the SEC, for interim financial statements, and should be read in conjunction with our Consolidated Financial Statements and other financial information for the fiscal year ended September 30, 2013, which were included in our Annual Report on Form 10-K filed with the SEC on November 22, 2013. In our opinion, the unaudited interim Consolidated Financial Statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair statement of the financial condition, results of operations and cash flows for the periods indicated.

The consolidated results of operations for the interim periods reported are not necessarily indicative of the results to be experienced for the entire fiscal year.

Overview

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

We are highly focused on serving our core business collaboration and communications markets with open fit-for-purpose products and distributed software services and support models. We shape our portfolio to meet the demands of customers today and in the future. Our products are aimed at large enterprises, midmarket businesses and government organizations. We offer our products in three key business collaboration and communications categories:

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

• Customer Experience Management, including Contact Center applications

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

communications and contact center portfolios

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

Initial Registration Statement of Parent

Avaya is a wholly owned subsidiary of Avaya Holdings Corp., a Delaware corporation (“Parent”). Parent was formed by affiliates of two private equity firms, Silver Lake Partners (“Silver Lake”) and TPG Capital (“TPG”) (collectively, the “Sponsors”). Silver Lake and TPG, through Parent, acquired Avaya in a transaction that was completed on October 26, 2007 (the “Merger”). See discussion in Note 1, “Background, Merger and Basis of Presentation - Merger,” to our unaudited interim Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

On June 9, 2011, Parent filed with the SEC a registration statement on Form S-1 (as amended from time to time, the “registration statement”) relating to a proposed initial public offering of its common stock. As contemplated in the registration statement, the net proceeds of the proposed offering are expected to be used, among other things, to repay a portion of our long-term indebtedness. The registration statement remains under review by the SEC and shares of common stock registered thereunder may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Form 10-Q and the pending registration statement shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of those securities in any State or other jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State or other jurisdiction. Further, there is

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no way to predict whether or not Parent will be successful in completing the offering as contemplated and if it is successful, we cannot be certain if, or how much of, the net proceeds will be used for the purposes identified above.

Refinancing of Debt

During fiscal 2013, the Company completed a series of transactions which allowed the Company to refinance (1) all of its senior secured term B-1 loans ("term B-1 loans") outstanding under its senior secured credit facility originally due October 26, 2014, and (2) $642 million of its 9.75% senior unsecured cash-pay notes and $742 million of its senior unsecured paid-in-kind ("PIK") toggle notes each originally due November 1, 2015. As a result of these debt refinancing transactions, the Company extended the maturity date of $2.8 billion of its debt by an additional three to six years.

Long-term debt consists of the following:

In millions	December 31, 2013
9.75% senior unsecured cash pay notes due November 1, 2015	$	58
10.125%/10.875% senior unsecured PIK toggle notes due November 1, 2015	92
Variable rate senior secured term B-3 loans due October 26, 2017	2,121
Variable rate senior secured term B-4 loans due October 26, 2017	1
Variable rate senior secured term B-5 loans due March 31, 2018	1,138
7% senior secured notes due April 1, 2019	1,009
9% senior secured notes due April 1, 2019	290
10.50% senior secured notes due March 1, 2021	1,384
Unaccreted discount	(16		)
	6,077
Debt maturing within one year	(35		)
Long-term debt	$	6,042

During the three months ended December 31, 2012, the Company completed three transactions which allowed the Company to refinance $848 million of its term B-1 loans. On October 29, 2012 the Company completed an amendment and restatement of the senior secured credit facility and senior secured multi-currency asset-based revolving credit facility along with the extension of the maturity date of $135 million aggregate principal amount of term B-1 loans from October 26, 2014 to October 26, 2017 by converting such loans into a new tranche of senior secured term B-4 loans ("term B-4 loans"). On December 21, 2012 the Company completed an amendment and restatement of the senior secured credit facility along with the extension of the maturity date of $713 million aggregate principal amount of term B-1 loans from October 26, 2014 to March 31, 2018 and $134 million aggregate principal amount of term B-4 loans from October 26, 2017 to March 31, 2018 in each case by converting such loans into a new tranche of senior secured term B-5 loans ("term B-5 loans"). On December 21, 2012 the Company issued $290 million of 9% senior secured notes due April 2019 (the "9% Senior Secured Notes"), the proceeds of which were used to repay $284 million principal amount of term B-5 loans and to pay related fees and expenses.

On March 7, 2013, Avaya Inc. completed an exchange offer in which $642 million of the 9.75% senior unsecured cash-pay notes and $742 million of the 10.125%/10.875% senior unsecured PIK toggle notes each originally due November 1, 2015 were exchanged for $1,384 million of 10.50% senior secured notes due March 1, 2021. In addition, on March 12, 2013, Avaya Inc. refinanced the remaining term B-1 loans due October 26, 2014, with the cash proceeds from the issuance of $589 million aggregate principal amount of term B-5 loans due March 31, 2018 under its senior secured credit facility.

In connection with the amendments and restatements of the senior secured credit facility necessary to effectuate the transactions described above, the applicable interest rate for the portion of the term B-1 loans that were converted into term B-4 loans and term B-5 loans was also changed. The weighted average interest rate of the Company's outstanding debt as of December 31, 2013 and September 30, 2013 was 7.4% and 7.4%, respectively. The Company incurred $49 million in debt issuance and debt modification costs in connection with the debt refinancing transactions during fiscal 2013, of which $18 million was expensed as incurred and included in Other Expense, net and $31 million was deferred and is being amortized over the term of the related debt.

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Annual maturities of debt, based on our debt profile as of December 31, 2013 for the next five years ending September 30th and thereafter consist of:

In millions	December 31, 2013
2014	$	29
2015	53
2016	174
2017	38
2018	3,116
2019 and thereafter	2,683
Total	$	6,093

None of the 7% Senior Secured Notes, the 9% Senior Secured Notes or the 10.50% Senior Secured Notes have been, and none of them will be, registered under the Securities Act or applicable State securities laws and none of them may be offered or sold absent registration under the Securities Act or applicable State securities laws or applicable exemptions from registration requirements.

On February 5, 2014, the Company completed an amendment of the senior secured credit facility pursuant to which the Company refinanced $1,138 million aggregate principal amount of term B-5 loans with the cash proceeds from the issuance of senior secured term B-6 loans ("term B-6 loans"). The refinancing provided for a lower interest rate while maintaining the same maturity date of March 31, 2018 for the associated debt.

The new tranche of term B-6 loans bears interest and the term B-5 loans bore interest at a rate per annum equal to either a base rate (subject to a floor of 2.00% in the case of the term B-6 loans and 2.25% in the case of the term B-5 loans) or a LIBOR rate (subject to a floor of 1.00% in the case of the term B-6 loans and 1.25% in the case of the term B-5 loans), in each case plus an applicable margin. Subject to the floor described in the immediately preceding sentence, the base rate is determined by reference to the higher of (1) the prime rate of Citibank, N.A. and (2) the federal funds effective rate plus one half of 1%. The applicable margin for borrowings of term B-6 loans is and the term B-5 loans was 4.50% and 5.75% per annum with respect to base rate borrowings and 5.50% and 6.75%, respectively per annum with respect to LIBOR borrowings, in each case, subject to increase pursuant to the senior secured credit facility in connection with the making of certain refinancing, extended or replacement term loans under the senior secured credit facility with an Effective Yield (as defined in the senior secured credit facility) greater than the applicable Effective Yield payable in respect of the term B-6 loans at such time plus 50 basis points.

See Note 7, “Financing Arrangements” and Note 17, “Subsequent Events,” to our unaudited interim Consolidated Financial Statements for further details.

Major Business Areas

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

Our Products and Services

We offer products and services in three key business collaboration and communications categories:

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

• Customer Experience Management, including Contact Center applications

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

Our products and services are designed to meet the diverse needs of small and mid-size businesses, as well as large enterprises and government customers. The majority of our product portfolio is comprised of software products that reside on either a client or server. Client software resides on both our own and third-party devices, including desk phones, tablets, desktop PCs and mobile phones. Server-side software controls communication and collaboration for the enterprise, and delivers rich value-added applications such as messaging, telephony, voice, video and web conferencing, mobility and customer service. Hardware includes a broad range of desk phones, servers and gateways and LAN/WAN switching wireless access points and gateways. A portion of the portfolio has been subjected to rigorous interoperability and security testing and is approved for acquisition by

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the US Government. Avaya’s portfolio of services includes product support, integration, Cloud and managed services as well as professional services that enable customers to optimize and manage their communications networks worldwide and achieve enhanced business results.

