Tableof Contents

 

 

 

**U.S.SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

# **FORM 10-Q**

 

**(MarkOne)**

 

**x****     ****Quarterly report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**Forthe quarterly period ended March 31, 2009**

** **

**or**

 

**o****        ****Transition report pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**Forthe transition period from          to          **

 

**Commissionfile number: 000-30575**

 

**AVOCENTCORPORATION**

(Exact Name ofRegistrant as Specified in Its Charter)

 

| **Delaware**                                                    | ** ** | **91-2032368**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |       | (I.R.S. Employer  Identification Number) |
|                                                            |       |                                     |
| **4991  Corporate Drive   Huntsville, Alabama**                 | ** ** | **35805**                                |
| (Address of  Principal Executive Offices)                       |       | (Zip Code)                               |

 

**256-430-4000**(Registrant’sTelephone Number, Including Area Code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934, as amended, during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.  Yes xNo o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding12 months (or for such shorter period that the registrant was required tosubmit and post such files).  Yes o No o

 

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

 

| Large  accelerated filer x |   | Accelerated  filer o         |
|----------------------------|--------|------------------------------|
|                       |   |                         |
| Non-accelerated  filer o   |   | Smaller  reporting company o |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct):  Yes o No x

 

As of May 4, 2009, the number of outstanding shares ofthe Registrant’s Common Stock was 44,302,806.

 

 

 

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Table of Contents

 

**AVOCENTCORPORATION**

**FORM 10-Q**

**March 31,2009**

 

**INDEX**

 
| ** **   | ** **            | **Page(s)**                                                                                                              |
|--------------|-----------------------|--------------------------------------------------------------------------------------------------------------------------|
| Part I  | Financial Information |                                                                                                                     |
|         |                  |                                                                                                                     |
|         | Item 1.               | Financial Statements (unaudited)                                                                                         |   |
|         |                  |                                                                                                                     |   |
|         |                  | Consolidated  Statements of Operations for the Three Months Ended March 31, 2009 and  March 28, 2008           | 3 |
|         |                  |                                                                                                                     |   |
|         |                  | Consolidated  Balance Sheets at March 31, 2009 and December 31, 2008                                           | 4 |
|         |                  |                                                                                                                     |   |
|         |                  | Condensed Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2009 and  March 28, 2008 | 5 |
|         |                  |                                                                                                                     |   |
|         |                  | Notes  to Condensed Consolidated Financial Statements                                                                    | 6-16 |
|         |                  |                                                                                                                     |   |
|         | Item 2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              | 17-29 |
|         |                  |                                                                                                                     |   |
|         | Item 3.               | Quantitative  and Qualitative Disclosures about Market Risks                                                             | 29 |
|         |                  |                                                                                                                     |   |
|         | Item 4.               | Controls and  Procedures                                                                                                 | 29 |
|         |                  |                                                                                                                     |   |
| Part II | Other Information     |                                                                                                                     |
|         |                  |                                                                                                                     |   |
|         | Item 1.               | Legal Proceedings                                                                                                        | 30 |
|         |                  |                                                                                                                     |   |
|         | Item 1A.              | Risk Factors                                                                                                             | 30 |
|         |                  |                                                                                                                     |   |
|         | Item 2.               | Unregistered  Sales of Equity Securities and Use of Proceeds                                                             | 46 |
|         |                  |                                                                                                                     |   |
|         | Item 6.               | Exhibits                                                                                                                 | 47 |
|         |                  |                                                                                                                     |   |
| Signature    | 47                    |

 

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**PART I —FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

**AVOCENT CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited, in thousands, except per share data)**

#### ** **

| ** **                                                                                                                                      | ** **   | **For the three months ended** | ** **   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------------------------------|--------------|
| ** **                                                                                                                                      | ** **   | **March 31,**                                 | ** **   | **March 28,** | ** ** |
| ** **                                                                                                                                      | ** **   | **2009**                                           | ** **   | **2008** | ** ** |
| Net sales:                                                                                                                                      | *** *** | *** ***                                       | *** *** | *** *** | *** *** |
| Products                                                                                                                                        |         | $                                                  | 85,124       |   | $ | 108,081 |   |
| Licenses and  royalties                                                                                                                         |         | 22,729                                             |         | 23,817 |   |
| Services                                                                                                                                        |         | 18,209                                             |         | 9,501 |   |
| Total net sales                                                                                                                                 |         | 126,062                                            |         | 141,399 |   |
| ** **                                                                                                                                      | ** **   | ** **                                         | ** **   | ** ** | ** ** |
| Cost of sales:                                                                                                                                  | ** **   | ** **                                         | ** **   | ** ** | ** ** |
| Products                                                                                                                                        |         | 39,476                                             |         | 43,721 |   |
| Licenses and  royalties                                                                                                                         |         | 469                                                |         | 701 |   |
| Services                                                                                                                                        |         | 4,309                                              |         | 3,076 |   |
| Amortization of  intangibles — licenses and royalties                                                                                      |         | 4,558                                              |         | 2,767 |   |
| Total cost of  sales (includes $223 and $244 of stock-based compensation expense in 2009 and  2008, respectively)                               |         | 48,812                                             |         | 50,265 |   |
|                                                                                                                                            |         |                                               |         |   |   |
| Gross profit                                                                                                                                    |         | 77,250                                             |         | 91,134 |   |
|                                                                                                                                            |         |                                               |         |   |   |
| Research and  development expenses (includes $577 and $1,015 of stock-based compensation  expense in 2009 and 2008, respectively)               |         | 20,491                                             |         | 23,367 |   |
| Selling, general  and administrative expenses (includes $2,445 and $2,679 of stock-based  compensation expense in 2009 and 2008, respectively)  |         | 47,167                                             |         | 55,119 |   |
| Restructuring,  integration and retirement expenses (includes $49 and $615 of stock-based  compensation expense in 2009 and 2008, respectively) |         | 5,295                                              |         | 2,971 |   |
| Amortization of  intangible assets                                                                                                              |         | 10,113                                             |         | 7,535 |   |
| Impairment of  goodwill                                                                                                                         |         | 80,000                                             |         | — |   |
| Total operating  expenses                                                                                                                       |         | 163,066                                            |         | 88,992 |   |
|                                                                                                                                            |         |                                               |         |   |   |
| Income (loss)  from operations                                                                                                                  |         | (85,816                                            | )            | 2,142 |   |
|                                                                                                                                            |         |                                               |         |   |   |
| Net investment  income                                                                                                                          |         | 151                                                |         | 897 |   |
| Interest expense                                                                                                                                |         | (2,242                                             | )            | (1,838 | ) |
| Other income  (expense), net                                                                                                                    |         | (1,196                                             | )            | 455 |   |
|                                                                                                                                            |         |                                               |         |   |   |
| Income (loss)  before provision for income taxes                                                                                                |         | (89,103                                            | )            | 1,656 |   |
| Provision  (benefit) from income taxes                                                                                                          |         | (29,178                                            | )            | 925 |   |
|                                                                                                                                            |         |                                               |         |   |   |
| Net income  (loss)                                                                                                                              |         | $                                                  | (59,925      | ) | $ | 731 |   |
|                                                                                                                                            |         |                                               |         |   |   |
| Earnings (loss)  per share:                                                                                                                     |         |                                               |         |   |   |
| Basic                                                                                                                                           |         | $                                                  | (1.34        | ) | $ | 0.02 |   |
|                                                                                                                                            |         |                                               |         |   |   |
| Diluted                                                                                                                                         |         | $                                                  | (1.34        | ) | $ | 0.02 |   |
|                                                                                                                                            |         |                                               |         |   |   |
| Weighted average  shares used in computing earnings (loss) per share:                                                                           |         |                                               |         |   |   |
| Basic                                                                                                                                           |         | 44,794                                             |         | 46,233 |   |
|                                                                                                                                            |         |                                               |         |   |   |
| Diluted                                                                                                                                         |         | 44,794                                             |         | 46,617 |   |

 

See notesaccompanying these condensed consolidated financial statements.

 

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**AvocentCorporation**

**Consolidated Balance Sheets**

** (Unaudited, in thousands, except per sharedata)**

 
| ** **                                                                                                                                                                                                                | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                           |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                |       | $                        | 108,931    |                        | $          | 126,858 |   |
| Accounts  receivable, less allowance for doubtful accounts of $4,473 and $4,548 at  March 31, 2009 and December 31, 2008, respectively                                                                          |       | 101,006                  |       | 122,133                     |       |
| Other  receivables                                                                                                                                                                                                        |       | 11,218                   |       | 12,281                      |       |
| Inventories                                                                                                                                                                                                               |       | 38,019                   |       | 31,516                      |       |
| Other current  assets                                                                                                                                                                                                     |       | 6,294                    |       | 5,209                       |       |
| Deferred tax  assets, net                                                                                                                                                                                                 |       | 3,991                    |       | 6,885                       |       |
| Total current  assets                                                                                                                                                                                                     |       | 269,459                  |       | 304,882                     |       |
|                                                                                                                                                                                                                      |       |                     |       |                        |       |
| Property and  equipment, net                                                                                                                                                                                              |       | 36,683                   |       | 38,197                      |       |
| Goodwill                                                                                                                                                                                                                  |       | 536,315                  |       | 616,326                     |       |
| Other intangible  assets, net                                                                                                                                                                                             |       | 165,748                  |       | 180,276                     |       |
| Deferred tax  asset, non-current                                                                                                                                                                                          |       | 40,884                   |       | 10,873                      |       |
| Other assets                                                                                                                                                                                                              |       | 3,453                    |       | 3,616                       |       |
| Total assets                                                                                                                                                                                                              |       | $                        | 1,052,542  |                        | $          | 1,154,170 |   |
|                                                                                                                                                                                                                      |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                             | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                                                                     |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                                                                          |       | $                        | 11,327     |                        | $          | 17,494 |   |
| Accrued wages  and commissions                                                                                                                                                                                            |       | 19,934                   |       | 30,966                      |       |
| Accrued liabilities                                                                                                                                                                                                       |       | 35,769                   |       | 42,027                      |       |
| Income taxes  payable                                                                                                                                                                                                     |       | 11,941                   |       | 11,678                      |       |
| Deferred  revenue, current                                                                                                                                                                                                |       | 66,228                   |       | 66,248                      |       |
| Total current  liabilities                                                                                                                                                                                                |       | 145,199                  |       | 168,413                     |       |
|                                                                                                                                                                                                                      |       |                     |       |                        |       |
| Unsecured bank  line of credit                                                                                                                                                                                            |       | 170,000                  |       | 170,000                     |       |
| Deferred  revenue, non-current                                                                                                                                                                                            |       | 7,418                    |       | 9,572                       |       |
| Other  non-current liabilities                                                                                                                                                                                            |       | 3,761                    |       | 4,028                       |       |
| Total  liabilities                                                                                                                                                                                                        |       | 326,378                  |       | 352,013                     |       |
|                                                                                                                                                                                                                      |       |                     |       |                        |       |
| Commitments and  contingencies*(see Note 13)*                                                                                                                                                                             |       |                     |       |                        |       |
|                                                                                                                                                                                                                      |       |                     |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                                               |       |                     |       |                        |       |
| Preferred stock,  par value $0.001 per share; 5,000 shares authorized; no shares issued and  outstanding                                                                                                                  |       | —                   |       | —                      |       |
| Common stock,  par value $0.001 per share; 200,000 shares authorized; March 31, 2009  —55,067 shares issued and 44,240 outstanding; December 31, 2008 — 54,533  shares issued and 44,706 outstanding; |       | 55                       |       | 55                          |       |
| Additional  paid-in capital                                                                                                                                                                                               |       | 1,226,243                |       | 1,230,840                   |       |
| Accumulated  other comprehensive loss                                                                                                                                                                                     |       | (806                     | )          | (1,606                      | )          |
| Accumulated  deficit                                                                                                                                                                                                      |       | (253,172                 | )          | (193,247                    | )          |
| Treasury stock,  at cost; March 31, 2009, 10,827 shares; December 31, 2008, 9,827  shares;                                                                                                                      |       | (246,156                 | )          | (233,885                    | )          |
| Total  stockholders’ equity                                                                                                                                                                                          |       | 726,164                  |       | 802,157                     |       |
|                                                                                                                                                                                                                      |       |                     |       |                        |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                          |       | $                        | 1,052,542  |                        | $          | 1,154,170 |   |

 

See notesaccompanying these condensed consolidated financial statements.

 

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**AVOCENTCORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited, inthousands)

 
| ** **                                                                                | ** **   | **For the three months ended** | ** **   |
|-------------------------------------------------------------------------------------------|--------------|----------------------------------------------------|--------------|
| ** **                                                                                | ** **   | **March 31,**                                 | ** **   | **March 28,** | ** ** |
| ** **                                                                                | ** **   | **2009**                                           | ** **   | **2008** | ** ** |
| *** ***                                                                              | *** *** | *** ***                                       | *** *** | *** *** | *** *** |
| Cash flows from  operating activities:                                                    | * *     | * *                                           | * *     | * * | * * |
| Net income  (loss)                                                                        |         | $                                                  | (59,925      | ) | $ | 731 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |         |                                               |         |   |   |
| Depreciation                                                                              |         | 2,228                                              |         | 2,592 |   |
| Amortization of  intangible assets                                                        |         | 14,752                                             |         | 10,454 |   |
| Stock-based  compensation                                                                 |         | 3,294                                              |         | 4,547 |   |
| Net (gain) loss  on disposition of fixed assets                                           |         | (296                                               | )            | 14 |   |
| Impairment of  goodwill                                                                   |         | 80,000                                             |         | — |   |
| Excess tax benefit from stock-based  compensation                                         |         | 2,591                                              |         | (3 | ) |
| Changes in  operating assets and liabilities, net of acquisition:                         |         |                                               |         |   |   |
| Accounts  receivable, net                                                                 |         | 22,283                                             |         | 3,457 |   |
| Inventories                                                                               |         | (6,510                                             | )            | (247 | ) |
| Other assets                                                                              |         | 73                                                 |         | (426 | ) |
| Accounts payable                                                                          |         | (5,690                                             | )            | (6,153 | ) |
| Accrued wages  and commissions                                                            |         | (11,032                                            | )            | (3,021 | ) |
| Accrued other  liabilities and deferred revenue                                           |         | (9,762                                             | )            | (824 | ) |
| Income taxes,  current and deferred                                                       |         | (29,859                                            | )            | (6,420 | ) |
| Net cash  provided by operating activities                                                |         | 2,147                                              |         | 4,701 |   |
| ** **                                                                                | ** **   | ** **                                         | ** **   | ** ** | ** ** |
| Cash flows from  investing activities:                                                    |         |                                               |         |   |   |
| Purchase of other  intangible assets                                                      |         | (218                                               | )            | (199 | ) |
| Additional  consideration paid for LANDesk and Touchpaper                                 |         | (4,077                                             | )            | — |   |
| Purchases of  property and equipment                                                      |         | (1,234                                             | )            | (2,123 | ) |
| Proceeds from  sale of property and equipment                                             |         | 759                                                |         | — |   |
| Maturities and  proceeds from sales of investments                                        |         | —                                             |         | 5,942 |   |
| Net cash (used  in) provided by investing activities                                      |         | (4,770                                             | )            | 3,620 |   |
| ** **                                                                                | ** **   | ** **                                         | ** **   | ** ** | ** ** |
| Cash flows from  financing activities:                                                    | ** **   | ** **                                         | ** **   | ** ** | ** ** |
| Borrowings under  unsecured line of credit, net                                           |         | —                                             |         | 45,000 |   |
| Proceeds from  employee stock option exercises                                            |         | 140                                                |         | 129 |   |
| Excess tax benefit from stock-based  compensation                                         |         | (2,591                                             | )            | 3 |   |
| Purchases of  treasury stock                                                              |         | (12,271                                            | )            | (62,956 | ) |
| Net cash used in  financing activities                                                    |         | (14,722                                            | )            | (17,824 | ) |
|                                                                                      |         |                                               |         |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                             |         | (582                                               | )            | 2,814 |   |
|                                                                                      |         |                                               |         |   |   |
| Net decrease in  cash and cash equivalents                                                |         | (17,927                                            | )            | (6,689 | ) |
| Cash and cash  equivalents at beginning of period                                         |         | 126,858                                            |         | 105,183 |   |
| Cash and cash  equivalents at end of period                                               |         | $                                                  | 108,931      |   | $ | 98,494 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

(Unaudited, inthousands, except share data)

 

Note 1.          Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in conformity with United States generally acceptedaccounting principles and reflect all adjustments consisting of normalrecurring adjustments which, in the opinion of management, are necessary for afair statement of the results for the periods shown.  The results of operations for these periodsare not necessarily indicative of the results expected for the full fiscal yearnor for any future period.  Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenue and expenses during the reportingperiod.  Actual results could differ fromthose estimates and assumptions.

 

The accompanying unaudited condensed consolidated financial statementsshould be read in conjunction with the audited consolidated financialstatements and the related notes contained in our Annual Report on Form 10-Kfor the year ended December 31, 2008, which is on file with the Securitiesand Exchange Commission and is available at our website, www.avocent.com. Theconsolidated balance sheet presented in the accompanying condensed consolidatedfinancial statements for December 31, 2008, was derived from the auditedfinancial statements filed in our 10-K for the period ended December 31,2008, but does not include all disclosures required by accounting principlesgenerally accepted in the United States of America.

 

We report our annualresults based on years ending December 31. Prior to 2009, we reported our quarterly results for the first threeinterim periods based on 13 week periods ending on Fridays and for the fourthinterim period ending on December 31. Beginning January 1, 2009, we began reporting our quarterly periodsbased on the calendar month end to better align our quarter ends with those ofour customers and others within our industry.

 

Certainreclassifications have been made to the prior year’s condensed consolidatedfinancial statements in order to conform to the 2009 presentation. Thesereclassifications had no effect on previously reported net income, net cashprovided by operating activities, net cash provided by investing activities nortotal stockholders’ equity.

 

Our financial statements are consolidated and include the accounts ofAvocent Corporation and our wholly owned subsidiaries.  All significant inter-company transactionsand balances have been eliminated in consolidation.

 

Note 2.          Inventories

 

Inventoriesconsisted of the following at:

 
| ** **      | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **      | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Raw materials   |       | $                            | 1,200      |                            | $          | 525 |   |
| Work-in-process |       | 639                          |       | 308                             |       |
| Finished goods  |       | 36,180                       |       | 30,683                          |       |
| Inventories     |       | $                            | 38,019     |                            | $          | 31,516 |   |

 

Inventories above have been reduced by reserves for excess and obsoleteinventories of $6,161 and $6,401 as of March 31, 2009 and December 31,2008, respectively.

 

Note 3.          Equity and Treasury Stock

 

We issued commonstock as a result of stock option exercise activity during the three monthsended March 31, 2009 and March 28, 2008 as follows:

 
| ** **              | ** ** | **For the three months ended** | ** ** |
|-------------------------|------------|----------------------------------------------------|------------|
| ** **              | ** ** | **March 31,  2009**                           | ** ** | **March 28,  2008** | ** ** |
|                    |       |                                               |       |   |   |
| Stock option  exercises |       | 12,932                                             |       | 17,121 |   |

 

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**AVOCENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, inthousands, except share data)

 

We issued commonstock as a result of restricted stock unit (RSU) vesting activity during thethree months ended March 31, 2009 and March 28, 2008 as follows:

 
| ** **               | ** ** | **For the three months ended** | ** ** |
|--------------------------|------------|----------------------------------------------------|------------|
| ** **               | ** ** | **March 31,  2009**                           | ** ** | **March 28,  2008** | ** ** |
|                     |       |                                               |       |   |   |
| RSUs vested              |       | 740,625                                            |       | 544,980 |   |
| Shares withheld  for tax |       | (218,551                                           | )          | (159,122 | ) |
| Net shares  issued       |       | 522,074                                            |       | 385,858 |   |

 

Share repurchaseactivity during the three months ended March 31, 2009 and March 28,2008 was as follows:

 
| ** **          | ** ** | **For the three months ended** | ** ** |
|---------------------|------------|----------------------------------------------------|------------|
| ** **          | ** ** | **March 31, 2009**                       | ** ** | **March 28, 2008** | ** ** |
|                |       |                                               |       |   |   |
| Shares  repurchased |       | 1,000,000                                          |       | 3,912,000 |   |

 

Note 4.   Accumulated Other Comprehensive Income

 

Werecord unrealized gains and losses on our foreign currency translationadjustments, unrealized gains and losses on derivatives which are cash flowhedges, and unrealized holding gains or losses on our available-for-salesecurities, net of tax, as accumulated other comprehensive income, which isincluded as a separate component of stockholders’ equity.  Comprehensive income for the three monthsended March 31, 2009 and March 28, 2008 is as follows:

 
| ** **                                    | ** ** | **For the three months ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                    | ** ** | **March 31, 2009**                       | ** ** | **March 28, 2008** | ** ** |
| Comprehensive  income (loss)                  |       |                                               |       |   |   |
| Net income  (loss)                            |       | $                                                  | (59,925    | ) | $ | 731 |   |
| Unrealized gains  (losses) on cash flow hedge |       | 196                                                |       | (249 | ) |
| Foreign currency  translation adjustment      |       | 604                                                |       | 2,107 |   |
| Total  comprehensive income (loss)            |       | $                                                  | (59,125    | ) | $ | 2,589 |   |

 

Asof March 31, 2009 and December 31, 2008, total accumulated othercomprehensive loss was $806 and $1,606, respectively.

