Table of Contents

 

 

 

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

**WASHINGTON,D.C.  20549**

 

# **FORM 10-Q**

 

**(MarkOne)**

 
| **x** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

 

**Forthe quarterly period ended September 30, 2009 or**

 
| **o** | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**Forthe transition period from           to**

 

**Commissionfile number: 000-30575**

 

**AVOCENT CORPORATION**

(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. x Yes oNo

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T duringthe preceding 12 months (or for such shorter period that the registrantwas required to submit 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 October 30, 2009, the number of outstanding sharesof the Registrant’s Common Stock was 44,591,979.

 

 

 

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Table of Contents

 

**AVOCENTCORPORATION**

**FORM 10-Q**

**September 30,2009**

 

**INDEX**

 
| ** **   | ** **            | **Page(s)**                                                                                                                               |
|--------------|-----------------------|-------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   | ** **            | ** **                                                                                                                                |
| Part I  | Financial Information |                                                                                                                                      |   |
|         |                  |                                                                                                                                      |   |
|         | Item 1.               | Financial Statements (unaudited)                                                                                                          |   |   |
|         |                  |                                                                                                                                      |   |   |
|         |                  | Consolidated  Statements of Operations for the Three and Nine Months Ended  September 30, 2009 and September 26, 2008           |   | 3 |
|         |                  | Consolidated  Balance Sheets at September 30, 2009 and December 31, 2008                                                        |   | 4 |
|         |                  | Condensed  Consolidated Statements of Cash Flows for the Three and Nine Months Ended  September 30, 2009 and September 26, 2008 |   | 5 |
|         |                  | Notes to Condensed Consolidated Financial Statements                                                                                      |   | 6-18 |
|         |                  |                                                                                                                                      |   |   |
|         | Item 2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                               |   | 19-30 |
|         |                  |                                                                                                                                      |   |   |
|         | Item 3.               | Quantitative  and Qualitative Disclosures about Market Risks                                                                              |   | 30 |
|         |                  |                                                                                                                                      |   |   |
|         | Item 4.               | Controls and  Procedures                                                                                                                  |   | 31 |
|         |                  |                                                                                                                                      |   |   |
| Part II | Other Information     |                                                                                                                                      |   |
|         |                  |                                                                                                                                      |   |   |
|         | Item 1.               | Legal Proceedings                                                                                                                         |   | 31 |
|         |                  |                                                                                                                                      |   |   |
|         | Item 1A.              | Risk Factors                                                                                                                              |   | 32 |
|         |                  |                                                                                                                                      |   |   |
|         | Item 2.               | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                              |   | 48 |
|         |                  |                                                                                                                                      |   |   |
|         | Item 6.               | Exhibits                                                                                                                                  |   | 49 |
|         |                  |                                                                                                                                      |   |   |
| Signature    |                  | 50                                                                                                                                        |

 

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Tableof Contents

 

**PART I —FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

**AVOCENT CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
| ** **                                                                                                                                                                                                                       | ** ** | **For the  three months ended** | ** ** | **For the  nine months ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                                                       | ** ** | **September 30,**          | ** ** | **September 26,**         | ** ** | **September 30,** | ** ** | **September 26,** | ** ** |
| ** **                                                                                                                                                                                                                       | ** ** | **2009**                        | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net sales:                                                                                                                                                                                                                       | * *   | * *                        | * *   | * *                       | * *   | * * | * * | * * | * * |
| Products                                                                                                                                                                                                                         |       | $                               | 93,564     |                           | $          | 131,693 |   | $ | 263,828 |   | $ | 354,861 |   |
| Licenses and royalties                                                                                                                                                                                                           |       | 24,948                          |       | 30,873                         |       | 71,185 |   | 80,688 |   |
| Services                                                                                                                                                                                                                         |       | 19,043                          |       | 20,482                         |       | 57,235 |   | 48,080 |   |
| Total net sales                                                                                                                                                                                                                  |       | 137,555                         |       | 183,048                        |       | 392,248 |   | 483,629 |   |
|                                                                                                                                                                                                                             |       |                            |       |                           |       |   |   |   |   |
| Cost of sales:                                                                                                                                                                                                                   |       |                            |       |                           |       |   |   |   |   |
| Products                                                                                                                                                                                                                         |       | 43,648                          |       | 58,355                         |       | 120,499 |   | 154,685 |   |
| Licenses and royalties                                                                                                                                                                                                           |       | 308                             |       | 566                            |       | 1,243 |   | 1,935 |   |
| Services                                                                                                                                                                                                                         |       | 4,822                           |       | 5,862                          |       | 14,406 |   | 12,186 |   |
| Amortization of intangibles related to licenses and  royalties                                                                                                                                                                   |       | 4,133                           |       | 4,218                          |       | 12,823 |   | 9,753 |   |
| Total cost of sales (including stock  compensation of $552 and $1,014 for the three and nine months ended Sept. 30,  2009; $298 and $797 for the three and nine months ended Sept. 26, 2008)                                     |       | 52,911                          |       | 69,001                         |       | 148,971 |   | 178,559 |   |
|                                                                                                                                                                                                                             |       |                            |       |                           |       |   |   |   |   |
| Gross profit                                                                                                                                                                                                                     |       | 84,644                          |       | 114,047                        |       | 243,277 |   | 305,070 |   |
|                                                                                                                                                                                                                             |       |                            |       |                           |       |   |   |   |   |
| Research and development expenses (including  stock compensation of $869 and $2,727 for the three and nine months ended  Sept. 30, 2009; $1,523 and $3,878 for the three and nine months ended Sept.  26, 2008)                  |       | 19,548                          |       | 24,398                         |       | 61,077 |   | 72,126 |   |
| Acquired in-process research and development  expenses                                                                                                                                                                           |       | —                          |       | 700                            |       | — |   | 700 |   |
| Selling, general and administrative expenses (including  stock compensation of $5,194 and $10,992 for the three and nine months ended  Sept. 30, 2009; $3,986 and $9,288 for the three and nine months ended Sept.  26, 2008)    |       | 52,182                          |       | 60,266                         |       | 149,521 |   | 172,830 |   |
| Restructuring, integration and retirement expenses  (including stock compensation of ($142) and ($138) for the three and  nine months ended Sept. 30, 2009; $480 and $2,999 for the three and nine  months ended Sept. 26, 2008) |       | 2,884                           |       | 5,926                          |       | 9,709 |   | 13,627 |   |
| Amortization of intangible assets                                                                                                                                                                                                |       | 7,780                           |       | 8,971                          |       | 25,843 |   | 24,123 |   |
| Impairment of goodwill                                                                                                                                                                                                           |       | —                          |       | —                         |       | 80,000 |   | — |   |
| Total operating expenses                                                                                                                                                                                                         |       | 82,394                          |       | 100,261                        |       | 326,150 |   | 283,406 |   |
|                                                                                                                                                                                                                             |       |                            |       |                           |       |   |   |   |   |
| Income (loss) from operations                                                                                                                                                                                                    |       | 2,250                           |       | 13,786                         |       | (82,873 | ) | 21,664 |   |
|                                                                                                                                                                                                                             |       |                            |       |                           |       |   |   |   |   |
| Net investment income                                                                                                                                                                                                            |       | 105                             |       | 295                            |       | 390 |   | 1,863 |   |
| Interest expense                                                                                                                                                                                                                 |       | (1,845                          | )          | (2,268                         | )          | (6,079 | ) | (5,915 | ) |
| Other income, net                                                                                                                                                                                                                |       | 1,888                           |       | 2,362                          |       | 724 |   | 2,722 |   |
|                                                                                                                                                                                                                             |       |                            |       |                           |       |   |   |   |   |
| Income (loss) before provision (benefit) for income  taxes                                                                                                                                                                       |       | 2,398                           |       | 14,175                         |       | (87,838 | ) | 20,334 |   |
| Provision (benefit) for income taxes                                                                                                                                                                                             |       | (4,652                          | )          | 3,214                          |       | (31,617 | ) | 5,199 |   |
|                                                                                                                                                                                                                             |       |                            |       |                           |       |   |   |   |   |
| Net income (loss)                                                                                                                                                                                                                |       | $                               | 7,050      |                           | $          | 10,961 |   | $ | (56,221 | ) | $ | 15,135 |   |
|                                                                                                                                                                                                                             |       |                            |       |                           |       |   |   |   |   |
| Earnings (loss) per share:                                                                                                                                                                                                       |       | $                               | 0.16       |                           | $          | 0.24 |   | $ | (1.27 | ) | $ | 0.33 |   |
| Basic                                                                                                                                                                                                                            |       | $                               | 0.16       |                           | $          | 0.24 |   | $ | (1.27 | ) | $ | 0.33 |   |
| Diluted                                                                                                                                                                                                                          |       |                            |       |                           |       |   |   |   |   |
| Weighted average shares used in computing earnings  (loss) per share:                                                                                                                                                            |       |                            |       |                           |       |   |   |   |   |
| Basic                                                                                                                                                                                                                            |       | 44,341                          |       | 44,792                         |       | 44,383 |   | 45,241 |   |
| Diluted                                                                                                                                                                                                                          |       | 44,801                          |       | 45,467                         |       | 44,383 |   | 45,868 |   |

 

See notesaccompanying these condensed consolidated financial statements.

 

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**AvocentCorporation**

**Consolidated Balance Sheets**

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

 
| ** **                                                                                                                                                                                                                     | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                     | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                                |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                     |       | $                            | 110,103    |                        | $          | 126,858 |   |
| Accounts  receivable, less allowance for doubtful accounts of $3,562 and $4,548 at  September 30, 2009 and December 31, 2008, respectively                                                                           |       | 99,536                       |       | 122,133                     |       |
| Other  receivables                                                                                                                                                                                                             |       | 7,752                        |       | 12,281                      |       |
| Inventories                                                                                                                                                                                                                    |       | 24,236                       |       | 31,516                      |       |
| Other current  assets                                                                                                                                                                                                          |       | 7,871                        |       | 5,209                       |       |
| Deferred tax  assets, net                                                                                                                                                                                                      |       | 7,544                        |       | 6,885                       |       |
| Total current  assets                                                                                                                                                                                                          |       | 257,042                      |       | 304,882                     |       |
|                                                                                                                                                                                                                           |       |                         |       |                        |       |
| Property and  equipment, net                                                                                                                                                                                                   |       | 35,266                       |       | 38,197                      |       |
| Goodwill                                                                                                                                                                                                                       |       | 535,529                      |       | 616,326                     |       |
| Other intangible  assets, net                                                                                                                                                                                                  |       | 142,088                      |       | 180,276                     |       |
| Deferred tax  asset, non-current                                                                                                                                                                                               |       | 46,198                       |       | 10,873                      |       |
| Other assets                                                                                                                                                                                                                   |       | 5,705                        |       | 3,616                       |       |
| Total assets                                                                                                                                                                                                                   |       | $                            | 1,021,828  |                        | $          | 1,154,170 |   |
|                                                                                                                                                                                                                           |       |                         |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                  | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                                                                          |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                                                               |       | $                            | 13,504     |                        | $          | 17,494 |   |
| Accrued wages  and commissions                                                                                                                                                                                                 |       | 23,206                       |       | 30,966                      |       |
| Accrued  liabilities                                                                                                                                                                                                           |       | 29,484                       |       | 42,027                      |       |
| Income taxes  payable                                                                                                                                                                                                          |       | 15,035                       |       | 11,678                      |       |
| Deferred  revenue, current                                                                                                                                                                                                     |       | 65,678                       |       | 66,248                      |       |
| Total current  liabilities                                                                                                                                                                                                     |       | 146,907                      |       | 168,413                     |       |
|                                                                                                                                                                                                                           |       |                         |       |                        |       |
| Unsecured bank  credit facility                                                                                                                                                                                                |       | 125,000                      |       | 170,000                     |       |
| Deferred  revenue, non-current                                                                                                                                                                                                 |       | 7,134                        |       | 9,572                       |       |
| Other  non-current liabilities                                                                                                                                                                                                 |       | 3,480                        |       | 4,028                       |       |
| Total  liabilities                                                                                                                                                                                                             |       | 282,521                      |       | 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; September 30,  2009 — 55,307 shares issued and 44,280 outstanding; December 31, 2008 —  54,533 shares issued and 44,706 outstanding; |       | 55                           |       | 55                          |       |
| Additional  paid-in capital                                                                                                                                                                                                    |       | 1,237,480                    |       | 1,230,840                   |       |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                                 |       | 599                          |       | (1,606                      | )          |
| Accumulated deficit                                                                                                                                                                                                            |       | (249,468                     | )          | (193,247                    | )          |
| Treasury stock,  at cost; September 30, 2009, 11,027 shares; December 31, 2008,  9,827 shares;                                                                                                                       |       | (249,359                     | )          | (233,885                    | )          |
| Total  stockholders’ equity                                                                                                                                                                                               |       | 739,307                      |       | 802,157                     |       |
|                                                                                                                                                                                                                           |       |                         |       |                        |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                               |       | $                            | 1,021,828  |                        | $          | 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 nine months ended** | ** **   |
|-------------------------------------------------------------------------------------------|--------------|-------------------------------|--------------|
| ** **                                                                                | ** **   | **September 30,**        | ** **   | **September 26,** | ** ** |
| ** **                                                                                | ** **   | **2009**                      | ** **   | **2008** | ** ** |
| *** ***                                                                              | *** *** | *** ***                  | *** *** | *** *** | *** *** |
| Cash  flows from operating activities:                                                    | * *     | * *                      | * *     | * * | * * |
| Net  income (loss)                                                                        |         | $                             | (56,221      | ) | $ | 15,135 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |         |                          |         |   |   |
| Depreciation                                                                              |         | 6,113                         |         | 7,027 |   |
| Amortization  of intangible assets                                                        |         | 39,002                        |         | 34,416 |   |
| Stock-based  compensation                                                                 |         | 14,586                        |         | 16,957 |   |
| Acquired  in-process research and development expense                                     |         | —                        |         | 700 |   |
| Net  loss on disposition of fixed assets                                                  |         | 238                           |         | 548 |   |
| Impairment  of goodwill                                                                   |         | 80,000                        |         | — |   |
| Tax adjustments  from stock-based compensation                                            |         | 3,216                         |         | (85 | ) |
| Changes  in operating assets and liabilities, net of acquisitions:                        |         |                          |         |   |   |
| Accounts  receivable, net                                                                 |         | 24,670                        |         | (8,214 | ) |
| Inventories                                                                               |         | 7,356                         |         | 4,521 |   |
| Other  assets                                                                             |         | 239                           |         | (3,127 | ) |
| Accounts  payable                                                                         |         | (6,632                        | )            | (4,252 | ) |
| Accrued  wages and commissions                                                            |         | (7,760                        | )            | 4,170 |   |
| Accrued  other liabilities and deferred revenue                                           |         | (17,306                       | )            | 3,532 |   |
| Income  taxes, current and deferred                                                       |         | (36,061                       | )            | (5,167 | ) |
| Net  cash provided by operating activities                                                |         | 51,440                        |         | 66,161 |   |
| ** **                                                                                | ** **   | ** **                    | ** **   | ** ** | ** ** |
| Cash  flows from investing activities:                                                    |         |                          |         |   |   |
| Purchase  of Ergo, net of cash received                                                   |         | —                        |         | (28,443 | ) |
| Purchase  of Touchpaper, net of cash received                                             |         | —                        |         | (47,113 | ) |
| Purchase  of other intangible assets                                                      |         | (727                          | )            | (674 | ) |
| Additional  consideration paid for LANDesk and Touchpaper                                 |         | (4,077                        | )            | — |   |
| Purchases  of property and equipment                                                      |         | (3,823                        | )            | (6,773 | ) |
| Proceeds  from sale of property and equipment                                             |         | 622                           |         | — |   |
| Maturities  and proceeds from sales of investments                                        |         | —                        |         | 5,942 |   |
| Net  cash used in investing activities                                                    |         | (8,005                        | )            | (77,061 | ) |
| ** **                                                                                | ** **   | ** **                    | ** **   | ** ** | ** ** |
| Cash  flows from financing activities:                                                    | ** **   | ** **                    | ** **   | ** ** | ** ** |
| Borrowings  under term loan                                                               |         | —                        |         | 90,000 |   |
| Payments  under unsecured line of credit, net                                             |         | (45,000                       | )            | (5,000 | ) |
| Proceeds  from employee stock plans                                                       |         | 1,509                         |         | 1,484 |   |
| Tax adjustments  from stock-based compensation                                            |         | (3,216                        | )            | 85 |   |
| Purchases  of treasury stock                                                              |         | (15,474                       | )            | (64,449 | ) |
| Net  cash (used in) provided by financing activities                                      |         | (62,181                       | )            | 22,120 |   |
|                                                                                      |         |                          |         |   |   |
| Effect  of exchange rate changes on cash and cash equivalents                             |         | 1,991                         |         | (1,502 | ) |
|                                                                                      |         |                          |         |   |   |
| Net  increase (decrease) in cash and cash equivalents                                     |         | (16,755                       | )            | 9,718 |   |
| Cash  and cash equivalents at beginning of period                                         |         | 126,858                       |         | 105,183 |   |
| Cash  and cash equivalents at end of period                                               |         | $                             | 110,103      |   | $ | 114,901 |   |