Our Products

Real-Time Collaboration, Video and Unified Communications

Enterprises of all sizes depend on Avaya for unified communications products and technology that help improve efficiency, collaboration and competitiveness. Our people-centric products integrate voice, video and data, enabling users to communicate and collaborate in real-time, in the mode best suited to each interaction. This eliminates inefficiencies in communications to help make organizations more productive and responsive.

Video and Conferencing

Avaya helps enable faster, more effective collaboration inside the enterprise and externally with conferencing products for desktops, meeting rooms and mobile devices.

• Avaya Scopia is a standards-based portfolio of hardware and software products that includes conference room systems, desktop and mobile video conferencing and infrastructure and management (see “—Platforms, Infrastructure and Phones" below for more information).

Avaya Scopia High Definition ("HD") video conferencing room systems incorporate state-of-the-art video technology with capabilities required to support today’s room system deployments. The Avaya Scopia XT5000 is ideal for large conference rooms, while the Avaya Scopia XT4200 is specifically designed for the needs of smaller and mid-sized conference rooms. We also offer desktop clients from the software Avaya Scopia Desktop to the Avaya Scopia XT Executive 240. These advanced HD personal video conferencing endpoints are cost effective for expanding the reach of the video deployment beyond the conference room.

Avaya Scopia Mobile extends the Avaya Scopia product to the latest mobile devices providing applications for video conferencing, control and management via smartphones and tablets supporting Apple iOS and Google Android. Avaya Scopia products are used by institutions, enterprises and service providers to create high quality, easy-to-use voice, video, and data collaboration environments, regardless of the communication network—IP, Session Initiation Protocol ("SIP"), 3G, 4G, H.323, integrated services digital networks ("ISDN") or next generation integrated messaging systems ("IMS").

• Avaya Aura Conferencing gives users one-touch control over collaboration. With it they can drag and drop contacts to start a conference, without dialing, switch between IM, email, voice, and video in one window and in one application, scroll and click on contacts with the ability to send invitations that automatically contain conference information and links, share content and desktops with a click of the “collaborate” button, and see who is in the conference, who just arrived and who is presenting.

• The Avaya Flare Experience is an easy-to-use interface with one-click access to real-time, enterprise-wide audio, video, and web collaboration. The intuitive drag-and-drop experience integrates directories, contextual history, and more. During a conference, a user can manage everything with built-in controls, including the ability to click an icon to escalate from an audio call to point-to-point, or multi-party video, or start web collaboration, access contacts, enterprise directories, and preferences via the contact fan, share desktops, applications, or the whiteboard and take notes and minutes. The Avaya Flare Experience can be downloaded onto many consumer devices including Apple iPad, Apple iPhone and Windows-based PCs.

Communication and Messaging

Avaya applications deliver advanced enterprise communication and messaging tools to end users on their device of choice. Among others, Avaya offers Avaya one-X Unified Communications clients, which deliver software-based user experiences for consistent, enterprise-wide mobility and collaboration. Users can work from anywhere, using virtually any device, including desktop and laptop computers, tablets and smartphones—helping enterprises lower expenses, increase productivity, enhance business continuity, and streamline customer support.

• Avaya one-X Communicator is ideal for users who communicate frequently, manage multiple calls, set up ad-hoc conferencing and need to be highly reachable. Avaya one-X Communicator provides users with access to unified communications capabilities including voice calling, audio conferencing, instant messaging and presence, corporate directories and communication logs. This software client can be deployed on desktop or laptop computers running either Microsoft Windows or Apple Mac operating systems and is supported over VDI connections.

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• Avaya one-X Mobile enables users to access enterprise communications from a wide selection of mobile devices, including high-end smart phones and tablets. A choice of one-X Mobile clients is available for popular platforms including Apple iPhone, Google Android and RIM BlackBerry. Through integration with Avaya one-X Client Enablement Services, Avaya one-X Mobile users have access to a broad range of unified communications capabilities such as visual voicemail, corporate directory, aggregated presence, VIP lists and synchronized call logs and contacts. Avaya one-X Mobile gives users single number/single identity for both inbound and outbound calls, even when using personal devices.

• Avaya Client Applications provide access to Avaya voice and video services from business applications such as Microsoft Lync, Microsoft Office Communications Server, Microsoft Outlook, Microsoft Office, IBM Sametime, and customer relationship management ("CRM") applications such as Salesforce.com and Microsoft Dynamics.

In addition to the above, Avaya’s standards-based, IP unified messaging portfolio provides features such as call answering, voice messaging, and speech capabilities, each supporting specific business and end user needs.

Platforms, Infrastructure and Phones

Avaya’s feature-rich applications have at their foundation platforms and infrastructure products designed to support and strengthen them. In addition, Avaya’s product portfolio includes phones and other endpoints that are designed to showcase the benefits those applications provide to their users.

• The Avaya Aura platform is at the core of many of our next-generation collaboration and communications products. Using this architecture, organizations can rapidly and cost-effectively deploy applications from a centralized data center to users on nearly any device or network. The Avaya Aura platform provides a simple means of connecting legacy, multi-vendor systems to new open standards SIP-based applications, helping enterprises to reduce costs and increase user productivity and choice simultaneously. We believe our Avaya Aura platform is one of the most reliable, secure and comprehensive offerings in the industry and that our commitment to open, standards-based products helps provide customers with the flexibility to be more efficient and successful.

The Avaya Aura platform uses virtualization technology across all applications to reduce the physical number of servers relative to existing offerings, reducing total cost of ownership for medium sized and large enterprises alike. The Avaya Aura portfolio provides collaboration and communication capabilities on a broad variety of operating systems, devices, desktop, laptop and tablet computers, smart phones, mobile devices and dedicated deskphones.

• Avaya Aura Collaboration Environment is a software platform that reduces the complexity of embedding collaboration and communications capabilities into business applications, making it possible to quickly develop creative new ways of doing business. It enables the integration of business applications with unified communications technology and contact center capabilities including voice, texts, and email.

• Avaya IP Office is our award-winning, flagship solution for the midmarket. Avaya IP Office simplifies processes and streamlines information exchange within systems. Communications capabilities can be added as needed. Avaya IP Office connects to both traditional and the latest IP lines to give growing companies flexibility and the ability to retain and leverage their existing investment. The latest version of Avaya IP Office (9.0) offers increased scale, flexible deployment options, simplified management and support for branch deployments. Avaya IP Office software extends Avaya innovation to the midmarket, delivering a seamless collaboration experience across voice, video and mobility for up to 2,000 users.

• Avaya Aura Messaging gives users a rich set of features that increase their reachability, add new message notification options, and provide more ways to access and receive messages-all controlled using an intuitive web portal. Avaya Aura Messaging adapts to enterprise environments with flexible per-user message storage options, resiliency options and deployment options for consolidation, centralization and scale. Avaya Aura Messaging helps to enable smooth migrations from legacy voicemail systems, with choice of telephone user interface ("TUI"), and tools for migrations.

• Avaya Messaging Service extends SMS messages to and from smartphones, tablets, notebooks and desktop devices, thereby enabling one-number communications via text messaging. By flowing through the corporate network, Avaya Messaging Service brings the same level of security, compliance and quality companies expect in email text messaging.

• Avaya Agile Communication Environment ("ACE") offers a rich set of web application programming interfaces, or APIs, that enable developers to integrate communications into other business applications (such as CRM, enterprise resource planning ("ERP"), business process management ("BPM") and social application frameworks) and business processes (such as dynamic team formation, business continuity planning and customer engagements). For more policy-based style customization on enterprise communications, the Avaya ACE Foundation Toolkit offers Java APIs to allow customers to build Java feature sets to influence the treatment of incoming and/or outbound communications

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leveraging the SIP architecture. These capabilities enable rapid development of custom applications, which helps reduce costs and increases flexibility for enterprises. Programmers with limited communications expertise can readily embed real-time communications in business applications and workflows, expanding both the ability and opportunity to use Avaya collaboration capabilities. Avaya ACE provides a versatile platform for the members of Avaya DevConnect, our developer ecosystem, to build applications.

• Avaya Session Border Controller ("SBC") for Enterprise provides enhanced security for mobile collaboration allowing remote users to securely connect to the enterprise without the need of a VPN connection, and protects SIP trunks from multiple threats.