 

Note 5.   Earnings (Loss) Per Share (share data inthousands)

 
| ** **                                                                  | ** ** | **Income (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per-Share  Amount** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|-----------------------|------------|
| ** **                                                                  | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **            | ** ** |
| **For the  three months ended March 31, 2009**                         |       |                        |       |                      |       |                  |       |
| **Basic  EPS**                                                              |       |                        |       |                      |       |                  |       |
| Net income  (loss) available to common stockholders                         |       | $                           | (59,925    | )                         | 44,794     |                  | $          | (1.34 | ) |
| **Effect  of Dilutive Securities**                                          |       |                        |       |                      |       |                  |       |
| Stock options  and unvested RSUs                                            |       | —                      |       | —                    |       | —                |       |
| **Diluted  EPS**                                                            |       |                        |       |                      |       |                  |       |
| Net income  (loss) available to common stockholders and assumed conversions |       | $                           | (59,925    | )                         | 44,794     |                  | $          | (1.34 | ) |
| ** **                                                                  |       |                        |       |                      |       |                  |       |
| **For the  three months ended March 28, 2008**                         |       |                        |       |                      |       |                  |       |
| **Basic  EPS**                                                              |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders                                |       | $                           | 731        |                      | 46,233     |                  | $          | 0.02 |   |
| **Effect  of Dilutive Securities**                                          |       |                        |       |                      |       |                  |       |
| Stock options  and unvested RSUs                                            |       | —                      |       | 384                       |       | —                |       |
| **Diluted  EPS**                                                            |       |                        |       |                      |       |                  |       |
| Net income  available to common stockholders and assumed conversions        |       | $                           | 731        |                      | 46,617     |                  | $          | 0.02 |   |

 

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**AVOCENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 

Anti-dilutive options to purchase commonstock outstanding were excluded from the calculations above.  Anti-dilutive options totaled 4,712 and 4,365as of March 31, 2009 and March 28, 2008, respectively.

 

Note 6.   Segment Reporting

 

In the thirdquarter of 2008, we divided the Connectivity and Control business unit into itsthree product lines: the Equinox branded serial business, the Broadcastbusiness and the Pro Audio Visual business. We folded our broadcast product line into Management Systems and intendto sell (or license the technology of) the remaining two parts of thisbusiness.  All revenues and costsassociated with our broadcast business are included within Management Systemsand historical segment results for both Management Systems and our otherbusiness units have been adjusted to reflect this change.

 

We evaluate theperformance of our segments based on revenue and operating profit, which arecalculated before corporate and unallocated costs, amortization and impairmentof intangibles, acquired in-process research and development expense,restructuring, integration and retirement expenses and stock compensationcosts.  We do not track nor use assets bysegment as a measure of performance, therefore, we have not presented assets bysegment.  The following is a presentationof information for our two reportable segments, Management Systems and LANDesk:

** **
| ** **                 | ** ** | **For the three months ended** | ** ** |
|----------------------------|------------|----------------------------------------------------|------------|
| ** **                 | ** ** | **March 31, 2009**                       | ** ** | **March 28, 2008** | ** ** |
| Net revenue:               | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Management  Systems        |       | $                                                  | 89,402     |   | $ | 108,755 |   |
| LANDesk                    |       | 34,450                                             |       | 29,193 |   |
| Other business  units      |       | 628                                                |       | 2,675 |   |
| Corporate and  unallocated |       | 1,582                                              |       | 776 |   |
| Total net  revenue         |       | $                                                  | 126,062    |   | $ | 141,399 |   |

** **
| ** **                                          | ** ** | **For the three months ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **March 31, 2009**                       | ** ** | **March 28, 2008** | ** ** |
| Operating income  (loss):                           | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Management  Systems                                 |       | $                                                  | 16,028     |   | $ | 26,915 |   |
| LANDesk                                             |       | 5,629                                              |       | 610 |   |
| Other business  units                               |       | (1,300                                             | )          | (1,555 | ) |
| Corporate and  unallocated costs                    |       | (2,962                                             | )          | (6,615 | ) |
| Amortization of  intangibles                        |       | (14,671                                            | )          | (10,304 | ) |
| Impairment of  goodwill                             |       | (80,000                                            | )          | — |   |
| Restructuring,  integration and retirement expenses |       | (5,246                                             | )          | (2,356 | ) |
| Stock-based  compensation expense                   |       | (3,294                                             | )          | (4,553 | ) |
| Total income  (loss) from operations                |       | (85,816                                            | )          | 2,142 |   |
|                                                |       |                                               |       |   |   |
| Other expense                                       |       | (3,287                                             | )          | (486 | ) |
| Income (loss)  before provision for income taxes    |       | $                                                  | (89,103    | ) | $ | 1,656 |   |

 

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**AVOCENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, inthousands, except share data)

 

Revenue andoperating income for Management Systems includes the operating results of Ergofrom July 10, 2008, the date of acquisition.  Revenue and operating income for LANDeskincludes the operating results of Touchpaper from June 30, 2008, the dateof the acquisition.

 

Sales by productline for Management Systems and LANDesk for the three months ended March 31,2009 and March 28, 2008 are as follows:

 
| ** **                            | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------------------------|------------|
| ** **                            | ** ** | **March 31, 2009**                       | ** ** | **March 28, 2008** | ** ** |
| Management  Systems net revenue:      |       |                                               |       |   |   |
| KVM                                   |       | $                                                  | 62,201     |   | $ | 79,950 |   |
| Serial  management                    |       | 7,198                                              |       | 12,719 |   |
| Embedded  software and solutions      |       | 5,977                                              |       | 8,347 |   |
| Other                                 |       | 14,026                                             |       | 7,739 |   |
| Total Management  Systems net revenue |       | $                                                  | 89,402     |   | $ | 108,755 |   |

 
| ** **                 | ** ** | **For the Three Months Ended** | ** ** |
|----------------------------|------------|----------------------------------------------------|------------|
| ** **                 | ** ** | **March 31, 2009**                       | ** ** | **March 30, 2007** | ** ** |
| LANDesk net  revenue:      |       |                                               |       |   |   |
| Licenses and  royalties    |       | $                                                  | 17,191     |   | $ | 17,042 |   |
| Maintenance and  services  |       | 17,259                                             |       | 12,151 |   |
| Total LANDesk  net revenue |       | $                                                  | 34,450     |   | $ | 29,193 |   |

 

We sell ourproducts internationally to customers in several countries; however no foreigncountry accounted for more than 10% of sales in the first quarter of 2009 or2008.

 

Followingis a presentation of long-lived assets as of March 31, 2009 and December 31,2008:

 
| ** **          | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **          | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Long-lived  assets: |       |                     |       |                        |       |
| United States       |       | $                        | 27,825     |                        | $          | 28,176 |   |
| International       |       | 8,858                    |       | 10,021                      |       |
| Total               |       | $                        | 36,683     |                        | $          | 38,197 |   |

** **

**Note 7.   ForwardContracts and Interest Rate Swap**

** **

We use forward contracts to reduce our foreigncurrency exposure related to the net cash flows from our internationaloperations.  The majority of thesecontracts are short-term contracts (three months or less) and are marked-to-marketeach quarter and included in trade payables, with the offsetting gain or lossincluded in other income (expense) in the accompanying consolidated statementsof income.  As of March 31, 2009, wehad five open forward contracts with an approximate fair value of ($1).  As of December 31, 2008, we had fouropen forward contracts with an approximate fair value of $26.

 

There was $170,000outstanding under our credit facility, which includes both our line of creditand term loan, as of March 31, 2009. The line of credit and term loan contain affirmative and negativecovenants, including limitations on our ability to (i) make distributions,investments, and other payments unless we satisfy certain financial tests orother criteria, (ii) incur additional indebtedness, (iii) restructureour subsidiaries, and (iv) make acquisitions and capitalexpenditures.  The financial testsinclude an interest coverage ratio and a total leverage ratio.  We believe we are in compliance with thesecovenants and related tests as of March 31, 2009.****Thefailure to comply with these covenants could result in an event of defaultwhich, if not cured or waived, could have a material adverse effect on us.  We pay a commitment fee on the unused portionof the line of credit based on the results of a leverage ratio computation. Asof March 31, 2009, the commitment fee rate is 20 basis points per quarter.

 

As of March 31,2009, we have two interest rate swaps, which are recorded on our balancesheet.  On May 1, 2008, we enteredinto an interest rate swap agreement with a notional amount of $80,000.  The notional amount of the interest rate swapwas $60,000 as of March 31, 2009. The swap was effective on May 1, 2008 and terminates on December 31,2009.  The swap calls for us to make fixed rate payments of 3.05% over theterm of the hedge and to receive floating rate payments based on LIBOR(matching the LIBOR rate in the line of credit above) from thecounter-party.  On November 6, 2008we entered into an additional interest rate swap agreement with a notionalamount of $90,000.  The notional amountof this interest rate swap will remain at $90,000 until the termination on June 16,2011.   The swap was effective on December 31,2008.  The swap calls for us to make fixed rate payments of 2.75% over theterm of the hedge and to receive floating rate payments based on LIBOR(matching the LIBOR rate in the line of credit above) from the counter-party.

 

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**AVOCENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, inthousands, except share data)

 

Theobjective of the interest rate swap agreements is to provide a hedge againstLIBOR interest rate changes that could have an effect on our cash flows andborrowing costs. We anticipate these hedges will be settled upon maturity andthey are accounted for as cash flow hedges. The interest rate swaps are recorded at fair value each reporting periodwith the changes in the fair value of the hedge that take place through thedate of maturity recorded in accumulated other comprehensive income.

 

Theseinterest rate swaps qualify as derivative instruments and are designated ascash flow hedges.  The cash flow hedgeswere in a liability position as of March 31, 2009 and were included inother non-current liabilities in the consolidated balance sheet, as follows:

 
| ** **           | ** ** | **March 31, 2009** | ** ** |
|----------------------|------------|------------------------------|------------|
| ** **           | ** ** | ** **                   | ** ** |
| Cash flow  hedges:   |       |                         |       |
| Interest rate  swaps |       | $                            | 3,213      |   |
|                      |            |                              |            |  |

 

Forthe three months ended March 31, 2009, the activity related to ourinterest rate swaps designated as cash flow hedges is included in our condensedconsolidated financial statements as follows:

 
| ** **           | ** ** | **March 31, 2009**                                                 | ** ** |
|----------------------|------------|------------------------------------------------------------------------------|------------|
| ** **           | ** ** | **Effective Portion  Included in OCI,  Net of Tax** | ** ** | **Effective Portion  in AOCI,  Reclassified into  Earnings** | ** ** | **Ineffectiveness,  Excluded from  Hedge  Effectiveness** | ** ** |
| Cash flow  hedges:   |       |                                                                         |       |   |   |   |   |
| Interest rate  swaps |       | $                                                                            | 163        |   | $ | 32 |   | $ | — |   |
|                      |            |                                                                              |            |  |  |  |  |  |  |  |

 

**Note 8.   Goodwilland Other Intangible Assets**

** **

**Other intangibleassets subject to amortization were as follows:**

** **
| ** **                                | ** ** | **March 31, 2009**     | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **Gross**

**Carrying  Amounts** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** |
|                                      |       |                             |       |                            |       |   |   |   |   |
| Developed  technology                     |       | $                                | 84,438     |                            | $          | 35,383 |   | $ | 86,285 |   | $ | 31,401 |   |
| Internally  developed software for resale |       | 21,900                           |       | 9,429                           |       | 21,900 |   | 8,517 |   |
| Patents and  trademarks                   |       | 31,440                           |       | 11,996                          |       | 31,236 |   | 10,915 |   |
| Customer base                             |       | 110,900                          |       | 39,253                          |       | 116,121 |   | 39,388 |   |
| Maintenance  contracts                    |       | 17,600                           |       | 6,160                           |       | 17,600 |   | 5,280 |   |
| Non-compete  agreements                   |       | 7,225                            |       | 5,534                           |       | 11,325 |   | 8,690 |   |
|                                      |       | $                                | 273,503    |                            | $          | 107,755 |   | $ | 284,467 |   | $ | 104,191 |   |

** **

**For the threemonths ended March 31, 2009 and March 28, 2008, amortization expensefor other intangible assets was $14,752 and $10,454, respectively.  The approximate estimated annual amortizationfor other intangibles is as follows:**

** **
| **Years ending December 31:** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2009, remainder                              |       | $          | 35,774     |   |
| 2010                                         |       | $          | 46,444     |   |
| 2011                                         |       | $          | 38,110     |   |
| 2012                                         |       | $          | 28,992     |   |
| 2013                                         |       | $          | 15,976     |   |
| Thereafter                                   |       | $          | 452        |   |

** **

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** **

**AVOCENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

**(Unaudited, inthousands, except share data)**

** **

**In accordancewith FASB Statement No. 142, *Goodwilland Intangible Assets*(FASB 142), we evaluate the carrying value ofgoodwill for potential impairment annually during the fourth quarter of eachyear or on an interim basis if an event occurs or circumstances change thatindicate that the fair value of a reporting unit is likely to be below itscarrying value.** Our fourth quarter 2008 impairment testconcluded that there had been no impairment of goodwill; however therewere certain factors noted during the 2008 testing that would require continuedmonitoring, especially related to any potential future decline in our marketcapitalization.  During the first quarterof 2009, we concluded that interim impairment testing was required due to thecontinued deterioration in the global economic environment, the resultingdecrease in our market capitalization to less than the book value of ourshareholders’ equity, and declining market valuations for many other companiesin our peer group.  Additionally, werevisited our five year forecast in light of the continuing globalrecession.  Based on that trend, werevised our five year forecast to reduce estimated revenues and expenses.

** **

**The Company has fourreporting units: Management Systems (MS), LANDesk, Connectivity and Control,and AESS (which is combined with MS for segment reporting purposes). **Our Management Systems business unit alsoincludes the reporting unit AESS.  We perform our goodwill impairmenttest in two steps. Step one compares the fair value of each reporting unit(operating segment) to its carrying amount. If step one indicates that animpairment potentially exists, the second step is performed to measure theamount of impairment, if any. Goodwill impairment exists when the estimated fairvalue of goodwill is less than its carrying value.

** **

**For purposes of the interim stepone analysis, the fair value of our reporting units was determined through theuse of a combination of a discounted cash flow analysis, utilizing the incomeapproach, and the guideline public company method, utilizing a marketapproach.  The result of each valuationwas weighted in determining the fair value of the reporting units.**Under the market approach, thefair value of each reporting unit is determined based upon comparisons topublic companies engaged in similar businesses. Under the income approach, thefair value of each reporting unit was based on the present value of estimatedfuture cash flows. The income approach is dependent on a number of significantmanagement assumptions including estimated demand in each geographic market andthe discount rate. The discount rate is commensurate with the risk inherent inthe projected cash flows and reflects the rate of return required by aninvestor in the current economic conditions. Based on our assessment of these economic conditions, the weightingapplied to the market approach for the March 1, 2009 valuation was decreasedfrom 50% to 40% and the weighting for the income approach was increased from50% to 60%,as compared to the assumptions as of October 1, 2008.  This change was considered appropriate as itreflects our longer term view, including our revised cash flow projectionsbased on current expectations, while continuing to reflect the impact ofdeclining equity values in this highly volatile equity market impacting ourstock price and the stock price of many of our peers.

** **

**The results of our step onetest as of March 1, 2009 indicated that the fair value of each of ourreporting units had declined from 2008, however the estimated fair values exceededtheir carrying value, with the exception of LANDesk.  We estimated the fair value of our largest reportingunit, Management Systems, to be $184 million higher, or approximately 35%, thanits carrying value of $520 million.  Ourremaining reporting units are not material to our financial statements, howeverwe estimated the combined fair value of these reporting units to be $49 millionhigher, or well over double, their combined carrying value of $20 million.**

** **

Due to thecomplexities involved in step two in determining the implied fair value of thegoodwill of the LANDesk reporting unit, we have not finalized our evaluation asof the filing of this Quarterly Report on Form 10-Q for the first quarterof 2009. However, based upon the work performed to date, we have concluded thatan impairment is probable and can be reasonably estimated. Accordingly, we haverecorded an $80 million charge representing our best estimate of the impairmentof LANDesk goodwill for the quarter ended March 31, 2009.

 

**The goodwill impairment charge issubject to change as we complete our evaluation, and any resulting change couldvary materially from the estimate recorded during the first quarter of2009.  We will record any differenceduring the second quarter of 2009.**

** **

**The changes inthe carrying amount of goodwill (*see note 11*)for the three months ended March 31, 2009, are as follows:**

 
| ** **                                   | ** ** | **Management** | ** ** | ** **  | ** ** | **Other  Business** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|----------------|------------|-------------|------------|---------------------|------------|------------|------------|
| ** **                                   | ** ** | **Systems**    | ** ** | **LANDesk** | ** ** | **Units**           | ** ** | **Total**  | ** ** |
|                                         |       |           |       |        |       |                |       |       |       |
| Balance as of  January 1, 2009          |       | $              | 335,096    |        | $          | 278,709             |       | $          | 2,521      |   | $ | 616,326 |   |
|                                         |       |           |       |        |       |                |       |       |       |
| Estimated impairment loss related to LANDesk |       | —         |       | (80,000     | )          | —              |       | (80,000    | )          |
|                                         |       |           |       |        |       |                |       |       |       |
| Other  adjustments                           |       | (11            | )          | —      |       | —              |       | (11        | )          |
|                                         |       |           |       |        |       |                |       |       |       |
| Balance as of  March  31, 2009          |       |           |       |        |       |                |       |       |       |
| Goodwill                                     |       | 335,085        |       | 278,709     |       | 2,521               |       | 616,315    |       |
| Accumulated  impairment losses               |       | —         |       | (80,000     | )          | —              |       | (80,000    | )          |
|                                         |       | $              | 335,085    |        | $          | 198,709             |       | $          | 2,521      |   | $ | 536,315 |   |

 

**The $80,000adjustment to LANDesk goodwill was the result of the**estimated impairment charge recordedduring the three months ended March 31, 2009.

 

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**AVOCENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 

**Note 9.  ProductWarranties and Deferred Revenue**

 

The activitywithin the liability for warranty returns for the three months ended March 31,2009 was as follows:

 
| Balance, January 1, 2009                   |   | $      | 2,245  |   |
|-----------------------------------------------------------|--------|--------|--------|--------|
| Accruals for  product warranties issued during the period |   | 2,267  |   |
| Settlements made  during the period                       |   | (2,741 | )      |
| Balance,  March 31, 2009                             |   | $      | 1,771  |   |

 

We include an accruedliability for the extended warranty program in our balance sheet withindeferred revenue. The activity within deferred revenue for our extendedwarranty program for the three months ended March 31, 2009 was follows:

 
| Balance  January 1, 2009                         |   | $      | 5,151  |   |
|-------------------------------------------------------|--------|--------|--------|--------|
|                                                  |   |   |   |
| New extended  warranty contracts                      |   | 1,649  |   |
| Earned revenue  from amortization of deferred revenue |   | (1,134 | )      |
|                                                  |   |   |   |
| Balance  March 31, 2009                          |   | $      | 5,666  |   |

 

We defer revenuefor subscription, service and maintenance and upgrade protection contractsuntil earned, which is generally over the term of the contract or when servicesare performed. As of March 31, 2009, deferred revenue was $73,646.  As of December 31, 2008, deferredrevenue was $75,820.

 

Note 10. Income Taxes

 

The effective taxrate in the first quarter of 2009 was (32.8)% compared to an effective tax rateof 55.9% in the first quarter of 2008. The provision for income taxes was a benefit of ($29,179) for the firstquarter of 2009, compared to income tax expense of $925 for the first quarterof 2008.  The change in the effective taxrate was primarily attributable to the change in the amount and mix of ourpretax book income within taxable jurisdictions and a tax benefit recognized torecord a deferred tax asset associated with the goodwill impairment charge (*see note 8*).

 

As of March 31,2009, we had total reserves for uncertain tax positions related to grossunrecognized tax benefits of $5,619, of which $4,276, if recognized, wouldaffect the effective tax rate.  Werecognize potential accrued interest and penalties related to unrecognized taxbenefits from our global operations within income tax expense. We recorded $97of such expenses in the first quarter of 2009. As of March 31, 2009, we had accrued interest payable related tothe unrecognized tax benefits of $928.

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(Unaudited, in thousands, except share data)

 

We conductbusiness globally, and as a result our subsidiaries file income tax returns inthe U.S. federal jurisdiction and various state and foreign jurisdictions.  In the normal course of business we aresubject to examinations by taxing authorities throughout the world includingthe U.S.  With few exceptions, we are nolonger subject to U.S. federal, state, and local, or non-U.S. income taxexaminations for periods ending before 2005.

 

The InternalRevenue Service (IRS) commenced an examination in 2006 of our U.S. income taxreturns for 2004 and 2005.  During thefirst quarter of 2008, we reached a settlement with the IRS concerning thoseperiods.  A payment for additional tax,including interest was made of $6,600 during the first quarter of 2008.  This payment did not result in a materialchange to our financial position.  TheIRS is currently examining our 2006 and 2007 income tax returns.  As of March 31, 2009 the IRS had notissued any proposed adjustments for those periods.

 

Note 11. Fair Value Measurements

 

InSeptember 2006, the FASB issued SFAS No. 157, “*Fair ValueMeasurements,*” (SFAS 157), which was effective for fiscal yearsbeginning after November 15, 2007 and for interim periods within thoseyears. We adopted SFAS 157 as of January 1, 2008, with the exception ofthe application of the statement to nonfinancial assets and nonfinancialliabilities, which include those measured at fair value in goodwill impairmenttesting, indefinite lived intangible assets measured at fair value forimpairment testing, and those initially measured at fair value in a businesscombination.  We adopted the provisionsof SFAS 157 that pertain to the nonfinancial assets and nonfinancialliabilities as of January 1, 2009.