 

See notesaccompanying these condensed consolidated financial statements.

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(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 yearor 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 ourannual results based on years ending December 31.  Prior to 2009, we reported our quarterlyresults for the first three interim periods based on 13 week periods ending onFridays and for the fourth interim period ending on December 31.  Beginning January 1, 2009, we beganreporting our quarterly periods based on the calendar month end to better alignour quarter ends with those of our customers and others within our industry.

 

Certain reclassifications have beenmade to the prior year’s condensed consolidated financial statements in orderto conform to the 2009 presentation. These reclassifications had no effect onpreviously reported net income, net cash provided by operating activities, netcash provided by investing activities nor total 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:

 

| ** **      | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **      | ** ** | ** **                  | ** ** | ** **                 | ** ** |
| Raw  materials  |       | $                           | 2,135      |                       | $          | 525 |   |
| Work-in-process |       | 787                         |       | 308                        |       |
| Finished  goods |       | 21,314                      |       | 30,683                     |       |
| Inventories     |       | $                           | 24,236     |                       | $          | 31,516 |   |

 

Inventories above have been reduced by reserves forexcess and obsolete inventories of $4,645 and $6,401 as of September 30,2009 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 and ninemonths ended September 30, 2009 and September 26, 2008 as follows:

 

| ** **             | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **Sept. 30,  2009**            | ** ** | **Sept. 26,  2008**           | ** ** | **Sept. 30,  2009** | ** ** | **Sept. 26,  2008** | ** ** |
|                   |       |                           |       |                          |       |   |   |   |   |
| Stock option exercises |       | 24,000                         |       | 73,000                        |       | 49,000 |   | 138,000 |   |

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(Unaudited, inthousands, except share data)

 

We issued commonstock as a result of restricted stock unit (RSU) vesting activity during thethree and nine months ended September 30, 2009 and September 26, 2008as follows:

 

| ** **               | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|--------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **               | ** ** | **Sept. 30,  2009**            | ** ** | **Sept. 26,  2008**           | ** ** | **Sept. 30,  2009** | ** ** | **Sept. 26,  2008** | ** ** |
| Net RSUs issued          |       |                           |       |                          |       |   |   |   |   |
| RSU’s  vested       |       | 87,000                         |       | 28,000                        |       | 926,000 |   | 617,000 |   |
| Shares  withheld for tax |       | (27,000                        | )          | (4,000                        | )          | (274,000 | ) | (179,000 | ) |
| Net RSUs issued          |       | 60,000                         |       | 24,000                        |       | 652,000 |   | 438,000 |   |

 

Share repurchaseactivity during the three and nine months ended September 30, 2009 and September 26,2008 was as follows:

 

| ** **         | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|--------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **         | ** ** | **Sept. 30,  2009**            | ** ** | **Sept. 26,  2008**           | ** ** | **Sept. 30,  2009** | ** ** | **Sept. 26,  2008** | ** ** |
|               |       |                           |       |                          |       |   |   |   |   |
| Shares repurchased |       | 200,000                        |       | —                        |       | 1,200,000 |   | 4,000,000 |   |

 

We issued commonstock as a result of employee stock purchase plan (ESPP) activity during thethree and nine months ended September 30, 2009 and September 26, 2008as follows:

 

| ** **    | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|---------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **    | ** ** | **Sept. 30,  2009**            | ** ** | **Sept. 26,  2008**           | ** ** | **Sept. 30,  2009** | ** ** | **Sept. 26,  2008** | ** ** |
|          |       |                           |       |                          |       |   |   |   |   |
| ESPP activity |       | —                         |       | —                        |       | 73,000 |   | — |   |

 

RSUs granted —During the first nine months of 2009, our Compensation Committee approved thegrant of 1,656,000 restricted stock units to our employees, officers anddirectors.  Of these grants, 1,071,000were time-based and 585,000 were based on market and performanceconditions.  During the first nine monthsof 2008, our Compensation Committee approved the grant of 1,551,000 restrictedstock units to our employees, officers and directors.  Of these grants, 963,000 were time-based and588,000 were based on market and performance conditions.

 

Note 4.   Accumulated Other Comprehensive Income (Loss)

 

Werecord our foreign currency translation adjustments and unrealized gains andlosses on cash flow hedges, net of tax, within accumulated other comprehensiveincome (loss).This comprehensive income (loss) is included as a separatecomponent of stockholders’ equity with year to date balances for the ninemonths ended September 30, 2009 and September 26, 2008 as follows:

 
| ** **                               | ** ** | **For the  nine months ended**     | ** ** |
|------------------------------------------|------------|------------------------------------|------------|
| ** **                               | ** ** | **September 30,********2009** | ** ** | **September 26,  2008** | ** ** |
| Comprehensive  income (loss)             |       |                               |       |   |   |
| Net income  (loss)                       |       | $                                  | (56,221    | ) | $ | 15,135 |   |
| Unrealized gains  on cash flow hedge     |       | 471                                |       | 430 |   |
| Foreign currency  translation adjustment |       | 1,734                              |       | (1,871 | ) |
| Total  comprehensive income (loss)       |       | $                                  | (54,016    | ) | $ | 13,694 |   |

 

Asof September 30, 2009 and December 31, 2008, total accumulated othercomprehensive income (loss) was $599 and $(1,606), respectively.

 

7

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(Unaudited, inthousands, except share data)

 

Note 5.   Earnings (Loss) Per Share (share data in thousands)

 
| ** **                                                           | ** ** | **Income (Loss) (Numerator)** | ** ** | **Shares   (Denominator)** | ** ** | **Per-Share   Amount** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|------------------------|------------|
| ** **                                                           | ** ** | ** **                    | ** ** | ** **                 | ** ** | ** **             | ** ** |
| **For the three months ended September 30,  2009**              |       |                          |       |                       |       |                   |       |
| **Basic EPS**                                                        |       |                          |       |                       |       |                   |       |
| Net  income available to common stockholders                         |       | $                             | 7,050      |                       | 44,341     |                   | $          | 0.16 |   |
| **Effect of Dilutive Securities**                                    |       |                          |       |                       |       |                   |       |
| Stock  options and unvested RSUs                                     |       | —                        |       | 460                        |       | —                 |       |
| **Diluted EPS**                                                      |       |                          |       |                       |       |                   |       |
| Net  income available to common stockholders and assumed conversions |       | $                             | 7,050      |                       | 44,801     |                   | $          | 0.16 |   |
|                                                                 |       |                          |       |                       |       |                   |       |
| **For the three months ended September 26,  2008**              |       |                          |       |                       |       |                   |       |
| **Basic EPS**                                                        |       |                          |       |                       |       |                   |       |
| Net  income available to common stockholders                         |       | $                             | 10,961     |                       | 44,792     |                   | $          | 0.24 |   |
| **Effect of Dilutive Securities**                                    |       |                          |       |                       |       |                   |       |
| Stock  options and unvested restricted stock awards                  |       | —                        |       | 675                        |       | —                 |       |
| **Diluted EPS**                                                      |       |                          |       |                       |       |                   |       |
| Net  income available to common stockholders and assumed conversions |       | $                             | 10,961     |                       | 45,467     |                   | $          | 0.24 |   |
|                                                                 |       |                          |       |                       |       |                   |       |
| **For the nine months ended September 30,  2009**               |       |                          |       |                       |       |                   |       |
| **Basic EPS**                                                        |       |                          |       |                       |       |                   |       |
| Net  loss available to common stockholders                           |       | $                             | (56,221    | )                          | 44,383     |                   | $          | (1.27 | ) |
| **Effect of Dilutive Securities**                                    |       |                          |       |                       |       |                   |       |
| Stock  options and unvested RSUs                                     |       | —                        |       | —                     |       | —                 |       |
| **Diluted EPS**                                                      |       |                          |       |                       |       |                   |       |
| Net  loss available to common stockholders and assumed conversions   |       | $                             | (56,221    | )                          | 44,383     |                   | $          | (1.27 | ) |
|                                                                 |       |                          |       |                       |       |                   |       |
| **For the nine months ended September 26,  2008**               |       |                          |       |                       |       |                   |       |
| **Basic EPS**                                                        |       |                          |       |                       |       |                   |       |
| Net  income available to common stockholders                         |       | $                             | 15,135     |                       | 45,241     |                   | $          | 0.33 |   |
| **Effect of Dilutive Securities**                                    |       |                          |       |                       |       |                   |       |
| Stock  options and unvested restricted stock awards                  |       | —                        |       | 627                        |       | —                 |       |
| **Diluted EPS**                                                      |       |                          |       |                       |       |                   |       |
| Net  income available to common stockholders and assumed conversions |       | $                             | 15,135     |                       | 45,868     |                   | $          | 0.33 |   |

 

Anti-dilutive options to purchase common stockoutstanding were excluded from the calculations above.  Anti-dilutive options and anti-dilutive RSUstotaled 3,160 and 4,884 for the three and nine months ended September 30,2009, respectively. Anti-dilutive options and anti-dilutive RSUs totaled 3,871and 4,074 for the three and nine months ended September 26, 2008,respectively.

 

Note 6.   SegmentReporting

 

In the thirdquarter of 2008, we began the process of dissolving our Connectivity and Controlbusiness unit and merging its products into our remaining business units. Wedivided this business unit into its three product lines: the Equinox brandedserial business, the Broadcast business and the Pro Audio Visual business.  We folded the broadcast product line intoManagement Systems in the third quarter of 2008.  We folded the Serial product line and the ProAudio Visual product line into Management Systems during third quarter of 2009.  As a result of these actions, all revenuesand costs associated with our Connectivity and Control business are includedwithin Management Systems in the tables below. Additionally, historical segment results for Management Systems havebeen changed to reflect these changes and the Connectivity and Control businessunit has now been effectively dissolved.

 

8

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS,CONTINUED**

(Unaudited, inthousands, except share data)

 

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 LANDeskand for Corporate and unallocated:

 
| ** **                 | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|----------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                 | ** ** | **Sept. 30,  2009**            | ** ** | **Sept. 26,  2008**           | ** ** | **Sept. 30,  2009** | ** ** | **Sept. 26,  2008** | ** ** |
| Net revenue:               |       |                           |       |                          |       |   |   |   |   |
| Management  Systems        |       | $                              | 100,322    |                          | $          | 140,983 |   | $ | 282,289 |   | $ | 378,995 |   |
| LANDesk                    |       | 36,459                         |       | 41,559                        |       | 107,625 |   | 102,594 |   |
| Corporate  and unallocated |       | 774                            |       | 506                           |       | 2,334 |   | 2,040 |   |
| Total net revenue          |       | $                              | 137,555    |                          | $          | 183,048 |   | $ | 392,248 |   | $ | 483,629 |   |

** **
| ** **                                          | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|-----------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                          | ** ** | **Sept. 30,  2009**            | ** ** | **Sept. 26,  2008**           | ** ** | **Sept. 30,  2009** | ** ** | **Sept. 26,  2008** | ** ** |
| Operating income (loss):                            |       |                           |       |                          |       |   |   |   |   |
| Management  Systems                                 |       | $                              | 23,924     |                          | $          | 38,634 |   | $ | 57,477 |   | $ | 93,351 |   |
| LANDesk                                             |       | 4,931                          |       | 7,620                         |       | 17,152 |   | 12,161 |   |
| Corporate  and unallocated costs                    |       | (5,194                         | )          | (6,844                        | )          | (14,394 | ) | (21,515 | ) |
| Acquired  research and development expense          |       | —                         |       | (700                          | )          | — |   | (700 | ) |
| Amortization  of intangibles and other expenses     |       | (11,913                        | )          | (13,191                       | )          | (38,666 | ) | (34,043 | ) |
| Impairment  of goodwill                             |       | —                         |       | —                        |       | (80,000 | ) | — |   |
| Restructuring,  integration and retirement expenses |       | (3,025                         | )          | (5,446                        | )          | (9,847 | ) | (10,628 | ) |
| Stock-based  compensation expense                   |       | (6,473                         | )          | (6,287                        | )          | (14,595 | ) | (16,962 | ) |
| Total  income (loss) from operations                |       | $                              | 2,250      |                          | $          | 13,786 |   | $ | (82,873 | ) | $ | 21,664 |   |

** **

Sales by productline for Management Systems and LANDesk for the three and nine months ended September 30,2009 and September 26, 2008 are as follows:

 
| ** **                           | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **Sept. 30,  2009**            | ** ** | **Sept. 26,  2008**           | ** ** | **Sept. 30,  2009** | ** ** | **Sept. 26,  2008** | ** ** |
| Management Systems net revenue:      |       |                           |       |                          |       |   |   |   |   |
| KVM                                  |       | $                              | 67,314     |                          | $          | 97,101 |   | $ | 191,706 |   | $ | 271,379 |   |
| Serial  management                   |       | 7,706                          |       | 13,517                        |       | 22,327 |   | 39,572 |   |
| Embedded  software and solutions     |       | 7,493                          |       | 10,229                        |       | 19,731 |   | 26,981 |   |
| Other                                |       | 17,809                         |       | 20,136                        |       | 48,525 |   | 41,063 |   |
| Total Management Systems net revenue |       | $                              | 100,322    |                          | $          | 140,983 |   | $ | 282,289 |   | $ | 378,995 |   |

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(Unaudited, inthousands, except share data)

 
| ** **                 | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|----------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                 | ** ** | **Sept. 30,  2009**            | ** ** | **Sept. 26,  2008**           | ** ** | **Sept. 30,  2009** | ** ** | **Sept. 26,  2008** | ** ** |
| LANDesk net revenue:       | ** ** | ** **                     | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Licenses  and royalties    |       | $                              | 18,069     |                          | $          | 22,092 |   | $ | 52,790 |   | $ | 57,919 |   |
| Maintenance  and services  |       | 18,390                         |       | 19,467                        |       | 54,835 |   | 44,675 |   |
| Total  LANDesk net revenue |       | $                              | 36,459     |                          | $          | 41,559 |   | $ | 107,625 |   | $ | 102,594 |   |

 

We sell ourproducts internationally to customers in several countries; however no foreigncountry accounted for more than 10% of sales in the first nine months of 2009or 2008.