• Avaya Video Conferencing infrastructure includes Avaya Scopia Elite MCUs, which are reliable and highly scalable multi-party video conferencing platforms for enterprise and service provider environments. They offer advanced and easy-to-use multi-party infrastructure for video conferencing and are at the core of a high definition deployment. In addition, gateways for Microsoft Lync and SIP provide connectivity and interoperability with unified communications products to standards-based video conferencing systems and infrastructure. Avaya Scopia Gateways are ideal for connecting IP video networks with ISDN and public switched telephone networks ("PSTN") providing connectivity to ISDN endpoints or telephones. In addition to the above, Avaya Scopia Management provides a comprehensive management product for voice and video collaboration, while Avaya Scopia ECS Gatekeeper is a high-performance, H.323 ECS (Enhanced Communication Server) Gatekeeper that provides intelligent, advanced backbone management for IP telephony and multimedia communication networks. Finally, Avaya’s eVident monitoring technology helps enable enterprises and service providers to ensure network readiness before and after voice and video applications are deployed.

• Endpoints are sold in a range of models that suit employees at every level, including IP and digital deskphones, digital enhanced cordless telecommunications ("DECT") handsets, wireless phones, conference phones and the Avaya Desktop Video Device ("ADVD").

Avaya Contact Center and Customer Experience Management

Avaya is a leader in the contact center market. The contact center portfolio provides a foundation for managing voice interactions that has been extended to include multiple channels supporting instant messaging, video, email and social media. Based on client engagements globally, we understand how to deliver world-class customer experience management to establish rich and informed relationships with customers. Our approach is based on two core principles:

• Awareness, which is the application of relevant available contextual information for each customer; and

• Persistent conversation, which connects all interactions with a customer into a seamless experience.

Avaya believes there are five components to effective Customer Experience Management. Each component delivers value to an organization, and, when combined, they improve customer acquisition, increase customer retention and growth, deliver high quality experiences and help enable efficient management. Avaya Contact Center products align along these five components:

• Interaction, which involves connecting an enterprise with its end customers over their preferred media and modes such as web, social, mobile, voice and video. This also includes the desktop element that provides relevant information to agents and knowledge workers and facilitates collaboration across all the resources involved in delivering the customer experience. It includes products such as Customer Connections Mobile, Customer Connections Web, Social Media Manager, Automated Chat, One Touch Video, Avaya one-X Agent and Avaya Aura Agent Desktop.

• Experience includes leveraging real-time awareness of customer needs, business policies and resource availability to determine the next best action and best resource to address the customer needs at the right time based on target customer experience the organization wants to deliver. It is also responsible for integrating inbound and outbound self service, agent selection and workflows with back-office processes and operations to enable this holistic customer experience. It includes products such as Intelligent Customer Routing, Dynamic Routing, Avaya Aura Call Center Elite Multichannel, Avaya Aura Contact Center, Avaya Interaction Center, Avaya Aura Experience Portal, Media Processing Server, Proactive Contact, Proactive Outreach Manager and Callback Assist.

• Performance encompasses the collection, consolidation and analysis of data and information in order to gain insight into the customer experience and business performance. It includes reporting and analytics tools for improving overall workforce management, skills, efficiency and effectiveness. It includes products such as Avaya Call Management System, Avaya IQ, Avaya Operational Analyst, Speech Analytics, Call Recording, Quality Monitoring, Workforce Management, e-Learning and e-Coaching, Customer Feedback and Avaya Aura Performance Center.

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• Design includes open, standards-based tools for creating and managing applications and workflows that are integrated into back office processes, third party applications and customer databases. It includes products such as Avaya Aura Orchestration Designer and Application Enablement Services.

• Management means enabling centralized management and administration for all the above systems, applications and resources within the framework as well as the ability to identify potential issues and perform root-cause analysis to prevent system outages and performance degradation. It includes products such as Avaya Contact Center Control Manager.

Avaya Networking

In support of our data communications strategy, our networking product portfolio is designed to address and compete on the basis of three key requirements: resiliency, efficiency and performance.

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

Our networking products focus on data center, campus, branch and wireless access networking, and we believe these products

provide better support for real-time collaboration. Our networking portfolio includes:

• Ethernet Switching-a range of Ethernet Switches for data center, core, edge and branch applications;

• Unified Branch-a range of routers and VPN appliances that provide a secure connection for branches;

• Wireless Networking-cost-effective and scalable products that enable enterprises to support wireless connectivity and services;

• Access Control-products that enforce role- and policy-based access control to the network; and

• Unified Management-providing support for data and voice networks by simplifying the requirements associated across functional areas.

Avaya leverages these hardware platforms to deliver a range of next-generation networking capabilities that are collectively offered under the Virtual Enterprise Network Architecture ("VENA") banner. An end-to-end strategic framework, VENA helps simplify data center and campus networking and optimizes business applications and service deployments, while helping to reduce costs, improve time-to-service and enhance business agility. For example, Fabric Connect, part of the VENA portfolio, is a fully-integrated, end-to-end network virtualization offering based on the Shortest-Path Bridging ("SPB") standard, designed to automate service provisioning, improve performance and reduce outages.

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

Our Services

Avaya Global Services consult, enable, support, manage, optimize and even outsource enterprise communications products (applications and networks) to help customers achieve enhanced business results both directly and through partners. Avaya’s award-winning portfolio of services enables customers to mitigate risk, reduce total cost of ownership, and optimize communication products for performance worldwide. Avaya Global Services is supported by patented design and management tools and network operations and technical support centers around the world.

Avaya’s Global Services portfolio spans three types of services, Avaya Professional Services, Avaya Global Support Services, and Avaya Cloud and Managed Services. Avaya Client Services is a business unit that encompasses Avaya Global Support Services and Avaya Cloud and Managed Services offers.

• Avaya Professional Services ("APS") helps organizations leverage technologies effectively to meet their business objectives. Our strategic and technical consulting, as well as deployment and customization services, help customers accelerate business performance and deliver an improved customer experience. Whether deploying new products or optimizing existing capabilities, APS leverages its specialists globally and operates in three core areas:

◦ Enablement Services, providing access to expertise and resources for defining and deploying Avaya products that maximize technology potential and helping assure they work as designed. Avaya Professional Services strives to exceed customers’ expectations by providing the greatest possible benefit for their investment.

◦ Optimization Services, to help drive increased value and greater business results from customers’ existing technology. Leveraging best practices, Avaya consultants and product architects analyze a communications

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environment in the context of customer business priorities and strategies, helping develop a communications business case, expected results and technical considerations.

◦ Innovation Services, to help an organization leverage communications to reach new levels of business potential and market competitiveness. Focused on leading technology and advanced services delivery, we offer a forward-thinking perspective to drive new business productivity, employee efficiency and superior levels of service. Our consultative approach and custom application services, from business planning through to execution and product integration, create alignment with customer’s specific business objectives.

• Avaya Client Services ("ACS") is a market-leading organization that supports, manages and optimizes enterprise communications networks to help customers mitigate risk, reduce total cost of ownership, and optimize product performance. ACS is supported by patented tools and by network operations and technical support centers around the world. The contracts for these services range from one to multiple-years, with three year terms being the most common. Custom or complex services contracts are typically five years in length. The portfolio of ACS services includes:

◦ Global Support Services provides a comprehensive suite of support options both directly and through partners to proactively resolve issues and improve uptime. Support offers and capabilities include 24x7 remote support, proactive remote monitoring, parts replacement and onsite response. Recent innovations include our new Avaya Support Web site that quickly connects customers to advanced Avaya technicians via live chat, voice or video. The web site also provides access to “Ava”, an interactive virtual chat agent that quickly searches our knowledge base and a wide range of “how-to” videos to answer customer support questions. Ava learns with each customer interaction and can make the decision to transition the chat to an Avaya technician—often without the customer realizing the change is taking place. All new support solutions are published to the web by our engineers, generally within 90 minutes of finding a resolution, adding value for customers by providing known solutions for potential issues rapidly. Most of our customers also benefit from real-time monitoring of diagnostic and system status to proactively identify potential issues to improve reliability, uptime and faster issue resolution.

