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**U.S.SECURITIES AND EXCHANGE COMMISSION**WASHINGTON, D.C.  20549

** **

# **FORM 10-Q**

 
| **(Mark  One)**                                                                                                                                                   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                              |   |
| **x**                                                                                                                                                             | **Quarterly report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                              |   |
| **For  the quarterly period ended June 30, 2009 or**                                                                                                         |
|                                                                                                                                                              |   |
| **o**                                                                                                                                                             | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                              |   |
| **For  the transition period from            to            ** |
|                                                                                                                                                              |   |
| **Commission  file number: 000-30575**                                                                                                                            |

 

**AVOCENTCORPORATION**

(Exact Name ofRegistrant as Specified in Its Charter)

 

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

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934, as amended, during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.  x Yes  o No

 

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

 

Asof August 4, 2009, the number of outstanding shares of the Registrant’sCommon Stock was 44,351,911.

 

 

 

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**AVOCENTCORPORATION**

**FORM 10-Q**

**June 30,2009**

 

**INDEX**

 
| ** **   | **Page(s)**           |
|--------------|-----------------------|
| Part I  | Financial Information |   |
|         |                  |   |   |
|         | Item 1.               | Financial Statements  (unaudited) |   |
|         |                  |   |   |
|         |                  | Consolidated  Statements of Operations for the Three and Six Months Ended June 30,  2009 and June 27, 2008 | 3 |
|         |                  | Consolidated  Balance Sheets at June 30, 2009 and December 31, 2008 | 4 |
|         |                  | Condensed Consolidated Statements of Cash Flows for  the Three and Six Months Ended June 30, 2009 and June 27, 2008 | 5 |
|         |                  | Notes to Condensed Consolidated Financial Statements | 6-17 |
|         |                  |   |   |
|         | Item 2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 18-29 |
|         |                  |   |   |
|         | Item 3.               | Quantitative  and Qualitative Disclosures about Market Risks | 29 |
|         |                  |   |   |
|         | Item 4.               | Controls and  Procedures | 29 |
|         |                  |   |   |
| Part II | Other Information     |   |
|         |                  |   |
|         | Item 1.               | Legal Proceedings | 30 |
|         |                  |   |   |
|         | Item 1A.              | Risk Factors | 30 |
|         |                  |   |   |
|         | Item 2.               | Unregistered  Sales of Equity Securities and Use of Proceeds | 46 |
|         |                  |   |   |
|         | Item 4.               | Submission of  Matters to a Vote of Security Holders | 47 |
|         |                  |   |   |
|         | Item 6.               | Exhibits | 47 |
|         |                  |   |   |
| Signature    | 48                    |

 

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**PART I —FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

**AVOCENT CORPORATION  CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited, in thousands, except per share data)**