 

Followingis a presentation of long-lived assets as of September 30, 2009 and December 31,2008:

 
| ** **          | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------|------------|------------------------------|------------|-----------------------------|------------|
| Long-lived  assets: |       |                         |       |                        |       |
| United  States      |       | $                            | 26,951     |                        | $          | 28,176 |   |
| International       |       | 8,315                        |       | 10,021                      |       |
| Total               |       | $                            | 35,266     |                        | $          | 38,197 |   |

** **

**Note 7.**   ForwardContracts, Interest Rate Swaps and Credit Facility

** **

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 aremarked-to-market each quarter and included in trade payables, with the offsettinggain or loss included in other income (expense) in the accompanyingconsolidated statements of income.  As ofSeptember 30, 2009, we had five open forward contracts with an approximatefair value of $(22).  As of December 31,2008, we had four open forward contracts with an approximate fair value of $26.

 

Therewas $125,000 outstanding under our credit facility, which includes both ourline of credit and term loan, as of September 30, 2009.  The line of credit and term loan containaffirmative and 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 in compliance with these covenants andrelated tests as of September 30, 2009.**** Failure to comply with these covenants couldresult in an event of default which, if not cured or waived, could have amaterial adverse effect on us.  We pay acommitment fee on the unused portion of the line of credit based on the resultsof a leverage ratio computation. As of September 30, 2009, the commitmentfee rate is 20 basis points per quarter. The fair value of our unsecured bankcredit facility approximates its carrying value at September 30, 2009.

 

As of September 30,2009, 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 remaining notional amount of thisinterest rate swap was $20,000 as of September 30, 2009.  The swap was effective on May 1, 2008and terminates on December 31, 2009.  The swap calls for us to makefixed rate payments of 3.05% over the term of the hedge and to receive floatingrate payments based on LIBOR (matching the LIBOR rate in the line of creditabove) from the counter-party.  On November 6,2008 we 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 unless otherwise terminated by us at an earlier date.   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 term loan above) from the counter-party.

 

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. As of September 30, 2009, we anticipate these hedges willbe settled upon maturity and they are accounted for as cash flow hedges.  The interest rate swaps are recorded at fairvalue each reporting period with the changes in the fair value of the hedgesthat take place through the date of maturity recorded in accumulated othercomprehensive income (loss).

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS,CONTINUED**

(Unaudited, inthousands, except share data)

 

Theseinterest rate swaps qualify as derivative instruments and are designated ascash flow hedges.  We do not expect anymaterial amounts to be reclassified into earnings, as a result of interest rateswap ineffectiveness, within the next twelve months. The cash flow hedges werein a liability position as of September 30, 2009 and were included inother non-current liabilities in the consolidated balance sheet, as follows:

 
| ** **           | ** ** | **September 30,  2009** | ** ** |
|----------------------|------------|------------------------------|------------|
| Cash  flow hedges:   |       |                         |       |
| Interest rate  swaps |       | $                            | 2,727      |   |
|                      |            |                              |            |  |

 

Forthe nine months ended September 30, 2009, the activity related to ourinterest rate swaps designated as cash flow hedges is included in our condensedconsolidated financial statements as follows:

 
| ** **           | ** ** | **September 30, 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 |       | $                                                   | 471        |   | $ | — |   | $ | — |   |
|                      |            |                                                     |            |  |  |  |  |  |  |  |

 

**Note 8.**   Goodwill andOther Intangible Assets

** **

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

** **
| ** **                                | ** ** | **September 30, 2009**  | ** ** | **December 31, 2008**    | ** ** |
|-------------------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **                                | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** |
|                                      |       |                         |       |                          |       |   |   |   |   |
| Developed  technology                     |       | $                            | 84,437     |                          | $          | 43,896 |   | $ | 86,285 |   | $ | 31,401 |   |
| Internally  developed software for resale |       | 21,900                       |       | 11,254                        |       | 21,900 |   | 8,517 |   |
| Patents  and trademarks                   |       | 31,941                       |       | 14,173                        |       | 31,236 |   | 10,915 |   |
| Customer  base                            |       | 110,900                      |       | 48,103                        |       | 116,121 |   | 39,388 |   |
| Maintenance  contracts                    |       | 17,600                       |       | 7,920                         |       | 17,600 |   | 5,280 |   |
| Non-compete  agreements                   |       | 7,225                        |       | 6,569                         |       | 11,325 |   | 8,690 |   |
|                                      |       | $                            | 274,003    |                          | $          | 131,915 |   | $ | 284,467 |   | $ | 104,191 |   |

** **

**For the threemonths ended September 30, 2009 and September 26, 2008, amortizationexpense for other intangible assets was $11,995 and $13,383, respectively.  For the nine months ended September 30,2009 and September 26, 2008, amortization expense for other intangibleassets was $39,002 and $34,416, respectively. The approximate estimated annual amortization for other intangibles isas follows:**

** **

| **Years ending December 31:** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
| 2009,  remainder                   |       | $          | 11,727     |   |
| 2010                               |       | $          | 46,504     |   |
| 2011                               |       | $          | 38,170     |   |
| 2012                               |       | $          | 29,052     |   |
| 2013                               |       | $          | 16,036     |   |
| Thereafter                         |       | $          | 599        |   |

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(Unaudited, inthousands, except share data)

 

**We evaluate thecarrying value of goodwill for potential impairment annually during the fourthquarter of each year, and on an interim basis if an event occurs orcircumstances change that indicate a potential detrimental impact to the fairvalue of a reporting unit compared to its carrying value may have occurred.** Our fourth quarter 2008 impairment testconcluded that there had been no impairment of goodwill, however, there were certain factors noted during the 2008testing that required continued monitoring, especially related to any potentialfuture decline in our market capitalization. During the first quarter of 2009, we concluded that interim impairmenttesting was required due to the continued deterioration in the global economicenvironment, the resulting decrease in our market capitalization to less thanthe book value of our shareholders’ equity, and declining market valuations formany other companies in our peer group. In preparation for this interim testing, we revised our five yearforecast, used as a base element of this testing, in light of the continuingglobal recession.

** **

**As of September 30, 2009we have three reporting units: Management Systems (MS), LANDesk and AESS, whichis combined with MS for segment reporting purposes.   We**perform ourgoodwill impairment test in two steps. Step one compares the fair value of eachreporting unit to its carrying amount. If step one indicates that an impairmentpotentially exists, the second step is performed to measure the amount ofimpairment, if any.  Goodwill impairmentexists when the estimated fair value of goodwill is less than its carryingvalue.

** **

**For purposes of the interimstep one analysis prepared as of March 1, 2009, the fair values of ourreporting units were determined through the use of a combination of adiscounted cash flow analysis, utilizing the income approach, and the guidelinepublic company method, utilizing a market approach.  The result of each valuation was weighted indetermining each of the reporting unit’s fair value.**Underthe market approach, the fair value of each reporting unit is determined basedupon comparisons to public companies engaged in similar businesses. Under theincome approach, the fair value of each reporting unit was based on the presentvalue of estimated future cash flows. The income approach is dependent on anumber of significant management assumptions including estimated demand in eachgeographic market and the discount rate. The discount rate is commensurate withthe risk inherent in the projected cash flows and reflects an assumed rate ofreturn required by an investor in the current economic conditions.  Based on ourassessment of the market conditions, the weighting applied to the marketapproach for the March 1, 2009 valuation was decreased from 50% to 40% andthe weighting for the income approach was increased from 50% to 60%, ascompared to the assumptions as of October 1, 2008, the date used for ourmost recent prior impairment testing.  Webelieve that this change was appropriate as it reflects our longer term view,including our revised cash flow projections based on current expectations,while continuing to reflect the impact of declining equity values in thishighly volatile equity market impacting our stock price and the stock price ofmany 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, but, with the exception of LANDesk, theestimated fair values exceeded their carrying value.  We estimated the fair value of ManagementSystems to be $184 million higher, or approximately 35%, than its carryingvalue of $520 million.  Our remainingreporting units at the time were not material to our financial statements,however we estimated the combined fair value of these reporting units to be $49million higher, or well over double, their combined carrying value of $20million.**

** **

**As a result of our step onetesting, we then performed step two testing for potential goodwill impairmenton the LANDesk business unit.  Thistesting focuses on the identifiable tangible and intangible assets associatedwith a particular business unit and estimates the fair market value a potentialacquirer would assign them.  Any residualamount is considered to be applicable to goodwill and is compared to thecurrent carrying value of the related goodwill. Any unfavorable variance is considered as the impairment amount.  Our step two testing resulted in an $80,000impairment charge during our three months ended March 31, 2009 and isreflected in the following table.**

 

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**AVOCENTCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, inthousands, except share data)

 

**The changes inthe carrying amount of goodwill (*see note 11*)for the nine months ended September 30, 2009, are as follows:**

 

| ** **                             | ** ** | ** **     | ** ** | ** **  | ** ** | **Corporate** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|----------------|------------|-------------|------------|---------------|------------|------------|------------|
| ** **                             | ** ** | **Management** | ** ** | ** **  | ** ** | **and**       | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Systems**    | ** ** | **LANDesk** | ** ** | **Other**     | ** ** | **Total**  | ** ** |
|                                   |       |           |       |        |       |          |       |       |       |
| Balance as of  January 1, 2009    |       | $              | 335,096    |        | $          | 278,709       |       | $          | 2,521      |   | $ | 616,326 |   |
|                                   |       |           |       |        |       |          |       |       |       |
| Impairment loss  related to LANDesk    |       | —         |       | (80,000     | )          | —        |       | (80,000    | )          |
|                                   |       |           |       |        |       |          |       |       |       |
| Reallocation  from segment changes     |       | 2,521          |       |        |       | (2,521        | )          | —     |       |
|                                   |       |           |       |        |       |          |       |       |       |
| Other  adjustments                     |       | 27             |       | (824        | )          | —        |       | (797       | )          |
|                                   |       |           |       |        |       |          |       |       |       |
|                                   |       |           |       |        |       |          |       |       |       |
| Balance as of  September 30, 2009 |       |           |       |        |       |          |       |       |       |
| Goodwill                               |       | 337,644        |       | 277,885     |       | —        |       | 615,529    |       |
| Accumulated  impairment losses         |       | —         |       | (80,000     | )          | —        |       | (80,000    | )          |
|                                   |       | $              | 337,644    |        | $          | 197,885       |       | $          | —     |   | $ | 535,529 |   |

 

**Note 9.  ProductWarranties and Deferred Revenue**

 

The activity within theliability for warranty returns for the nine months ended September 30,2009 was as follows:

 

| Balance  as of January 1, 2009                              |   | $      | 2,245  |   |
|------------------------------------------------------------------|--------|--------|--------|--------|
| Accruals  for product warranties issued during the period        |   | 5,247  |   |
| Settlements  and adjustments to estimates made during the period |   | (5,797 | )      |
| Balance  as of September 30, 2009                           |   | $      | 1,695  |   |

 

Weinclude an accrued liability for the extended warranty program in our balancesheet within deferred revenue. The activity within deferred revenue for ourextended warranty program for the nine months ended September 30, 2009 wasas follows:

 

| Balance  as of January 1, 2009                   |   | $      | 5,151  |   |
|-------------------------------------------------------|--------|--------|--------|--------|
|                                                  |   |   |   |
| New  extended warranty contracts                      |   | 3,423  |   |
| Earned  revenue from amortization of deferred revenue |   | (3,100 | )      |
|                                                  |   |   |   |
| Balance as of  September 30, 2009                |   | $      | 5,474  |   |

 

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 September 30, 2009, deferred revenue was$72,812.  As of December 31, 2008,deferred revenue was $75,820.

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(Unaudited, inthousands, except share data)

 

Note 10. Income Taxes

 

The effective taxrate in the third quarter of 2009 was (193.2)% compared to an effective taxrate of 22.7% for the third quarter of 2008. The benefit for income taxes was $4,652 for the third quarter of 2009,compared to a provision of $3,214 for the third quarter of 2008.  The effective tax rate for the first ninemonths of 2009 was (36)% compared to an effective tax rate of 25.6% for thefirst nine months of 2008.  The benefitfor income taxes was $31,617 for the first nine months of 2009, compared to aprovision of $5,199 for the first nine months of 2008.  The change in the effective tax rate wasprimarily attributable to the change in the amount and mix of our pretax bookincome within taxable jurisdictions and the tax benefit recognized to record adeferred tax asset associated with the goodwill impairment charge (*see note 8*).

 

We have consideredguidance within Accounting Standards Codification (ASC) 740, the income taxestopic within the FASB ASC, which limits the amount of benefit that can bereflected in a year-to-date interim loss period to an amount equal to theanticipated benefit that would be derived from the anticipated cumulative lossfor the entire reporting year.  Our lossthrough September 30, 2009 exceeds the anticipated loss for the year andthe tax benefit recognized through September 30, 2009 has been limited tothe amount that would be recognized based on the anticipated full yearloss.  As of September 30, 2009, wehave limited our benefit by $722.

 

As of September 30,2009, we had total reserves for uncertain tax positions related to grossunrecognized tax benefits of $5,897, of which $4,553, 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 $203of such expenses in the first nine months of 2009.  As of September 30, 2009, we had accruedinterest payable related to the unrecognized tax benefits of $1,050.

 

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 in the U.S. and throughout theworld.  With few exceptions, we are nolonger subject to U.S. federal, state, 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 September 30, 2009, we haveproposed certain voluntary adjustments pursuant to the 2006 and 2007 income taxexaminations.  These did not have amaterial impact on our financial statements.