◦ Avaya Cloud and Managed Services provides IT Infrastructure Library ("ITIL")-aligned, multivendor managed and outsourcing services for customers’ communications environments. Avaya can globally manage complex multi-vendor, multi-technology and aging networks with Service Level Agreements ("SLAs") to help optimize network performance. With Avaya Managed Services, Avaya can manage a customer’s mixed environment and gain the opportunity to upgrade it over time to the latest technology, at the pace and in an operational expense model that makes sense for the customer. Managed services can be procured in standard packages or in fully custom arrangements that include tailored SLAs, billing and reporting. In addition, managed services can take the form of one of three Cloud models offered by Avaya:

▪ Avaya Powered Partner Cloud, supporting public and private products offered by service providers and system integrators;

▪ Avaya Cloud for Customers and Partners, an Avaya-hosted multi-customer public Cloud option; and

▪ Private Cloud, a private cloud model for individual customers.

Our Technology

We believe that technology enhances the way in which people collaborate. At Avaya, we work with customers, industry groups and technical bodies to foster innovation. Across our portfolio we leverage critical technology to our customers’ advantage. Avaya is a leading innovator in leveraging the use of SIP for business collaboration. This open-standard based protocol shifts communications from having to coordinate multiple, independent media and communications systems toward session management based environments, where multiple media and resources can flexibly be brought into a fully-integrated, session-based interaction. This fundamental difference supports more fluid, effective and persistent collaboration across multiple media and modes of communications.

Centralized SIP-Based Architecture

At the core of our architecture, SIP based Avaya Aura Session Manager centralizes communications control and application

integration. Avaya Aura Session Manager orchestrates a wide array of communication and collaboration applications and systems by decoupling them from the network. Applications can be deployed to individual users based on their need, rather than by where they work or the capabilities of the system to which they are connected. Avaya Aura Session Manager reduces complexity and provides the foundation for broader unified communications and collaboration strategies.

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Unique SIP-Based Experiences

The Avaya Flare Experience leverages the Avaya Aura technology and its session control and management, presence, unified

communications features and services, application creation and enablement capabilities. Social network interfaces to services, such as Facebook, allow for integrated directories across platforms. Users can access Microsoft Exchange services, such as e-mail, contacts and calendar, directly from a user’s contact card and, via the Avaya Aura Presence Services, can exchange instant message and presence information with Microsoft Lync users (i.e., Microsoft Communicator clients). Point-to-point video calls do not require a separate video conferencing server, and multi-party conferencing is enabled by Avaya Aura Conferencing.

Flexible Deployment Options

While Avaya’s unified communication offerings, including its comprehensive video portfolio and Avaya’s contact center products, have traditionally been deployed on a customer’s premise, the underlying distributed architecture enables a broader range of deployment options. Supporting customers looking to shift all or a portion of their communication and collaboration investment from capital expense to operating expense, Avaya’s unified communications and contact center products and services can be deployed in public, private, hybrid and managed cloud models by small to large enterprises and by service providers and systems integrators. Further, through comprehensive monitoring technologies, these products and services can also be deployed as managed services.

Additional Technologies

In addition to SIP, we use technologies including:

• SIP/SIMPLE and XMPP: the Avaya Aura Presence Services collects, publishes, aggregates and federates rich presence and enables instant messaging using SIP/SIMPLE and XMPP standards, providing interoperability with systems from other vendors, including but not limited to Microsoft, IBM and Google;

• Platform Services: Avaya’s products are designed for extensibility, allowing customers, systems integrators, and ISVs using industry standard protocols and interfaces to develop new applications and to seamlessly integrate with the underlying capabilities of the communication and collaboration infrastructure;

• Operating System, or OS, Support: our software applications run on a broad range of operating systems including, but not limited to, Microsoft Windows, Apple MAC OS, Google Android and RIM Blackberry;

• High Quality/Low Bandwidth Video: Avaya’s Video products and services are able to deliver high quality video while minimizing bandwidth consumption and responding to adverse network conditions through the use of dual 1080p/60fps video channels, H.264 High Profile for bandwidth efficiency and cascading media to optimize bandwidth between sites and H.264 Scalable Video Coding ("SVC") technology to maintain quality video during times of intermittent network congestion;

• Virtualization Technology is used in our core Avaya Aura portfolio to reduce the physical server footprint using hypervisor technology to run multiple applications concurrently on a single physical platform;

• Resilient data networking: our data portfolio provides highly resilient IPv4 and IPv6 routing services, with redundant hardware components, forwarding and restart capabilities that minimize interruptions, including one of the industry’s few sub second failover capabilities; and

• Avaya believes that as WebRTC (web based real-time communication) standards continue to mature, WebRTC will be a key component of both unified communications and contact center products enabling broader access and simpler deployment models. Avaya has dedicated resources developing extensions to existing products and exploring new uses of this emerging technology.

Our Go-To-Market Strategy

Our global go-to-market strategy is designed to focus and strengthen our reach and impact on large multinational enterprises, midmarket and more regional enterprises and small businesses. Our go-to-market strategy is to serve our customers the way they prefer to work with us, either directly with Avaya or through our indirect sales channel, which includes our global network of alliance partners, distributors, dealers, value-added resellers, telecommunications service providers and system integrators. Our sales organizations are equipped with a broad product and software portfolio, complemented with services offerings including product support, integration and professional and managed services.

The Avaya sales organization is globally deployed with direct and indirect (e.g., channel partner) presence in over 160 countries. We continue to focus on efficient deployment of Avaya sales resources, both directly and indirectly, for maximum market penetration and global growth. Our investment in our sales organization includes training curricula to support the evolution of our sales strategy toward a solutions-based sales process targeted at helping businesses reduce costs, lower risk and grow their revenues. The program includes sales process, skills and solutions curricula for all roles within our sales organization.

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We continue to better align our go-to-market strategy for our products and services with the enterprise and midmarket customer bases. We have been deploying new customer segmentation and enhanced geographic emphasis while leveraging our existing and new channel partners. This has generated momentum in our midmarket efforts. During the first quarter of fiscal 2014, we have brought additional industry-seasoned sales and technical personnel into customer and partner facing roles. During the quarter we have added over 100 quota carrying sales personnel and over 50 other sales consultant, sales support, sales operations, and marketing roles. While these actions represent upfront investments, with these and existing resources, we expect to more efficiently address the enterprise and midmarket customer base.

Financial Results Summary

Our revenue for the three months ended December 31, 2013decreased as compared to the corresponding period in the prior year, primarily as a result of lower customer spending on unified communications products, particularly gateways and legacy Nortel phones and platforms, and contact center products which contributed to lower maintenance and professional services revenues. We believe these declines are primarily attributable to customers choosing not to upgrade their systems in a cautious spending environment. The decline in gateway sales may be in part impacted by better utilization of SIP technology, which enables our customers to run their communications networks more efficiently. We believe the decrease in our product revenues may also be due in part to a growing market trend around Cloud consumption preferences with more customers exploring OpEx models as opposed to CapEx models for procuring technology. Increasingly, to manage costs and efficiencies, customers are exploring a shift to OpEx models, where they pay a fee for business collaboration and communications services but the underlying solutions, infrastructure and personnel are owned and managed by the equipment vendor or a managed services or Cloud provider, as opposed to CapEx models that require them to invest in and own the solutions, infrastructure and headcount. We believe the market trend toward OpEx models will continue as we see an increasing number of opportunities and requests for proposal based on the OpEx model, where contract values are usually larger, however, the associated revenues will be recognized over a longer period, typically three to seven years.

The Company has maintained its focus on profitability levels and investing in future results and continued to initiate cost savings programs designed to streamline its operations, generate cost savings, and eliminate overlapping processes and expenses associated with various acquisitions and in response to the global economic downturn. These cost savings programs have included: (1) reducing headcount, (2) relocating certain job functions to lower cost geographies, including service delivery, customer care, research and development, human resources and finance, (3) eliminating real estate costs associated with unused or under-utilized facilities and (4) implementing gross margin improvement and other cost reduction initiatives. During the three months ended December 31, 2013 and 2012, the Company incurred restructuring charges of $7 million and $84 million, respectively. The Company continues to evaluate opportunities to streamline its operations and identify cost savings globally and may take additional restructuring actions in the future and the costs of those actions could be material.

Operating income for the three months ended December 31, 2013 was $91 million as compared to operating income of $23 million for the three months ended December 31, 2012, an increase of $68 million. The increase in operating income is primarily attributable to lower restructuring charges and the continued benefit from our cost savings initiatives partially offset by the decrease in revenues described above and $16 million of additional depreciation associated with the Company's Westminster, Colorado facility which we are in the process of vacating.

Operating income for the three months ended December 31, 2013 and 2012 includes non-cash expenses for depreciation and amortization of $118 million and $114 million and share-based compensation of $6 million and $2 million for each of the periods, respectively.