 
| ** **                                                                                                                                                                                                                          | ** ** | **For the  three months ended** | ** ** | **For the  six months ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                                                                                                          | ** ** | **June 30,**               | ** ** | **June 27,**             | ** ** | **June 30,** | ** ** | **June 27,** | ** ** |
| ** **                                                                                                                                                                                                                          | ** ** | **2009**                        | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net sales:                                                                                                                                                                                                                          | * *   | * *                        | * *   | * *                      | * *   | * * | * * | * * | * * |
| Products                                                                                                                                                                                                                            |       | $                               | 85,140     |                          | $          | 123,088 |   | $ | 170,264 |   | $ | 231,169 |   |
| Licenses and royalties                                                                                                                                                                                                              |       | 23,508                          |       | 25,998                        |       | 46,237 |   | 49,815 |   |
| Services                                                                                                                                                                                                                            |       | 19,983                          |       | 10,096                        |       | 38,192 |   | 19,597 |   |
| Total net sales                                                                                                                                                                                                                     |       | 128,631                         |       | 159,182                       |       | 254,693 |   | 300,581 |   |
|                                                                                                                                                                                                                                |       |                            |       |                          |       |   |   |   |   |
| Cost of sales:                                                                                                                                                                                                                      |       |                            |       |                          |       |   |   |   |   |
| Products                                                                                                                                                                                                                            |       | 37,375                          |       | 52,609                        |       | 76,851 |   | 96,330 |   |
| Licenses and royalties                                                                                                                                                                                                              |       | 466                             |       | 668                           |       | 935 |   | 1,369 |   |
| Services                                                                                                                                                                                                                            |       | 5,275                           |       | 3,248                         |       | 9,584 |   | 6,324 |   |
| Amortization of intangibles related to licenses and  royalties                                                                                                                                                                      |       | 4,132                           |       | 2,768                         |       | 8,690 |   | 5,535 |   |
| Total cost of sales (including stock  compensation of $238 and $461 for the three and six months ended  June 30, 2009; $257 and $500 for the three and six months ended  June 27, 2008)                                   |       | 47,248                          |       | 59,293                        |       | 96,060 |   | 109,558 |   |
|                                                                                                                                                                                                                                |       |                            |       |                          |       |   |   |   |   |
| Gross profit                                                                                                                                                                                                                        |       | 81,383                          |       | 99,889                        |       | 158,633 |   | 191,023 |   |
|                                                                                                                                                                                                                                |       |                            |       |                          |       |   |   |   |   |
| Research and development expenses (including  stock compensation of $1,282 and $1,859 for the three and six months ended  June 30, 2009; $1,340 and $2,355 for the three and six months ended  June 27, 2008)             |       | 21,038                          |       | 24,361                        |       | 41,529 |   | 47,728 |   |
| Selling, general and administrative expenses (including  stock compensation of $3,353 and $5,798 for the three and six months ended June 30,  2009; $2,622 and $5,302 for the three and six months ended June 27,  2008)  |       | 50,172                          |       | 57,445                        |       | 97,339 |   | 112,564 |   |
| Restructuring, integration and retirement expenses  (including stock compensation of ($45) and $4 for the three and six  months ended June 30, 2009; $1,904 and $2,519 for the three and six  months ended June 27, 2008) |       | 1,530                           |       | 4,730                         |       | 6,825 |   | 7,701 |   |
| Amortization of intangible assets                                                                                                                                                                                                   |       | 7,950                           |       | 7,617                         |       | 18,063 |   | 15,152 |   |
| Impairment of goodwill                                                                                                                                                                                                              |       | —                          |       | —                        |       | 80,000 |   | — |   |
| Total operating expenses                                                                                                                                                                                                            |       | 80,690                          |       | 94,153                        |       | 243,756 |   | 183,145 |   |
|                                                                                                                                                                                                                                |       |                            |       |                          |       |   |   |   |   |
| Income (loss) from operations                                                                                                                                                                                                       |       | 693                             |       | 5,736                         |       | (85,123 | ) | 7,878 |   |
|                                                                                                                                                                                                                                |       |                            |       |                          |       |   |   |   |   |
| Net investment income                                                                                                                                                                                                               |       | 134                             |       | 671                           |       | 285 |   | 1,568 |   |
| Interest expense                                                                                                                                                                                                                    |       | (1,992                          | )          | (1,810                        | )          | (4,234 | ) | (3,647 | ) |
| Other income (expense), net                                                                                                                                                                                                         |       | 32                              |       | (95                           | )          | (1,164 | ) | 360 |   |
|                                                                                                                                                                                                                                |       |                            |       |                          |       |   |   |   |   |
| Income (loss) before provision (benefit) for income  taxes                                                                                                                                                                          |       | (1,133                          | )          | 4,502                         |       | (90,236 | ) | 6,159 |   |
| Provision (benefit) for income taxes                                                                                                                                                                                                |       | 2,213                           |       | 1,059                         |       | (26,965 | ) | 1,985 |   |
|                                                                                                                                                                                                                                |       |                            |       |                          |       |   |   |   |   |
| Net income (loss)                                                                                                                                                                                                                   |       | $                               | (3,346     | )                             | $          | 3,443 |   | $ | (63,271 | ) | $ | 4,174 |   |
|                                                                                                                                                                                                                                |       |                            |       |                          |       |   |   |   |   |
| Earnings (loss) per share:                                                                                                                                                                                                          |       |                            |       |                          |       |   |   |   |   |
| Basic                                                                                                                                                                                                                               |       | $                               | (0.08      | )                             | $          | 0.08 |   | $ | (1.42 | ) | $ | 0.09 |   |
| Diluted                                                                                                                                                                                                                             |       | $                               | (0.08      | )                             | $          | 0.08 |   | $ | (1.42 | ) | $ | 0.09 |   |
| Weighted average shares used in computing earnings  (loss) per share:                                                                                                                                                               |       |                            |       |                          |       |   |   |   |   |
| Basic                                                                                                                                                                                                                               |       | 44,320                          |       | 44,731                        |       | 44,556 |   | 45,469 |   |
| Diluted                                                                                                                                                                                                                             |       | 44,320                          |       | 45,378                        |       | 44,556 |   | 46,126 |   |