 

Note 11. Fair Value Measurements

 

InSeptember 2006, the FASB issued a new statement regarding fair valuemeasurement disclosures.  The guidancewas effective for fiscal years beginning after November 15, 2007 and forinterim periods within those years. We adopted the guidance as of January 1,2008, with the exception of the application of the statement to nonfinancialassets and nonfinancial liabilities, which include those measured at fair valuein goodwill impairment testing, indefinite lived intangible assets measured atfair value for impairment testing, and those initially measured at fair valuein a business combination.  We adoptedthe provisions of the guidance that pertain to nonfinancial assets andnonfinancial liabilities as of January 1, 2009.

 

Thefair value guidance established a valuation hierarchy for disclosure of inputsto the valuation used to measure fair value. This hierarchy prioritizes theinputs into three broad levels as follows. Level 1 inputs are quoted prices(unadjusted) in active markets for identical assets or liabilities. Level 2inputs are observable for the asset or liability, either directly orindirectly.  If the asset or liabilityhas a specified contractual term, a level 2 input must be observable forsubstantially the full term of the asset or liability. Level 3 inputs areunobservable inputs based on our own estimates on assumptions marketparticipants would use in pricing the assets or liabilities (includingassumptions about risk), used to measure assets and liabilities at fair value.An asset or liability’s classification within the hierarchy is determined basedon the lowest level input that is significant to the fair value measurement inits entirety.

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS,CONTINUED**

(Unaudited, inthousands, except share data)

 

Thefollowing table provides the financial assets and liabilities carried at fairvalue measured on a recurring basis as of September 30, 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     |       | $                           | 42         |                                                         | $          | 42 |   | $ | — |   | $ | — |   |
| Derivative  liabilities |       | $                           | 2,727      |                                                         | $          | — |   | $ | 2,727 |   | $ | — |   |

 

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 September 30, 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.

 

Thefollowing table provides the indefinite lived intangible assets and liabilitiescarried at fair value, measured on a non-recurring basis during the nine monthsended September 30, 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 |       | $                          | 197,885    |                                                         | $          | — |   | $ | — |   | $ | 197,885 |   | $ | (80,000 | ) |
|                   |            |                            |            |                                                              |            |  |  |  |  |  |  |  |  |  |  |  |

 

Ourimpairment testing prepared on March 1, 2009 for LANDesk goodwillindicated that its implied fair value was less than its pre-adjusted carryingvalue of $277,885.   The fair value ofLANDesk goodwill was determined through the combination of a discounted cashflow analysis, utilizing the income approach and a guideline public companymethod, utilizing a market approach (*see note 8*).

 

Note 12.  Restructuring, Integration and Retirement

 

During 2008 webegan a series of restructuring actions which continued into the third 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 and thecosts associated with the relocation of certain functions from our Shannon,Ireland, Redmond, Washington and Shanghai, China facilities to Huntsville,Alabama.

 

We recorded $2,884and $5,926 of such costs for the three months ended September 30, 2009 andSeptember 26, 2008, respectively. We recorded $9,709 and $13,627 of such costs for the nine months ended September 30,2009 and September 26, 2008, respectively. These costs include severance and other charges settled in cash, stock compensationadjustments and integration costs related to the Ergo and Touchpaperacquisitions. The costs in the first quarter of 2008 also include costs settledin cash related to the retirement of our former CEO.    The following table provides the amountsattributable to each element within our restructuring, integration andretirement expenses:

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(Unaudited, inthousands, except share data)

 
| ** **                                   | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                   | ** ** | **Sept. 30,  2009**            | ** ** | **Sept. 26,  2008**           | ** ** | **Sept. 30,  2009** | ** ** | **Sept. 26,  2008** | ** ** |
| ** **                                   | ** ** | ** **                     | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Severance  and other charges settled in cash |       | $                              | 2,929      |                          | $          | 4,510 |   | $ | 7,130 |   | $ | 8,280 |   |
| Integration                                  |       | 97                             |       | 936                           |       | 2,717 |   | 936 |   |
| Stock  compensation                          |       | (142                           | )          | 480                           |       | (138 | ) | 2,999 |   |
| Retirement                                   |       | —                         |       | —                        |       | — |   | 1,412 |   |
| Total                                        |       | $                              | 2,884      |                          | $          | 5,926 |   | $ | 9,709 |   | $ | 13,627 |   |

 

As of September 30,2009, we had accrued approximately $2,391 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:

 

| Balance  as of January 1, 2009    |   | $      | 3,585  |   |
|----------------------------------------|--------|--------|--------|--------|
| Accruals  for severance costs          |   | 6,620  |   |
| Adjustments  to accrual                |   | (384   | )      |
| Settlements  made during the period    |   | (7,430 | )      |
| Balance  as of September 30, 2009 |   | $      | 2,391  |   |

 

We expect torecord additional restructuring and integration expenses of approximately $900related to these actions after the third quarter of 2009.  We expect the remaining accruals and anyadditional costs to be paid by the end of the fourth quarter 2009.

 

Note 13.  Legal Matters

 

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.  The PTOhas now confirmed the patentability of the patents and terminated thereexaminations.  We have asked the District Court to restart thelitigation.  In July 2009, Rose filed new reexamination requests withthe PTO against two of the three patents at issue in the litigation.

 

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, RoseElectronics has intervened, and a trial has been scheduled for June 2010.

 

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 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.

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(Unaudited, inthousands, except share data)

 

On October 20,2009, a purported class action complaint was filed in the Court of Chancery ofthe State of Delaware against us, all of our current directors, EmersonElectric, Inc. (“Emerson”) and Globe Acquisition Corp. (“Globe”). Among other things, the complaint alleges that (i) our Board of Directorsbreached the fiduciary duties owed to our stockholders in connection with theapproval of our proposed acquisition by Emerson (the “Merger”), (ii) ourBoard of Directors breached fiduciary duties owed to our stockholders bydisseminating inadequate and materially misleading information in connectionwith the filing of our Schedule 14D-9 Solicitation/Recommendation Statement on October 15,2009, and (iii) we, Emerson, and Globe aided and abetted our Board ofDirectors in such breaches.  The complaint seeks class certification,certain forms of equitable relief, including enjoining the consummation of theMerger, and unspecified damages.  A hearing on the plaintiff’s motion fora preliminary injunction has been scheduled for November 6, 2009. The parties have commenced discovery.

 

Alsoon October 20, 2009, a second purported class action complaint was filedin the Circuit Court of Madison County, Alabama, against us, all of our currentdirectors, and Emerson.  Among other things, the complaint alleges that (i) ourBoard of Directors breached fiduciary duties owed to our stockholders inconnection with the approval of the Merger, (ii) we and our Board ofDirectors breached fiduciary duties owed to our stockholders by disseminatinginadequate and materially misleading information in connection with our filingof the Schedule 14D-9 Solicitation/Recommendation Statement on October 15,2009 and (iii) Emerson aided and abetted us and our Board of Directors insuch breaches.  The complaint seeks class certification, unspecifieddamages, and such other relief as the court may find just and proper.  On October 22,2009, plaintiff filed a motion for temporary restraining order and expediteddiscovery that seeks an order by the court that would temporarily restrain theconsummation of the Merger until a hearing on a forthcoming motion for apreliminary injunction may be held.  On October 26, 2009, thedefendants filed a motion to dismiss, a motion to stay, and an opposition tothe plaintiff’s motion for a temporary restraining order and expediteddiscovery.  Also on October 26, 2009, the court held a hearing atwhich it did not rule on any of the pending motions.

 

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.

 

**Note 14. Recently Issued Accounting Pronouncements**

** **

InDecember 2007, the FASB issued new guidance that 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.  The new businesscombination guidance is to be applied prospectively to business combinationsfor which the acquisition date is on or after an entity’s fiscal year thatbegins after December 15, 2008. Since we have significant acquired deferred tax assets for which fullvaluation allowances were recorded at the acquisition date, this guidance couldmaterially affect the results of operations if changes in the valuationallowances occur after adoption of the standard.  We will assess the impact of this guidance onfuture acquisitions, however the application will result in a significantchange in accounting for any such future acquisitions.

 

In March 2008,the FASB issued new guidance that requires companies with derivativeinstruments to disclose information that would enable financial statement usersto understand how and why a company uses derivative instruments, how derivativeinstruments and related hedged items are accounted for, 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 the guidance.This guidance was effective for financial statements issued for fiscal yearsand interim periods beginning after November 15, 2008. We adopted the newguidance on January 1, 2009 and it did not have a material impact on ourfinancial statements.

 

In April 2008,the FASB issued guidance which amends the factors that should be considered indeveloping renewal or extension assumptions used to determine the useful lifeof an intangible asset.  This guidance iseffective for financial statements issued for fiscal years beginning after December 15,2008 and interim periods within those years. We adopted this guidance on January 1, 2009 and it did not have amaterial impact on our financial statements.

 

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**AVOCENTCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED**

(Unaudited, inthousands, except share data)

 

In April, 2009,the FASB issued new guidance which provides methodology for determining whethera market is inactive and a transaction is distressed in order to apply theexisting fair value measurement guidance. In addition, the new guidancerequires enhanced disclosures regarding financial assets and liabilities thatare recorded at fair value. This guidance is effective for interim and annualreporting periods ending after June 15, 2009.  We adopted the guidance on June 15, 2009and it did not have a material impact on our financial statements.

** **

**In April 2009,the FASB issued new guidance which requires disclosures about fair value offinancial instruments in interim financial statements as well as in annualfinancial statements. This guidance is effective for interim periods endingafter June 15, 2009. We adopted this guidance in the second quarter of2009, and have provided the disclosures required.**

** **

In June 2009,the FASB issued new guidance which incorporates the subsequent events guidancecontained in the auditing standards literature into authoritative accountingliterature. It also requires entities to disclose the date through which theyhave evaluated subsequent events and whether the date corresponds with therelease of their financial statements. This guidance is effective for allinterim and annual periods ending after June 15, 2009. We adopted theguidance upon its issuance and it had no material impact on our financial statements.See Note 15 - “Subsequent Events” for this new disclosure.

 

In June 2009,the FASB issued new guidance to improve financial reporting by companiesinvolved with variable interest entities and to provide more relevant andreliable information to users of financial statements. The new guidance iseffective for fiscal years beginning after November 15, 2009. We arecurrently evaluating the impact that the adoption of this guidance will have onour financial statements.

 

On July 1, 2009,the FASB issued the FASB Accounting Standards Codification (the Codification).The Codification became the single source of authoritative nongovernmental U.S.GAAP, superseding existing FASB, American Institute of Certified PublicAccountants (AICPA), Emerging Issues Task Force (EITF) and related literature.The Codification eliminates the previous US GAAP hierarchy and establishes onelevel of authoritative GAAP. All other literature is considerednon-authoritative. The Codification was effective for interim and annual periodsending after September 15, 2009.  Weadopted this during the third quarter of 2009.

 

In October 2009,the FASB issued amended revenue recognition guidance for arrangements withmultiple deliverables.  The new guidanceeliminates the residual method of revenue recognition and requires the use ofmanagement’s best estimate of selling price for individual elements of anarrangement when vendor specific objective evidence (VSOE), vendor objectiveevidence (VOE) or third-party evidence (TPE) is unavailable.  This guidance is effective for all new ormaterially modified arrangements entered into on or after January 1, 2011with earlier application permitted as of the beginning of a fiscal year. Fullretrospective application of the new guidance is optional.  We are currently assessing our implementationof this new guidance, but do not expect a material impact on our financialstatements.

 

**Note 15. Subsequent Events**

** **

We have evaluated subsequent events for recognition or disclosurethrough November 4, 2009, which was the date we filed this Form 10-Qwith the SEC.

 

On October 6, 2009, we announced an agreementwhereby Emerson Electric Co. will acquire all the outstanding shares ofAvocent.  The Avocent Board of Directorsunanimously endorsed the terms of an all-cash tender offer of $25 per share, orapproximately $1,100,000. The purchase is expected to close around January 1,2010, pending customary regulatory approvals and acceptance of the offer byAvocent stockholders holding a majority of Avocent shares.  For additional information see our currentreports on Form 8-K and Schedules 14D-9 filed with the U.S. Securities andExchange Commission in October, 2009.

 

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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-Kfiled 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 71% of sales in the firstnine months of 2009 and 67% of sales in the first nine months of 2008.  Sales to our OEM customers accounted for 29%of sales in the first nine months of 2009 and 33% of sales in the first ninemonths of 2008.  We do not have contractswith many of our branded customers, and in general, our OEM and brandedbusiness customers are obligated to purchase products from us only pursuant tobinding purchase orders.  Although we arenot substantially 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 48% of sales in the first nine months ofboth 2009 and 2008.

 

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 51% and 53% of first nine months sales in 2009 and 2008,respectively.  No other country accountedfor more than 10% of sales in the first nine months of 2009 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 ofoperations.  World-wide efforts to cut capital spending, general economicuncertainty, and a weakening global economy could have a material adverseeffect on us.  For example, in recentperiods global credit and other financial markets have suffered substantialstress, volatility, illiquidity, and

 

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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 nine months of 2009 and 2008, our Board of Directors granted bothtime-based and  market and performancecondition-based restricted stock units (RSUs) with two and three year vesting.

 

During the firstnine months of 2009, we had the following three 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 mobiledevices across the enterprise; and Connectivity and Control, which focuses on our audio-visualproducts, but was folded into Management Systems in the third quarter of 2009(see further discussion below).

 

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 2008,we began the process of dissolving the Connectivity and Control business unitand merging its products into our Management Systems business units. We dividedthis business unit into its three product lines: the Equinox branded serialbusiness, the Broadcast business and the Pro Audio Visual business.  We folded the broadcast product line intoManagement Systems in the third quarter of 2008.  We folded the serial product line and  the Pro Audio Visual product line intoManagements Systems during the third quarter of 2009.  As a result of theseactions, all revenues and costs associated with our Connectivity and Controlbusiness are included within Management Systems in the relevant tables in thisquarterly report.  Additionally,historical segment results for Management Systems have been changed to reflectthese changes and the Connectivity and Control business unit has now beeneffectively dissolved.

 

**Our largest business unit, ManagementSystems, comprised 72% of our consolidated net revenue in the first nine monthsof 2009 and 77% in 2008.  LANDeskcontributed 27% of net revenue in the first nine months of 2009 and 21% in2008.  Our Corporate and unallocatedrevenue comprised the remaining percentage of our consolidated net revenue in2009 and 2008.  See Note 6 in the notesto the condensed c**onsolidatedfinancial statements contained in Part I, Item 1 ofthis document.