Net loss for the three months ended December 31, 2013 and 2012 was $54 million and $85 million, respectively. The decrease in our net loss is primarily attributable to the increase in operating income as described above partially offset by the impact of higher income taxes and interest expense for the three months ended December 31, 2013 as compared to the three months ended December 31, 2012. Net loss for the three months ended December 31, 2012 also included a $3 million loss on extinguishment of debt and $4 million of costs incurred in connection with modifications to certain credit facilities.

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Results From Operations

Three Months Ended December 31, 2013 Compared with Three Months Ended December 31, 2012

Revenue

Our revenue for the three months ended December 31, 2013 and 2012 was $1,158 million and $1,240 million, respectively, a decrease of $82 million or 7%. The following table sets forth a comparison of revenue by portfolio:

	Three months ended December 31,
	2013		2012		Percentage of Total Revenue				Yr. to Yr. Percentage Change		Yr. to Yr. Percentage Change, net of Foreign Currency Impact
Dollars in millions					2013		2012
GCS	$	507	$	573	44	%	46	%	(12	)%	(12	)%
Networking	67		58		6	%	5	%	16	%	16	%
Total ECS product revenue	574		631		50	%	51	%	(9	)%	(9	)%
AGS	584		609		50	%	49	%	(4	)%	(4	)%
Total revenue	$	1,158	$	1,240	100	%	100	%	(7	)%	(6	)%

GCS revenue for the three months ended December 31, 2013 and 2012 was $507 million and $573 million, respectively, a decrease of $66 million or 12%. The decrease in GCS revenue was primarily the result of lower customer spend on unified communications and contact center products in a cautious spending environment as discussed above.

Networking revenue for the three months ended December 31, 2013 and 2012 was $67 million and $58 million, respectively, an increase of $9 million or 16%. The increase in Networking revenue is primarily attributable to several new product launches beginning in July 2012.

AGS revenue for the three months ended December 31, 2013 and 2012 was $584 million and $609 million, respectively, a decrease of $25 million or 4%. The decrease in AGS revenue was primarily due to lower maintenance and professional services revenues as a result of lower product sales and lower government IT services revenues associated with our U.S. government customers. These decreases were partially offset by increases from Cloud and managed services performed under contracts entered into in prior periods and increases in other U.S. government services revenues.

The following table sets forth a comparison of revenue by location:

	Three months ended December 31,
	2013		2012		Percentage of Total Revenue				Yr. to Yr. Percentage Change		Yr. to Yr. Percentage Change, net of Foreign Currency Impact
Dollars in millions					2013		2012
U.S.	$	631	$	670	54	%	54	%	(6	)%	(6	)%
International:
EMEA	303		331		26	%	27	%	(8	)%	(10	)%
APAC - Asia Pacific	114		123		10	%	10	%	(7	)%	(5	)%
Americas International - Canada and Latin America	110		116		10	%	9	%	(5	)%	(1	)%
Total International	527		570		46	%	46	%	(8	)%	(7	)%
Total revenue	$	1,158	$	1,240	100	%	100	%	(7	)%	(6	)%

Revenue in the U.S. for the three months ended December 31, 2013 and 2012 was $631 million and $670 million, respectively, a decrease of $39 million or 6%. The decrease in U.S. revenue was primarily attributable to lower sales associated with our unified communications and contact center products, which contributed to lower revenues from maintenance and professional services. These declines were partially offset by an increase in networking revenue. Revenue in EMEA for the three months ended December 31, 2013 and 2012 was $303 million and $331 million, respectively, a decrease of $28 million or 8%. The decrease in EMEA revenue was primarily attributable to lower sales associated with our unified communications products partially offset by a favorable impact of foreign currency. Revenue in APAC for the three months ended December 31, 2013 and 2012 was $114 million and $123 million, respectively, a decrease of $9 million or 7%. The decrease in APAC revenue is primarily attributable to lower revenues associated with our unified communications products and an unfavorable impact of foreign currency partially

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offset by higher maintenance services. Revenue in Americas International was $110 million and $116 million for the three months ended December 31, 2013 and 2012, respectively, a decrease of $6 million or 5%. The decrease in Americas International revenue was primarily attributable to an unfavorable impact of foreign currency.

We sell our products directly to end users and through an indirect sales channel. The following table sets forth a comparison of revenue from sales of products by channel:

	Three months ended December 31,
	2013		2012		Percentage of Total ECS Product Revenue				Yr. to Yr. Percentage Change		Yr. to Yr. Percentage Change, net of Foreign Currency Impact
Dollars in millions					2013		2012
Direct	$	149	$	141	26	%	22	%	6	%	5	%
Indirect	425		490		74	%	78	%	(13	)%	(13	)%
Total ECS product revenue	$	574	$	631	100	%	100	%	(9	)%	(9	)%

Gross Profit

The following table sets forth a comparison of gross profit by segment:

	Three months ended December 31,
	Gross Profit						Gross Margin				Change
Dollars in millions	2013			2012			2013		2012		Amount		Pct.
GCS	$	314		$	349		61.9	%	60.9	%	(35	)	(10	)%
Networking	32			22			47.8	%	37.9	%	10		45	%
ECS	346			371			60.3	%	58.8	%	(25	)	(7	)%
AGS	314			318			53.8	%	52.2	%	(4	)	(1	)%
Unallocated amounts	(15		)	(23		)	(1)		(1)		8		(1)
Total	$	645		$	666		55.7	%	53.7	%	(21	)	(3	)%

⁽¹⁾  Not meaningful

Gross profit for the three months ended December 31, 2013 and 2012 was $645 million and $666 million, respectively, a decrease of $21 million or 3%. The decrease is primarily attributable to a decrease in sales volume and the effect of a $5 million benefit associated with the release of contingent liability during three months ended December 31, 2012, related to a labor matter in EMEA that we released as a result of a favorable court ruling. These decreases were partially offset by the success of our gross margin improvement initiatives, the impact of lower amortization of acquired technology intangible assets and lower customer discounts. Our gross margin improvement initiatives include exiting facilities, reducing the workforce, relocating positions to lower-cost geographies, productivity improvements, and obtaining better pricing from our contract manufacturers and transportation vendors. As a result of the above factors, gross margin increased to 55.7% for the three months ended December 31, 2013 from 53.7% for the three months ended December 31, 2012.

GCS gross profit for the three months ended December 31, 2013 and 2012 was $314 million and $349 million, respectively, a decrease of $35 million or 10%. The decrease in GCS gross profit is primarily due to the decrease in sales volume partially offset by the success of our gross margin improvement initiatives discussed above and lower customer discounts. As a result of the above factors, GCS gross margin increased to 61.9% for the three months ended December 31, 2013 compared to 60.9% for the three months ended December 31, 2012.

Networking gross profit for the three months ended December 31, 2013 and 2012 was $32 million and $22 million, respectively, an increase of $10 million or 45%. Networking gross margin increased to 47.8% for the three months ended December 31, 2013 from 37.9% for the three months ended December 31, 2012. The increases in Networking gross profit and margin were due to higher revenues which allowed us to leverage our fixed costs.

AGS gross profit for the three months ended December 31, 2013 and 2012 was $314 million and $318 million, respectively, a decrease of $4 million or 1%. The decrease in AGS gross profit is primarily due to the decrease in services revenue and the effect of a $5 million benefit associated with the release of contingent liability during three months ended December 31, 2012, related to a labor matter in EMEA that we released as a result of a favorable court ruling. These decreases were partially offset by the continued benefit from our gross margin improvement initiatives discussed above. We have redesigned the Avaya support

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website and continue to transition our customers from an agent-based support model to a self-service/web-based support model. These improvements have allowed us to reduce the workforce and relocate positions to lower-cost geographies. As a result of the above factors, AGS gross margin increased to 53.8% for the three months ended December 31, 2013 compared to 52.2% for the three months ended December 31, 2012.

Unallocated amounts for the three months ended December 31, 2013 and 2012 include the effect of the amortization of acquired technology intangibles and costs that are not core to the measurement of segment management’s performance, but rather are controlled at the corporate level. The decrease in unallocated costs is primarily due to the impact of lower amortization associated with technology intangible assets acquired prior to fiscal 2013.