 

SFAS157 establishes a valuation hierarchy for disclosure of the inputs to valuationused to measure fair value. This hierarchy prioritizes the inputs into threebroad levels as follows. Level 1 inputs are quoted prices (unadjusted) inactive markets for identical assets or liabilities. Level 2 inputs areobservable for the asset or liability, either directly or indirectly.  If the asset or liability has a specifiedcontractual term, a level 2 input must be observable for substantially the fullterm of the asset or liability. Level 3 inputs are unobservable inputs based onour own assumptions about the assumptions that market participants would use inpricing the assets or liabilities (including assumptions about risk), used tomeasure assets and liabilities at fair value. An asset or liability’sclassification within the hierarchy is determined based on the lowest levelinput that is significant to the fair value measurement in its entirety.

 

Thefollowing table provides the financial assets and liabilities carried at fairvalue measured on a recurring basis as of March 31, 2009:

 
| ** **              | ** ** | ** **                 | ** ** | **Fair value measurements**                       | ** ** |
|-------------------------|------------|----------------------------|------------|-------------------------------------------------------------|------------|
| ** **              | ** ** | **Total  Carrying  Value** | ** ** | **Quoted  prices in  active  markets  (Level 1)** | ** ** | **Significant  other  observable  inputs  (Level 2)** | ** ** | **Significant  unobservable  inputs  (Level 3)** | ** ** |
|                    |       |                       |       |                                                        |       |   |   |   |   |
| Money market  funds     |       | $                          | 3,038      |                                                        | $          | 3,038 |   | — |   | — |   |
| Derivative  liabilities |       | $                          | 3,213      |                                                        | —     |   | $ | 3,213 |   | — |   |
|                         |            |                            |            |                                                             |            |  |  |  |  |  |  |  |

 

Thefair market value of our money market funds is measured at fair value usingquoted prices in active markets.  Thesefair value measurements are classified within Level 1 of the valuationhierarchy.

 

Thefair market value of “over-the-counter” derivatives is measured at fair valueusing expected cash flows over the life of the trade.  The fair value measurement is prepared usingthe closing mid-market rate/price environment on March 31, 2009, usingproprietary models, available market data and reasonable assumptions andincludes a consideration of credit risk. These fair value measurements are classified within Level 2 of thevaluation hierarchy.

 

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**AVOCENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, inthousands, except share data)

 

Thefollowing table provides the indefinite lived intangible assets and liabilitiescarried at fair value, measured on a non-recurring basis, as of March 31,2009:

 
| ** **       | ** ** | ** **                 | ** ** | **Fair value measurements**                       | ** ** |
|------------------|------------|----------------------------|------------|-------------------------------------------------------------|------------|
| ** **       | ** ** | **Total  Carrying  Value** | ** ** | **Quoted  prices in  active  markets  (Level 1)** | ** ** | **Significant  other  observable  inputs  (Level 2)** | ** ** | **Significant  unobservable  inputs  (Level 3)** | ** ** | **Total  Gains  (Losses)** | ** ** |
|             |       |                       |       |                                                        |       |   |   |   |   |   |   |
| LANDesk goodwill |       | $                          | 198,709    |                                                        | —     |   | — |   | $ | 198,709 |   | $ | (80,000 | ) |
|                  |            |                            |            |                                                             |            |  |  |  |  |  |  |  |  |  |

 

Ourimpairment testing for LANDesk, performed in accordance with SFAS 142,indicated that its implied fair value was less than its carrying value (*see note 8*).  The fair value of LANDesk was determined throughthe combination of a discounted cash flow analysis, utilizing the incomeapproach and a guideline public company method, utilizing a marketapproach.  Results from these two methodsare then weighted to determine the fair market value for each reportingunit.  These fair value measurements areclassified within Level 3 of the valuation hierarchy.  We based the discounted cash flow analysis onmanagement’s forecasts for LANDesk and applied a discount rate of 24%, takinginto consideration the relative risk associated with LANDesk.  The guideline public company method utilizescomparative analysis of the reporting units with publicly traded guidelinecompanies in the same or similar industries. We applied a combination of the enterprise value multiple to revenue andEBITDA in determining the reporting unit and other comparable company valuesfor purposes of the guideline public company method.

 

The step twoanalysis, which has not been completed at the date of the filing of thisQuarterly Report on Form 10-Q, involves preparing valuation estimates for alltangible and intangible assets of the reporting unit, where the fair valueindicated in step one is used as the fair value of the entire reportingunit.  We have estimated the fair valueof the LANDesk goodwill to be approximately $198,700 as compared to thecarrying value of $278,700, resulting in an estimated impairment ofapproximately $80,000.

 

Note 12.  Restructuring, Integration and Retirement

 

During 2008 webegan a series of restructuring actions which continued into the first quarterof 2009.  Also in 2008, we began theintegration of our Ergo and Touchpaper acquisitions, each acquired in the thirdquarter of 2008.  The restructuring andintegration actions were designed to enhance competitiveness, improveefficiency, and reduce our overall cost structure.  The restructuring and integration costs,along with costs associated with our former CEO’s retirement incurred in thefirst quarter of 2008, have been separately identified as “Restructuring,integration and retirement expenses” within our operating expenses.  Restructuring and integration expensesinclude severance charges incurred for certain workforce reductions, costsassociated with the reduction of certain research and development investments,cost associated with the integration of marketing functions, and the costsassociated with the relocation of certain functions from our Redmond,Washington and Shanghai, China facilities to Huntsville, Alabama.

 

We recorded $5,295and $2,971 of such costs for the three months ended March 31, 2009 and March 28,2008, respectively.  These costs includestock compensation costs of $49 and $615 during the three months ended March 31,2009 and March 28, 2008, respectively. These costs also include $737 of integration costs related to the Ergoand Touchpaper acquisitions during the three months ended March 31,2009.  The costs in the first quarter of2008 also include approximately $1,400 of costs settled in cash related to theretirement of our former CEO.  Thebalance of costs in both periods relate to severance charges and other costs tobe settled in cash.

 

As of March 31,2009, we had accrued approximately $2,324 related to severance costs, whichwere included in accrued wages and commissions in our consolidated balancesheet.  All costs associated with ourrestructuring and integration program were carried at the corporate level, andnone of these costs were allocated to specific business units.  A rollforward of the liability for severancecharges associated with our restructuring programs is as follows:

 

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**AVOCENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, inthousands, except share data)

 
| Balance as of  January 1, 2009 |   | $      | 3,585  |   |
|-------------------------------------|--------|--------|--------|--------|
| Accruals for  severance costs       |   | 2,439  |   |
| Adjustments to  accrual             |   | (35    | )      |
| Settlements made  during the period |   | (3,665 | )      |
| Balance as of  March 31, 2009  |   | $      | 2,324  |   |

 

We expect torecord approximately $2,000 in additional restructuring and integrationexpenses related to these actions during the second quarter of 2009.  We expect any remaining accruals to be paidby the end of the second or beginning of the third quarter 2009.

 

Note 13.  Legal Matters

 

In January 2007, we filed a complaint forpatent infringement in the United States District Court for the WesternDistrict of Washington against Aten Technology, Inc., Aten InternationalCo., Ltd, Belkin Corporation, Rose Electronics and its general partners, andTrippe Manufacturing Company.  Thedefendants filed counterclaims alleging non-infringement, unenforceability, andinvalidity.  In May 2007, we enteredinto a Settlement and License Agreement with Trippe Manufacturing, anddismissed Trippe from the lawsuit.  In October 2007,the District Court stayed the action pending a re-examination of our patents bythe Patent and Trademark Office.  InMarch/April 2009, the PTO confirmed the patentability of one of thosereexamined patents, confirmed the patentability of a portion of a second one ofthose reexamined patents, and rejected entirely a third one of those reexaminedpatents.  Avocent Redmond plans to appealthe decisions rejecting all or portions of its patents and press forward onlitigation for the confirmed patents.

 

In January 2008,Avocent Redmond Corp. filed a complaint for unauthorized use of patentedinventions against the United States government in the United States Court ofFederal Claims.  The complaint alleges that the United States governmentaccepted products manufactured and sold by Rose Electronics that are covered bypatents held by Avocent Redmond.  The United States has answered and RoseElectronics has intervened.

 

In March 2007,KBM Enterprises, formerly a contract manufacturer forAvocent, filed a complaint against Avocent in the Circuit Court of MadisonCounty, Alabama, seeking $9,500 for costs allegedly incurred by KBMin its manufacturing efforts on behalf of Avocent.  We have filed an answer and counterclaimsagainst KBM and one of its principals. Discovery is currently underway.

 

In April 2007,we filed a complaint for declaratory judgment against Aten International Co.,Ltd. in the United States District Court for the Northern District ofAlabama.  We are seeking a declaratory judgment that two patents owned byAten and asserted against Avocent are invalid and that certain of productsalleged by Aten to infringe do not infringe these patents.  In August 2007,Aten’s motion to dismiss for lack of personal jurisdiction was granted.  We appealed the District Court’s dismissalorder to the Federal Circuit Court of Appeals, and the dismissal was affirmedby the Federal Circuit Court of Appeals. We petitioned the Federal Circuit Court of Appeals for a rehearing enbanc, which was denied, and we have filed a petition for a Writ of Certiorariwith the United States Supreme Court.

 

In November 2007,Gemini IP, LLC filed a complaint for patent infringement in the United StatesDistrict Court for the Eastern District of Texas, Sherman Division, againstAvocent Corporation and our subsidiary LANDesk Software, Inc.  The complaint alleges infringement of aGemini patent through the sales of a LANDesk product.  The complaint seeks injunctive relief,damages, attorneys’ fees, and costs. Avocent Corporation was dismissed from the lawsuit in January 2008.  In April 2008, the District Court stayedthe action pending a review of the Gemini Patent by the Patent and TrademarkOffice.

 

Weintend to vigorously defend each of these matters, but the outcome of anyclaim, litigation, or proceeding is always inherently uncertain.  Based on the facts and circumstancescurrently known to us, we believe that resolution of the foregoing matterswill not materially affect our operations, financial condition, or cash flows.

 

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** **

**AVOCENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, inthousands, except share data)

** **

**Note 14. Recently Issued Accounting Pronouncements**

** **

InDecember 2007, the Financial Accounting Standards Board (FASB) issued SFASNo. 141(R), “*Business Combinations”*(SFAS 141(R)), which replaces SFAS 141.  SFAS 141(R) establishes principlesand requirements for how an acquirer in a business combination recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any controlling interest; recognizes and measures thegoodwill acquired in the business combination or a gain from a bargainpurchase; and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination.  SFAS 141(R) isto be applied prospectively to business combinations for which the acquisitiondate is on or after an entity’s fiscal year that begins after December 15,2008.  Since we have significant acquireddeferred tax assets for which full valuation allowances were recorded at theacquisition date, SFAS 141(R) could materially affect the results ofoperations if changes in the valuation allowances occur after adoption of thestandard.  We will assess the impact ofSFAS 141(R) on future acquisitions, however the application of SFAS141(R) will result in a significant change in accounting for any suchfuture acquisitions after the effective date.

 

In March 2008,the FASB issued SFAS No. 161, “*Disclosures aboutDerivative Instruments and Hedging Activities*” (SFAS 161). SFAS 161requires companies with derivative instruments to disclose information thatwould enable financial statement users to understand how and why a company usesderivative instruments, how derivative instruments and related hedged items areaccounted for under SFAS No. 133, “*Accounting for DerivativeInstruments and Hedging Activities*,” (SFAS 133) and how derivativeinstruments and related hedged items affect a company’s financial position,financial performance and cash flows. The new requirements apply to derivativeinstruments and non-derivative instruments that are designated and qualify ashedging instruments and related hedged items accounted for under SFAS 133. SFAS161 is effective for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008. We adopted  SFAS 161 on January 1, 2009 and it didnot have a material impact on our financial statements.

 

In April 2008,the FASB issued FASB Staff Position No. 142-3, “Determination of theUseful Lives of Intangible Assets”, which amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of an intangible asset.  Thisinterpretation is effective for financial statements issued for fiscal yearsbeginning after December 15, 2008 and interim periods within thoseyears.  We adopted the interpretation on January 1,2009 and it did not have a material impact on our financial statements.

** **

**On April 9,2009, the FASB issued FASB Staff Position (FSP) No. FAS 157-4 “DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That Are Not Orderly”(FSP FAS 157-4). FSP FAS 157-4 provides guidance for determining whether amarket is inactive and a transaction is distressed in order to apply theexisting fair value measurement guidance in FASB Statement of FinancialAccounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS 157).In addition, FSP FAS 157-4 requires enhanced disclosures regarding financialassets and liabilities that are recorded at fair value. This FSP is effectivefor interim and annual reporting periods ending after June 15, 2009.  We will evaluate this FSP further, but do notexpect its adoption to have a material impact on our financial condition andresults of operations.**

** **

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** **

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

 

*THE INFORMATION IN THIS ITEM 2**“MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”**AND INOTHER PARTS OF THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS,INCLUDING, WITHOUT LIMITATION, STATEMENTS RELATING TO OUR FUTURE BUSINESSPROSPECTS AND ECONOMIC CONDITIONS IN GENERAL; STATEMENTS REGARDING OUR ABILITYTO PREDICT FUTURE SALES AND MANAGE INVENTORY LEVELS; STATEMENTS REGARDINGPRICING PRESSURE; STATEMENTS REGARDING THE FLUCTUATION OF OUR REVENUE GROWTH INRELATION TO ECONOMIC CONDITIONS AND IT RELATED SPENDING TRENDS; STATEMENTSREGARDING OUR PRODUCT PLATFORMS AND OUR ABILITY TO RESUME GROWTH IN OUR OVERALLBUSINESS; STATEMENTS REGARDING INCREASED SALES OF OUR DIGITAL PRODUCTS ANDEMBEDDED SOLUTIONS AND THEIR ABILITY TO OFFSET PRICE DECLINES AND COMPETITIVEFACTORS; STATEMENTS REGARDING OUR ANTICIPATED FUTURE GROSS MARGINS, RESEARCHAND DEVELOPMENT EXPENSES, AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES; ANDSTATEMENTS REGARDING THE OUTCOME OF, AND OUR LEGAL COSTS FOR, PATENT AND OTHERLEGAL CLAIMS, LITIGATION, AND PROCEEDINGS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS ANDUNCERTAINTIES THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROMTHOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS.  FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCEINCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN PART II, ITEM 1A “RISKFACTORS.”*

** **

**Overview**

 

AvocentCorporation designs, manufactures, licenses, and sells software and hardwareproducts and technologies that provide connectivity and centralized managementof information technology (IT) infrastructure. We (meaning Avocent and its wholly-owned subsidiaries) provide connectivity and systems management,endpoint security, and service management products and technologies thatcentralize control of servers, desktop computers, serial devices, wirelessdevices, mobile devices, and network appliances, thus increasing the efficiencyof IT resources.  Server manufacturersresell private-labeled Avocent KVM (keyboard, video, and mouse) switches, LCDtrays, and embedded software and hardware technology in their systems, andcompanies large and small depend on our software and hardware products andtechnologies for managing their growing IT infrastructure.

 

For a more completedescription of our products, technologies and markets, please refer to our Form 10-K,which was filed on February 27, 2009.

 

Most of our revenue isderived from sales to a limited number of OEMs (who purchase our products on aprivate-label or branded basis for integration and sale with their ownproducts), sales through our reseller and distributor network, and sales to alimited number of direct customers. Sales to our branded customers accounted for 67% of sales in the firstquarter of 2009 and 66% of sales in the first quarter of 2008.  Sales to our OEM customers accounted for 33%of sales in the first quarter of 2009 and 34% of sales in the first quarter of2008.  We do not have contracts with manyof our branded customers, and in general, our OEM and branded businesscustomers are obligated to purchase products from us only pursuant to bindingpurchase orders.  Although we are notsubstantially dependent on any one OEM customer, the loss of, or materialdecline in orders from, these customers would have a material adverse effect onour business, financial condition, results of operations, and cash flows.  Our top five customers include both OEM andbranded customers, and accounted for 45% and 46% of sales in the first quarterof 2009 and 2008, respectively.

 

We sell products toresellers, distributors, end-users, and OEMs in the United States, Canada,Europe, and Asia as well as in other foreign markets.  Sales within the United States accounted forapproximately 47% and 52% of first quarter sales in 2009 and 2008,respectively.  Outside the United States,no other country accounted for more than 10% of sales in the first quarter of2009 or 2008.

 

With continuedindustry-wide initiatives to reduce all channel inventories and to shorten leadtimes, trends with our major customers are, generally, to reduce the number ofweeks of forward-committed firm orders. This trend continues to affect our business with certain distributors,OEMs, and other server manufacturers, and we believe that it will continueto make our future sales more difficult to predict and inventory levels moredifficult to manage.  We monitorinventories of our products owned by our major distribution partners and westrive to maintain a level of inventory in our own facilities to service thesecustomers, and monitor these levels to minimize potential exposure of havingexcessive inventory on hand.  A change inthe amount of inventory held by a customer in any one period could adverselyaffect our revenues through reduced orders in that or a subsequent period whichcould have a material impact on our business, financial condition, results ofoperations, and cash flows.

 

We experience significantprice competition in the market for most of our products, and we expect thatpricing pressures will continue in the future. In addition, our business and operating results depend to a significantextent on economic conditions in general and on IT spending in particular, andwe expect our revenue growth rate to fluctuate in relation to economicconditions and IT related spending trends. Any adverse change in IT spending due to adverse economic conditions,declining capital spending levels, or other factors could have a materialadverse effect on our business, financial condition, and results of operations. World-wide efforts to cut capital spending, general economic uncertainty, and aweakening global economy could have a material adverse effect on us.  For 

 

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example, in recentperiods global credit and other financial markets have suffered substantialstress, volatility, illiquidity, and disruption.  This financial crisis and the current globalrecession could have an impact on our business in a variety of ways, includinginsolvency of key suppliers resulting in product delays, inability of customersto obtain credit to finance purchases of our products and customerinsolvencies.  As we evaluate anticipatedimpacts from the global economic uncertainties, we periodically adjust ourspending and related headcount to mitigate the overall impact on our financialresults of any anticipated negative changes. We continually monitor the financial health of our key suppliers andcustomers by constant reviews of our accounts receivable aging and openpurchase orders to ensure our customers are paying in a timely fashion and oursuppliers are meeting our needs so that we can service our customers.

 

Many of our executiveofficers and directors are vested in significant amounts of options to purchaseshares of our common stock and RSUs. These officers and directors have informed us that they have sold, andmay sell additional, shares of our common stock to provide liquidity anddiversify their portfolios.  During thefirst and second quarters of 2008, our Board of Directors granted bothtime-based and market condition-based restricted stock units (RSUs) with twoand three year vesting to our employees, however no such grants have beenissued to date in 2009.

 

During the firstquarter of 2009, we had the following business units:  Management Systems, which includes ourbranded and OEM KVM, embedded software, serial console, power control, LCDtray, and management appliance businesses; LANDesk, which includes****systems, security,and service management solutions for desktops, servers, and mobile devicesacross the enterprise;and Connectivity and Control, which focuses on our audio-visual products.

 

We believe our businessunits allow us to focus on new technology and growth opportunities and to addproduct and shareholder value in the future. We believe this structure enhances customer service, speeds delivery ofproducts to market and better focuses our research, development, and marketingresources.   In the third quarter of 2008we announced our intention to sell or license the technology of the majority ofour emerging Connectivity and Control Business Unit.  We divided this entrepreneurial business unitinto its three product lines; the Equinox branded serial business, theBroadcast business and the Pro Audio Visual business.  We have folded our Broadcast product lineinto Management Systems and intend to sell or license the technology of theremaining two parts of this business. All revenues and costs associated with our broadcast business areincluded within Management Systems and historical results for both ManagementSystems and our other business units have been adjusted to reflect this change.

** **

**Our largest business unit, ManagementSystems, comprised 71% of our consolidated net revenue in the first quarter of2009 and 77% in 2008.  LANDeskcontributed 27% of net revenue to the first quarter of 2009 and 21% in2008.  Our other business units andunallocated revenue comprised the remaining percentage of our consolidated netrevenue in 2009 and 2008.  See Note 6 inthe notes to the condensed c**onsolidated financial statements contained in Part I,Item 1 of this document.

** **

**Resultsof Operations**

 

The following table sets forth, for the periodsindicated, selected statement of income data expressed as a percentage of netsales:

 
| ** **                                                  | ** ** | **For the three months ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                  | ** ** | **March 31, 2009**                       | ** ** | **March 28, 2008** | ** ** |
| Net sales                                                   |       | 100.0                                              | %          | 100.0 | % |
| Cost of sales                                               |       | 35.1                                               |       | 33.5 |   |
| Cost of sales —  amortization of intangibles           |       | 3.6                                                |       | 2.0 |   |
| Gross profit                                                |       | 61.3                                               |       | 64.5 |   |
| Operating  expenses:                                        |       |                                               |       |   |   |
| Research and  development expenses                          |       | 16.3                                               |       | 16.5 |   |
| Selling, general  and administrative expenses               |       | 37.4                                               |       | 39.0 |   |
| Restructuring,  integration and retirement expenses         |       | 4.2                                                |       | 2.1 |   |
| Amortization of  intangible assets                          |       | 8.0                                                |       | 5.3 |   |
| Impairment of  goodwill                                     |       | 63.5                                               |       | — |   |
| Total operating  expenses                                   |       | 129.4                                              |       | 62.9 |   |
|                                                        |       |                                               |       |   |   |
| Income (loss)  from operations                              |       | (68.1                                              | )          | 1.6 |   |
| Net investment  income                                      |       | 0.1                                                |       | 0.6 |   |
| Interest expense                                            |       | (1.8                                               | )          | (1.3 | ) |
| Other income  (expense), net                                |       | (0.9                                               | )          | 0.3 |   |
| Income (loss)  before provision (benefit) from income taxes |       | (70.7                                              | )          | 1.2 |   |
| Provision  (benefit) from income taxes                      |       | (23.1                                              | )          | 0.7 |   |
| Net income  (loss)                                          |       | (47.6                                              | )%         | 0.5 | % |

 

*Net sales.*  Our net salesconsist of sales of keyboard, video, and mouse (KVM) console switching systems,digital connectivity products and technologies, software licenses andsubscriptions, support and maintenance agreements, serial connectivity devices,wireless extension products, IPMI, extension, remote access and managementproducts and technologies, and royalties from licensing our intellectualproperty.