** **

**Resultsof Operations**

 

The followingtable sets forth, for the periods indicated, selected statement of income dataexpressed as a percentage of net sales:

 
| ** **                                                 | ** ** | **Three  months ended** | ** ** | **Nine  months ended** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **Sept.  30, 2009**     | ** ** | **Sept.  26, 2008**    | ** ** | **Sept.  30, 2009** | ** ** | **Sept.  26, 2008** | ** ** |
| Net sales                                                  |       | 100.0                   | %          | 100.0                  | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                              |       | 38.5                    |       | 37.7                   |       | 38.0 |   | 36.9 |   |
| Gross profit                                               |       | 61.5                    |       | 62.3                   |       | 62.0 |   | 63.1 |   |
| Operating expenses:                                        |       |                    |       |                   |       |   |   |   |   |
| Research and development expenses                          |       | 14.2                    |       | 13.3                   |       | 15.6 |   | 14.9 |   |
| Acquired research and development expenses                 |       | —                  |       | 0.4                    |       | — |   | 0.1 |   |
| Selling, general and administrative expenses               |       | 37.9                    |       | 32.9                   |       | 38.1 |   | 35.7 |   |
| Restructuring, integration and retirement expenses         |       | 2.1                     |       | 3.2                    |       | 2.5 |   | 2.8 |   |
| Amortization of intangible assets                          |       | 5.7                     |       | 4.9                    |       | 6.6 |   | 5.0 |   |
| Impairment of goodwill                                     |       | —                  |       | —                 |       | 20.4 |   | — |   |
| Total operating expenses                                   |       | 59.9                    |       | 54.7                   |       | 83.2 |   | 58.5 |   |
|                                                       |       |                    |       |                   |       |   |   |   |   |
| Income (loss) from operations                              |       | 1.6                     |       | 7.6                    |       | (21.2 | ) | 4.6 |   |
|                                                       |       |                    |       |                   |       |   |   |   |   |
| Net investment income                                      |       | 0.1                     |       | 0.2                    |       | 0.1 |   | 0.4 |   |
| Interest expense                                           |       | (1.3                    | )          | (1.2                   | )          | (1.5 | ) | (1.2 | ) |
| Other income (expense), net                                |       | 1.3                     |       | 1.2                    |       | 0.2 |   | 0.6 |   |
| Income (loss) before provision (benefit) for income  taxes |       | 1.7                     |       | 7.8                    |       | (22.4 | ) | 4.4 |   |
| Provision (benefit) for income taxes                       |       | (3.4                    | )          | 1.8                    |       | (8.1 | ) | 1.1 |   |
| Net income (loss)                                          |       | 5.1                     | %          | 6.0                    | %          | (14.3 | )% | 3.3 | % |

 

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*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 services, serial connectivity devices,wireless extension products, IPMI, extension, remote access and managementproducts and technologies, and royalties from licensing our intellectualproperty.

 
| ** **                                           | ** ** | **For the three months ended** | ** ** | ** **           | ** ** | **For the nine months ended** | ** ** | ** **           | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|----------------------|------------|-------------------------------|------------|----------------------|------------|
| **(dollars presented in 000’s)** | ** ** | **Sept. 30,  2009**       | ** ** | **% of  Sales** | ** ** | **Sept. 26,  2008**      | ** ** | **% of  Sales** | ** ** | **Sept. 30,  2009** | ** ** | **% of  Sales** | ** ** | **Sept. 26,  2008** | ** ** | **% of  Sales** | ** ** |
| Net  revenue, customer distribution                  |       |                           |       |                 |       |                          |       |                 |       |   |   |   |   |   |   |   |   |
| Branded                                              |       | $                              | 100,410    |                 | 73         | %                             | $          | 124,613              |       | 68 | % | $ | 276,863 |   | 71 | % | $ | 325,147 |   | 67 | % |
| OEM                                                  |       | 37,145                         |       | 27                   | %          | 58,435                        |       | 32                   | %          | 115,385 |   | 29 | % | 158,482 |   | 33 | % |
| Total  net revenue                                   |       | $                              | 137,555    |                 | 100        | %                             | $          | 183,048              |       | 100 | % | $ | 392,248 |   | 100 | % | $ | 483,629 |   | 100 | % |

 

We experienced a 25% decline in sales during the thirdquarter of 2009 compared to the third quarter of 2008.  The decline in sales was evident in both ourbranded sales, which were down 19%, and our OEM sales, which were down 36%.  Branded sales in North America were down 17%,while EMEA declined 24% and Asia declined 20%. OEM sales declined 26% in North America, 42% in EMEA and 44% in Asia inthe third quarter of 2009 as compared to the same period of 2008.  As detailed below, the sales decline wasevident in both our Management Systems and LANDesk business units.  We attribute the weakness we experienced insales this quarter primarily to decreased data center purchasing activity,especially lower server purchases, as customers continue to reduce technologyspending due to the ongoing global economic recession.  Additionally, foreign exchange ratescontributed to our revenue decline for the third quarter of 2009 compared tothe third quarter of 2008.  If we had experiencedthe same foreign exchange rates in the third quarter of 2009 as the thirdquarter a year ago, our revenues would have been approximately $1.5 millionhigher.  Net sales decreased 19% for thefirst nine months of 2009 compared to the first nine months of 2008 for thesame reasons as described for the third quarter of 2009.

 
| ** **                                           | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| **(dollars presented in 000’s)** | ** ** | **Sept. 30,  2009**       | ** ** | **Sept. 26,  2008**      | ** ** | **Sept. 30,  2009** | ** ** | **Sept. 26,  2008** | ** ** |
| Net revenue:                                         |       |                           |       |                          |       |   |   |   |   |
| Management  Systems                                  |       | $                              | 100,322    |                          | $          | 140,983 |   | $ | 282,289 |   | $ | 378,995 |   |
| LANDesk                                              |       | 36,459                         |       | 41,559                        |       | 107,625 |   | 102,594 |   |
| Corporate  and unallocated                           |       | 774                            |       | 506                           |       | 2,334 |   | 2,040 |   |
| Total net revenue                                    |       | $                              | 137,555    |                          | $          | 183,048 |   | $ | 392,248 |   | $ | 483,629 |   |

 

Our Management Systems business unit is comprised ofour traditional KVM products, serial products, and embedded software andsolutions products.  Management Systemssales decreased approximately 29% in the third quarter 2009 compared to thethird quarter of 2008, primarily due to the decline in data center and serverpurchasing activity as a result of the continuing global recession.  The decline in revenue was experienced acrossall major Management Systems product lines. Our KVM products sales were down 31% in the third quarter of 2009 fromthe third quarter of 2008, primarily as a result of the slower OEM and brandedsales across all major geographic regions as customers reduced their datacenter investments due to the ongoing global economic recession.  Sales by product line for Management Systemsfor the three and nine months ended September 30, 2009 and September 26,2008 were as follows:

 
| ** **                                           | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(dollars presented in 000’s)** | ** ** | **Sept. 30,  2009**                           | ** ** | **Sept. 26,  2008**                          | ** ** | **Sept. 30,  2009** | ** ** | **Sept. 26,  2008** | ** ** |
| Management Systems net revenue:                      |       |                                               |       |                                              |       |   |   |   |   |
| KVM                                                  |       | $                                                  | 67,314     |                                              | $          | 97,101 |   | $ | 191,706 |   | $ | 271,379 |   |
| Serial  Management                                   |       | 7,706                                              |       | 13,517                                            |       | 22,327 |   | 39,572 |   |
| Embedded  software and solutions                     |       | 7,493                                              |       | 10,229                                            |       | 19,731 |   | 26,981 |   |
| Other                                                |       | 17,809                                             |       | 20,136                                            |       | 48,525 |   | 41,063 |   |
| Total Management Systems net revenue                 |       | $                                                  | 100,322    |                                              | $          | 140,983 |   | $ | 282,289 |   | $ | 378,995 |   |

 

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 Management Suite (LDMS).  Compared to the third quarter of 2008,LANDesk revenues decreased 12% during the third quarter of 2009, primarily as aresult of the weakened demand stemming from the ongoing global economicrecession.  The weakness in license androyalty revenue noted below for the third quarter of 2009 was attributableprimarily to a $2.5 million combined decline in our LDMS and Service Deskproducts. The decline in our maintenance and services revenue noted below forthe third quarter of 2009 was attributable primarily to a $2.2 million declinein our professional services.  Sales byproduct line for LANDesk for the three and nine months ended September 30,2009 and September 26, 2008 were as follows:

 

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| ** **                                           | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(dollars presented in 000’s)** | ** ** | **Sept. 30,  2009**                           | ** ** | **Sept. 26,  2008**                          | ** ** | **Sept. 30,  2009** | ** ** | **Sept. 26,  2008** | ** ** |
| LANDesk net revenue:                                 | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Licenses  and royalties                              |       | $                                                  | 18,069     |                                              | $          | 22,092 |   | $ | 52,790 |   | $ | 57,919 |   |
| Maintenance  and services                            |       | 18,390                                             |       | 19,467                                            |       | 54,835 |   | 44,675 |   |
| Total  LANDesk net revenue                           |       | $                                                  | 36,459     |                                              | $          | 41,559 |   | $ | 107,625 |   | $ | 102,594 |   |

 

International sales declinedby 29% in the third quarter of 2009 from the third quarter of 2008, while saleswithin the United States declined approximately 21% over the same period.  As mentioned previously, the global recessionnegatively affected both our U.S. and international revenue in the thirdquarter of 2009.

 
| ** **                                           | ** ** | **For the three months ended** | ** ** | ** **           | ** ** | **For the nine months ended**  | ** ** | ** **           | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|----------------------|------------|--------------------------------|------------|----------------------|------------|
| **(dollars presented in 000’s)** | ** ** | **Sept. 30,  2009**       | ** ** | **% of  Sales** | ** ** | **Sept. 26,   2008** | ** ** | **% of  Sales** | ** ** | **Sept. 30,  2009** | ** ** | **% of  Sales** | ** ** | **Sept. 26,  2008** | ** ** | **% of  Sales** | ** ** |
| Net  revenue, geographic region                      |       |                           |       |                 |       |                           |       |                 |       |   |   |   |   |   |   |   |   |
| United  States                                       |       | $                              | 74,899     |                 | 54         | %                              | $          | 94,850               |       | 52 | % | $ | 201,493 |   | 51 | % | $ | 256,217 |   | 53 | % |
| International                                        |       | 62,656                         |       | 46                   | %          | 88,198                         |       | 48                   | %          | 190,755 |   | 49 | % | 227,412 |   | 47 | % |
| Total  net revenue                                   |       | $                              | 137,555    |                 | 100        | %                              | $          | 183,048              |       | 100 | % | $ | 392,248 |   | 100 | % | $ | 483,629 |   | 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 assembly services.Gross profits and margins as a percentage of sales for the three and ninemonths ended September 30, 2009 and September 26, 2008 were asfollows:

 
| ** **                                           | ** ** | **For the three months ended** | ** ** | ** **        | ** ** | **For the nine months ended** | ** ** | ** **        | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|-------------------|------------|-------------------------------|------------|-------------------|------------|
| **(dollars presented in 000’s)** | ** ** | **September  30, 2009**   | ** ** | **Gross  Margin** | ** ** | **September 26,  2008**  | ** ** | **Gross  Margin** | ** ** | **September  30, 2009** | ** ** | **Gross  Margin** | ** ** | **September  26, 2008** | ** ** | **Gross  Margin** | ** ** |
|                                                 |       |                           |       |              |       |                          |       |              |       |   |   |   |   |   |   |   |   |
| Management  Systems                                  |       | $                              | 57,206     |              | 57.0       | %                             | $          | 82,876            |       | 58.8 | % | $ | 162,682 |   | 57.6 | % | $ | 225,242 |   | 59.4 | % |
| LANDesk                                              |       | 31,236                         |       | 85.7              | %          | 35,088                        |       | 84.4              | %          | 91,915 |   | 85.4 | % | 88,281 |   | 86.0 | % |
| Corporate,  other and unallocated                    |       | 887                            |       |              |       | 599                           |       |              |       | 2,517 |   |   |   | 2,097 |   |   |   |
| Stock-based  compensation                            |       | (552                           | )          |              |       | (298                          | )          |              |       | (1,014 | ) |   |   | (797 | ) |   |   |
| Intangible  amortization — LANDesk software     |       | (4,133                         | )          |              |       | (4,218                        | )          |              |       | (12,823 | ) |   |   | (9,753 | ) |   |   |
| Gross  profit and margin                             |       | $                              | 84,644     |              | 61.5       | %                             | $          | 114,047           |       | 62.3 | % | $ | 243,277 |   | 62.0 | % | $ | 305,070 |   | 63.1 | % |

 

The decline ingross margin and gross profit in the third quarter and nine months ended September 30,2009 resulted from lower sales volume. Although we have made significant improvements in our gross margin andprofit through cost savings realized from our supply chain realignment program,these improvements were not enough to offset the impact of the lower salesvolume experienced in the third quarter of 2009.

 

*Operatingexpenses.*

 
| ** **                                           | ** ** | **For the three months ended** | ** ** | ** **           | ** ** | **For the nine months ended**  | ** ** | ** **           | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|----------------------|------------|--------------------------------|------------|----------------------|------------|
| **(dollars presented in 000’s)** | ** ** | **Sept. 30,  2009**       | ** ** | **% of  Sales** | ** ** | **Sept. 26,   2008** | ** ** | **% of  Sales** | ** ** | **Sept. 30,  2009** | ** ** | **% of  Sales** | ** ** | **Sept. 26,  2008** | ** ** | **% of  Sales** | ** ** |
|                                                 |       |                           |       |                 |       |                           |       |                 |       |   |   |   |   |   |   |   |   |
| Research and development expenses                    |       | $                              | 19,548     |                 | 14.2       | %                              | $          | 24,398               |       | 13.3 | % | $ | 61,077 |   | 15.6 | % | $ | 72,126 |   | 14.9 | % |
| Acquired research and development expenses           |       | —                         |       |                 |       | 700                            |       | 0.4                  | %          | — |   |   |   | 700 |   | 0.1 | % |
| Selling, general and administrative expenses         |       | 52,182                         |       | 37.9                 | %          | 60,266                         |       | 32.9                 | %          | 149,521 |   | 38.1 | % | 172,830 |   | 35.7 | % |
| Restructuring, integration and retirement expenses   |       | 2,884                          |       | 2.1                  | %          | 5,926                          |       | 3.2                  | %          | 9,709 |   | 2.5 | % | 13,627 |   | 2.8 | % |
| Amortization of intangible assets                    |       | 7,780                          |       | 5.7                  | %          | 8,971                          |       | 4.9                  | %          | 25,843 |   | 6.6 | % | 24,123 |   | 5.0 | % |
| Impairment of goodwill                               |       | —                         |       |                 |       | —                         |       |                 |       | 80,000 |   | 20.4 | % | — |   |   |   |
|                                                 |       | $                              | 82,394     |                 | 59.9       | %                              | $          | 100,261              |       | 54.7 | % | $ | 326,150 |   | 83.2 | % | $ | 283,406 |   | 58.5 | % |

 

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*Researchand development expenses.*  Research and developmentexpenses include compensation for engineers, support personnel, outsidecontracted services, and materials costs, all of which are expensed asincurred.  R&D decreased 20% in thethird quarter of 2009 from the third quarter of 2008.  The decrease in R&D expense is primarilyattributable to the effect of our re-alignment, restructuring and cost-cuttingefforts which began at the end of the second quarter of 2008.  Salaries and wages decreased approximately$1.8 million and contracted services declined $1.3 million from the thirdquarter of 2008 to the third quarter of 2009 as a result of theseactivities.  R&D decreased 15% fromthe first nine months of 2008 compared to the first nine months of 2009 forsimilar reasons as that experienced in the third quarter of 2009.  We continue to invest in targeted integratedR&D projects that 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 13% in the third quarter of 2009from the third quarter of 2008.  Thedecrease in selling, general and administrative expenses was attributed to theeffect of our cost-cutting efforts which began at the end of the second quarterof 2008 and lower sales commissions incurred as a result of lower sales volumeon a comparative basis.  The results ofour cost cutting measures were evident in reduced salaries, trade show andtravel costs and reduced contracted services. Salaries decreased approximately $3.0 million, while trade show expensesand travel-related expenses decreased approximately $1.5 million in the thirdquarter of 2009 compared to the same period in 2008.  Additionally, contracted services decreased$1.4 million in the third quarter of 2009 compared to the same period in2008.  SG&A expenses decreased 14% inthe first nine months of 2009 from the first nine months of 2008 for similarreasons as that experienced in the third quarter of 2009.