 

See notesaccompanying these condensed consolidated financial statements.

 

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**AvocentCorporation**

**Consolidated Balance Sheets**

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

 
| ** **                                                                                                                                                                                                                | ** ** | **June 30, 2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                | ** ** | ** **             | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                           |       |                   |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                |       | $                      | 107,050    |                        | $          | 126,858 |   |
| Accounts  receivable, less allowance for doubtful accounts of $3,807 and $4,548 at  June 30, 2009 and December 31, 2008, respectively                                                                           |       | 95,132                 |       | 122,133                     |       |
| Other  receivables                                                                                                                                                                                                        |       | 7,672                  |       | 12,281                      |       |
| Inventories                                                                                                                                                                                                               |       | 35,861                 |       | 31,516                      |       |
| Other current  assets                                                                                                                                                                                                     |       | 6,136                  |       | 5,209                       |       |
| Deferred tax  assets, net                                                                                                                                                                                                 |       | 5,163                  |       | 6,885                       |       |
| Total current  assets                                                                                                                                                                                                     |       | 257,014                |       | 304,882                     |       |
|                                                                                                                                                                                                                      |       |                   |       |                        |       |
| Property and  equipment, net                                                                                                                                                                                              |       | 34,927                 |       | 38,197                      |       |
| Goodwill                                                                                                                                                                                                                  |       | 535,529                |       | 616,326                     |       |
| Other intangible  assets, net                                                                                                                                                                                             |       | 153,820                |       | 180,276                     |       |
| Deferred tax  asset, non-current                                                                                                                                                                                          |       | 43,395                 |       | 10,873                      |       |
| Other assets                                                                                                                                                                                                              |       | 3,573                  |       | 3,616                       |       |
| Total assets                                                                                                                                                                                                              |       | $                      | 1,028,258  |                        | $          | 1,154,170 |   |
|                                                                                                                                                                                                                      |       |                   |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                             | ** ** | ** **             | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                                                                     |       |                   |       |                        |       |
| Accounts payable                                                                                                                                                                                                          |       | $                      | 12,873     |                        | $          | 17,494 |   |
| Accrued wages  and commissions                                                                                                                                                                                            |       | 23,691                 |       | 30,966                      |       |
| Accrued  liabilities                                                                                                                                                                                                      |       | 30,438                 |       | 42,027                      |       |
| Income taxes payable                                                                                                                                                                                                      |       | 15,130                 |       | 11,678                      |       |
| Deferred  revenue, current                                                                                                                                                                                                |       | 66,409                 |       | 66,248                      |       |
| Total current  liabilities                                                                                                                                                                                                |       | 148,541                |       | 168,413                     |       |
|                                                                                                                                                                                                                      |       |                   |       |                        |       |
| Unsecured bank  credit facility                                                                                                                                                                                           |       | 140,000                |       | 170,000                     |       |
| Deferred  revenue, non-current                                                                                                                                                                                            |       | 6,481                  |       | 9,572                       |       |
| Other  non-current liabilities                                                                                                                                                                                            |       | 3,317                  |       | 4,028                       |       |