 

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| ** **                        | ** ** | **For the three months ended** | ** ** |
|-----------------------------------|------------|----------------------------------------------------|------------|
| ** **                        | ** ** | **March 31, 2009**                       | ** ** | **% of  Sales** | ** ** | **March 28, 2008** | ** ** | **% of  Sales** | ** ** |
| Customer  distribution net sales: |       |                                               |       |   |   |   |   |   |   |
| Branded                           |       | $                                                  | 84,088     |   | 67 | % | $ | 93,663 |   | 66 | % |
| OEM                               |       | 41,974                                             |       | 33 | % | 47,736 |   | 34 | % |
|                              |       |                                               |       |   |   |   |   |   |   |
|                              |       | $                                                  | 126,062    |   | 100 | % | $ | 141,399 |   | 100 | % |

 

We experienced an 11% decline in sales during thefirst quarter of 2009 from the first quarter of 2008.  The decline in sales was evident in both ourbranded sales, which were down 10% and our OEM sales, which were down 12%.  Branded sales in the U.S. were down 12%,while EMEA and Asia both declined 8%. OEM sales declined 27% in the U.S and 5% in EMEA, but they grewapproximately 10% in Asia in the first quarter of 2009.  We attribute the weakness we experienced insales this quarter primarily to decreased data center purchasing activity,especially lower server purchases, as customers responded to the changes in theglobal economy.  Additionally, foreignexchange rates contributed to our revenue decline for the first quarter of 2009compared to the first quarter of 2008. If we had experienced the same foreign exchange rates in the firstquarter of 2009 as the first quarter a year ago, our revenues would have beenapproximately $5 million higher.

 
| ** **                 | ** ** | **For the three months ended** | ** ** |
|----------------------------|------------|----------------------------------------------------|------------|
| ** **                 | ** ** | **March 31, 2009**                       | ** ** | **% of  Sales** | ** ** | **March 28, 2008** | ** ** | **% of  Sales** | ** ** |
| Business unit  net sales:  |       |                                               |       |   |   |   |   |   |   |
| Management  Systems        |       | $                                                  | 89,402     |   | 71 | % | $ | 108,755 |   | 77 | % |
| LANDesk                    |       | 34,450                                             |       | 27 | % | 29,193 |   | 21 | % |
| Other business  units      |       | 628                                                |       | — |   | 2,675 |   | 2 | % |
| Corporate and  unallocated |       | 1,582                                              |       | 2 | % | 776 |   | — |   |
|                       |       |                                               |       |   |   |   |   |   |   |
|                       |       | $                                                  | 126,062    |   | 100 | % | $ | 141,399 |   | 100 | % |

 

Our Management Systems business unit is comprised ofour traditional KVM products, our serial products and our embedded software andsolutions products.  Management Systemssales decreased approximately 18% in the first quarter 2009 compared to thefirst quarter of 2008, primarily due to the decline in data center and serverpurchasing activity as a result of the global recession.  The decline in revenue was experienced acrossall of Management Systems product lines. Our KVM products sales were down 22%in the first quarter of 2009 from the first quarter of 2008, primarily as aresult of the slower OEM and branded sales across geographic regions.  Management Systems “other” product categoryincludes LCD tray product revenue, from our third quarter acquisition of theassets of Ergo 2000, Inc. Sales of our Ergo LCD trays were approximately$5.9 million in the first quarter of 2009 and accounts for the increase in the “other”product category within Management Systems noted below.  Sales by product line for Management Systemsfor the three months ended March 31, 2009 and March 28, 2008 were asfollows:

 
| ** **                            | ** ** | **For the three months  ended** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                            | ** ** | **March 31,  2009**                                 | ** ** | **March 28,  2008** | ** ** |
| Management  Systems, net revenue:     |       |                                                     |       |   |   |
| KVM                                   |       | $                                                        | 62,201     |   | $ | 79,950 |   |
| Serial  management                    |       | 7,198                                                    |       | 12,719 |   |
| Embedded  software and solutions      |       | 5,977                                                    |       | 8,347 |   |
| Other                                 |       | 14,026                                                   |       | 7,739 |   |
| Total Management  Systems net revenue |       | $                                                        | 89,402     |   | $ | 108,755 |   |

 

LANDesk revenue iscomprised of license-based revenue, primarily from the LANDesk Management Suite product,and subscription-based revenue, primarily from the LANDesk Security Suite productsand from maintenance and support agreements related to LANDesk ManagementSuite.  The first quarter of 2009 LANDeskrevenue also includes $5.8 million in revenue from Touchpaper, which wasacquired in the third quarter of 2008. Compared to the first quarter of 2008, LANDesk revenues increased 18%during the first quarter of 2009, as a result of the additional revenue fromTouchpaper.  Sales by product line forLANDesk for the three months ended March 31, 2009 and March 28, 2008are as follows:

 

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| ** **                 | ** ** | **For the three months ended** | ** ** |
|----------------------------|------------|----------------------------------------------------|------------|
| ** **                 | ** ** | **March 31,  2009**                           | ** ** | **March 28,  2008** | ** ** |
| LANDesk net  revenue:      |       |                                               |       |   |   |
| Licenses and  royalties    |       | $                                                  | 17,191     |   | $ | 17,042 |   |
| Maintenance and  services  |       | 17,259                                             |       | 12,151 |   |
| Total LANDesk  net revenue |       | $                                                  | 34,450     |   | $ | 29,193 |   |

 

International salesdeclined slightly by 1% in the first quarter of 2009 from the first quarter of2008, while sales within the United States declined approximately 20% over thesame period.  As mentioned previously,the global recession negatively affected both our U.S. and internationalrevenue in the first quarter of 2009. Our international sales would have experienced a greater decline if notfor to the inclusion of Touchpaper revenue in the first quarter of 2009.  Touchpaper’s revenue is comprised almostentirely of sales outside the United States.

 
| ** **                             | ** ** | **For the three months ended** | ** ** |
|----------------------------------------|------------|----------------------------------------------------|------------|
| ** **                             | ** ** | **March 31,  2009**                           | ** ** | **% of  Sales** | ** ** | **March 28,  2008** | ** ** | **% of  Sales** | ** ** |
| Geographical  distribution, net sales: |       |                                               |       |   |   |   |   |   |   |
| United States                          |       | $                                                  | 59,606     |   | 47 | % | $ | 74,218 |   | 52 | % |
| International                          |       | 66,456                                             |       | 53 | % | 67,181 |   | 48 | % |
|                                   |       |                                               |       |   |   |   |   |   |   |
|                                   |       | $                                                  | 126,062    |   | 100 | % | $ | 141,399 |   | 100 | % |

 

*Grossprofit.* Grossprofit is affected by a variety of factors, including the ratio of sales amongour distribution channels, as OEM sales typically have lower gross margins thanour branded sales; absorption of fixed costs as sales levels fluctuate; productmix and component costs; labor costs; new product introductions by us and byour competitors; increasing sales of our software products which tend to havehigher gross margins; and our outsourcing of manufacturing and assemblyservices.

 
| ** **                              | ** ** | **For the three months ended** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------|------------|
| ** **                              | ** ** | **March 31, 2009**                       | ** ** | **Gross  Margin  %** | ** ** | **March 28, 2008** | ** ** | **Gross  Margin  %** | ** ** |
| Management  Systems                     |       | $                                                  | 50,981     |   | 57.0 | % | $ | 66,514 |   | 61.7 | % |
| LANDesk                                 |       | 29,688                                             |       | 86.2 | % | 25,339 |   | 86.8 | % |
| Other business  units                   |       | 277                                                |       | 44.1 | % | 1,548 |   | 41.8 | % |
| Corporate and  unallocated              |       | 1,085                                              |       |   |   | 744 |   |   |   |
| Stock-based  compensation               |       | (223                                               | )          |   |   | (244 | ) |   |   |
| Intangible  amortization —software |       | (4,558                                             | )          |   |   | (2,767 | ) |   |   |
| Gross profit  dollars and margin %      |       | $                                                  | 77,250     |   | 61.3 | % | $ | 91,134 |   | 64.5 | % |

 

The decline ingross margin resulted primarily from lower sales volume at Management Systems,which was partially offset by increased sales of higher margin softwareproducts at LANDesk.  The decline inoverall gross profit was the result of lower sales volume while certain of ourexpenses included in cost of sales remained fixed.  LANDesk sales grew 18% in the first quarterof 2009 as a result of the Touchpaper acquisition, compared to the firstquarter of 2008.  However, the increasein LANDesk sales was not enough to offset the sales declines experienced byManagement Systems.  Management Systemsrevenue decreased almost 18% in the first quarter of 2009 compared to the firstquarter of 2008.

 

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*Operatingexpenses.*

 
| ** **                                          | ** ** | **For the three months ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **March 31,  2009**                           | ** ** | **% of  Sales** | ** ** | **March 28,  2008** | ** ** | **% of  Sales** | ** ** |
|                                                |       |                                               |       |   |   |   |   |   |   |
| Research and  development expense                   |       | $                                                  | 20,491     |   | 16.3 | % | $ | 23,367 |   | 16.5 | % |
| Selling,  general, and administrative expense       |       | 47,167                                             |       | 37.4 | % | 55,119 |   | 39.0 | % |
| Restructuring,  integration and retirement expenses |       | 5,295                                              |       | 4.2 | % | 2,971 |   | 2.1 | % |
| Amortization of  intangible assets                  |       | 10,113                                             |       | 8.0 | % | 7,535 |   | 5.3 | % |
| Impairment of  goodwill                             |       | 80,000                                             |       | 43.6 | % | — |   |   |   |
|                                                |       |                                               |       |   |   |   |   |   |   |
| Total operating  expenses                           |       | $                                                  | 163,066    |   | 109.5 | % | $ | 88,992 |   | 62.9 | % |

 

*Research and development expenses.* Research and development expenses include compensation for engineers,support personnel, outside contracted services, and materials costs, all ofwhich are expensed as incurred.  R&Ddecreased 12% in the first quarter of 2009 from the first quarter of 2008. Thedecrease in R&D expense is primarily attributable to the effect of ourre-alignment, restructuring and cost-cutting efforts first implemented at theend of the second quarter of 2008. Salaries and wages decreased approximately $600,000 and contractedservices declined $1.2 million from the first quarter of 2008 to the firstquarter of 2009 as a result of these activities.  We continue to invest in targeted integratedR&D projects, including Avocent Management Platform, real-timevisualization and power management. These projects leverage technology from both Management Systems andLANDesk.  We believe that the timelydevelopment of innovative products and enhancements to existing products isessential to maintaining our competitive position, and we will continue to makesignificant investments in research and development.

 

***Selling,general and administrative expenses.***  Selling, general and administrative expensesinclude personnel, materials, services and other related costs foradministration, finance, information systems, human resources, sales andmarketing and general management, rent, utilities, legal and accountingexpenses, bad debts, advertising, promotional material, trade show expenses,and related travel costs.  Selling,general and administrative expenses decreased 14% in the first quarter of 2009from the first quarter of 2008. The decrease in selling, general andadministrative expenses was attributed to the effect of our cost-cuttingefforts first implemented at the end of the second quarter of 2008 and lowersales commissions incurred as a result of lower sales volume.  The resultsof our cost cutting measures were evident in reduced trade show and travelcosts.  Trade show expenses decreasedapproximately $1.0 million while travel-related expenses decreasedapproximately $2.0 million in the first quarter of 2009 compared to the sameperiod in 2008.  Additionally, legal feesdecreased almost $800,000 in the first quarter of 2009 compared with the first quarterof 2008.

** **

*Restructuring, integration and retirement expenses**. ***Restructuring, integration and retirement expenses of $5.3 million for the first quarter of 2009 relate to severance charges incurred for workforce reductions in connection with our realignment of resources,  integration of marketing functions, and integration of our 2008 acquisitions into our operations.  Restructuring and retirement expenses of $2.9 million for the first quarter of 2008 related to the retirement costs for our former CEO and severance charges incurred due to the termination of certain research and development activities.

** **

***Amortizationof intangible assets***. Amortization was $10.1 million and $7.5 million for the three monthsended March 31, 2009 and March 28, 2008, respectively.  The increase in amortization for 2009 was dueto the amortization of intangible assets related to our acquisitions ofTouchpaper and Ergo, completed early in the third quarter of 2008.

** **

***Impairment ofgoodwill.*** The $80.0 million preliminary impairment of goodwill relates entirely tothe write-off of a portion of goodwill associated with the LANDesk businessunit in the first quarter of 2009.  Asprescribed under Statement of Financial Accounting Standard No. 142, weperformed an impairment review during the first quarter of 2009 as a result ofthe continued decline in our stock price and those of comparablecompanies.  The resulting interim impairmentanalysis determined that the goodwill associated with LANDesk was impaired byan estimated amount of $80.0 million.  Thefinal impairment amount may be materially different from this estimate.  No other business unit was determined to havean impairment at the time of the impairment analysis. (See updates to criticalaccounting policies elsewhere in Part I, Item 2 of this filing.)  There could be additional impairment in thefuture depending on the current recessionary environment and the resultingimpact on our business, our stock price, and market valuations of companies inour peer group.

** **

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** **

*Stock-based Compensation. *Weallocate stock-based compensation expense based on the functional area in whichan employee works.  Stock compensationexpenses for the first quarter 2009 and 2008 were as follows:

 
| ** **                                   | ** ** | **For the three months ended** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                   | ** ** | **March 31,  2009**                           | ** ** | **% of  Sales** | ** ** | **March 28,  2008** | ** ** | **% of**

**Sales** | ** ** |
| Stock-based  compensation:                   |       |                                               |       |   |   |   |   |   |   |
| Cost of sales                                |       | $                                                  | 223        |   |   |   | $ | 244 |   |   |   |
| Research and  development expense            |       | 577                                                |       |   |   | 1,015 |   |   |   |
| Selling, general  and administrative expense |       | 2,445                                              |       |   |   | 2,679 |   |   |   |
| Restructuring  and retirement expense        |       | 49                                                 |       |   |   | 615 |   |   |   |
|                                         |       |                                               |       |   |   |   |   |   |   |
|                                         |       | $                                                  | 3,294      |   | 2.6 | % | $ | 4,553 |   | 3.3 | % |

 

Stock-basedcompensation decreased 28% in the first quarter 2009 from the first quarter2008 primarily as a result of recording $615,000 of charges associated with theacceleration of vesting for certain RSUs and other equity related charges in2008, while similar charges totaled only $49,000 in the first quarter of2009.  Additionally, our CompensationCommittee approved the grant of time-based and market condition-basedrestricted stock units to our officers in the first quarter of 2008 while nosuch grant was made in the first quarter of 2009, which further reducedstock-based compensation in the first quarter of 2009.

* *

*Netinvestment income**.** *Net******investmentincome decreased to $151,000 in the first quarter of 2009 as compared to$897,000 in the first quarter of 2008. This decline was primarily the result oflower interest rates during the comparative periods.

* *

*Interestexpense.*Interestexpense was $2.2 million and $1.8 million in the first quarter of 2009 and2008, respectively.  Interest expenseresults from borrowings under our $250 million unsecured line of credit and our$90 million term loan.  Interest expenseincreased in 2009 compared to 2008 due to higher borrowings as we borrowed anadditional $50 million to partially fund the acquisitions of Touchpaper andErgo in July 2008.

* *

*Other income (expense), net.* Net other income (expense) declined from income of $455,000 in the firstquarter of 2008 to expense of $1.2 million in the first quarter of 2009.  The increase in expense primarily is theresult of increased net foreign currency transaction losses of approximately$1.4 million over the comparative period.

 

*Provisionfor income taxes.*  The effective tax rate in the first quarterof 2009 was a benefit of 32.8% compared to a provision of 55.9% in the firstquarter of 2008.  The benefit for incometaxes was $29.2 million for the first quarter of 2009, compared to a provisionof $925,000 in the first quarter of 2008. The change in the effective tax rate was primarily attributable to thechange in the amount and mix of our pretax book income within taxablejurisdictions and a tax benefit recognized to record a deferred tax assetassociated with a goodwill impairment charge. We adopted FASB Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes, an interpretation of FASB Statement No. 109” on January 1,2007.  As of March 31, 2009, we hadtotal reserves for uncertain tax positions related to gross unrecognized taxbenefits of $5.6 million, of which $4.3 million if recognized, would affect theeffective tax rate.

 

*Netincome (loss).*  Net income (loss) for the first quarter of2009 was a loss of $59.9 million compared to $731,000 of income for the firstquarter of 2008, as a result of the factors detailed in the above discussion.  Net income (loss), as a percentage of salesfor the first quarter of 2009 was (47.6)%, compared to 0.5% for the firstquarter of 2008.

 

**Liquidityand Capital Resources**

 

As of March 31,2009, our principal sources of liquidity consisted of $109 million in cash andcash equivalents and $170 million available from our $340 million creditfacility that is available for general corporate purposes.  The balance of the entire facility is due in June 2011.  The term loan and line of credit have similarvariable interest rates.

 

The line of credit and term loan contain affirmativeand negative covenants, including limitations on our ability to (i) makedistributions, investments, and other payments unless we satisfy certainfinancial tests or other criteria, (ii) incur additional indebtedness, (iii) restructureour subsidiaries, and (iv) make acquisitions and capitalexpenditures.  The financial testsinclude an interest coverage ratio and a total leverage ratio.  We are currently in compliance with thesecovenants and related tests as of March 31, 2009.  All of these restrictions could affect ourability to operate our business and may limit our ability to take advantage ofpotential business opportunities as they arise. The failure to comply with these covenants could result in an event ofdefault which, if not cured or waived, could have a material adverse effect onus.

 

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The line of credit andterm loan currently bear an interest rate of LIBOR plus 150 basis points.  There was $170 million outstanding under thecredit facility as of March 31, 2009. We classify these obligations as long-term as they mature in June 2011.  We expect to repay the borrowings throughfuture cash flows from operations.   Asummary of our cash flows is as follows:

 
| ** **                               | ** ** | **For the Three months ended** | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                               | ** ** | **March 31,  2009**                           | ** ** | **March 28,  2008** | ** ** |
| Total cash  provided by (used in):       |       |                                               |       |   |   |
| Operating  activities                    |       | $                                                  | 2,147      |   | $ | 4,701 |   |
| Investing  activities                    |       | (4,770                                             | )          | 3,620 |   |
| Financing  activities                    |       | (14,722                                            | )          | (17,824 | ) |
| Effect of  exchange rate changes on cash |       | (582                                               | )          | 2,814 |   |
| Decrease in cash  and cash equivalents   |       | $                                                  | (17,927    | ) | $ | (6,689 | ) |

 

The decline in cash flow from operations in the first quarter of 2009 was primarily the result of decreases in accounts payable, accrued wages and commissions and accrued other liabilities combined with an increase in inventory.  These changes were offset somewhat by a decrease in accounts receivable. Accrued wages and commissions were $9.7 million lower at March 31, 2009, primarily as result of paying our 2008 bonuses during the first quarter of 2009 and due to lower accrued commissions at the end of the period as a result of lower sales during the quarter.  Additionally, our accounts payable declined by $5.6 million as a result of reduced inventory purchases later in the quarter as we reacted to our significantly lower sales volume.  However, inventory increased approximately $6.5 million during the first quarter 2009.  Our reduced purchases during the quarter were not enough to offset inventory receipts from prior purchase commitments.  These prior purchase commitments were made when we were anticipating a much higher sales volume for the first quarter of 2009.  Our accounts receivable decreased $22.2 million from December 31, 2008 to March 31, 2009 as a result of the lower sales volume.

 

Our days sales outstanding (DSO) increased to 73 days at the end of the first quarter 2009 compared to 69 days at the end of the first quarter of 2008.  DSO increased primarily as a result of the weakened economy driving slightly longer payment trends with some of our customers in the first quarter of 2009 compared to the first quarter of 2008. As previously mentioned, inventories increased $6.5 million from December 31, 2008 to March 31, 2009.  Consequently, our inventory turns declined to 4.5 at the end of the first quarter of 2009 compared to 5.7 at the end of the first quarter of 2008, primarily as a result of our lower sales volume experienced in the first quarter of 2009.

 

Our investing activitiesused $4.8 million of cash flow in the first quarter of 2009, primarily to payan additional $4.1 million of consideration previously accrued for LANDesk andTouchpaper.  Our investing activitiesproduced $3.6 million of positive cash flow in the first quarter of 2008,primarily as we converted matured investments to cash for use in paying downour borrowings under the outstanding line of credit and for purchase of ourtreasury shares.

 

Our financing activitiesused cash on hand to repurchase 1 million shares of our common stock during thefirst quarter of 2009 at a cost totaling $12 million.  Our financing activities used the cashprovided by operations and investing activities, as well as additional borrowings,to repurchase approximately 4 million shares of our common stock during thefirst quarter of 2008 at a cost totaling $63 million.  These treasury shares were purchased throughvarious brokers under the stock repurchase program approved by our Board ofDirectors.  As of March 31, 2009 wehave approximately 1.1 million shares available for purchase under the program.