** **

*Restructuring,integration and retirement expenses.*  Restructuring,integration and retirement expenses of $2.9 million for the third quarter of2009 and $5.9 million in for the third quarter of 2008 relate to severancecharges incurred for workforce reductions in connection with our realignment ofresources, integration of marketing functions, and integration of our 2008acquisitions into our operations. Restructuring, integration and retirement expenses of $9.7 million forthe first nine months of 2009 and $13.6 million for the first nine months of2008 were comprised of charges similar to those incurred during the thirdquarter of 2009.  In addition to thethird quarter charges, restructuring and retirement charges for the first ninemonths of 2008 includes the retirement costs for our former CEO of $2.2million.

 

***Amortizationof intangible assets***. Amortization was $7.8 million and $9.0 million for the three monthsended September 30, 2009 and September 26, 2008, respectively.  Amortization was $25.8 million and $24.1million for the nine months ended September 30, 2009 and September 26,2008, respectively.  The increase inamortization for the nine months ended 2009 was due to the amortization ofintangible assets related to our acquisitions of Touchpaper and Ergo, completedearly in the third quarter of 2008.

** **

***Impairment ofgoodwill.*** The $80.0 million impairment of goodwill relates entirely to thewrite-off of a portion of goodwill associated with the LANDesk business unit inthe first quarter of 2009.  We performedan impairment review during the first quarter of 2009 as a result of thecontinued decline in our stock price and those of comparable companies.  The resulting impairment analysis determinedthat the goodwill associated with LANDesk was impaired by $80.0 million.  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 any worsening of the recessionary environment and theresulting impact on our business, our stock price, and market valuations ofcompanies in our peer group.

** **

*Stock-based Compensation. *Weallocate stock-based compensation expense based on the functional area in whichan employee works.  Stock compensationexpenses for the periods ending September 30, 2009 and September 26,2008 were as follows:

 
| ** **                                           | ** ** | **For the three months ended** | ** **  | ** **           | ** ** | **For the nine months ended** | ** ** | ** **           | ** ** |
|------------------------------------------------------|------------|--------------------------------|-------------|----------------------|------------|-------------------------------|------------|----------------------|------------|
| **(dollars presented in 000’s)** | ** ** | **Sept. 30,  2009**       | ** **  | **% of  Sales** | ** ** | **Sept. 26,  2008**      | ** ** | **% of  Sales** | ** ** | **Sept. 30,  2009** | ** ** | **% of  Sales** | ** ** | **Sept. 26,  2008** | ** ** | **% of  Sales** | ** ** |
|                                                 |       |                           |        |                 |       |                          |       |                 |       |   |   |   |   |   |   |   |   |
| Cost of sales                                        |       | $                              | 552         |                 |       |                          | $          | 298                  |       |   |   | $ | 1,014 |   |   |   | $ | 797 |   |   |   |
| Research and development expense                     |       | 869                            |        |                 |       | 1,523                         |       |                 |       | 2,727 |   |   |   | 3,878 |   |   |   |
| Selling, general and administrative expense          |       | 5,194                          |        |                 |       | 3,986                         |       |                 |       | 10,992 |   |   |   | 9,288 |   |   |   |
| Restructuring and retirement expense                 |       | (142                           | )           |                 |       | 480                           |       |                 |       | (138 | ) |   |   | 2,999 |   |   |   |
|                                                 |       | $                              |  6,473 |                 | 4.7        | %                             | $          | 6,287                |       | 3.4 | % | $ | 14,595 |   | 3.7 | % | $ | 16,962 |   | 3.5 | % |

 

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Stock-basedcompensation expense decreased approximately 3% in the third quarter 2009 fromthe third quarter 2008.  Stock-basedcompensation expense decreased almost 14% in the first nine months of 2009 fromthe first nine months of 2008.  Our CompensationCommittee approved the grant of time-based and market condition-basedrestricted stock units to our officers and other employees in the first quarterof 2008 while such grants for 2009 were made at the end of the second quarterof 2009 (following shareholder approval of amendments to our equity plan in June 2009).  This delay further reduced stock-basedcompensation expense in the first nine months of 2009 compared to the similarperiod in 2008.  Additionally, werecorded almost $3.0 million of expense as a result of modifying certain equityawards as part of our restructuring efforts in the first nine months of2008.  However, we recorded $138,000 ofincome as a result of modifying such equity awards in the first nine months of2009.  We expect to continue to incurstock-based compensation expense in future periods.

 

*Net investmentincome**.** *Net******investmentincome decreased to $105,000 in the third quarter of 2009 as compared to$295,000 in the third quarter of 2008. Net******investment income decreasedto $390,000 in the first nine months of 2009 as compared to $1.9 million in thefirst nine months of 2008.

 

*Interestexpense.*Interestexpense decreased to $1.8 million in the third quarter 2009, compared to $2.3million in the third quarter of 2008. The decrease primarily resulted from lower borrowings outstanding forthe third quarter of 2009 compared to the same period in 2008.  Interest expense increased slightly to $6.1million in the first nine months of 2009, compared to $5.9 million in the firstnine months of 2008.  This slightincrease was driven by the higher borrowings outstanding for most of the firstnine months of 2009 compared to 2008.

 

*Other income , net.*  Net otherincome decreased to $1.9 million in the third quarter of 2009 from $2.4 millionin the third quarter of 2008.  Net otherincome declined to $724,000 in the first nine months of 2009 from $2.7 millionin the first nine months of 2008.  Thedecrease in other income for the first nine months of 2009 is primarily theresult of decreased net foreign currency transaction gains of approximately$2.6 million over the comparative period in 2008, primarily as a result ofchanges in the both the euro and British pound and the impact of movement offoreign currency denominated cash and other assets into U.S. dollar denominatedbalances, causing a realization of certain foreign exchange gains and losses.

 

*Provisionfor income taxes.*  The effective tax rate for the third quarterof 2009 was (193.2)% compared to an effective tax rate of 22.7% for the thirdquarter of 2008.  The benefit for incometaxes was $4.7 million for the third quarter of 2009, compared to a provisionof $3.2 million for the third quarter of 2008. The effective tax rate for the first nine months of 2009 was (36.0)%compared to 25.6% for the first nine months of 2008.  The benefit for income taxes was $31.6million for the first nine months of 2009, compared to a provision of $5.2million for the first nine months 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 recorded in the first quarter of2009.  Further, we have consideredguidance within ASC 740, the income taxes topic within the FASB ASC, whichlimits the amount of benefit that can be reflected in a year-to-date interimloss period to an amount equal to the anticipated benefit that would be derivedfrom the anticipated cumulative loss for the entire reporting year.  Our loss through September 30, 2009exceeds the anticipated loss for the year and the tax benefit recognizedthrough September 30, 2009 has been limited to the amount that would berecognized based on the anticipated full year loss.  Accordingly, as of September 30, 2009,we have limited our benefit by $722,000. As of September 30, 2009, we had total reserves for uncertain taxpositions related to gross unrecognized tax benefits of $5.9 million, of which$4.6 million if recognized would affect the effective tax rate.

 

*Netincome (loss).*  Net income for the third quarter of 2009 was$7.1 million compared to net income $11.0 million for the third quarter of2008, as a result of the factors detailed in the above discussion.  Net income, as a percentage of sales for thethird quarter of 2009 was 5.1%, compared to 6.0% for the third quarter of2008.  Net loss for the first nine monthsof 2009 was $(56.2) million compared to net income of $15.1 million for thefirst nine months of 2008, as a result of the factors detailed in the abovediscussion.  Net income (loss), as apercentage of sales for the first nine months of 2009 was (14.3)%, compared to3.3% for the first nine months of 2008.

 

**Liquidityand Capital Resources**

 

As of September 30,2009, our principal sources of liquidity consisted of $110 million in cash andcash equivalents and $215 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 September 30, 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. 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 $125 million outstanding under thecredit facility as of September 30, 2009. We classify these obligations as long-term as they mature in June 2011.  As of September 30, 2009, we expect torepay the borrowings through future cash flows from operations.   A summary of our cash flows is as follows:

 

| ** **                                        | ** ** | **For the nine months ended** | ** ** |
|---------------------------------------------------|------------|-------------------------------|------------|
| ** **                                        | ** ** | **Sept. 30,  2009**           | ** ** | **Sept. 26,  2008** | ** ** |
| Total  cash provided by (used in):                |       |                          |       |   |   |
| Operating  activities                             |       | $                             | 51,440     |   | $ | 66,161 |   |
| Investing  activities                             |       | (8,005                        | )          | (77,061 | ) |
| Financing  activities                             |       | (62,181                       | )          | 22,120 |   |
| Effect  of exchange rate changes on cash          |       | 1,991                         |       | (1,502 | ) |
| Increase  (decrease) in cash and cash equivalents |       | $                             | (16,755    | ) | $ | 9,718 |   |

 

The decline in cash flow from operations in the first nine months of 2009 was primarily the result of lower net income as well as decreases in accounts payable, accrued wages and commissions and accrued other liabilities.  These changes were offset somewhat by increased collections of accounts receivable and a decrease in inventory.  Accrued wages and commissions were lower at September 30, 2009, due to lower accrued commissions at the end of the period as a result of lower sales during the period.  Additionally, our accounts payable declined as a result of reduced inventory purchases as we reacted to our significantly lower sales volume.  The reduced inventory purchases also resulted in significantly lower inventory on-hand at September 30, 2009 compared to December 31, 2008.

 

Our days sales outstanding (DSO) increased to 66 days at the end of the third quarter 2009 compared to 63 days at the end of the third 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 third quarter of 2009 compared to the third quarter of 2008.  Inventories decreased $7.4 million from December 31, 2008 to September 30, 2009, and when combined with the lower sales volume, resulted in a decrease in inventory turns from 8.6 at the end of the third quarter of 2008 compared to 7.1 at the end of the third quarter 2009.  Our inventory turns improved from 4.1 at the end of the second quarter of 2009, primarily as a result of our lower inventory levels.

 

Our investing activitiesused $8.0 million of cash flow in the first nine months of 2009, primarily topay an additional $4.1 million of consideration previously accrued for LANDeskand Touchpaper.  Our investing activitiesused $77.1 million of cash flow in the first nine months of 2008, primarily tofund the Touchpaper and Ergo acquisitions completed in July 2008.

 

Our financing activitiesused cash to repay $45 million of borrowings from our line of credit and torepurchase 1.2 million shares of our common stock during the first nine monthsof 2009 at a cost totaling over $15 million. Our financing activities used the cash provided by operations andinvesting activities, as well as additional borrowings, to repurchaseapproximately 4 million shares of our common stock during the first nine monthsof 2008 at a cost totaling $64 million. These treasury shares were purchased through various brokers under thestock repurchase program approved by our Board of Directors.  As of September 30, 2009 we haveapproximately 900,000 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, in January 2009, andagain in July 2009 we announced a series of actions designed to enhancecompetitiveness, improve our efficiency, and reduce our cost structure.  We initiated workforce reduction andconsolidation actions designed to intensify our focus on our growth areas andimprove our operating efficiency.  Therestructuring included actions to increase our organizational efficiency,reduce certain research and development investments in lower growth productareas, integrate our marketing functions, and shift support for our Asianoperations from Shannon, Ireland, to our recently-established regional hub inSingapore.  We also relocated certain functionsfrom Redmond, Washington to Huntsville, Alabama.

 

On October 6,2009, we announced an agreement whereby Emerson Electric Co. will acquire allthe outstanding shares of Avocent.  TheAvocent Board of Directors unanimously endorsed the terms of an all-cash tenderoffer of $25 per share, or approximately $1.1 billion. The purchase is expectedto close around January 1, 2010, pending customary regulatory approvalsand acceptance of the offer by Avocent stockholders holding a majority ofAvocent shares.  For additionalinformation see our current reports on Form 8-K and Schedules 14D-9 filedwith the U.S. Securities and Exchange Commission in October, 2009.

 

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**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 we have for the products we purchase from our U.S. and European basedsuppliers.  Our actual contractualcommitments are typically limited to products needed for one to three months offorecasted sales.  The liabilities forthese inventory purchases, along with the related inventory assets, aretypically 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 September 30,2009, there have been no material changes to contractual obligations outsidethe ordinary course of business.  Wereduced our debt balance $45 million to $125 million at September 30,2009, down from $170 million 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 that wouldrequire consolidation within our financial results. As of September 30,2009 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**

 

Tosupplement our consolidated financial statements presented in accordance withGAAP, we present investors with certain non-GAAP operational measures which weuse internally to manage our business, including gross profit, operatingexpenses, and the resulting operating income, income before taxes, operationalnet income, and operational earnings per share, all of which primarily excludethe effects of amortization related to purchase accounting adjustments,goodwill impairment expense, stock-based compensation, and restructuring,integration and retirement  expenses.  Specifically, we use the following non-GAAPmeasures:

 

| ** **                                                                                      | ** ** | **Three  months ended** | ** ** | **Nine  months ended**  | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Non-GAAP Operational Measures****(dollars presented in 000’s)** | ** ** | **September 30,  2009** | ** ** | **September 26,  2008** | ** ** | **September 30,  2009** | ** ** | **September 26,  2008** | ** ** |
| ** **                                                                                      | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operational  gross profit                                                                       |       | $                            | 89,328     |                         | $          | 118,564 |   | $ | 257,114 |   | $ | 315,620 |   |
| Operational  operating income                                                                   |       | $                            | 23,661     |                         | $          | 39,410 |   | $ | 60,235 |   | $ | 83,997 |   |
| Operational  net income                                                                         |       | $                            | 20,134     |                         | $          | 30,441 |   | $ | 45,401 |   | $ | 63,289 |   |
| Operational  diluted earnings per share                                                         |       | $                            | 0.45       |                         | $          | 0.67 |   | $ | 1.01 |   | $ | 1.38 |   |

 

·                                          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,goodwill impairment expense and amortization related to purchase accountingadjustments as they relate to the particular operating expense.