Operating Expenses

	Three months ended December 31,
	2013		2012		Percentage of Revenue				Change
Dollars in millions					2013		2012		Amount			Pct.
Selling, general and administrative	$	395	$	384	34.1	%	31.0	%	$	11		3	%
Research and development	95		118		8.2	%	9.5	%	(23		)	(19	)%
Amortization of intangible assets	57		57		4.9	%	4.6	%	—			0	%
Restructuring charges, net	7		84		0.6	%	6.8	%	(77		)	(92	)%
Total operating expenses	$	554	$	643	47.8	%	51.9	%	$	(89	)	(14	)%

Selling, general and administrative ("SG&A") expenses for the three months ended December 31, 2013 and 2012 were $395 million and $384 million, respectively, an increase of $11 million. The increase was primarily due to $16 million of additional depreciation related to the change in the estimates of salvage value and useful life of the Company's Westminster, Colorado facility and additional selling expenses to support our go-to-market strategy within the enterprise and midmarket customer bases. These increases were partially offset by our cost savings initiatives. Our cost savings initiatives include exiting and consolidating facilities, reducing the workforce and relocating positions to lower-cost geographies.

Research and development ("R&D") expenses for the three months ended December 31, 2013 and 2012 were $95 million and $118 million, respectively, a decrease of $23 million. The decrease was primarily due to lower expenses associated with our cost savings initiatives discussed above. Capitalized software development costs for the three months ended December 31, 2013 and 2012 were $1 million and $7 million, respectively, a decrease of $6 million. During fiscal 2013, there were large programs in development and a greater portion of our period R&D spend was capitalized.

Amortization of intangible assets was $57 million and $57 million for the three months ended December 31, 2013 and 2012, respectively.

Restructuring charges, net, for the three months ended December 31, 2013 and 2012 were $7 million and $84 million, respectively, a decrease of $77 million. The Company continued to identify opportunities to streamline its operations and generate cost savings which included consolidating and exiting facilities and eliminating employee positions. Restructuring charges recorded during the three months ended December 31, 2013 include employee separation costs of $5 million and lease obligations of $2 million. Restructuring charges recorded during the three months ended December 31, 2012 include employee separation costs of $70 million and lease obligations of $14 million. The employee separation costs are primarily associated with employee severance actions in EMEA and the U.S. The EMEA approved plan provides for the elimination of 234 positions and resulted in a charge of $50 million. A voluntary program offered to certain management employees in the U.S. resulted in the elimination of 195 positions and resulted in a charge of $9 million. The separation charges include, but are not limited to, social pension fund payments and health care and unemployment insurance costs to be paid to or on behalf of the affected employees. Restructuring charges for the three months ended December 31, 2012 includes lease obligations primarily related to the Company's Maidenhead, United Kingdom and Highlands Ranch, Colorado facilities.

Operating Income

For the three months ended December 31, 2013, operating income was $91 million compared to $23 million for the three months ended December 31, 2012.

Operating income for the three months ended December 31, 2013 and 2012 includes non-cash expenses for depreciation and amortization of $118 million and $114 million and share-based compensation of $6 million and $2 million for each of the periods, respectively.

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Interest Expense

Interest expense for the three months ended December 31, 2013 and 2012 was $119 million and $108 million, respectively, which includes non-cash interest expense of $4 million and $6 million, respectively. Non-cash interest expense for each period includes amortization of debt issuance costs and accretion of debt discount. Cash interest expense for the three months ended December 31, 2013 compared to the three months ended December 31, 2012 increased as a result of certain debt refinancing transactions that occurred during fiscal 2013 partially offset by a decrease in interest expense as a result of the expiration of certain unfavorable interest rate swap contracts.

During fiscal 2013, the Company completed a series of transactions which allowed the Company to refinance term loans under its senior secured credit facilities that originally matured October 26, 2014 and substantially all of its senior unsecured notes that were scheduled to mature on November 1, 2015. As a result of these debt refinancing transactions, the interest rate associated with the portion of the Company's debt that was refinanced increased. See Note 7, "Financing Arrangements" to our unaudited interim Consolidated Financial Statements for further details.

Other Income (Expense), Net

Other income, net, for the three months ended December 31, 2013 was $1 million as compared to other expense, net of $6 million for the three months ended December 31, 2012. Other income, net, for the current period includes net foreign currency transaction gains of $2 million. Other expense, net for the three months ended December 31, 2012 includes fees paid to third parties in connection with the modifications to our senior secured credit facility of $4 million and net foreign currency transaction losses of $2 million.

Loss on Extinguishment of Debt

In connection with the issuance of our 9% Senior Secured Notes and the payment of $284 million of our term B-5 loans, we recognized a loss on extinguishment of debt for the three months ended December 31, 2012 of $3 million. The loss represents the difference between the reacquisition price of the term B-5 loans and the carrying value of the term B-5 loans (including unamortized debt issue costs). See Note 7, "Financing Arrangements" to our unaudited interim consolidated financial statements for further details on the issuance of our 9% Senior Secured Notes and the repayment of a portion of our term B-5 loans.

(Provision for) Benefit from Income Taxes

The provision for income taxes for the three months ended December 31, 2013 was $27 million, as compared to the benefit from income taxes of $9 million for the three months ended December 31, 2012.

The effective income tax rate for the three months ended December 31, 2013 differs from the statutory U.S. Federal income tax rate primarily due to (1) the effect of tax rate differentials on foreign income/loss in the Consolidated Statements of Operations, and (2) changes in the valuation allowance established against the Company’s deferred tax assets.

The effective rate for the three months ended December 31, 2012 differs from the statutory U.S. Federal income tax rate primarily due to (1) the effect of tax rate differentials on foreign income/loss in the Consolidated Statement of Operations, (2) changes in the valuation allowance established against the Company’s deferred tax assets, (3) $17 million of income tax benefit recognized upon the expiration of certain interest rate swaps, and (4) the recognition of a $2 million income tax benefit as a result of net gains in other comprehensive income.

During the three months ended December 31, 2012, the Company recorded a tax charge of $2 million to other comprehensive income primarily relating to gains associated with the Company's pension benefits. As a result of the charge to other comprehensive income for this tax effect the Company recognized an income tax benefit in the Consolidated Statement of Operations and less current period valuation allowance was required against the Company's deferred tax assets.

During the three months ended December 31, 2012, the Company recognized $17 million of income tax benefit related to the elimination of the tax effect of certain interest rate swaps in other comprehensive income. The tax effect of such interest rate swaps was recognized in other comprehensive income prior to the establishment of a valuation allowance against the Company's U.S. net deferred tax assets and was eliminated following the expiration of the final interest rate swap upon which the tax effect was established.

Liquidity and Capital Resources

Cash and cash equivalents increased by $12 million to $300 million at December 31, 2013 from $288 million at September 30, 2013. We expect our existing cash balance, cash generated by operations and borrowings available under our credit facilities to be our primary sources of short-term liquidity. Based on our current level of operations, we believe these sources will be adequate to meet our liquidity needs for at least the next twelve months. Our ability to meet our cash requirements will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. As part of our analysis, we have assessed the implications of recent financial

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events on our current business and determined that these market conditions have not resulted in an inability to meet our obligations as they come due in the ordinary course of business and have not had a significant impact on our liquidity as of December 31, 2013. However, we cannot assure you that our business will generate sufficient cash flows from operations or that future borrowings will be available to us under our credit facilities in an amount sufficient to enable us to repay our indebtedness, or to fund our other liquidity needs.

Sources and Uses of Cash

The following table provides the condensed statement of cash flows for the three months ended December 31, 2013 and 2012:

	Three months ended December 31,
In millions	2013			2012
Net cash (used for) provided by:
Net loss	$	(54	)	$	(85	)
Adjustments to net loss for non-cash items	132			101
Changes in operating assets and liabilities	(14		)	(10		)
Operating activities	64			6
Investing activities	(43		)	(31		)
Financing activities	(10		)	(26		)
Effect of exchange rate changes on cash and cash equivalents	1			(1		)
Net increase (decrease) in cash and cash equivalents	12			(52		)
Cash and cash equivalents at beginning of period	288			337
Cash and cash equivalents at end of period	$	300		$	285

Operating Activities

Cash provided by operating activities was $64 million and $6 million for the three months ended December 31, 2013 and 2012, respectively.

Adjustments to reconcile net loss to net cash provided by operations for the three months ended December 31, 2013 and 2012 were $132 million and $101 million, and primarily consisted of depreciation and amortization of $118 million and $114 million, respectively.