 

We may use a portion ofour cash and cash equivalents or our line of credit for strategic acquisitionsof technologies and companies that we believe will enhance and complement ourexisting technologies and help increase our sales.

 

In fiscal July 2008, and again in January 2009,we announced a series of actions designed to enhance competitiveness, improveour efficiency, and reduce our cost structure. We initiated workforce reduction and consolidation actions designed tointensify our focus on our growth areas and improve our operatingefficiency.  The restructuring includedactions to increase our organizational efficiency, reduce certain research anddevelopment investments in lower growth product areas, integrate our marketingfunctions, and shift support for our Asian operations from Shannon, Ireland, toour recently-established regional hub in Singapore.  We also relocated certain functions fromRedmond, Washington to Huntsville, Alabama.

** **

**Off-Balance Sheet Arrangements andContractual Obligations**

 

In the ordinarycourse of our business, we may at any point in time have a significant amountof contractual commitments not yet recognized in our financial statements.  These commitments relate primarily to ourneed to schedule the purchase of inventories in advance of the relatedforecasted sales to customers.  We havelonger lead times for the products we purchase from suppliers based in Asiathan those for our U.S. based and European based suppliers.  Our actual contractual commitments aretypically limited to products needed for one to three months of forecastedsales.  The liabilities for theseinventory purchases, along with the related 

 

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inventory assets,are typically recognized upon our receipt of the products.  We also have, at any point in time, a varietyof short term contractual commitments for services such as advertising,marketing, accounting, legal, and research and development activities.  The liabilities for these services and therelated expenses are typically recognized upon our receipt of the relatedservices.  In our 2008 Form 10-K, wedisclosed our contractual obligations in the section entitled “Off-Balance Sheet Arrangements andContractual Obligations” in Part II Item 7. At March 31, 2009,there have been no material changes to contractual obligations outside theordinary course of business.  Our debtbalance remained $170 million at March 31, 2009, consistent with thebalance at December 31, 2008.

 

Other than operatingleases for offices and warehouse space, we do not engage in off-balance sheetfinancing arrangements or have any variable-interest entities. As of March 31,2009 we did not have any off-balance sheet arrangements as defined in Item303(a)(4)(ii) of SEC Regulation S-K.

 

**Non-GAAP Operational Measures**

 

To supplement our consolidated financialstatements presented in accordance with GAAP, we present investors with certainnon-GAAP operational measures which we use internally to manage our business,including gross profit, operating expenses, and the resulting operating income,income before taxes, operational net income, and operational earnings pershare, all of which primarily exclude the effects of amortization related topurchase accounting adjustments, estimated goodwill impairment expense,stock-based compensation, and restructuring, integration and retirement  expenses. Specifically, we use the following non-GAAP measures:

 
| ** **                                  | ** ** | **For the three months ended** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------|------------|
| **Non-GAAP Operational Measures** | ** ** | **March 31,  2009**                           | ** ** | **March 28,  2008** | ** ** |
|                                        |       |                                               |       |   |   |
| Operational  gross profit                   |       | $                                                  | 82,031     |   | $ | 94,145 |   |
| Operational  operating income               |       | $                                                  | 17,395     |   | $ | 19,355 |   |
| Operational net  income                     |       | $                                                  | 11,217     |   | $ | 14,468 |   |
| Operational  diluted earnings per share     |       | $                                                  | 0.25       |   | $ | 0.31 |   |

 

·                  Thenon-GAAP gross profit operational measure consists of net sales, less cost ofsales, excluding the impact of stock-based compensation and amortizationrelated to purchase accounting adjustments as they relate to cost of sales.

 

·                  Thenon-GAAP operating expense operational measure consists of GAAP operatingexpenses, excluding the impact of stock-based compensation, restructuring,integration and  retirement expenses,estimated goodwill impairment expense and amortization related to purchaseaccounting adjustments as they relate to the particular operating expense.

 

·                  Thenon-GAAP operating income operational measure consists of GAAP operating incomeadjusted for the non-GAAP operational measures described above.

 

·                  Thenon-GAAP net income operational measure consists of GAAP net income, adjustedby the non-GAAP operational measures described above and the tax effects ofthese non-GAAP operational measures plus the income tax benefit realized fromdeducting the amortization of LANDesk goodwill for tax purposes (which is notamortized under GAAP).

 

·                  Thenon-GAAP earnings per share operational measure is calculated by dividing thenon-GAAP net income operational measure described above by GAAP weightedaverage basic and diluted shares outstanding.

 

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We provide the followingreconciliations between GAAP and our operational measures:

 
| ** **                              | ** ** | **GAAP**                                           | ** ** | ** **       | ** ** | **Impairment  & Purchase** | ** ** | **Restructuring,  Integration** | ** ** | **Non-GAAP**    | ** ** |
|-----------------------------------------|------------|----------------------------------------------------|------------|------------------|------------|-------------------------------------|------------|---------------------------------|------------|-----------------|------------|
| ** **                              | ** ** | **Financial**                                      | ** ** | **Stock-based**  | ** ** | **Accounting**                      | ** ** | **and Retirement**         | ** ** | **Operational** | ** ** |
| ** **                              | ** ** | **Measures**                                       | ** ** | **Compensation** | ** ** | **Adjustments**                     | ** ** | **Expenses**                    | ** ** | **Measures**    | ** ** |
| ** **                              |       | **For the three months ended March 31, 2009** |       |
|                                    |       |                                               |       |             |       |                                |       |                            |       |            |       |
| Operational  gross profit               |       | $                                                  | 77,250     |             | 223        |                                | 4,558      |                            | —     |            | $          | 82,031 |   |
| Operational  operating income           |       | $                                                  | (85,816    | )                | 3,294      |                                | 94,671     |                            | 5,246      |            | $          | 17,395 |   |
| Operational net  income                 |       | $                                                  | (59,925    | )                | 2,619      |                                | 64,352     |                            | 4,171      |            | $          | 11,217 |   |
| Operational  diluted earnings per share |       | $                                                  | (1.34      | )                | 0.06       |                                | 1.44       |                            | 0.09       |            | $          | 0.25 |   |

 
| ** **                              |   | **For the three months ended March 28, 2008** |   |
|-----------------------------------------|--------|----------------------------------------------------|--------|
|                                    |   |                                               |   |   |   |   |   |   |   |   |   |
| Operational  gross profit               |   | $                                                  | 91,134 |   | 244 |   | 2,767 |   | — |   | $ | 94,145 |   |
| Operational  operating income           |   | $                                                  | 2,142  |   | 4,553 |   | 10,304 |   | 2,356 |   | $ | 19,355 |   |
| Operational net  income                 |   | $                                                  | 731    |   | 3,491 |   | 8,440 |   | 1,806 |   | $ | 14,468 |   |
| Operational  diluted earnings per share |   | $                                                  | 0.02   |   | 0.07 |   | 0.18 |   | 0.04 |   | $ | 0.31 |   |

 

We believe that excluding amortizationassociated with purchase accounting adjustments and the estimated goodwillimpairment expense, as well as the tax impact of certain purchase accountingelections for prior acquisitions provides meaningful supplemental informationand an alternative presentation useful to investors’ understanding our coreoperating results and trends between periods. Not only are these depreciation and amortization and tax impactadjustments based on amounts assigned in purchase accounting, that may havelittle bearing on present or future replacement costs, but they also are basedon management’s estimates of remaining useful lives.

 

Similarly, we believe that excluding stock-basedcompensation and restructuring, integration and retirement expenses providesmeaningful supplemental information and an alternative presentation useful toinvestors’ understanding of our core operating results and trends, especiallywhen comparing those results on a consistent basis to results for previousperiods and anticipated results for future periods.

 

We also believe that, in excluding stock-basedcompensation and restructuring, integration and retirement expenses, estimatedgoodwill impairment expense and amortization associated with purchaseaccounting adjustments (together with the related tax effects), our non-GAAPfinancial measures provide investors with transparency into the information andbasis used by management and our Board of Directors to measure and forecast ourresults of operations, to compare on a consistent basis our results ofoperations for the current period to that of prior periods, to compare ourresults of operations on a more consistent basis against that of other companiesin making financial and operating decisions, and to establish targets formanagement incentive compensation.

 

These non-GAAP operational measures havehistorically been used as key performance metrics by our senior management asthey evaluate both the performance of the consolidated financial results aswell as those of individual business segments. These non-GAAP operational measures are reviewed individually as well asin total in measuring our performance against internal and externalexpectations for the period and the expectations for such key non-GAAPoperational measures are the basis for any financial guidance provided bymanagement for future periods.  Webelieve that the use of each of these non-GAAP financial measures providesenhanced consistency and comparability with our past financial reports, andalso facilitates comparisons with other companies in our industry, many ofwhich use similar non-GAAP financial measures to supplement their GAAP results. We provide this information to investors to enable them to performadditional analyses of past, present and future operating performance, compareus to other companies, and evaluate our ongoing financial operations.

 

We believe that each of these operationalmeasures is useful to investors in their assessment of our operatingperformance and the valuation of our company.   Operational net sales,gross profit, operating income, operational net income, and operationalearnings per share are significant measures used by management for:

 

·                  Reportingour financial results and forecasts to our Board of Directors;

 

·                  Evaluatingthe operating performance of our company;

 

·                  Managingand comparing performance internally across our businesses and externallyagainst our peers; and

 

·                  Establishinginternal operating targets.

 

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These non-GAAP operational measures, includingoperational net sales, operational gross profit, operational operating income,operational net income, and operational earnings per share are used by us asbroad measures of financial performance that encompass our operatingperformance, cash, capital structure, investment management, and income taxplanning effectiveness.  These operational measures are not calculated inaccordance with GAAP, and should be considered supplemental to, and not as asubstitute for, or superior to, financial measures calculated in accordancewith GAAP.  These operational measures have limitations in that they donot reflect all of the costs associated with the operations of our business asdetermined in accordance with GAAP.  Inaddition, these operational measures may not be comparable to non-GAAPfinancial measures reported by other companies.  As a result, one shouldnot consider these measures in isolation or as a substitute for analysis of ourresults as reported under GAAP.  We compensate for these limitations byanalyzing current and future results on a GAAP basis as well as a non-GAAPbasis, prominently disclosing GAAP results and providing reconciliations fromGAAP results to non-GAAP operational measures.  We expect to continue toincur expenses similar to the non-GAAP adjustments described above, and theexclusion or inclusion of these items from our non-GAAP financial measuresshould not be construed as an inference that these costs are unusual orinfrequent.  One of the limitations inrelying on our non-GAAP financial measures is that the non-GAAP gross profit,operating income, net income, and earnings per share operational measures arelimited in that they do not include the impact of stock-based compensationexpense or specific costs and benefits associated with certain purchaseaccounting adjustments or,restructuring, integration and retirement expenses.

 

We compensate for these limitations byprominently disclosing the reported GAAP results and providing investors withreconciliations from GAAP to the non-GAAP measures in the financial tablesabove.

 

**Recently Issued Accounting Standards andRegulatory Standards**

 

InSeptember 2006, the FASB issued SFAS No. 157, “*Fair ValueMeasurements,*” (SFAS 157), which was effective for fiscal yearsbeginning after November 15, 2007 and for interim periods within thoseyears. We adopted SFAS 157 as of January 1, 2008, with the exception ofthe application of the statement to nonfinancial assets and nonfinancialliabilities, which include those measured at fair value in goodwill impairmenttesting, indefinite lived intangible assets measured at fair value forimpairment testing, and those initially measured at fair value in a businesscombination.  We adopted the provisionsof SFAS 157 that pertain to the nonfinancial assets and nonfinancialliabilities as of January 1, 2009.

 

InDecember 2007, the FASB issued SFAS No. 141(R), “*Business Combinations”* (SFAS 141(R)),which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how anacquirer in a business combination recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, and anycontrolling interest; recognizes and measures the goodwill acquired in thebusiness combination or a gain from a bargain purchase; and determines whatinformation to disclose to enable users of the financial statements to evaluatethe nature and financial effects of the business combination.  SFAS 141(R) is to be appliedprospectively to business combinations for which the acquisition date is on orafter an entity’s fiscal year that begins after December 15, 2008.  Since we have significant acquired deferredtax assets for which full valuation allowances were recorded at the acquisitiondate, SFAS 141(R) could materially affect the results of operations ifchanges in the valuation allowances occur after adoption of the standard.  We will assess the impact of SFAS 141(R) onfuture acquisitions, however the application of SFAS 141(R) will result ina significant change in accounting for any such future acquisitions after theeffective date.

 

In March 2008, theFASB issued SFAS No. 161, “*Disclosures aboutDerivative Instruments and Hedging Activities*” (SFAS 161). SFAS 161requires companies with derivative instruments to disclose information thatwould enable financial statement users to understand how and why a company usesderivative instruments, how derivative instruments and related hedged items areaccounted for under SFAS No. 133, “*Accounting for DerivativeInstruments and Hedging Activities*,” (SFAS 133) and how derivativeinstruments and related hedged items affect a company’s financial position,financial performance and cash flows. The new requirements apply to derivativeinstruments and non-derivative instruments that are designated and qualify ashedging instruments and related hedged items accounted for under SFAS 133. SFAS161 is effective for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008. We adopted  SFAS 161 on January 1, 2009 and it didnot have a material impact on our financial statements.

 

In April 2008, theFASB issued FASB Staff Position No. 142-3, “Determination of the UsefulLives of Intangible Assets”, which amends the factors that should be consideredin developing renewal or extension assumptions used to determine the usefullife of an intangible asset.  Thisinterpretation is effective for financial statements issued for fiscal yearsbeginning after December 15, 2008 and interim periods within thoseyears.  We adopted the interpretation on January 1,2009 and it did not have a material impact on our financial statements.

 

**On April 9,2009, the Financial Accounting Standards Board (FASB) issued FASB StaffPosition (FSP) No. FAS 157-4 “Determining Fair Value When the Volume andLevel of Activity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4provides guidance for determining whether a market is inactive and atransaction is**

 

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** **

**distressed inorder to apply the existing fair value measurement guidance in FASB Statementof Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements”..  FSP FAS 157-4 also requires enhanceddisclosures regarding financial assets and liabilities that are recorded atfair value. This FSP is effective for interim and annual reporting periodsending after June 15, 2009.  We willevaluate this FSP further, but do not expect its adoption to have a materialimpact on our financial condition and results of operations.**

** **

**Updates to Critical Accounting Estimates**

** **

·                  As discussed in Notes 7 and 14 to theCondensed Consolidated Financial Statements, we have adopted SFAS 161 as of January 1,2009.  The statement requires certaindisclosures surrounding derivatives and hedges. We have interest rate swaps that qualify as derivative instruments andare classified as cash flow hedges.

 

·                  As discussed below and in Note 11 to theCondensed Consolidated Financial Statements, we have adopted SFAS 157 as of January 1,2009 as it applies to the application of the statement to nonfinancial assetsand nonfinancial liabilities. During the first quarter of 2009 we measured our goodwillat fair value based upon Level 3 inputs, as defined under SFAS 157. We determine the fair value of our reportingunits through a discounted cash flow analysis, utilizing the income approach,and a guideline public company method, utilizing a market approach, and weightthe results of each valuation in determining the fair value of the reportingunits.

 

**·****                **The $80.0 million adjustment to LANDesk goodwill wasthe result of a preliminary impairment charge recorded during the three monthsended March 31, 2009.  In accordancewith FASB Statement No. 142, *Goodwill and IntangibleAssets* (FASB 142), we evaluate the carrying value of goodwill for potential impairment annuallyduring the fourth quarter of each year or on an interim basis if an eventoccurs or circumstances change that indicate that the fair value of a reportingunit is likely to be below its carrying value. Our fourth quarter 2008 impairment test concluded that there had been noimpairment of goodwill; however there were certain factors noted during the2008 testing that would require continued monitoring, especially related to anypotential future decline in our market capitalization.  During the first quarter of 2009, weconcluded that interim impairment testing was required due to the continueddeterioration in the global economic environment, the resulting decrease in ourmarket capitalization to less than the book value of our shareholders’ equity,and declining market valuations for many other companies in our peer group.  Additionally, we revisited our five yearforecast in light of the continuing global recession.  Based on that trend, we revised our five yearforecast to reduce estimated revenues and expenses.

** **

**For internal purposes, we prepare business unit operatingstatements (operating segment level) which include revenue, cost of goods sold,operating expenses and operating margin for the following three operatingsegments (or business units): Management Systems (MS), LANDesk, andConnectivity and Control, as well as Corporate and Unallocated.  Our Management Systems business unit alsoincludes the reporting unit AESS.  Weperform our goodwill impairment test in two steps. Step one compares the fairvalue of each reporting unit (operating segment) to its carrying amount. Ifstep one indicates that an impairment potentially exists, the second step isperformed to measure the amount of impairment, if any. Goodwill impairmentexists when the estimated fair value of goodwill is less than its carryingvalue.**

** **

**For purposes of the step one analysis, fair value of ourreporting units was determined through the use of a combination of a discountedcash flow analysis, utilizing the income approach, and the guideline publiccompany method, utilizing a market approach. The result of each valuation was weighted in determining the fair valueof the reporting units. Under the market approach, the fair value of eachreporting unit is determined based upon comparisons to public companies engagedin similar businesses. Under the income approach, the fair value of eachreporting unit was based on the present value of estimated future cash flows.The income approach is dependent on a number of significant managementassumptions including estimated demand in each geographic market and thediscount rate. The discount rate is commensurate with the risk inherent in theprojected cash flows and reflects the rate of return required by an investor inthe current economic conditions. Based on our assessment of these economicconditions, the weighting applied to the market approach for the March 1, 2009valuation was decreased from 50% to 40% and while the weighting for the incomeapproach was increased from 50% to 60%, as compared to the assumptions as ofOctober 1, 2008.  This change wasconsidered appropriate as it reflects our longer term view, including ourrevised cash flow projections based on current expectations, while continuingto reflect the impact of declining equity values in this highly volatile equitymarket impacting our stock price and the stock price of many of our peers.**

** **

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** **

**The results of our step on test as of March 1, 2009indicated that the implied fair value of each of our reporting units exceededtheir carrying value, with the exception of LANDesk.  We calculated the fair value of our largest reportingunit, Management Systems, to be $184 million higher, or approximately 35%, thanits carrying value of $520 million.  Ourremaining reporting units are not material to our financial statements, howeverwe calculated the combined fair value of these reporting units to be $49million higher, or well over double, their combined carrying value of $20million.  **

** **

**Due to the complexities involved in step two in determiningthe implied fair value of the goodwill of the LANDesk reporting unit, we havenot finalized our evaluation as of the filing of this Quarterly Report on Form10-Q for the first quarter of 2009. However, based upon the work performed todate, we have concluded that an impairment is probable and can be reasonablyestimated. Accordingly, we have recorded an $80 million charge representing ourbest estimate of the impairment of LANDesk goodwill for the quarter ended March31, 2009.**

** **

**The goodwill impairment charge is subject to change as wecomplete our evaluation, and any resulting change could vary materially fromthe estimate recorded during the first quarter of 2009.  We will record any difference during thesecond quarter of 2009. **

** **

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** **

Other than these changes,there have been no significant changes in our critical accounting estimatesduring the first three months of 2009.

 

**Item 3.**  **Quantitative and Qualitative Disclosures About Market Risk.**

 

Our primary market riskis the interest rate risk on our bank line of credit, which currently bearsinterest at a variable rate of LIBOR plus 150 basis points.  We have partially hedged this exposure tointerest rate risk with interest rate swaps, which have a remaining notionalamount of $150 million, with Regions Bank and SunTrust Bank.

 

We also face foreign currency exchange rate risk tothe extent that the value of certain foreign currencies relative to the U.S.dollar affects our financial results. Our international operations transact a significant portion of ourbusiness in currencies other than the U.S. dollar, predominantly the euro, andchanges in exchange rates may positively or negatively affect our revenue,gross margins, operating expenses, and retained earnings since thesetransactions are reported by us in U.S. dollars.  We occasionally purchase foreign currencyforwards aimed at limiting the impact of currency fluctuations.  These instruments provide only limitedprotection against currency exchange risks, and there can be no assurance thatsuch an approach will be successful, especially if a significant and suddendecline occurs in the value of local currencies.  As of March 31, 2009, we had five openforward contracts with an approximate fair value of $(1,200).

 

**Item 4.** **Controls and Procedures.**

 

(a) *Evaluation of disclosurecontrols and procedures.*    Basedon their evaluation as of March 31, 2009, our Chief Executive Officer andChief Financial Officer have concluded that our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934) are effective.

 

(b) *Changes in internal control over financial reporting*.    There were no changes in our internalcontrols over financial reporting during the quarter ended March 31, 2009that materially affected or are reasonably likely to materially affect, ourinternal controls over financial reporting.

 

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### **PART II —OTHER INFORMATION**

 

**Item 1.    Legal Proceedings.**

 

In January 2007,we filed a complaint for patent infringement in the United States DistrictCourt for the Western District of Washington against Aten Technology, Inc.,Aten International Co., Ltd, Belkin Corporation, Rose Electronics and itsgeneral partners, and Trippe Manufacturing Company.  The defendants filed counterclaims allegingnon-infringement, unenforceability, and invalidity.  In May 2007, we entered into aSettlement and License Agreement with Trippe Manufacturing, and dismissedTrippe from the lawsuit.  In October 2007,the District Court stayed the action pending a re-examination of our patents bythe Patent and Trademark Office.  InMarch/April 2009, the PTO confirmed the patentability of one of thosereexamined patents, confirmed the patentability of a portion of a second one ofthose reexamined patents, and rejected entirely a third one of those reexaminedpatents.  Avocent Redmond plans to appealthe decisions rejecting all or portions of its patents and press forward onlitigation for the confirmed patents.