 

·                                          Thenon-GAAP operating income operational measure consists of GAAP operatingincome, adjusted 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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Weprovide the following reconciliations between GAAP and our operationalmeasures:

 

| ** **                                              | ** ** | **GAAP**      | ** ** | ** **       | ** ** | **Purchase**    | ** ** | **Restructuring**  | ** ** | **Non-GAAP**    | ** ** |
|---------------------------------------------------------|------------|---------------|------------|------------------|------------|-----------------|------------|--------------------|------------|-----------------|------------|
| ** **                                              | ** ** | **Financial** | ** ** | **Stock-based**  | ** ** | **Accounting**  | ** ** | **and Retirement** | ** ** | **Operational** | ** ** |
| ** **                                              | ** ** | **Measures**  | ** ** | **Compensation** | ** ** | **Adjustments** | ** ** | **Expenses**       | ** ** | **Measures**    | ** ** |
| **For the three months ended  September 30, 2009** |       |          |       |             |       |            |       |               |       |            |       |
| Operational gross profit                                |       | $             | 84,644     |             | 552        |            | 4,132      |               | —     |            | $          | 89,328 |   |
| Operational operating income                            |       | $             | 2,250      |             | 6,473      |            | 11,913     |               | 3,025      |            | $          | 23,661 |   |
| Operational net income                                  |       | $             | 7,050      |             | 5,474      |            | 5,007      |               | 2,602      |            | $          | 20,134 |   |
| Operational diluted earnings per share                  |       | $             | 0.16       |             | 0.12       |            | 0.11       |               | 0.06       |            | $          | 0.45 |   |
|                                                    |       |          |       |             |       |            |       |               |       |            |       |
| **For the three months ended  September 26, 2008** |       |          |       |             |       |            |       |               |       |            |       |
| Operational gross profit                                |       | $             | 114,047    |             | 298        |            | 4,219      |               | —     |            | $          | 118,564 |   |
| Operational operating income                            |       | $             | 13,786     |             | 6,287      |            | 13,891     |               | 5,446      |            | $          | 39,410 |   |
| Operational net income                                  |       | $             | 10,961     |             | 4,802      |            | 10,518     |               | 4,160      |            | $          | 30,441 |   |
| Operational diluted earnings per share                  |       | $             | 0.24       |             | 0.11       |            | 0.23       |               | 0.09       |            | $          | 0.67 |   |
|                                                    |       |          |       |             |       |            |       |               |       |            |       |
| **For the nine months ended  September 30, 2009**  |       |          |       |             |       |            |       |               |       |            |       |
| Operational gross profit                                |       | $             | 243,277    |             | 1,014      |            | 12,823     |               | —     |            | $          | 257,114 |   |
| Operational operating income                            |       | $             | (82,873    | )                | 14,595     |            | 118,666    |               | 9,847      |            | $          | 60,235 |   |
| Operational net income                                  |       | $             | (56,221    | )                | 11,989     |            | 81,483     |               | 8,150      |            | $          | 45,401 |   |
| Operational diluted earnings per share                  |       | $             | (1.27      | )                | 0.27       |            | 1.83       |               | 0.18       |            | $          | 1.01 |   |
|                                                    |       |          |       |             |       |            |       |               |       |            |       |
| **For the nine months ended  September 26, 2008**  |       |          |       |             |       |            |       |               |       |            |       |
| Operational gross profit                                |       | $             | 305,070    |             | 797        |            | 9,753      |               | —     |            | $          | 315,620 |   |
| Operational operating income                            |       | $             | 21,664     |             | 16,962     |            | 34,743     |               | 10,628     |            | $          | 83,997 |   |
| Operational net income                                  |       | $             | 15,135     |             | 12,978     |            | 27,044     |               | 8,132      |            | $          | 63,289 |   |
| Operational diluted earnings per share                  |       | $             | 0.33       |             | 0.28       |            | 0.59       |               | 0.18       |            | $          | 1.38 |   |

 

We believe that excluding amortization associatedwith purchase accounting adjustments and the goodwill impairment expense, aswell as the tax impact of certain purchase accounting elections for prioracquisitions, provides meaningful supplemental information and an alternativepresentation useful to investors’ understanding our core operating results andtrends between periods.  Not only arethese depreciation, amortization and tax impact adjustments based on amountsassigned in purchase accounting, that may have little bearing on present orfuture replacement costs, but they also are based on management’s estimates ofremaining 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, goodwillimpairment expense and amortization associated with purchase accountingadjustments (together with the related tax effects), our non-GAAP financialmeasures provide investors with transparency into the information and basisused 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 othercompanies in making financial and operating decisions, and to establish targetsfor management incentive compensation.

 

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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.

 

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**

 

InDecember 2007, the FASB issued new guidance that 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.  The new businesscombination guidance is to be applied prospectively to business combinationsfor which the acquisition date is on or after an entity’s fiscal year thatbegins after December 15, 2008. Since we have significant acquired deferred tax assets for which fullvaluation allowances were recorded at the acquisition date, this guidance couldmaterially affect the results of operations if changes in the valuationallowances occur after adoption of the standard.  We will assess the impact of this guidance onfuture acquisitions, however the application will result in a significantchange in accounting for any such future acquisitions.

 

In March 2008,the FASB issued new guidance which requires companies with derivativeinstruments to disclose information that would enable financial statement usersto understand how and why a company uses derivative instruments, how derivativeinstruments and related hedged items are accounted for, and how derivativeinstruments and related hedged items affect a company’s financial position,financial performance and cash flows. The new requirements apply to derivative

 

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instruments andnon-derivative instruments that are designated and qualify as hedginginstruments and related hedged items accounted for under the guidance. This guidancewas effective for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008. We adopted the new guidance on January 1,2009 and it did not have a material impact on our financial statements.

 

In April 2008,the FASB issued guidance which amends the factors that should be considered indeveloping renewal or extension assumptions used to determine the useful lifeof an intangible asset.  This guidance iseffective for financial statements issued for fiscal years beginning after December 15,2008 and interim periods within those years. We adopted this guidance on January 1, 2009 and it did not have amaterial impact on our financial statements.

** **

In April, 2009,the FASB issued new guidance which provides methodology for determining whethera market is inactive and a transaction is distressed in order to apply theexisting fair value measurement guidance. In addition, the new guidancerequires enhanced disclosures regarding financial assets and liabilities that arerecorded at fair value. This guidance is effective for interim and annualreporting periods ending after June 15, 2009.  We adopted the guidance on June 15, 2009and it did not have a material impact on our financial statements.

** **

**In April 2009,the FASB which requires disclosures about fair value of financial instrumentsin interim financial statements as well as in annual financial statements. Thisguidance is effective for interim periods ending after June 15, 2009. Weadopted this guidance in the second quarter of 2009, and have provided thedisclosures required.**

** **

In June 2009,the FASB issued new guidance which incorporates the subsequent events guidancecontained in the auditing standards literature into authoritative accountingliterature. It also requires entities to disclose the date through which theyhave evaluated subsequent events and whether the date corresponds with therelease of their financial statements. This guidance is effective for allinterim and annual periods ending after June 15, 2009. We adopted theguidance upon its issuance and it had no material impact on our financialstatements. See Note 15 - “Subsequent Events” for this new disclosure.

 

In June 2009,the FASB issued new guidance to improve financial reporting by companies involvedwith variable interest entities and to provide more relevant and reliableinformation to users of financial statements. The new guidance is effective forfiscal years beginning after November 15, 2009. We are currentlyevaluating the impact that the adoption of this guidance will have on ourfinancial statements.

 

On July 1, 2009,the FASB issued the FASB Accounting Standards Codification (the Codification).The Codification became the single source of authoritative nongovernmental U.S.GAAP, superseding existing FASB, American Institute of Certified PublicAccountants (AICPA), Emerging Issues Task Force (EITF) and related literature.The Codification eliminates the previous US GAAP hierarchy and establishes onelevel of authoritative GAAP. All other literature is considerednon-authoritative. The Codification was effective for interim and annualperiods ending after September 15, 2009. We adopted this during the third quarter of 2009.

 

In October 2009,the FASB issued amended revenue recognition guidance for arrangements withmultiple deliverables.  The new guidanceeliminates the residual method of revenue recognition and requires the use ofmanagement’s best estimate of selling price for individual elements of anarrangement when vendor specific objective evidence (VSOE), vendor objectiveevidence (VOE) or third-party evidence (TPE) is unavailable.  This guidance is effective for all new ormaterially modified arrangements entered into on or after January 1, 2011with earlier application permitted as of the beginning of a fiscal year. Fullretrospective application of the new guidance is optional.  We are currently assessing our implementationof this new guidance, but do not expect a material impact on our financialstatements.

** **

**Updates to Critical Accounting Estimates**

** **

·                  As discussed in Notes 7 and 14 to theCondensed Consolidated Financial Statements, we have adopted recently issuedguidance for derivatives and hedging as of January 1, 2009.  This guidance requires certain disclosuressurrounding derivatives and hedges.  Wehave interest rate swaps that qualify as derivative instruments and areclassified as cash flow hedges.

 

·                  As discussed below and in Note 11 to theCondensed Consolidated Financial Statements, we have adopted recently issuedguidance for fair value measurement as of January 1, 2009 as it applies tothe application of the statement to nonfinancial assets and nonfinancialliabilities. During the first quarter of 2009 we measured our goodwill at fairvalue based upon Level 3 inputs, as defined under the guidance.  Wedetermine the fair value of our reporting units through a discounted cash flowanalysis, utilizing the income approach, and a guideline public company method,utilizing a market approach, and weight the results of each valuation indetermining the fair value of the reporting units.

 

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** **

**·**                  The $80.0 million adjustment toLANDesk goodwill was the result of an impairment charge recorded during thethree months ended March 31, 2009. We evaluate the carrying value of goodwill for potential impairmentannually during the fourth quarter of each year, and on an interim basis if anevent occurs or circumstances change that indicate a potential detrimentalimpact to the fair value of a reporting unit compared to its carrying value mayhave occurred. Our fourth quarter 2008 impairment testconcluded that there had been no impairment of goodwill, however, there were certain factors noted during the 2008testing that  required 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.  In preparation forthis interim testing, we revised our five year forecast, used as a base elementof this testing, in light of the continuing global recession.

** **

**As of September 30, 2009 wehad three reporting units: Management Systems (MS), LANDesk and AESS, which iscombined with MS for segment reporting purposes.   We**perform ourgoodwill impairment test in two steps. Step one compares the fair value of eachreporting unit (operating segment) to its carrying amount. If step oneindicates that an impairment potentially exists, the second step testing isperformed to measure the amount of impairment, if any.  Goodwill impairment exists when the estimatedfair value of goodwill is less than its carrying value.

** **

**For purposes of the interim stepone analysis prepared as of March 1, 2009, the fair values of ourreporting units were determined through the use of a combination of adiscounted cash flow analysis, utilizing the income approach, and the guidelinepublic company method, utilizing a market approach.  The result of each valuation was weighted indetermining each reporting units fair value.**Under the marketapproach, the fair value of each reporting unit is determined based uponcomparisons to public companies engaged in similar businesses. Under the incomeapproach, the fair value of each reporting unit was based on the present valueof estimated future cash flows. The income approach is dependent on a number ofsignificant management assumptions including estimated demand in eachgeographic market and the discount rate. The discount rate is commensurate withthe risk inherent in the projected cash flows and reflects the estimated rateof return required by an investor in the current economic conditions.  Based on ourassessment of the market conditions, the weighting applied to the marketapproach for the March 1, 2009 valuation was decreased from 50% to 40% andthe weighting for the income approach was increased from 50% to 60%, ascompared 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 our stockprice and the stock price of many of our peers.

** **

**The results of our step one testas of March 1, 2009 indicated that the fair value of each of our reportingunits had declined from 2008, however, with the exception of LANDesk, theestimated fair values exceeded their carrying value.  We estimated the fair value of ManagementSystems to be $184 million higher, or approximately 35%, than its carryingvalue of $520 million.  Our remainingreporting units at the time were not material to our financial statements,however we estimated the combined fair value of these reporting units to be $49million higher, or approximately 250%, their combined carrying value of $20million.**

** **

**Other than these changes, there havebeen no significant changes in our critical accounting estimates during thefirst nine months of 2009.**

** **

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

 

Our primary market riskis the interest rate risk on our credit facility, 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 aggregatenotional amount of $110 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 andBritish pound, and changes in exchange rates may positively or negativelyaffect our revenue, gross margins, operating expenses, and retained earningssince these transactions 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 September 30, 2009, we had fiveopen forward contracts with an approximate fair value of $(22,300).

 

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

 

(a) *Evaluation of disclosurecontrols and procedures.*   Based on their evaluation as of September 30, 2009, our ChiefExecutive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the 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 September 30,2009 that materially affected or are reasonably likely to materially affect,our internal controls over financial reporting.

### ** **

### **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. The PTO has now confirmed the patentability ofthe patents and terminated the reexaminations.  We have asked the DistrictCourt to restart the litigation.  In July 2009, Rose filed newreexamination requests with the PTO against two of the three patents at issuein the litigation.

 

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, RoseElectronics has intervened, and a trial has been scheduled for June 2010.

 

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 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.

 

On October 20, 2009,a purported class action complaint was filed in the Court of Chancery of theState of Delaware against us, all of our current directors, Emerson Electric, Inc.(“Emerson”) and Globe Acquisition Corp. (“Globe”).  Among other things,the complaint alleges that (i) our Board of Directors breached thefiduciary duties owed to the our stockholders in connection with the approvalof our proposed acquisition by Emerson (the “Merger”), (ii) our Board ofDirectors breached fiduciary duties owed to our stockholders by disseminatinginadequate and materially misleading information in connection with the filingof our Schedule 14D-9 Solicitation/Recommendation Statement on October 15,2009 and (iii) we, Emerson, and Globe aided and abetted our Board ofDirectors in such breaches.  The complaint seeks class certification,certain forms of equitable relief, including enjoining the consummation of theMerger, and unspecified damages.  A hearing on the plaintiff’s motion fora preliminary injunction has been scheduled for November 6, 2009. The parties have commenced discovery.

 

Also on October 20,2009, a second purported class action complaint was filed in the Circuit Courtof Madison County, Alabama, against us, all of our current directors, andEmerson.  Among other things, the complaint alleges that (i) ourBoard of Directors breached fiduciary duties owed to our stockholders inconnection with the approval of the Merger, (ii) we and our Board ofDirectors breached fiduciary duties owed to our stockholders by disseminatinginadequate and materially misleading information in connection with our filingof the Schedule 14D-9 Solicitation/Recommendation Statement on October 15,2009, and (iii) Emerson aided and abetted us and our Board of Directors insuch breaches.  The complaint seeks class certification, unspecifieddamages, and such other relief as the court may find just and proper.  On October 22,2009, plaintiff filed a motion for temporary restraining order and expediteddiscovery that seeks an order by the court that would temporarily restrain theconsummation of the Merger until a hearing on a forthcoming motion for apreliminary injunction may be held.  On October 26, 2009, thedefendants filed a motion to dismiss, a motion to stay, and an opposition tothe plaintiff’s motion for a temporary restraining order and expediteddiscovery.  Also on October 26, 2009, the court held a hearing atwhich it did not rule on any of the pending motions.