During the three months ended December 31, 2013, changes in our operating assets and liabilities resulted in a net decrease in cash and cash equivalents of $14 million. The net decrease was driven by payments associated with our employee incentive programs. accrued interest, and business restructuring reserves established in previous periods. These decreases were partially offset by collection of accounts receivable and the timing of payment of accounts payable.

During the three months ended December 31, 2012, changes in our operating assets and liabilities resulted in a net decrease in cash and cash equivalents of $10 million. The net decrease was driven by the payment of accrued interest and payments associated with our employee incentive programs, partially offset by the effects of non-cash business restructuring reserves net of cash payments against our reserves.

Investing Activities

Cash used for investing activities was $43 million and $31 million for the three months ended December 31, 2013 and 2012, respectively. The primary use of cash for investing activities for the three months ended December 31, 2013 was related to capital expenditures of $32 million and an acquisition of a business, net of cash acquired of $11 million. The primary use of cash for investing activities for the three months ended December 31, 2012 was related to capital expenditures and capitalized software development costs of $23 million and $7 million, respectively. Also included in cash used for investing activities for the three months ended December 31, 2012 was $9 million of cash proceeds for the sale of long-lived assets. Further, during the three months ended December 31, 2012, the Company advanced to Parent $10 million in exchange for a note receivable. The principal amount of this note plus any accrued and unpaid interest is due in full October 3, 2015 with interest at the rate of 0.93% per annum. The proceeds of this note were used by Parent to partially fund an acquisition in October 2011. Once the acquisition was complete, Parent immediately merged the acquired entity with and into the Company, with the Company surviving the merger.

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Financing Activities

Cash used for financing activities was $10 million and $26 million for the three months ended December 31, 2013 and 2012, respectively, and includes $9 million in scheduled debt payments for each period. Cash flows from financing activities for the three months ended December 31, 2012 includes proceeds of $290 million from the issuance of 9% Senior Secures Notes. The proceeds from the issuance were used to repay $284 million principal amount of our term B-5 loans. Cash used for financing activities for the three months ended December 31, 2012 also includes cash paid for debt issuance and modification costs of $22 million.

Credit Facilities

We have entered into borrowing arrangements and further amended the arrangements with several financial institutions in connection with the Merger on October 26, 2007 and the acquisition of the enterprise solutions business of Nortel.

During the three months ended December 31, 2012, the Company completed three transactions which allowed the Company to refinance $848 million of term loans under its senior secured credit facilities that were scheduled to mature on October 26, 2014. These transactions were (1) an amendment and restatement of the senior secured credit facility and the senior secured multi-currency asset-based revolving credit facility on October 29, 2012 along with the extension of the maturity date of $135 million aggregate principal amount of senior secured term B-1 loans ("term B-1 loans"), (2) an amendment and restatement of the senior secured credit facility on December 21, 2012 along with the extension of the maturity date of $713 million aggregate principal amount of term B-1 loans and $134 million aggregate principal amount of senior secured term B-4 loans, and (3) the issuance on December 21, 2012 of $290 million of 9% senior secured notes due April 2019.

During the three months ended March 31, 2013, the Company refinanced the remaining $584 million of term B-1 loans outstanding under its senior secured credit facility with the cash proceeds of $589 million aggregate principal amount of term B-5 loans under the senior secured credit facility.

Additionally, during the three months ended March 31, 2013, the Company refinanced $1,384 million of senior unsecured notes through (1) amendments to the senior secured credit facility and the senior secured multi-currency asset-based revolving credit facility permitting the refinancing of the 9.75% senior unsecured notes due 2015 and 10.125%/10.875% senior unsecured PIK toggle notes due 2015 (collectively, the “Old Notes”) with indebtedness secured by a lien on certain collateral on a junior-priority basis and (2) the exchange of $1,384 million of Old Notes for $1,384 million of 10.50% senior secured notes due 2021.

As of December 31, 2013, term loans outstanding under the senior secured credit facility include term B-3 loans, term B-4 loans and term B-5 loans with remaining face values (after all principal payments through December 31, 2013) of $2,121 million, $1 million, and $1,138 million respectively. The Company regularly evaluates market conditions, its liquidity profile, and various financing alternatives for opportunities to enhance its capital structure. If opportunities are favorable, the Company may refinance existing debt or issue additional debt securities.

On February 5, 2014, the Company, Citibank, N.A., as Administrative Agent, and the lenders party thereto entered into Amendment No. 8 to Credit Agreement, pursuant to which the senior secured credit facility was amended.

Pursuant to Amendment No. 8 to Credit Agreement, the Company refinanced in full all senior secured term B-5 loans outstanding under the senior secured credit facility with the cash proceeds from the Company’s borrowing of approximately $1,138 million aggregate principal amount of senior secured term B-6 loans under the senior secured credit facility.  In addition, the Company paid $15 million in cash for certain fees and expenses incurred in connection with the refinancing. The new senior secured term B-6 loans mature on March 31, 2018, which was the same date on which the senior secured term B-5 loans were scheduled to mature.

The new tranche of senior secured term B-6 loans bears interest at a rate per annum equal to either a base rate (subject to a floor of 2.00%) or a LIBOR rate (subject to a floor of 1.00%), in each case plus an applicable margin. Subject to the floor described in the immediately preceding sentence, the base rate is determined by reference to the higher of (1) the prime rate of Citibank, N.A. and (2) the federal funds effective rate plus one half of 1%. The applicable margin for borrowings of senior secured term B-6 loans is 4.50% per annum with respect to base rate borrowings and 5.50% per annum with respect to LIBOR borrowings, in each case, subject to increase pursuant to the senior secured credit facility in connection with the making of certain refinancing, extended or replacement term loans under the senior secured credit facility with an Effective Yield (as defined in the senior secured credit facility) greater than the applicable Effective Yield payable in respect of the senior secured term B-6 loans at such time plus 50 basis points.

Any voluntary prepayment, and certain mandatory prepayments, of principal of the senior secured term B-6 loans, or any amendment to the terms of the senior secured term B-6 loans, the primary purpose of which is to effect a Term B-6 Repricing Transaction (as defined in the senior secured credit facility), in each case, after February 5, 2014 and on or prior to August 5, 2014, will be subject to payment of a 1.0% premium on the aggregate principal amount of the senior secured term B-6 loans so prepaid or amended.

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See Note 7, “Financing Arrangements,” and Note 17, “Subsequent Events,” to our unaudited interim Consolidated Financial Statements for further details.

Future Cash Requirements

Our primary future cash requirements will be to fund benefit obligations, debt service, capital expenditures and restructuring payments. In addition, we may use cash in the future to make strategic acquisitions.

Specifically, we expect our primary cash requirements for the remainder of fiscal 2014 to be as follows:

• Benefit obligations—We estimate we will make payments under our pension and postretirement obligations totaling $187 million during the remainder of fiscal 2014. These payments include: $122 million to satisfy the minimum statutory funding requirements of our U.S. qualified plans, $5 million of payments under our U.S. benefit plans which are not pre-funded, $24 million under our non-U.S. benefit plans which are predominately not pre-funded, $4 million under our U.S. retiree medical benefit plan which is not pre-funded and $32 million under the agreements for represented retirees to post-retirement health trusts. See discussion in Note 11, “Benefit Obligations” to our unaudited interim Consolidated Financial Statements for further details of our benefit obligations.

• Debt service—We expect to make payments of $365 million during the remainder of fiscal 2014 for principal and interest associated with our long-term debt, as refinanced.

• Capital expenditures—We expect to spend approximately $95 million for capital expenditures and capitalized software development costs during the remainder of fiscal 2014.

• Restructuring payments—We expect to make payments of approximately $63 million during the remainder of fiscal 2014 for employee separation costs and lease termination obligations associated with restructuring actions we have implemented through December 31, 2013.

We and our subsidiaries, affiliates and significant shareholders may from time to time seek to retire or purchase our outstanding debt (including publicly issued debt) through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Future Sources of Liquidity

We expect our existing cash balance, cash generated by operations and borrowings available under our credit facilities to be our primary sources of short-term liquidity. We expect that revenues from higher margin products and services and continued focus on accounts receivable, inventory management and cost containment will enable us to generate positive net cash from operating activities. Further, we continue to focus on cost reductions and have initiated restructuring plans during fiscal 2013 designed to reduce overhead and provide cash savings.

We are currently party to (a) a senior secured credit facility which consists of both term loans and a senior secured multi-currency revolver allowing for borrowings of up to $200 million, and (b) a multi-currency asset-based revolving credit facility which provides senior secured revolving financing of up to $335 million, subject to availability under a borrowing base - see Note 7, “Financing Arrangements” to our unaudited interim Consolidated Financial Statements.