 

In January 2008,Avocent Redmond Corp. filed a complaint for unauthorized use of patentedinventions against the United States government in the United States Court ofFederal Claims.  The complaint alleges that the United States government acceptedproducts manufactured and sold by Rose Electronics that are covered by patentsheld by Avocent Redmond.  The United States has answered and RoseElectronics has intervened.

 

In March 2007,KBM Enterprises, formerly a contract manufacturer for Avocent, fileda complaint against Avocent in the Circuit Court of Madison County, Alabama,seeking $9,500 for costs allegedly incurred by KBM in itsmanufacturing efforts on behalf of Avocent. We have filed an answer and counterclaims against KBM and one of itsprincipals.  Discovery is currentlyunderway.

 

In April 2007, wefiled a complaint for declaratory judgment against Aten International Co., Ltd.in the United States District Court for the Northern District of Alabama. We are seeking a declaratory judgment that two patents owned by Aten andasserted against Avocent are invalid and that certain of products alleged byAten to infringe do not infringe these patents.  In August 2007, Aten’smotion to dismiss for lack of personal jurisdiction was granted.  We appealed the District Court’s dismissalorder to the Federal Circuit Court of Appeals, and the dismissal was affirmedby the Federal Circuit Court of Appeals. We petitioned the Federal Circuit Court of Appeals for a rehearing enbanc, which was denied, and we have filed a petition for a Writ of Certiorariwith the United States Supreme Court.

 

In November 2007,Gemini IP, LLC filed a complaint for patent infringement in the United StatesDistrict Court for the Eastern District of Texas, Sherman Division, againstAvocent Corporation and our subsidiary LANDesk Software, Inc.  The complaint alleges infringement of aGemini patent through the sales of a LANDesk product.  The complaint seeks injunctive relief,damages, attorneys’ fees, and costs. Avocent Corporation was dismissed from the lawsuit in January 2008.  In April 2008, the District Court stayedthe action pending a review of the Gemini Patent by the Patent and TrademarkOffice.

 

**Item1A.  Risk Factors.**

 

*THISQUARTERLY REPORT**CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS ANDUNCERTAINTIES THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROMTHOSE DISCUSSED IN THIS QUARTERLY REPORT.  THESE RISKS AND UNCERTAINTIESINCLUDE THE FOLLOWING:*

 

**Difficultiesencountered during challenging and changing economic conditions could adverselyaffect our results of operations.**

 

Our business andoperating results depend to a significant extent on economic conditions ingeneral and on IT spending and the server market in particular, and we expectour revenue growth rate to fluctuate in relation to economic conditions andIT-related spending trends.  Any adversechange in IT spending or in the server market due to adverse economicconditions, declining capital spending levels, or other factors could have amaterial adverse effect on our business, financial condition, and results ofoperations.  World-wide efforts to cut capital spending, general economicuncertainty, and a weakening global economy could have a material adverseeffect on us.  The current financialcrisis could have an impact on our business in a variety of ways, includinginsolvency of key suppliers resulting in product delays, inability of customersto obtain credit to finance purchases of our products, bank failure orgovernmental takeover of financial institutions, and customerinsolvencies.  In addition, we continueto see industry-wide initiatives by OEMs and by distributors and resellers ofour hardware products to reduce their inventories and to shorten their leadtimes, thereby reducing early commitments to firm orders by our major OEM anddistributor and reseller customers.  Ifwe are unable to effectively manage during the current challenging and changingeconomic conditions, our business, financial condition, and results ofoperations could be materially adversely affected.

 

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**We have acquired, and expect tocontinue to acquire, technologies and companies and these acquisitions coulddisrupt our business or expose us to other risks.**

 

A key component of ourengineering and product development strategy and our future growth is theinvestment in or the acquisition of technologies and companies.  We intend to continue to execute our strategythrough the acquisition of technologies or companies or through investments incomplementary companies, products, personnel, or technologies, and it is likelywe will complete such acquisitions or investments in the future.  These acquisitions and investments involvemany risks and factors outside our control, including the following:

 

·                                          Difficulty integrating the acquiredcompany’s personnel, distribution channels, products, product roadmaps,technologies, systems, processes, and operations, including productdevelopment, product delivery, order management, and information systems;

 

·                                          Difficulty in conforming the acquiredcompany’s financial policies and practices to our policies and practices and inimplementing and maintaining adequate internal systems and controls over thefinancial reporting and information systems of the acquired company;

 

·                                          Diversion of management’s attention anddisruption of our current business and the challenges associated with managingthe resulting larger company following any acquisition;

 

·                                          Difficulty in combining product andtechnology offerings and entering into new markets or geographical areas inwhich we have no or limited direct experience and where our competitors mayhave stronger market positions;

 

·                                          Loss (at either Avocent or in theacquired company) of management, sales, technical, or other key personnel orthe loss of customers, distributors, resellers, vendors, or other businessrelationships as a result of the acquisition;

 

·                                          Revenue or deferred revenue from theacquired company not meeting our expectation, and the potential loss of theacquired company’s customers, distributors, resellers, suppliers, or otherpartners;

 

·                                          Delays or difficulties and the attendantexpense in evaluating, coordinating, and combining administrative,manufacturing, research and development, operations, facilities, and relationshipswith third parties in accordance with local laws and other obligations whilemaintaining adequate standards, controls and procedures, including financialcontrols and controls over information systems;

 

·                                          Difficulty in completing projectsassociated with acquired in-process research and development;

 

·                                          Incurring amortization expense related tocertain intangible assets and recording goodwill and non-amortizable assetsthat will be subject to impairment testing and possible impairment charges;

 

·                                          Dilution of existing stockholders as aresult of issuing equity securities, including the assumption of any stockoptions or other equity issued by the acquired company;

 

·                                          Overpayment for any acquisition orinvestment or unanticipated costs or liabilities;

 

·                                          Assumption of liabilities of the acquiredcompany, including any potential intellectual property infringement or otherlitigation claims, the liabilities and obligations under the acquired company’sexisting agreements, and any unrecorded tax obligations; and

 

·                                          Incurring substantial write-offs,restructuring charges, interest expense, amortization, and transactionalexpenses.

 

Our integration plans andindemnification and escrow agreements might fail to adequately mitigate theserisks and factors, and our failure to manage these risks and challenges couldmaterially harm our business, financial condition, and results ofoperations.  Further, if we do notsuccessfully address these challenges in a timely manner, we may not fullyrealize all of the anticipated benefits or synergies on which the value of atransaction was based.  Futuretransactions could cause our financial results to differ materially fromexpectations of market analysts or investors for any given quarter.

 

**Ourimpairment testing may indicate we have an impairment of goodwill and requireus to take an impairment charge.**

 

As required by generallyaccepted accounting principles, we have performed an annual impairment test ofgoodwill in each of the fourth quarter of 2008, 2007, and 2006.  Ourtesting in the fourth quarter of each year concluded that there had been noimpairment of goodwill and that no adjustments were required.

 

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Our fourth quarter 2008impairment test concluded that there had been no impairment of goodwill andthat no adjustments were required.  Whileour testing in 2008 indicated there wasno goodwill impairment for any of our reporting units, there were certainfactors we noted during the 2008 testing that would require continuedmonitoring, especially related to any potential decline in our marketcapitalization.  During the first quarterof 2009 our market capitalization declined to less than the book value of ourshareholders’ equity.  In addition,market valuations for many companies in our peer group declined significantlyduring the quarter.  As a result,we determined goodwill impairment testing should be performed during the firstquarter of 2009.  We revisited our five-year forecast in lightof the continuing global recession. Based on that trend, we revised our five-year forecast, and we recordedan estimated impairment charge for LANDesk goodwill of $80.0 million during thethree months ended March 31, 2009.  Due to the complexities surrounding the impairment calculation, theevaluation is not complete as of the date of this filing and is thereforesubject to change.** **Dependant on the outcome of ourevaluation of LANDesk goodwill, any resulting change could vary materially fromthe estimate recorded during the first quarter of 2009.  We will record any difference during thesecond quarter of 2009.

 

As aresult of the continued uncertainty in the stock market and due to the currentrecessionary environment and the resulting impact on our business, we aremonitoring our stock price, control premium, and other conditions in relationto potential additional goodwill impairment testing.  There is a risk thatthere may be an additional impairment in the future requiring an adjustment tothe carrying value of goodwill and other intangible assets, and we may berequired to take an additional impairment charge.  If so, any charge couldhave material adverse effect on our financial position and the results of ouroperations.

 

**Intensecompetition from new and existing competitors or consolidation in the industrycould impair our ability to grow our business, to sustain our profitability,and to sell our products and technologies.**

 

The markets for ourproducts and technologies are highly fragmented, rapidly evolving, andintensely competitive, and we expect these characteristics to continue andincrease.  Aggressive competition from both hardware and software productsand technologies could lengthen the customer evaluation process and result inprice reductions and loss of sales, which would materially harm ourbusiness.  Our business is highly sensitive to the introduction of newproducts and technologies (such as virtualization), price changes, andmarketing efforts by numerous and varied competitors.  Accordingly, ourfuture success will be highly dependent upon our timely completion andintroduction of new products, technologies, and features at competitive pricesand performance levels that address changing industry trends and the evolvingneeds of our customers.  We continue to experience aggressive pricecompetition and increased customer sensitivity to product prices, and pricingand margin pressures are likely to increase in the future.  Because ofthis competition, we may have to continue to lower the prices of many of ourproducts and technologies or offer greater functionality within our productswithout increasing prices to deliver greater value to customers to staycompetitive, while at the same time trying to maintain or improve our revenueand gross margin.  Because our business model is based on providinginnovative and high quality products, we may spend a proportionately greateramount on research and development than some of our competitors.  If wecannot proportionately decrease our cost structure on a timely basis inresponse to competitive price pressures and the loss of revenue, our gross andoperating margins and profitability could be adversely affected.  Inaddition, if our pricing, functionality, and other factors are not sufficientlycompetitive, or if there is an adverse reaction to our product decisions, wemay lose market share in certain areas, which could adversely affect ourrevenue and prospects.

 

We compete for sales ofswitching systems and extension products with companies such as RaritanComputer, Rose Electronics, Minicom Advanced Systems, Aten International,Belkin, Digi International, and Lantronix.  These products also facecompetition from software providers (such as Microsoft, Computer Associates,Tivoli, Symantec, Novell, AMI, and BMC Software), who may be able to offersoftware products competitive with our hardware products at a much lower costor even bundled for free with their other products, and from servermanufacturers (including our OEM customers), who are able to offer theircompetitive technologies or products at the time of the server sale. These competitive software and hardware products address many of the problemsour switching systems and technologies, extension products, and remote accessproducts are designed to address.

 

We compete for sales ofour systems management and security products with companies such as Microsoft,Computer Associates, BMC Software, Novell, and Symantec, many of whom havegreater financial, technical, and marketing resources, a larger customer base,a longer operating history, greater name recognition, and more establishedrelationships in the industry than we do, and may offer their own orthird-party competitive software products at a lower cost or bundled for freewith their other products.  Microsoft, in particular, has deliveredcompetitive products and announced its intention to continue to developcompetitive software, and if it is successful in delivering software productsthat are competitive with our products, our ability to grow our softwarebusiness may be limited.

 

Our current and potentialcompetitors may be able to respond more quickly to new or emerging technologiesor products and to changes in customer requirements or to devote greaterresources to the research, development, promotion, sale, and support of theirproducts and technologies than we do.  In addition, current and potentialcompetitors have established or may establish cooperative relationships amongthemselves or with third parties that expand or enhance the ability of theirproducts and technologies to address 

 

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the needs of our currentand prospective customers.  Some of these competitors can also bundlehardware, software, and services together, and offer a more complete set ofproducts and services than we are able to offer. We may not be able to competesuccessfully against current and future competitors and competitive pressuremay materially harm our business, financial condition, operating results, andcash flows, or impair our ability to achieve our desired results.

 

Certain of our customers,such as Dell, Hewlett-Packard, IBM, Microsoft, and Symantec presently offercompetitive hardware and/or software products and technologies that addressmany of the problems our products and technologies address.  Thesecustomers could decide to manufacture or enhance their own switching, IPMI, orother embedded technologies, or systems management, security, and service deskproducts, or offer products or technologies supplied by competitors. Companies with hardware manufacturing experience or network managementproducts, many of which are substantially larger than we are and havesignificantly more financial resources than we do, also offer products ortechnologies that compete with us.  Established companies with hardwaremanufacturing or network management experience (such as Intel, Cisco, or EMC)could also offer new products, new technologies (such as virtualization), ornew solutions that compete with, or reduce the demand for, our products andtechnologies.

 

There has beenconsolidation in the markets in which we compete, which we believe willcontinue and could lead to increased price competition and other forms ofcompetition as companies attempt to maintain or extend their market positionsin the rapidly changing IT industry.  Inaddition, we may face competition in the future from large establishedcompanies or from emerging companies that have not previously entered themarket or that do not currently have products that directly compete with ourproducts.  This could lead to morevariability in our operating results for a variety of reasons including thelengthening of the customer evaluation process and/or the loss of business tothese competitors, which may adversely affect our business, financialcondition, and results of operations.

 

**Ourgross margins are expected to vary and may decline.**

 

Gross margins may vary ordecline from period-to-period and may be adversely affected by a number offactors, including:

 

·                                          The ratio of OEM sales to branded sales,since OEM sales typically have lower gross margins than branded sales;

 

·                                          The ratio of sales through indirectchannels to direct sales, since indirect sales typically have lower grossmargins than direct sales;

 

·                                          The ratio of sales in established marketsto sales in new markets with different pricing and cost structures;

 

·                                          Sales of lower margin products or otherchanges in our product mix, because sales of some of our products andtechnologies will have lower gross margins than sales of other products ortechnologies (e.g. our software products tend to have higher gross margins);

 

·                                          Increased price competition;

 

·                                          Changes in product costs and salesdiscounts;

 

·                                          Changes in raw materials, freight,regulatory, certification, import or export expenses, tariffs, and labor costs;

 

·                                          Introduction of new products, services,business models, and technologies by us and by our competitors;

 

·                                          The level of and costs for third-partytechnology and code used in our software products; and

 

·                                          The level of and costs for outsourcing ofour manufacturing and assembly services for our hardware products and theimpact this can have on our inventory valuation of older products.

 

We expect that our grossmargins may vary and may decline in the future primarily due to the factorslisted above and to increased competition and the introduction of new productsand technologies that may affect product prices and demand for our products.

 

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**We havelimited protection of proprietary rights and face risks of third-partyinfringements.**

 

Our future successdepends in part upon our ability to develop and protect proprietary rights inour products and technologies.  We seek to protect our intellectualproperty rights by invoking the benefits of the patent, trademark, copyright,trade secret, and unfair competition laws of the United States and other countriesand the protections provided by confidentiality and nondisclosure agreementsand other legal agreements.  These laws and practices, however, affordonly limited protection.  There can be no assurance that the steps we havetaken to protect our intellectual property rights, or that the steps we take inthe future, will be adequate to prevent or detect misappropriation of ourintellectual property or technologies or that our competitors will notindependently develop proprietary or other technologies that are substantiallyequivalent or superior to our products or technologies.  In addition, our proprietary information maybe misused or improperly disclosed by third parties entrusted with thisinformation.  There also can be noassurance that our proprietary rights will not be challenged, invalidated, oravoided.

 

The U.S. Patent andTrademark Office has issued several patents to us for various aspects of ourproducts.  We have various corresponding patent applications pending underthe provisions of the Patent Cooperation Treaty, which permits the filing ofcorresponding foreign patent applications in numerous foreign countries withina limited time period.  We also have other United States and foreignpatent applications pending.  There can be no assurance that anyadditional patents will be issued from any of those pending applications orthat any patents will be issued in any additional countries where our productscan be sold.  Claims allowed in our patents or in any pending patentapplications may not be of sufficient scope or strength for, or providemeaningful protection or any commercial advantage to us or such claims may notbe upheld if challenged.  Also, competitors may develop their ownintellectual property or technologies, obtain their own patents, or challengethe validity of, or be able to design around, our patents.  The laws ofcertain foreign countries in which our products are or may be developed,manufactured, or sold (particularly certain countries in Asia) may not protectour products or intellectual property rights to the same extent as do the lawsof the United States and thus increase the likelihood of piracy of ourtechnologies and products.

 

We may initiate claims orlitigation against other third parties for infringement of proprietary rightsor to establish the validity of proprietary rights.  Similarly, ourcompetitors or other third parties may initiate claims or litigation against usalleging infringement of their proprietary rights or improper use of theirintellectual property, and from time to time, third parties notify us that ourproducts may infringe their intellectual property rights, which regardless ofmerit, requires our time and resources to evaluate and respond.   Existing litigation, and any otherlitigation relating to intellectual property to which we become a party, issubject to numerous risks and uncertainties, including the risk ofcounterclaims or other litigation against us, and we may not be successful inany such litigation.  Dealing with adverse claims and litigation is veryexpensive, and the existing litigation or any other litigation by or against uscould result in significant additional expense, divert the efforts of technicaland management personnel, whether or not such litigation results in a favorabledetermination, harm our relationships with existing customers, and deter futurecustomers from purchasing or licensing our products.  In the event of anadverse result in any such litigation, we could be required to pay substantialdamages, suspend or cease the development, manufacture, use, marketing, andsale of any infringing products, expend significant resources to redesignproducts or develop non-infringing technology, discontinue the use of certainprocesses, or obtain licenses to the infringing technology.  There can beno assurance that we would be successful in such development or that suchlicenses would be available on reasonable terms, or at all, and any suchdevelopment or license could require us to expend substantial time and otherresources.  In the event that any third party makes a successful claimagainst us, or our customers, and a license is not made available oncommercially reasonable terms, our business, financial condition, and resultsof operations could be adversely affected. In addition, any dispute involving our intellectual property couldresult in our customers, distributors, or resellers becoming involved in thelitigation, which could trigger indemnification obligations in certain of oursales, license, or service agreements.

 

The IT industry ischaracterized by vigorous pursuit and protection of intellectual propertyrights or positions, which has resulted in significant and often protracted andexpensive litigation.  We have in the past been, and we may from time totime in the future be, a party in litigation or other proceedings alleginginfringement of intellectual property rights owned by third parties.  Ifnecessary or desirable, we may seek licenses under such intellectual propertyrights.  However, licenses may not be offered on terms acceptable to us,or at all.  The failure to obtain a license from a third party fortechnology used by us could cause us to incur substantial liabilities and tosuspend or cease the manufacture of products requiring such technology. In addition, current or future competitors could obtain patents or otherintellectual property rights that may prevent us from developing or selling ourproducts. The result of these litigation matters is difficult to predict and anunfavorable resolution could affect our operating results, business, orfinancial condition. The resolution of litigation may have a negative impact onour operating results or financial condition.

 

**Our recently-announced restructuring may disrupt ouroperations and adversely affect our operating and financial results.**

 

In fiscal July 2008, and again in January 2009,we announced a series of actions designed to enhance competitiveness, improveour efficiency, and reduce our cost structure. We initiated workforce reduction and consolidation actions designed tointensify our focus on our growth areas and improve our operatingefficiency.  The restructuring includesactions to increase our organizational efficiency, reduce certain research anddevelopment investments in lower growth product areas, integrate our marketingfunctions, and shift support for our Asian operations from Shannon, Ireland, toour recently-established regional hub in Singapore.  We are also relocating certain functions fromRedmond, Washington to Huntsville, Alabama. The impact of these organizational improvements will result in a netdecrease of approximately 273 positions or approximately 13% of our globalworkforce.  In fiscal July 2008, wealso announced that, as part of our continued focus on core markets, we intendto sell the portion of our entrepreneurial 

 

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Connectivity and Controls business unit dedicated toour Professional Audio Video and our Equinox serial products.  The restructuring activities could create uncertaintyand confusion among our employees, customers, and suppliers.  In addition, the restructuring activitiesmight not result in the cost savings or efficiencies we anticipate and mayresult in temporary operational inefficiencies.   As a result, these restructuring activitiescould have a material adverse effect on our business, financial condition, andresults of operations.  The factors described above also could disrupt ourproduct development, manufacturing, and sales, which would affect our financialresults.

 

**Weare likely to experience fluctuations in operating results.**

 

We have in the pastexperienced substantial fluctuations in revenue, bookings, and operatingresults, on a quarterly and an annual basis, and we expect these fluctuationswill continue in the future.  Our operating results will be affected by anumber of factors, including, but not limited to:

 

·                                          The volume, timing, pricing, and contractualterms of orders, particularly from OEMs, resellers, and other large customers,a significant portion of which tend to occur late in each quarter;

 

·                                          The timing of shipments;

 

·                                          The unpredictable nature of the salescycle for software products and the timing and completion of delivery ofsoftware products and any related services;

 

·                                          The timing of new product introductions,new technologies, and enhancements by us and by our competitors, and thepossibility that customers may defer purchases of our products in anticipationof these new products, new technologies, and enhancements;

 

·                                          Changes in or our failure to accuratelypredict product or distribution and reseller channel mixes, including changesin the mix of software licenses in which revenue is recognized upfront asopposed to subscription licenses that are deferred over time and changes in themix of revenue attributable to higher-margin products as opposed tolower-margin sales or services;

 

·                                          Changes in demand for our products andservices;

 

·                                          Changes in pricing policies, pricereductions, and channel programs;

 

·                                          Changes in laws, regulations, or othergovernment requirements;

 

·                                          Changes in renewal rates for softwareupgrade protection or maintenance;

 

·                                          Competition from new products, technologies,business models, and price reductions by competitors;

 

·                                          The availability and cost of supplies,components, or third-party code or content on commercially reasonable terms;

 

·                                          Compatibility or interoperability of ourproducts with third-party systems and applications;

 

·                                          Sales and marketing expenses related toentering into new markets, introducing new products, new technologies, andretaining current OEMs, resellers, and other large customers;

 

·                                          Fluctuations in sales of servers andpersonal computers due to changes in technology (such as virtualization),economic conditions, or capital spending levels;

 

·                                          The amount and timing of operatingexpenses and capital expenditures relating to the expansion of our business andoperations; and

 

·                                          Costs associated with legal proceedings,including legal fees and any adverse judgments or settlements.