 

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**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:*

 

**Theannouncement and pendency of our agreement to be acquired by Emerson couldadversely affect our business, financial results and operations.**

 

On October 6, 2009,we announced that we had entered into the Agreement and Plan of Merger withEmerson Electric Co. pursuant to which a wholly-owned subsidiary of Emersoncommenced a cash tender offer on October 15, 2009, to acquire all of ourissued and outstanding shares of common stock, at a price of $25.00 per share,net to the holder thereof in cash.  Afterthe consummation of the tender offer, and subject to the satisfaction or waiverof certain conditions set forth in the merger agreement, Emerson’s subsidiarywill merge with and into us, and we will become a wholly-owned subsidiary ofEmerson.

 

The announcement andpendency of the tender offer and the merger could cause disruptions in andcreate uncertainty surrounding our business, including affecting ourrelationships with our customers, vendors, and employees, which could have anadverse effect on our business, financial results, and operations.  In particular, we could lose importantpersonnel as a result of the departure of employees who decide to pursue otheropportunities in light of the proposed merger. We could potentially lose customers or suppliers, or customer orderscould be delayed or decreased.  The salescycles for our products may lengthen due to the uncertainty related to theproposed merger.  In addition, we havediverted, and will continue to divert, significant management resources in aneffort to complete the merger, which could adversely affect our business andresults of operations.  We are alsoexperiencing increased competition from certain of our competitors, who aretargeting our customers as a result of the uncertainty associated with ourproposed acquisition by Emerson.

 

We are subject toprohibitions contained in the merger agreement on soliciting, initiating,knowingly facilitating, or knowingly encouraging alternative acquisitionproposals.  If violated, theserestrictions could potentially result in the termination of the mergeragreement by Emerson.  We are alsosubject to restrictions contained in the merger agreement on the conduct of ourbusiness prior to the completion of the merger. These restrictions could result in our inability to respond effectivelyto competitive pressures, industry developments, and future opportunities ormay otherwise harm our business, financial results, and operations.

 

**Thefailure to complete the tender offer and/or the merger could adversely affectour business and the market price of our common stock and could result insubstantial termination and reimbursement costs.**

 

There is no assurancethat the tender offer and the merger with Emerson or any other transaction willoccur.  Consummation of the tender offeris subject to various conditions, including a minimum condition for the validtender of outstanding shares, the expiration or termination of applicablewaiting periods under the HSR Act and other applicable waiting periods,clearances, consents, or approvals of governmental authorities, and certainother conditions. The closing of the merger is subject to certain closingconditions specified in the merger agreement, including, if required, approvalof the merger by a majority of  ourstockholders.

 

If the proposed tenderoffer and/or merger, or a similar transaction, are not completed, the shareprice of our common stock may change to the extent that the current marketprice of our common stock reflects an assumption that a transaction will becompleted.  We will have incurredsignificant costs, including the diversion of management resources, for whichwe will have received little or no benefit. In addition, under circumstances defined in the merger agreement, we maybe required to pay Emerson a termination fee of $35 million and/or reimburseEmerson for up to $7.5 million in transaction expenses.  Furthermore, a failed transaction may resultin negative publicity and a negative impression of us in the investmentcommunity.

 

**Certainof our directors and executive officers have interests in the merger that maybe different from, or in addition to, the interests of our stockholders.**

 

Our executive officersnegotiated the terms of the merger agreement under the direction of theBoard.  The Board unanimously adopted,approved, and declared advisable the merger agreement and the transactionscontemplated by the merger agreement, declared it in the best interest of ourstockholders for us to enter into the merger agreement and consummate thetransactions contemplated by the merger agreement, declared the terms of thetender offer and the merger fair to our stockholders and recommended that ourstockholders tender their shares into the offer and, if required, vote in favorof adoption of the merger agreement. These directors and executive officers may have interests in the mergerthat are different from, or in addition to, or may be deemed to conflict withthose of our stockholders.  Theseinterests may include the continued employment of certain of our executiveofficers by the combined company and the indemnification of former directorsand officers by the combined company. With respect to these directors and executive officers, these interestsalso include the treatment in the merger of employment agreements, severancepolicies, change of control arrangements, performance shares, restricted stockunits, stock options, and other rights held by these directors and executiveofficers.

 

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**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.

 

**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;

 

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·                                          Dilution of existing stockholders as aresult of issuing equity securities, including the assumption of any stock optionsor 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.

 

**Werecorded an impairment charge in the first quarter of 2009, and our impairmenttesting may require us to take an additional impairment charge in the future.**

 

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.

 

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  impairment charge for LANDesk goodwillof $80.0 million during the three months ended March 31, 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 in responseto competitive price pressures and the loss of revenue, our gross and operatingmargins and profitability could be adversely affected.  In addition, ifour pricing, functionality, and other factors are not sufficiently competitive,or if there is an adverse reaction to our product decisions, we may lose marketshare in certain areas, which could adversely affect our revenue and prospects.

 

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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 the needs of our current and prospectivecustomers.  Some of these competitors can also bundle hardware, software,and services together, and offer a more complete set of products and servicesthan we are able to offer. We may not be able to compete successfully againstcurrent and future competitors and competitive pressure may materially harm ourbusiness, financial condition, operating results, and cash flows, or impair ourability 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;

 

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·                                          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.

 

**Wehave limited 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 othercountries and the protections provided by confidentiality and nondisclosureagreements and other legal agreements.  These laws and practices, however,afford only limited protection.  There can be no assurance that the stepswe have taken to protect our intellectual property rights, or that the steps wetake in the future, will be adequate to prevent or detect misappropriation ofour intellectual property or technologies or that our competitors will not independentlydevelop proprietary or other technologies that are substantially equivalent orsuperior to our products or technologies. In addition, our proprietary information may be misused or improperlydisclosed by third parties entrusted with this information.  There also can be no assurance that ourproprietary rights will not be challenged, invalidated, or avoided.

 

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 foreign patentapplications pending.  There can be no assurance that any additionalpatents will be issued from any of those pending applications or that anypatents will be issued in any additional countries where our products can besold.  Claims allowed in our patents or in any pending patent applicationsmay not be of sufficient scope or strength for, or provide meaningfulprotection or any commercial advantage to us or such claims may not be upheldif challenged.  Also, competitors may develop their own intellectualproperty or technologies, obtain their own patents, or challenge the validityof, or be able to design around, our patents.  The laws of certain foreigncountries in which our products are or may be developed, manufactured, or sold(particularly certain countries in Asia) may not protect our products orintellectual property rights to the same extent as do the laws of the UnitedStates and thus increase the likelihood of piracy of our technologies andproducts.

 

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 in anysuch 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.

 

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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.  Inaddition, 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 recent restructuring may disrupt our operations andadversely affect our operating and financial results.**

 

In fiscal July 2008, in January 2009, andagain in July 2009, we announced a series of actions designed to enhancecompetitiveness, improve our efficiency, and reduce our cost structure.  We initiated workforce reduction andconsolidation actions designed to intensify our focus on our growth areas andimprove our operating efficiency.  Therestructuring includes actions to increase our organizational efficiency,reduce certain research and development investments in lower growth product areas,integrate our marketing functions, and shift support for our Asian operationsfrom Shannon, Ireland, to our recently-established regional hub inSingapore.  We are also relocatingcertain functions from Redmond, Washington to Huntsville, Alabama.  The impact of these organizationalimprovements will result in a decrease of approximately 330 positions orapproximately 15% of our global workforce. In fiscal July 2008, we also announced that, as part of ourcontinued focus on core markets, we intended to sell the portion of ourentrepreneurial Connectivity and Control business unit dedicated to ourProfessional Audio Video and our Equinox serial products.  In of the third quarter of 2009, we dissolvedthe remaining portions of our Connectivity and Control business and absorbedthe Professional Audio Video products and serial products into  Management Systems.  The dissolution of this unit resulted in anet decrease of approximately 20 additional positions.  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.

 

**We arelikely 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, andcontractual terms of orders, particularly from OEMs, resellers, and other largecustomers, 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;

 

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·                                          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 delays in customer orders during unfavorableeconomic periods.  We believe that the third and fourth quarters willgenerally have higher net sales levels due to customer budgeting andprocurement 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 quarterly operatingresults fail to meet the expectations of equity research analysts, the price ofour 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 and distributors representedapproximately 60% of net sales in 2008, 61% of net sales in 2007, and 56% ofnet sales in 2006.  The loss of significant revenue opportunities withthese resellers and distributors could negatively impact our results ofoperations.  In addition, many of thesecustomers also have or distribute competing products.  If resellers and distributors elect toincrease the marketing of competing products or reduced marketing of ourproducts, our ability to grow our business will be negatively impacted and willimpair one of our substantial revenue sources.

 

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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.

 

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 timely basis. This could cause customer dissatisfaction and loss of future business.  Ifwe overestimate sales, we will experience increased costs from inventorystorage, 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.

 

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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 andresellers are generally nonexclusive and may be terminated on short notice byeither party without cause, and any new distributor or reseller agreements arelikely to contain similar provisions.  Distributors and resellers are notobligated to purchase products from us and frequently offer products from severaldifferent companies, including competitors’ products, and distributors andresellers 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.

 

**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 issubject to 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.

 

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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.

 

**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.

 

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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.

 

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.

 

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**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;

 

·                                          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.

 

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Continued or increased internationalpolitical instability, evidenced by the threat or occurrence of terroristattacks, enhanced national security measures in the United States or othercountries, 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.

 

**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 

 

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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 ofinteroperability or compatibility with our products, making our products lessattractive, increasing our research and development costs in order to modifyour products, license new solutions, or develop new products, and potentiallyharming our future revenue.  Our failureto anticipate, manage and adapt to these risks could result in significantdelays in our product releases, changes in our product roadmaps, loss ofcurrent customers for whom the lost compatibility is an issue, and damage toour operating results.

 

**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 

 

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in, the market acceptanceor our products, lost revenue and sales of our products, reallocation of, orincreases in, development and customer support resources, impairment to ourreputation, loss of future renewal or maintenance revenue, and increasedservice and warranty costs.  Errors couldalso result in significant delays in the release of updates, upgrades, or newproducts while such errors are corrected. Moreover, because our products primarily support other systems andapplications, any software errors or bugs in these other systems or applicationsmay affect the performance of our software, and it may be difficult orimpossible to determine where the errors reside.  As a result, product errors, failures, orbugs could result in significant harm to our business and have a materialadverse 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.

 

**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 and 

 

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vested options are currentlyunderwater.  This could affect our ability to retain presentemployees.  In addition, we are now required to record a charge toearnings for employee stock option grants and other equity incentives. Moreover, applicable stock exchange listing standards relating to obtainingstockholder approval of equity compensation plans could make it more difficultor expensive for us to make equity awards to employees in the future.  Asa result, we may incur increased compensation costs, change our equity compensationstrategy, or find it difficult to attract, retain, and motivate employees, anyof which could materially adversely affect our 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 retain sufficient and qualified managerial, operational, orfinancial personnel or to implement or maintain internal systems that enable usto effectively manage our growing business and operations worldwide, ourfinancial results in any given period may be adversely affected and ourbusiness and financial condition could be materially 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 an additional$90 million under a three-year term note. We may increase this bank debt or seek other bank debt in thefuture.  The balance outstanding on ourdebt agreements was $125 million as of September 30, 2009.  Interest expense on borrowings under the termloan and additional future borrowings under the line of credit could adverselyaffect our future net income, margins, expenses, and financial conditions 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;

 

·              Increasingour vulnerability to economic downturns 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.

 

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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 aggregate notional amountof $110 million, 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 be adverselyaffected by changes in the mix of earnings in countries with differingstatutory tax rates, in the valuation of deferred tax assets and liabilities,in tax laws and treaties, or by material audit assessments, which could affectour profitability.  In addition, the amount of income taxes we pay issubject to audit in various jurisdictions, and a material assessment by agoverning 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 adverse effect on our business, financialcondition, and results of operations.  Inaddition, correction of any “significant deficiencies” or “material weaknesses”(as defined under PCAOB guidelines) could require additional remedial measuresincluding hiring additional personnel, which could be costly andtime-consuming.  If a significantdeficiency or material weakness exists at any year-end (including a materialweakness identified prior to year-end for which there is an insufficient periodof time to evaluate and confirm the effectiveness of the corrections or relatednew procedures), our management and our auditors will be unable to reportfavorably as to the effectiveness of our control over financial reporting orinformation systems.  This could resultin a loss of investor confidence in the accuracy and completeness of ourfinancial reports and our management, which could result in a decline of ourstock price, damage to our business 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 our stockholders.

 

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 of EquitySecurities 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 September 30,2009, our Board has authorized a total of 19 million shares to berepurchased.  The plan has no expirationdate.  Details of purchases under theplan during the nine months ended September 30, 2009 are as follows:

 

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| **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      |                                                                                        |       |                                                                    |       |   |
|                                                   |       |                                                     |       |                                                    |       |                                                                                        |       |                                                                    |       |
| Quarter  ended June 30, 2009                      |       | —                                                   |       | —                                                  |       | 17,900,000                                                                                  |       | 1,100,000                                                               |       |
|                                                   |       |                                                     |       |                                                    |       |                                                                                        |       |                                                                    |       |
| July 1,  2009 — July 31, 2009           |       | 100,000                                                  |       | $                                                       | 15.91      |                                                                                        | 18,000,000 |                                                                    | 1,000,000  |   |
| August 1,  2009 — August 31, 2009       |       | 50,000                                                   |       | $                                                       | 15.63      |                                                                                        | 18,050,000 |                                                                    | 950,000    |   |
| September 1,  2009 — September 30, 2009 |       | 50,000                                                   |       | $                                                       | 16.59      |                                                                                        | 18,100,000 |                                                                    | 900,000    |   |
| Quarter  ended September 30, 2009                 |       | 200,000                                                  |       | $                                                       | 16.01      |                                                                                        |       |                                                                    |       |   |
| Nine  months ended September 30, 2009             |       | 1,200,000                                                |       | $                                                       | 12.89      |                                                                                        |       |                                                                    |       |   |

 

Approximately274,000 shares were withheld as payment for employee payroll withholding taxesat the release of vested restricted stock units in the first nine months of2009 (*see Note 3 to our condensedconsolidated financial statements contained in Part I, Item 1 of thisquarterly report*).  The274,000 shares were considered to be treasury shares; however, these treasuryshares were immediately retired and are not considered in the table above.

** **

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

 

(a) Exhibits

 
| 2.1    |   | Agreement and Plan of Merger among Avocent Corporation,  Emerson Electric Co., and Globe Acquisition Corporation dated as of  October 5, 2009 (incorporated  by reference to Exhibit 2.1 to the Company’s report on Form 8-K  filed with the SEC****on October 7, 2009) |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                             |
| 31.1   |   | Sarbanes-Oxley Act of 2002 Section 302(a) Certification of  the Chief Executive Officer                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                             |
| 31.2   |   | Sarbanes-Oxley Act of 2002 Section 302(a) Certification of  the Chief Financial  Officer                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                             |
| 32.1   |   | Certification of the Chief Executive Officer and the Chief Financial  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                               |

 

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

 

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### **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:    November 4,  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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