Our existing cash and cash equivalents and net cash provided by operating activities may be insufficient if we face unanticipated cash needs such as the funding of a future acquisition or other capital investment.

If we do not generate sufficient cash from operations, face unanticipated cash needs such as the need to fund significant strategic acquisitions or do not otherwise have sufficient cash and cash equivalents, we may need to incur additional debt or issue additional equity. In order to meet our cash needs we may, from time to time, borrow under our credit facilities or issue long-term or short-term debt or equity, if the market and our credit facilities and the indentures governing our notes permit us to do so. Furthermore, if we acquire a business in the future that has existing debt, our debt service requirements may increase. We regularly evaluate market conditions, our liquidity profile, and various financing alternatives for opportunities to enhance our capital structure. If opportunities are favorable, we may refinance our existing debt or issue additional securities.

On June 9, 2011, Parent filed with the SEC a registration statement on Form S-1 (as it may be amended from time to time, the “registration statement”) relating to a proposed initial public offering of its common stock. As contemplated in the registration statement, the net proceeds of the proposed offering are expected to be used, among other things, to repay a portion of our long-term indebtedness.  The registration statement remains under review by the SEC and shares of common stock registered thereunder may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This document shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of those securities in any State or other jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration

48

or qualification under the securities laws of any such State or other jurisdiction. Further, there is no way to predict whether or not Parent will be successful in completing the offering as contemplated and if it is successful, we cannot be certain if, or how much of, the net proceeds will be used for the purposes identified above.

During the fourth quarter of fiscal 2012, the Company changed its indefinite reinvestment of undistributed foreign earnings assertion with respect to its non-U.S. subsidiaries. This change in assertion reflects the Company's intention and ability to maintain flexibility with respect to sourcing of funds from non-U.S. locations.

Debt Ratings

As of December 31, 2013, we had a long-term corporate family rating of B3 with a negative outlook from Moody’s and a corporate credit rating of B- with a negative outlook from Standard & Poor’s. Our ability to obtain additional external financing and the related cost of borrowing may be affected by our debt ratings, which are periodically reviewed by the major credit rating agencies. The ratings are subject to change or withdrawal at any time by the respective credit rating agencies.

Critical Accounting Policies and Estimates

Management has reassessed the critical accounting policies as disclosed in our Annual Report on Form 10-K filed with the SEC on November 22, 2013 and determined that there were no significant changes to our critical accounting policies in the three months ended December 31, 2013 except for recently adopted accounting guidance as discussed in Note 2, “Recent Accounting Pronouncements” to our unaudited interim Consolidated Financial Statements.

New Accounting Pronouncements

See discussion in Note 2, “Recent Accounting Pronouncements” to our unaudited interim Consolidated Financial Statements for further details.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements.” All statements other than statements of historical fact are “forward-looking” statements for purposes of the U.S. federal and state securities laws. These statements may be identified by the use of forward looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or “will” or the negative thereof or other variations thereon or comparable terminology. In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance contained in this report under Part II, Item 1A, “Risk Factors,” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements.

We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in this report, may 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 products and contact center products;

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

• our ability to remain competitive in the markets we serve;

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

• our reliance on our indirect sales channel;

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

• 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;

• risks relating to the transaction of business internationally;

• our ability to effectively integrate acquired businesses;

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

• our ability to maintain adequate security over our information systems;

• environmental, health and safety laws, regulations, costs and other liabilities, and climate change risks; and

• pension and post-retirement healthcare and life insurance liabilities.

We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

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EBITDA and Adjusted EBITDA

EBITDA is defined as net income (loss) before income taxes, interest expense, interest income 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 the Company’s debt agreements, the ability to draw down on the 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. As defined in our debt agreements, Adjusted EBITDA is a non-GAAP 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 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 current capital structure. 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, based on our debt agreements the definition of Adjusted EBITDA allows us to add back certain non-cash charges that are deducted in calculating net income (loss). Our debt agreements also allow us to add back restructuring charges, certain fees payable to our private equity sponsors and other specific cash costs and expenses as defined in the agreements and that portion of our pension costs, other post-employment benefits costs, and non-retirement post-employment benefits costs representing the amortization of pension service costs and actuarial gain or loss associated with these employment benefits. However, these are expenses that may recur, may vary and are difficult to predict. Further, our 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.

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

	Three months ended December 31,
(In millions)	2013			2012
Net loss	$	(54	)	$	(85	)
Interest expense	119			108
Interest income	—			(1		)
Provision for (benefit from) income taxes	27			(9		)
Depreciation and amortization	118			114
EBITDA	210			127
Restructuring charges, net	7			84
Sponsors’ fees (a)	2			2
Integration-related costs (b)	2			4
Loss on extinguishment of debt (c)	—			3
Third-party fees expensed in connection with the debt modification (d)	—			4
Non-cash share-based compensation	6			2
Other	2			—
(Gain) loss on foreign currency transactions	(2		)	2
Pension/OPEB/nonretirement postemployment benefits and long-term disability costs (e)	13			23
Adjusted EBITDA	$	240		$	251

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(a) Sponsors’ fees represent monitoring fees payable to affiliates of the Sponsors and their designees pursuant to a management services agreement entered into at the time of the Merger.

(b) Integration-related costs primarily represent third-party consulting fees and other administrative costs associated with consolidating and coordinating the operations of Avaya with Radvision, NES and other acquisitions. In fiscal 2014 and 2013, the costs primarily relate to developing compatible IT systems and internal processes with NES and consolidating and coordinating the operations of Avaya with Radvision and other acquisitions.

(c) Loss on extinguishment of debt represents the loss recognized in connection with the repayment of $284 million of term B-5 loans. The loss is based on the difference between the reacquisition price and the carrying value (including unamortized debt issue costs) of the debt. See Note 7, “Financing Arrangements,” to our unaudited interim Consolidated Financial Statements located elsewhere in this Form 10-Q.

(d) The third-party fees expensed in connection with debt modification represent fees paid to third parties in connection with the modification of the senior secured credit facility. See Note 7, “Financing Arrangements,” to our unaudited interim Consolidated Financial Statements located elsewhere in this Form 10-Q.

(e) Represents that portion of our pension costs, other post-employment benefit costs and non-retirement post-employment benefit costs representing the amortization of prior service costs and net actuarial gains/losses associated with these employment benefits.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosure About Market Risk” in Avaya’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013 filed with the SEC on November 22, 2013. As of December 31, 2013, there have been no material changes in this information.

Item 4. Controls and Procedures.

a) Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this report, our management, under the supervision and with the participation of the principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)). Based on this evaluation, our principal executive officer and principal financial officer have concluded (1) that the disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and (2) that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

b)  Changes in Internal Control Over Financial Reporting.

There were no changes in the Company's internal control over financial reporting during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting,

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

See Note 15, “Commitments and Contingencies” to the unaudited interim Consolidated Financial Statements.

Item 1A. Risk Factors

There have been no material changes during the quarterly period ended December 31, 2013 to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

Not Applicable.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information.

Pursuant to Section 15(d) of the Securities Exchange Act of 1934, the Company’s obligations to file periodic and current reports ended as of October 1, 2010. Nevertheless, the Company continues to file periodic reports and current reports with the SEC voluntarily to comply with the terms of the indenture governing its senior secured notes due 2021.

During and subsequent to the quarter ended December 31, 2013, no events took place that were required to be disclosed in a report on Form 8-K but were not reported.

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Item 6. Exhibits.

Exhibit Number
31.1	Certification of Kevin J. Kennedy pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of David Vellequette pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Kevin J. Kennedy pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of David Vellequette pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from Avaya Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2013, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets at December 31, 2013 and September 30, 2013, (ii) Consolidated Statement of Operations for the three months ended December 31, 2013 and 2012(iii) the Consolidated Statement of Comprehensive Income for the three months ended December 31, 2013 and 2012 (iv) Consolidated Statements of Cash Flows for the three months ended December 31, 2013 and 2012, and (v) Notes to Consolidated Financial Statements (Unaudited)*

* Pursuant to Rule 406 T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those Sections.

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SIGNATURES

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

AVAYA INC.
By:	/S/    KEVIN J. MACKAY
	Kevin J. MacKay Vice President, Controller & Chief Accounting Officer (Principal Accounting Officer)

February 14, 2014

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