 

Our operating resultswill continue to be affected by seasonal trends, by general conditions in theIT market, and by general economic conditions.  Depending on the severityand longevity of the current economic crisis, we may see fluctuations in ouroperating results.  In addition, we haveexperienced, and we expect to continue to experience, seasonality due tocustomer buying cycles and

 

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delays in customer ordersduring unfavorable economic periods.  We believe that the third and fourthquarters will generally have higher net sales levels due to customer budgetingand procurement cycles, which may depress net sales in other quarters.  Inaddition, European sales are often weaker during the summer months.  Inthe past, we have typically seen a sequential decline in revenue from the fourthquarter of a year to the first quarter of the following year, and while it isdifficult to predict revenue in any quarter, we expect that this pattern willcontinue in the future.  Many of the factors that create and affectseasonal trends are beyond our control.

 

Our quarterly sales havealso reflected a pattern in which a disproportionate percentage of each quarter’stotal sales occur toward the end of the quarter, and this trend has become morepronounced in recent periods.  Ourincreased focus on the software market continues this trend with a greaterproportion of our software revenue coming from software license andsubscriptions booked in the last weeks or days of each quarter.  Thisuneven sales pattern makes prediction of revenue, earnings, and working capitalfor each financial period difficult, increases the risk of unanticipatedvariations in quarterly results and financial condition, and places pressure onour hardware inventory management and logistics systems.  If predicteddemand for hardware is substantially greater than orders, there will be excessinventory.  Alternatively, if hardware orders substantially exceedpredicted demand, we may not be able to fulfill all of the orders received inthe last few weeks of each quarter.  Other developments late in a quarter,such as a systems failure, component pricing movements, actions orannouncements from our competitors, global logistics disruptions, or largesales opportunities not being completed when predicted, could adversely impactinventory levels and results of operations in a manner that is disproportionateto the number of days in the quarter affected. In addition, accounting requirements associated with satisfying thevarious elements necessary to recognize software revenue may result insignificant fluctuations in our quarterly results.

 

In order to remaincompetitive and provide our increasingly sophisticated customers with moreoptions, we have made and expect to continue to make new products and newsoftware purchasing and licensing options available to our customers.  These new products and options may result inan increase in contracts where software revenue is deferred or cash is receivedover time as opposed to recognition of revenue or payment at or about the timeof the purchase or license.

 

We believe thatquarter-to-quarter comparisons of our historical financial results are notmeaningful indicators of our future operating results, and you should not relyon them as an indication of our future performance.  If our quarterlyoperating results fail to meet the expectations of equity research analysts,the price of our common stock could be negatively affected.

 

**A largeportion of our business consists of sales to a limited number of resellers anddistributors that are not obligated to continue doing business with us, andthese sales vary considerably from quarter to quarter.**

 

A large portion ofour sales consists of sales of our branded products to a limited number ofresellers and distributors.  Sales to resellers anddistributors represented approximately 60% of net sales in 2008, 61% ofnet sales in 2007, and 56% of net sales in 2006.  The loss of significantrevenue opportunities with these resellers and distributors could negativelyimpact our results of operations.  Inaddition, many of these customers also have or distribute competingproducts.  If resellers and distributorselect to increase the marketing of competing products or reduced marketing ofour products, our ability to grow our business will be negatively impacted andwill impair one of our substantial revenue sources.

 

Our reseller anddistributor business is subject to many risks, including:

 

·                                          Concentration of business in a limitednumber of resellers and distributors could result in significant damage to ourbusiness upon the termination of a reseller relationship;

 

·                                          Termination of reseller and distributoragreements or reduced or delayed orders;

 

·                                          Difficulty in predicting sales toresellers and distributors who do not have long-term commitments to purchasefrom us, which requires us to maintain sufficient inventory levels to satisfyanticipated demand;

 

·                                          Lack of visibility of end user customersand revenue recognition and channel inventory issues related to sales byresellers and distributors;

 

·                                          Resellers and distributors electing toresell or increase their marketing of competing products or technologies orreduced marketing of our products; and

 

·                                          Changes in corporate ownership, financialcondition, credit worthiness, payment patterns, business direction, salescompensation related to our products, or product mix by the resellers anddistributors.

 

Any of these risks couldhave a material adverse effect on our business, financial condition, andresults of operations.  We have experienced, and expect to continue toexperience, pricing pressures and significant variability in orders from ourresellers and distributors, which may in the future have a material adverseeffect on our quarterly sales and operating results.

 

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The loss of one or morelarge resellers or distributors could materially harm our business.  Whilewe have reseller and distributor agreements, none of our resellers ordistributors are obligated to purchase products from us.  Consequently,any reseller or distributor could cease doing business with us at anytime.  Our dependence upon a few resellers and distributors could resultin a significant concentration of credit risk, thus a substantial portion ofour trade receivables outstanding from time to time may be concentrated among alimited number of customers.  In addition, the inability to accuratelyforecast the timing and volume of orders for sales of branded products toresellers and distributors during any given quarter could adversely affectoperating results for such quarter and, potentially, for future periods. If we underestimate sales, we will not be able to fill orders on a timelybasis.  This could cause customer dissatisfaction and loss of futurebusiness.  If we overestimate sales, we will experience increased costsfrom inventory storage, waste, and obsolescence.

 

**We willneed to expand our sales distribution channels in order to develop our businessand increase revenue.**

 

We expect to relyincreasingly on distributors and resellers, VARs, and systems integrators forthe distribution and sale of our branded hardware and software products. Our strategy contemplates the expansion of our distributor and resellernetworks both domestically and internationally, particularly in Asia, and anincrease in the number of customers licensing our products through theseexpanded channels.  Our future success will depend in part on our abilityto attract, train, and motivate new distributors and resellers and expand oursales distribution channels.  We may not be successful in expanding ourdistributor and reseller relationships.  We will be required to investsignificant additional resources in order to expand these relationships, andthe cost of this investment may exceed the margins generated from thisinvestment.  Conducting business throughindirect sales channels presents a number of risks, including:

 

·                                          Difficulties in replacing any lost orterminated distributors or resellers;

 

·                                          Existing or new distributors andresellers may not be able to effectively sell our current or future products orservices;

 

·                                          Potential distributors and resellersdeciding not to enter into relationships with us because of our existingrelationships with other distributors and resellers with which they compete;

 

·                                          Our ability to provide proper trainingand technical support to our distributors and resellers;

 

·                                          The possibility of damage or impairmentto our market position, brands or trademarks as a result of the actions of ourdistributors and resellers;

 

·                                          Distributors and resellers electing toplace greater emphasis on products or services offered by our competitors; and

 

·                                          The lack of direct control over thebusiness practices, marketing, sales and services offered by distributors andresellers.

 

As we expand ourdistribution and reseller channels, we will also need to expand our salesorganization and invest substantial resources toward this expansion.  We may experience difficulty in recruiting,training, and retaining qualified sales personnel, and any failure to obtain,train, and keep qualified personnel could limit our ability to sell products.

 

In addition, distributorsand resellers of our hardware products often have rights of return, and in thefuture, these returns from our existing or any new distributors and resellersmay have a material adverse effect on our business, financial condition, andresults of operations.  Our agreements with our current distributors and resellersare generally nonexclusive and may be terminated on short notice by eitherparty without cause, and any new distributor or reseller agreements are likelyto contain similar provisions.  Distributors and resellers are notobligated to purchase products from us and frequently offer products fromseveral different companies, including competitors’ products, and distributorsand resellers may give higher priority to the sale of our competitors’products.  A reduction in sales efforts or efficiency by our distributorsor resellers could lead to a reduction in our sales and could materiallyadversely affect our business, financial condition, and results of operations.

 

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**A largeportion of our business consists of sales to a limited number of OEM customersthat are not obligated to continue doing business with us, and these sales varyconsiderably from quarter to quarter.**

 

A large portion of oursales is concentrated among a limited number of OEM customers.  Aggregatesales to these OEMs represented approximately 33% of our net sales in2008, 35% of net sales in 2007, and 40% of net sales in 2006.   The following table identifies our customersthat exceeded 10% of our net sales for the years 2008, 2007, and 2006:

 
| ** **      | ** ** | **Percentage of Net Sales for the Year Ended** | ** ** |
|-----------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **      | ** ** | **December 31,  2008**                                                       | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** |
| Dell            |       | 11                                                                                | %          | 13 | % | 14 | % |
| Hewlett-Packard |       | <10                                                                            | %          | 12 | % | 14 | % |
| Ingram Micro    |       | 13                                                                                | %          | <10 | % | <10 | % |
| Tech Data       |       | <10                                                                            | %          | 11 | % | 12 | % |

 

We have experienced, andwe expect to continue to experience, period-to-period variability in sales tothese OEM customers.  Any cancellation, rescheduling, or reduction oforders by OEM customers in the future could materially adversely affect ouroperating results.  Although our OEM customers typically place orders forproducts up to several months prior to scheduled shipment dates, these ordersare subject to cancellation.

 

Our OEM business is subjectto many risks, including:

 

·                                          Contract termination or reduced ordelayed orders;

 

·                                          Short order cycles and difficulty inpredicting sales because our OEM customers do not have long-term commitments topurchase from us;

 

·                                          Changes in the OEMs’ internal productlife cycles including the delay of planned new product introductions anduncertainty over product end-of-life decisions;

 

·                                          Adoption of competing products ortechnologies developed by third parties for the OEMs, acquisition or internaldevelopment of competing products or technologies by the OEMs, or changes inthe OEMs’ marketing of competing products or reduced marketing of our products;and

 

·                                          Changes in corporate ownership, financialcondition, credit worthiness, payment patterns, business direction, salescompensation related to our products, or product mix by the OEMs.

 

Any of these risks couldhave a material adverse effect on our business, financial condition, andresults of operations.  We have experienced, and expect to continue toexperience, pricing pressures and significant variability in orders from ourOEM customers, which may in the future have a material adverse effect on ourquarterly sales and operating results.

 

Although we are notsubstantially dependent on any one OEM customer, the loss of one or more largeOEM customers would materially harm our business.  While we haveagreements with some of our OEM customers, these agreements are generallycancellable at the will of the OEM (generally subject to notice provisions),and none of our OEM customers is obligated to purchase products from us exceptpursuant to binding purchase orders or licensing agreements.  Consequently, any OEM customer could ceasedoing business with us at any time.  Ourvolume of sales from just a few OEMs also results in a significant concentrationof credit risk, thus a large portion of our trade receivables outstanding fromtime to time may be concentrated among a limited number of customers.  Inaddition, OEM customers have longer payment cycles that increase the likelihoodof aged or problem accounts receivable.

 

We use multiplewarehouses for many of our OEM customers to fulfill their hardware orders undera just-in-time inventory management system, which requires us to maintainsufficient inventory levels of our hardware products at each of thesewarehouses to satisfy anticipated demand from our OEM customers, and wegenerally recognize revenue only when these OEM customers take possession ofour hardware products.  We are required to plan production, ordercomponents, and undertake our manufacturing activities prior to the time thatthese orders become firm or the products are accepted.  In addition, ourOEM customers have requested, and are likely to continue to request from timeto time, that we delay shipment dates or cancel orders for hardware productsthat are subject to firm orders.  As a result, at any time we may beholding a significant amount of OEM-branded hardware products in inventory, andour sales to OEMs for future quarters are difficult to predict.  Theinability to accurately predict the timing and volume of hardware orders forour OEM customers during any given quarter could adversely affect operatingresults for that quarter and, potentially, for future quarters.  If weunderestimate sales, we may not be able to fill orders on a timely basis. This could cause customer dissatisfaction and loss of future business.  Ifwe overestimate sales, we may experience increased costs from inventorystorage, waste, and obsolescence.

 

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**Ourfailure to respond to rapid technological change or to introduce successful newproducts and technologies may result in reduced revenue or revenue growth.**

 

The process of developingor acquiring new products, software, and technologies and enhancing existingproducts, software, and technologies is complex, costly, and uncertain, and anyfailure by us to anticipate customers’ changing needs and emerging technologicaltrends accurately could significantly harm our market share and results ofoperations.  Our products and technologies are characterized by rapidtechnological advances, frequent new product and technological introductionsand enhancements, and significant price competition.  If we do not keeppace with these changes, we will lose customers, and our business will beadversely affected.  The introduction of products or technologiesincorporating superior alternatives such as switching software, the emergenceof new industry standards such as virtualization, or changes in pricingstructure could render our existing products and technologies and those we haveunder development obsolete or unmarketable.  New technologies offered byus or our competitors could compete with our existing products at a lowerprice, which could reduce our revenue.

 

Our future success willdepend in large part upon continued innovative application of commerciallyavailable components and software or technologies, continued enhancements toour proprietary hardware, software, firmware, and other technologies, theexpansion and enhancement of existing products and technologies, and ourdevelopment and introduction of new products and technologies that addresschanging industry trends (including virtualization) and customer needs on acost-effective and timely basis.  If we fail to respond on a timely basisto technological developments, changes in industry standards, customerrequirements, competitive products, product localization, or softwareinnovations, we will lose customers, and our business will be greatlyharmed.  Similar results could occur if we experience significant delaysin the development or introduction of new products or technologies.

 

**We aredependent upon third-party suppliers and outsourced manufacturing for ourhardware products.  Disruption of our access to these supplies andservices, or problems with the quality of supplies or services, could preventus from filling customer orders and harm our business.**

 

The principal componentsof our hardware products are electronic components, power supplies,semiconductors, memory, cable assemblies, line filters, enclosures, and printedcircuit boards, all of which are purchased from outside vendors.  Wegenerally buy components under purchase orders and generally do not havelong-term agreements with our suppliers.  Also, we generally do notmaintain large inventories of components.  Any termination of, orsignificant disruption of, our relationships with the suppliers of our productcomponents may prevent us from filling customer orders in a timely manner whichcould result in customer dissatisfaction and lost sales.

 

We have occasionallyexperienced, and we may in the future experience, shortages or delays indelivery of components.  Although alternate suppliers are available formost of the components and services needed to produce our products, the numberof suppliers of some components is limited, and qualifying a replacementsupplier and receiving components from alternate suppliers could take severalmonths.

 

We have limited abilityto control quality issues (particularly with respect to faulty componentsmanufactured by third parties), and we depend upon suppliers to delivercomponents that are free from defects, competitive in functionality and cost,and in compliance with specifications and delivery schedules.  Disruptionin supply, a significant increase in the cost of one or more components,failure of a third-party supplier to remain competitive in functionality or price,or the failure of a supplier to comply with any of our procurement needs coulddelay or interrupt our ability to manufacture and deliver our products tocustomers on a timely basis, thereby delaying our revenue recognition andadversely affecting our business, financial condition, and results ofoperations.

 

We rely on third-partymanufacturers for subassembly of products and for final assembly, qualityassurance, and testing of many of our products.  These outsourcingarrangements and any future outsourcing arrangements involve numerous risks,including the economic and financial viability of these manufacturers, reducedcontrol over product quality, delivery schedules, manufacturing yields, andcosts.  Moreover, although arrangements with such manufacturers maycontain provisions for warranty obligations on the part of such manufacturers,we are primarily responsible to our customers for warranty obligations.

 

**Ourhardware products are subject to warranty claims and returns.  Increasedwarranty claims or returns could harm our business.**

 

We typically offer a30-day unconditional money-back guarantee on our appliance products sold inNorth America.  We also offer warranties for parts and service on ourhardware products, ranging from one to three years (and, in the case of some ofour Equinox branded products, five years).  Although our historical returnexperience has not been significant, our returns may increase in thefuture.  An increase in returns would have an adverse effect on our salesand could negatively affect our financial results.

 

For our softwareproducts, sales are final and we do not generally allow any returns.  We provide a 90-day limited warranty on themedia used to deliver the software, which is not applicable to electronicdownloads, and we generally provide a 90-day limited warranty (except where alonger period is required by law) that our products will function in accordancewith the user documentation.

 

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In the future, we may, asa result of competitive pressures, requirements in certain geographies, orcustomer demands, change our warranty policies or our warranty terms to providecoverage that is greater in scope and duration than the coverage we currentlyoffer.  If we were to increase our warranty coverage, our risk of warrantyclaims, and therefore our warranty expense and reserves, would likely increase.

 

**If weare unable to successfully develop our international distribution and resellernetworks and international sales efforts, results of operations may suffer.**

 

We are working todevelop, integrate, and expand our international distribution and resellernetworks in an effort to increase international sales and availability of ourproducts.  We may not be successful in developing or expanding theinternational distribution and reseller network or in marketing and sellingproducts in foreign markets, particularly Asia.  If the revenue generatedby our international sales is not adequate to recover the expense ofestablishing, expanding, and maintaining an international distribution andreseller network, our business, financial condition, and results of operationscould be materially adversely affected.  If international sales become amore significant component of net sales, our business could become morevulnerable to the risks inherent in doing business on an international level,including:

 

·                                          Difficulties in managing foreigndistributors and resellers;

 

·                                          Longer payment cycles and problems incollecting accounts receivable;

 

·                                          The effects of seasonal customer demand;

 

·                                          Differing license terms and conditions tomeet local requirements;

 

·                                          Changes in regulatory requirements;

 

·                                          Difficulties in meeting the requirementsof different international product regulations, including import and exportrequirements, tariffs, and other trade barriers;

 

·                                          Risks relating to the protection of ourintellectual property rights;

 

·                                          The impact on our marketing expenses andour research and development resources as we localize our product offerings tomeet local user requirements such as language translations and hardwarecompatibility issues;

 

·                                          Fluctuations in currency exchange rates;and

 

·                                          Potentially adverse tax consequences andpolitical instability.

 

The existence oroccurrence of any one or more of these factors could have a material adverseeffect on our business, financial condition, and results of operations.

 

**Due tothe international nature of our business, political or economic changes orother factors could harm our future revenue, increase our costs and expenses,and impair our financial condition.**

 

We are a global companywith sales, manufacturing, and research and development efforts around theworld.  Sales outside the United Statesgenerate approximately half of our revenue, over half of our manufacturingtakes place outside the United States, and we have research and developmentcenters in several locations outside the United States.  Accordingly, ourbusiness, operating results, future revenue, gross margin, expenses, andfinancial condition could suffer due to a variety of international factors,including:

 

·                                          Ongoing instability or changes in acountry’s or region’s economic or political conditions, including inflation,recession, interest rate fluctuations, and actual or anticipated military orpolitical conflicts, particularly in areas where we have offices or otherfacilities;

 

·                                          Currency fluctuations, which couldcontribute to variations in sales of products and technologies and could alsoaffect our reported results expressed in U.S. dollars;

 

·                                          Longer accounts receivable cycles andfinancial instability among customers;

 

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·                                          Tax or trade regulations, tariffs,duties, and procedures and actions affecting production, pricing, and marketingof or payments for products;

 

·                                          Local labor conditions and otherregulations;

 

·                                          Differing technology standards orcustomer requirements;

 

·                                          Limited or unfavorable intellectualproperty protection in certain foreign countries including the loss ofproprietary information due to piracy or misappropriation;

 

·                                          Fluctuations in freight costs anddisruptions at important geographic points of exit and entry;

 

·                                          Natural or manmade disasters, such asearthquakes, tsunamis, flooding, hurricanes, typhoons, fires, power shortages,blackouts, telecommunications failures, terrorism, or computer viruses;

 

·                                          Medical epidemics;

 

·                                          Seasonal reductions in business activityin certain foreign countries, such as the summer months in Europe;

 

·                                          Compliance with a wide variety of complexlaws, treaties, and regulations that increase the risks of doing business incertain foreign countries;

 

·                                          Restrictions against repatriation ofearnings from our international operations;

 

·                                          Difficulties in staffing and managinginternational operations, including the difficulty in managing a geographicallydispersed workforce;

 

·                                          Possible non-compliance with our Code ofConduct or other corporate policies due to inconsistent laws, interpretations,and/or application of corporate standards in foreign countries;

 

·                                          Increased financial accounting andreporting burdens and complexities; and

 

·                                          The need to localize our products.

 

The factors describedabove also could disrupt our product development and manufacturing, keysuppliers, and OEMs and resellers located outside of the United States. For example, we rely on manufacturers in Asia and Europe for the assemblyand manufacture of many of our hardware products, and we conduct substantialsoftware development and testing operations in China and Taiwan.  Accordingly, we are directly affected byeconomic, political, and military conditions in the regions where we haveoperations, including China and Taiwan. In particular, any interruption or curtailment of trade between Chinaand its present trading partners could materially adversely affect our productdevelopment, product releases, support, business, operating results, andfinancial condition.

 

Continued or increasedinternational political instability, evidenced by the threat or occurrence ofterrorist attacks, enhanced national security measures in the United States orother countries, sustained military action or other conflicts, or strainedinternational relations may impair our ability to do business, increase ourcosts and adversely affect our stock price. Increased international instability may negatively impact our ability toobtain adequate insurance at reasonable rates or require us to take extrasecurity precautions for our domestic and international operations.

 

**Fluctuationsin the value of foreign currencies could result in currency exchange losses.**

 

Currently, a majority ofour international business is conducted in U.S. dollars.  As we expand ourinternational operations, however, it is likely that international businesswill increasingly be conducted in foreign currencies.  Fluctuations in thevalue of foreign currencies relative to the U.S. dollar have caused, and areexpected to increasingly cause, currency transaction gains and losses.  Inaddition, currency fluctuations could also affect foreign denominatedinvestment values and reported results expressed in U.S. dollars.  While we attempt to hedge some foreigncurrency exposure, we cannot effectively hedge all exposures, nor predict theeffect of exchange rate fluctuations upon future operating results, and we mayexperience currency losses in the future.

 

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**Thesales cycle for our software products is unpredictable, making it difficult toforecast operating results for any given period.**

 

The sales cycle for oursoftware products is typically ninety to one hundred eighty days orlonger.  This sales cycle is subject to anumber of significant risks over which we have little or no control, including:

 

·                                          Customers’ budgetary constraints,fluctuations, or uncertainty, internal acceptance requirements, and procurementprocedures;

 

·                                          The actions or announcements of ourcompetitors and their products;

 

·                                          Customer concerns about the future orperformance of our company; and

 

·                                          Changes in economic conditions generally,in the technology market specifically, and in a customer’s particular industry.

 

Moreover, our softwarelicense revenue is heavily weighted toward the end of each quarter, with asmuch as ninety percent of LANDesk’s license revenue recorded in the third monthof a quarter, making it difficult to forecast operating results for any quarteror give accurate guidance.  For largeopportunities, especially for enterprise-wide sales, the sales cycle is oftensignificantly longer than our average sales cycle.  In addition, these large opportunities aremore difficult to forecast, and if we do not correctly forecast the timing in agiven period, the amount of revenue we recognize in a period could be higher orlower than we expect, which could significantly affect our operating resultsfor the then current period and future periods over which revenue would havebeen recognized.  The terms andconditions of the legal agreements for these large opportunities are oftenbased on our customers’ purchase agreements and may contain terms that aregenerally less favorable to us than our standard terms and conditions. As aresult, revenue recognition may be delayed or otherwise negatively affected,and if we fail to meet expectations, the price of our common stock could benegatively affected.

 

**Asignificant percentage of our software revenue is dependent on sales toexisting customers or the renewal of annual software upgrade protection ormaintenance services by existing customers.**

 

Our LANDesk business unithas historically derived, and plans to continue to derive, a significantportion of our total software revenue from existing customers who purchaseadditional products or annual maintenance or upgrade protection.  As we introduce new software products, ourcurrent customers may not require or desire the functionality of our newproducts and may choose not to license these new products or renew theiragreements for maintenance or upgrade protection.  If our current customers do not purchaseadditional products, increase the numbers of our products already in use, orrenew annual software upgrade protection or maintenance services, our abilityto increase or maintain revenue levels could be limited to only new customers.

 

Maintenance revenuerelated to the licensing of our software products is a significant part of ourcurrent and future operating revenue.  Ingeneral, maintenance fees increase with increased use of our software becausewe receive higher maintenance fees when we enter into new license agreementswith new customers and when existing customers license our products for use onadditional systems.  Due to increaseddiscounting for larger sales opportunities, maintenance fees on a per unitbasis for such large deals can be lower than average.  In addition, customers are generally providedannual maintenance discounts for entering into long-term maintenanceagreements.  Declines in our licensebookings, increases in long-term maintenance agreements, customers electing tomigrate to competitive products or other alternatives to our products, and/orincreased discounting could lead to reduced software maintenance revenue andreduced gross margins.

 

**Oursoftware products are designed with interoperability or compatibility with manythird-party platforms, systems, and applications, the absence of which may harmour business.**

 

Our software products aredesigned for use with specific third-party platforms, systems, andapplications.  We believe the breadth ofour integration with such platforms, systems, and applications is a significantcompetitive advantage.  Any significantchange in these third-party products could result in the loss of interoperabilityor compatibility with our products, making our products less attractive,increasing our research and development costs in order to modify our products,license new solutions, or develop new products, and potentially harming ourfuture revenue.  Our failure toanticipate, manage and adapt to these risks could result in significant delaysin our product releases, changes in our product roadmaps, loss of currentcustomers for whom the lost compatibility is an issue, and damage to ouroperating results.

 

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**Oursoftware products include licensed third-party content or code upon which werely for the interoperability, integration, development, or updates of ourproducts, and disruption of our access to such code or content could delayproduct releases, inhibit our compatibility with third-party products, and harmour business.**

 

The principal componentsof our software products are proprietary code and content.  We do, however, rely on some licensedthird-party code, content, or other intellectual property, and we expect to usesuch third-party code, content, or intellectual property in future products.Although we believe that there are usually adequate alternative sources for thethird-party technology licensed to us, any significant interruption in theavailability of these third-party software products on commercially acceptableterms or any defects in these products could delay development of futureproducts or enhancement of our future products and harm our revenue.  Use of such third-party code, content, orother intellectual property presents risks such as:

 

·                                          Owners or licensees of third-partysystems could adopt more restrictive policies or impose unfavorable orunacceptable terms and conditions for access to their products making it moredifficult for us to make our products compatible with their products andresulting in higher research and development costs for us for the enhancementor modification of our existing products and the development of new products;

 

·                                          Functionality provided by third-partycode, content, or other intellectual property in our products may becomeobsolete, defective, or incompatible with future versions of our products, maynot be adequately maintained or updated, and we may be unable to find viablealternatives or develop our own proprietary solution;

 

·                                          Quality, warranty, and support terms varydramatically when licensing third-party code, content, or other intellectualproperty and we have limited ability to control quality issues with third-partycode, content, or other intellectual property and we must depend on our ownresearch and development personnel to evaluate and select third-party code,content, or other intellectual property that we believe is of the most value toour customers; and

 

·                                          Technical difficulties in integrating ourproducts and third-party code, content, or other intellectual property tocreate a combined solution, and the risk that customers will not perceive theneed for such integrated solutions.

 

Any significant terminationof a third-party license, change in third-party license provisions, increase inthe cost of such third-party code, content or other intellectual property,failure of a code, content or other intellectual property provider to remaincompetitive in functionality, or defect in or a quality issue could delay orinterrupt our ability to develop and deliver software products to customers ona timely basis.  This could delay ourrevenue recognition and adversely affect our business, financial condition, andresults of operations and possibly expose us to claims under license agreementswith our customers and possibly increased litigation fees and expenses.  Our failure to anticipate, manage, and adaptto these risks could result in significant delays in our products releases,changes in our product roadmaps, and damage to our operating results.

 

**Softwareerrors or bugs, and possible product liability claims related to such errors orbugs, could result in increased costs, damage to our reputation, and loss of marketshare.**

 

Our software products aregenerally large and intricate programs. As a result, our current software products, updates, upgrades, or futureproducts may contain errors, failures, or “bugs,” some of which may not becomeknown until after the product has been released by us for use bycustomers.  While we routinely test ourproducts for such errors and identify and correct bugs through our customersupport group, these problems are inevitable. Any significant errors may result in, among other things, loss of, ordelay in, the market acceptance or our products, lost revenue and sales of ourproducts, reallocation of, or increases in, development and customer supportresources, impairment to our reputation, loss of future renewal or maintenancerevenue, and increased service and warranty costs.  Errors could also result in significantdelays in the release of updates, upgrades, or new products while such errorsare corrected.  Moreover, because ourproducts primarily support other systems and applications, any software errorsor bugs in these other systems or applications may affect the performance ofour software, and it may be difficult or impossible to determine where theerrors reside.  As a result, producterrors, failures, or bugs could result in significant harm to our business andhave a material adverse effect on our results of operations.

 

We may be subject tolegal actions or claims for damages related to product errors which could,whether or not successful, increase costs and distract our management and ourdevelopment and support teams and could harm our business, result in unexpectedexpenses and damage our reputation.  Ourlicense agreements with our customers typically contain provisions designed tolimit exposure to potential product liability claims, and, to the extentpermitted by governing law, our standard agreements in many jurisdictions alsoprovide that we will not be liable for indirect or consequential damages causedby the failure of our products.  Incertain jurisdictions, however, warranty and limitation of liability provisionsare not effective.

 

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**Use offree or open source software or technology in our products or in thedevelopment of our products may reduce our ability to control the quality andsupport for products and may result in damage to our operating results.**

 

Free or “open source”software is software that is made widely available by its authors or otherthird parties and is often licensed on an “as is” basis for a nominal fee or,in some cases, at no charge.  We haveincorporated some free and open source software into our products, allowing usto enhance certain solutions without incurring substantial additional researchand development costs.  In addition, wemay use free or open source tools in the development of our products.  While we have not experienced any materialproblems as a result of our use of free or open source software, use of free oropen source software entails significant risks including:

 

·                                          Free or open source software ortechnology becoming competitive with our proprietary technology, which couldcause sales of our products to decline or force us to reduce the fees we chargefor our products, which could have a material adverse impact on our revenue andoperating margins;

 

·                                          Requiring that we make available thesource code for any modifications or derivative works we make to or from thefree or open source software, and that we license or contribute suchmodifications or derivative works under the terms of a particular free or opensource license or other license granting third parties certain rights offurther use;

 

·                                          Our proprietary software could be combinedwith open source software in such a way that we would be required to releasethe source code of our proprietary software; and

 

·                                          The lack of any warranty, maintenance, orsupport for most open source software or technology.

 

We have established processesto help minimize these risks to the extent within our control, including areview process for screening requests from our development organizations forthe use of free or open source, but we cannot be sure that all free or opensource software, technology, or tools are submitted for approval prior to usein our products or in the development of our products or that all use is incompliance with our corporate policies. These risks, if not eliminated, couldnegatively affect our ability to sell and license our products and couldmaterially impact our business.

 

**Executiveofficers and other key personnel may depart, which could adversely affect ourresults of operations and harm our ability to grow the business.**

 

We are greatly dependenton the ability to retain key management, sales, and technical personnel, andour future success is highly dependent upon the personal efforts of ourmanagement, sales, and technical personnel and other key employees.  OurExecutive Vice President in charge of our Management Systems business unitdeparted in February 2009 and our Executive Vice President in charge ofmarketing departed in March 2009. Their loss or the loss of services of other key personnel could have amaterial adverse effect on our business, financial condition, and results ofoperations.  We have attempted to mitigate these risks by offering keyemployees retention bonuses (payable only if they continue employment with usfor specified periods) and equity awards that vest over time, but there is therisk that we could nevertheless lose key management, sales, and technicalemployees.

 

We have historically usedstock options and are currently using an Employee Stock Purchase Plan andrestricted stock units, including time-based, performance-based, and market conditioned-based shares, as a keycomponent in our executive and employee compensation programs in order to alignemployees’ interests with the interests of our stockholders, encourage employeeretention, and provide competitive compensation packages.  Many of ouremployee stock options are fully vested, but most of these outstanding andvested options are currently underwater.  This could affect our ability toretain present employees.  In addition, we are now required to record acharge to earnings for employee stock option grants and other equityincentives.  Moreover, applicable stock exchange listing standardsrelating to obtaining stockholder approval of equity compensation plans couldmake it more difficult or expensive for us to make equity awards to employeesin the future.  As a result, we may incur increased compensation costs,change our equity compensation strategy, or find it difficult to attract,retain, and motivate employees, any of which could materially adversely affectour business.

 

As we expand ourinternational operations, we will be required to recruit and retain experiencedmanagement, sales and technical personnel in our international offices, and weexpect that the identification, recruitment, training and retention of suchpersonnel will require significant management time and effort andresources.  Competition for employeeswith the skills required, particularly management, engineering and othertechnical personnel, is intense, and there can be no assurance that we will beable to attract and retain highly skilled employees in sufficient numbers tosustain our current business or to support future growth.  We may need topay recruiting or agency fees and offer additional compensation or incentivesto attract and retain these and other employees, resulting in an increase toour operating expenses.

 

In addition, for the lastseveral years, we have acquired several companies and these acquisitions haveresulted in increased responsibilities and placed significant strain on ourmanagerial, operational, and financial resources and resulted in new andincreased responsibilities for management personnel.  There can be noassurance that our management, personnel, systems, procedures, and controlsare, or will be, adequate to support our existing and future operations or thatwe will continue to grow.  If we fail torecruit and 

 

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retain sufficient andqualified managerial, operational, or financial personnel or to implement ormaintain internal systems that enable us to effectively manage our growingbusiness and operations worldwide, our financial results in any given periodmay be adversely affected and our business and financial condition could bematerially harmed.

 

**Terms and availability of creditcould adversely affect us and our operations.**

 

In the second quarter of2006, we obtained a $250 million unsecured, five-year, revolving, bank line ofcredit, and we used borrowings under this line of credit to fund a portion ofthe LANDesk acquisition and the purchase of our shares under ourrecently-expanded stock repurchase program. In July 2008, we amended the line of credit and borrowed anadditional $90 million under a three-year term note.  We may increase this bank debt or seek otherbank debt in the future.  The balanceoutstanding on our debt agreements was $170 million as of March 31,2009.  Interest expense on borrowingsunder the term loan and additional future borrowings under the line of creditcould adversely affect our future net income, margins, expenses, and financialconditions by:

 

·                                          Requiring us to dedicate a substantialportion of our cash flow from operations to payments on our indebtedness, whichwould reduce the availability of our cash flow to fund internal growth throughworking capital and capital expenditures and for other general corporatepurposes;

 

·                                          Increasing our vulnerability to economicdownturns in our industry;

 

·                                          Increasing our vulnerability to interestrate increases to the extent any of our variable rate debt is not hedged;

 

·                                          Placing us at a competitive disadvantagecompared to our competitors that have less debt in relation to cash flow;

 

·                                          Limiting our flexibility in planning foror reacting to changes in our business and our industry;

 

·                                          Limiting, among other things, our abilityto borrow additional funds, refinance the line of credit, or obtain otherfinancing capacity; and

 

·                                          Subjecting us to a risk of noncompliancewith financial and other restrictive covenants in our indebtedness.

 

The line of credit and term loan contain affirmativeand negative covenants, including limitations on our ability to (i) makedistributions, investments, and other payments unless we satisfy certainfinancial tests or other criteria, (ii) incur additional indebtedness, (iii) restructureour subsidiaries, and (iv) make acquisitions and capitalexpenditures.  All of these restrictionscould affect our ability to operate our business and may limit our ability totake advantage of potential business opportunities as they arise.  The failure to comply with these covenantscould result in an event of default which, if not cured or waived, could have amaterial adverse effect on us.

 

Our ability to complywith these provisions of our line of credit and term loan may be affected bychanges in the economic or business conditions or other events beyond ourcontrol.  If we do not comply with thesecovenants and restrictions, we could be in default under our line of creditand/or the term loan, and our debt, together with accrued interest, could thenbe declared immediately due and payable. There can be no assurance that we will be able to obtain sufficientfunds to enable us to repay or refinance our debt obligations on commerciallyreasonable terms or at all.  We also faceinterest rate risk on our bank line of credit and term loan which currentlybears interest at a variable rate of LIBOR plus 150 basis points.  We have hedged this exposure to interest raterisk with interest rate swaps, which have a remaining notional amount of $150million, with Regions Bank and SunTrust Bank.

 

**Unanticipatedchanges in our tax rates or exposure to additional income tax liabilities couldaffect our profitability.**

 

We are subject to incometaxes in both the United States and various foreign jurisdictions, and ourdomestic and international tax liabilities are subject to the allocation ofexpenses in different jurisdictions.  Our effective tax rates could beadversely affected by changes in the mix of earnings in countries withdiffering statutory tax rates, in the valuation of deferred tax assets andliabilities, in tax laws and treaties, or by material audit assessments, whichcould affect our profitability.  In addition, the amount of income taxeswe pay is subject to audit in various jurisdictions, and a material assessmentby a governing tax authority could affect our profitability.

 

**Failureto maintain adequate internal systems and effective internal controls over ourfinancial reporting and information systems could result in our management andauditors being unable to certify the effectiveness of our internal controlsover financial reporting and information systems, which could harm our businessreputation and cause our stock price to decline.**

 

Section 404 of theSarbanes-Oxley Act of 2002 requires that we implement and maintain adequateinternal systems and effective internal controls over financial reporting andinformation systems.  The absence of suchcontrols could have a material 

 

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adverse effect on ourbusiness, financial condition, and results of operations.  In addition, correction of any “significantdeficiencies” or “material weaknesses” (as defined under PCAOB guidelines)could require additional remedial measures including hiring additionalpersonnel, which could be costly and time-consuming.  If a significant deficiency or materialweakness exists at any year-end (including a material weakness identified priorto year-end for which there is an insufficient period of time to evaluate andconfirm the effectiveness of the corrections or related new procedures), ourmanagement and our auditors will be unable to report favorably as to theeffectiveness of our control over financial reporting or information systems.  This could result in a loss of investorconfidence in the accuracy and completeness of our financial reports and ourmanagement, which could result in a decline of our stock price, damage to ourbusiness reputation, and potential litigation.

 

**Provisionsin our charter documents and in Delaware law may discourage potentialacquisition bids for us and may prevent changes in management that stockholdersmay favor.**

 

Provisions in our charterdocuments could discourage potential acquisition proposals and could delay orprevent a change in control transaction that stockholders may favor. These provisions could have the effect of discouraging others from makingtender offers for shares, and as a result, these provisions may prevent themarket price of our common stock from reflecting the effects of actual orrumored takeover attempts and may prevent stockholders from reselling theirshares at or above the price at which they purchased their shares.  Theseprovisions may also prevent changes in management that stockholders mayfavor.  Our charter documents do not permit stockholders to act by writtenconsent, limit the ability of stockholders to call a stockholders meeting, andprovide for a classified Board of Directors, which means stockholders can onlyelect, or remove, a limited number of directors in any given year. Furthermore, our Board of Directors has the authority to issue up to fivemillion shares of preferred stock in one or more series.  The Board ofDirectors can fix the price, rights, preferences, privileges, and restrictionsof such preferred stock without any further vote or action by ourstockholders.  The issuance of shares of preferred stock may delay orprevent a change in control transaction without further action by ourstockholders.

 

In addition, Delaware lawmay inhibit potential acquisition bids for us.  Delaware law preventscertain Delaware corporations, including Avocent, from engaging, under certaincircumstances, in a business combination with any interested stockholder for threeyears following the date that such stockholder became an interestedstockholder.

 

**Item2.****          ****Unregistered Sales ofEquity Securities and Use of Proceeds.**

 

In the fourth quarter of2004 our Board of Directors approved a stock repurchase program whereby we may,from time to time, purchase our common stock in the open market, in privatelynegotiated transactions or otherwise, at prices that we deem appropriate.  Since the program’s initial approval through March 31,2009, our Board has authorized a total of 19 million shares to berepurchased.  The plan has no expirationdate.  Details of purchases under theplan during the three months ended March 31, 2009 are as follows:

 
| **Period:**                                          | ** ** | **Total Number of  Shares Purchased  During the Period** | ** ** | **Average Price Paid  Per Share for Period  Presented** | ** ** | **Total Cumulative  Number of  Shares Purchased as  Part of Publicly  Announced Plan** | ** ** | **Maximum  Number of  Shares  Remaining to  Purchase Under  the  Plan** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
|                                                 |       |                                                                              |       |                                                                             |       |                                                                                                                      |       |                                                                                   |       |
| January 1,  2009 — January 31, 2009   |       | 50,000                                                                            |       | $                                                                                | 14.60      |                                                                                                                      | 16,950,000 |                                                                                   | 2,050,000  |   |
| February 1,  2009 — February 28, 2009 |       | 675,000                                                                           |       | $                                                                                | 12.51      |                                                                                                                      | 17,625,000 |                                                                                   | 1,375,000  |   |
| March 1,  2009 — March 31, 2009       |       | 275,000                                                                           |       | $                                                                                | 11.26      |                                                                                                                      | 17,900,000 |                                                                                   | 1,100,000  |   |
| Quarter ended  March 31, 2009                   |       | 1,000,000                                                                         |       | $                                                                                | 12.27      |                                                                                                                      |       |                                                                                   |       |   |

 

Approximately219,000 shares were withheld as payment for employee payroll withholding taxesat the release of vested restricted stock units in the first quarter of 2009 (*see Note 3 to our condensed consolidated financialstatements contained in Part I, Item 1 of this quarterly report*).  The 219,000 shares were considered to betreasury shares; however, these treasury shares were immediately retired andare not considered in the table above.

 

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**Item6.****          ****Exhibits.**

 

(a) Exhibits

 

**31.1**                        Sarbanes-OxleyAct of 2002 Section 302(a) Certification of the Chief ExecutiveOfficer

** **

**31.2**                        Sarbanes-OxleyAct of 2002 Section 302(a) Certification of the Chief FinancialOfficer

** **

32.1                           Certificationof the Chief Executive Officer and the Chief Financial Officer pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

ITEMS 3, 4, AND 5 ARE NOTAPPLICABLE AND HAVE BEEN OMITTED.

 

### **SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                    |   | AVOCENT CORPORATION                                             |
|-------------------------|--------|-----------------------------------------------------------------|
|                    |   | (Registrant)                                                    |
|                    |   |                                                            |
|                    |   |                                                            |
| Date: May 11, 2009 |   | /s/  Edward H. Blankenship                                      |
|                    |   | Edward H. Blankenship                                           |
|                    |   | Senior Vice President  of Finance, Chief Financial              |
|                    |   | Officer, and Assistant  Secretary (Principal Financial Officer) |

 

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