| Total  liabilities                                                                                                                                                                                                        |       | 298,339                |       | 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; June 30, 2009 –  55,223 shares issued and 44,396 outstanding; December 31, 2008 – 54,533  shares issued and 44,706 outstanding; |       | 55                     |       | 55                          |       |
| Additional  paid-in capital                                                                                                                                                                                               |       | 1,231,366              |       | 1,230,840                   |       |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                            |       | 1,172                  |       | (1,606                      | )          |
| Accumulated  deficit                                                                                                                                                                                                      |       | (256,518               | )          | (193,247                    | )          |
| Treasury stock,  at cost; June 30, 2009, 10,827 shares; December 31, 2008, 9,827  shares;                                                                                                                       |       | (246,156               | )          | (233,885                    | )          |
| Total  stockholders’ equity                                                                                                                                                                                          |       | 729,919                |       | 802,157                     |       |
|                                                                                                                                                                                                                      |       |                   |       |                        |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                          |       | $                      | 1,028,258  |                        | $          | 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 six months ended** | ** **   |
|-------------------------------------------------------------------------------------------|--------------|------------------------------|--------------|
| ** **                                                                                | ** **   | **June 30,**            | ** **   | **June 27,** | ** ** |
| ** **                                                                                | ** **   | **2009**                     | ** **   | **2008** | ** ** |
| *** ***                                                                              | *** *** | *** ***                 | *** *** | *** *** | *** *** |
| Cash  flows from operating activities:                                                    | * *     | * *                     | * *     | * * | * * |
| Net  income (loss)                                                                        |         | $                            | (63,271      | ) | $ | 4,174 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |         |                         |         |   |   |
| Depreciation                                                                              |         | 4,363                        |         | 4,890 |   |
| Amortization  of intangible assets                                                        |         | 27,007                       |         | 21,033 |   |
| Stock-based  compensation                                                                 |         | 8,113                        |         | 10,671 |   |
| Net  loss on disposition of fixed assets                                                  |         | 82                           |         | 428 |   |
| Impairment  of goodwill                                                                   |         | 80,000                       |         | — |   |
| Tax adjustments  from stock-based compensation                                            |         | 2,961                        |         | (9 | ) |
| Changes  in operating assets and liabilities, net of acquisitions:                        |         |                         |         |   |   |
| Accounts  receivable, net                                                                 |         | 29,619                       |         | (1,367 | ) |
| Inventories                                                                               |         | (4,313                       | )            | 2,396 |   |
| Other  assets                                                                             |         | 3,874                        |         | 1,324 |   |
| Accounts  payable                                                                         |         | (6,448                       | )            | (899 | ) |
| Accrued  wages and commissions                                                            |         | (7,275                       | )            | 3,197 |   |
| Accrued  other liabilities and deferred revenue                                           |         | (15,944                      | )            | 846 |   |
| Income  taxes, current and deferred                                                       |         | (30,759                      | )            | (7,807 | ) |
| Net  cash provided by operating activities                                                |         | 28,009                       |         | 38,877 |   |
| ** **                                                                                | ** **   | ** **                   | ** **   | ** ** | ** ** |
| Cash  flows from investing activities:                                                    |         |                         |         |   |   |
| Purchase  of other intangible assets                                                      |         | (462                         | )            | (1,921 | ) |
| Additional  consideration paid for LANDesk and Touchpaper                                 |         | (4,077                       | )            | — |   |
| Purchases  of property and equipment                                                      |         | (1,724                       | )            | (5,011 | ) |
| Proceeds  from sale of property and equipment                                             |         | 622                          |         | — |   |
| Maturities  and proceeds from sales of investments                                        |         | —                       |         | 5,942 |   |
| Net  cash used in investing activities                                                    |         | (5,641                       | )            | (990 | ) |
| ** **                                                                                | ** **   | ** **                   | ** **   | ** ** | ** ** |
| Cash  flows from financing activities:                                                    | ** **   | ** **                   | ** **   | ** ** | ** ** |
| Borrowings  (payments) under unsecured line of credit, net                                |         | (30,000                      | )            | 35,000 |   |
| Proceeds  from employee stock plans                                                       |         | 1,216                        |         | 633 |   |
| Tax adjustments  from stock-based compensation                                            |         | (2,961                       | )            | 9 |   |
| Purchases  of treasury stock                                                              |         | (12,271                      | )            | (64,449 | ) |
| Net  cash used in financing activities                                                    |         | (44,016                      | )            | (28,807 | ) |
|                                                                                      |         |                         |         |   |   |
| Effect  of exchange rate changes on cash and cash equivalents                             |         | 1,840                        |         | 2,670 |   |
|                                                                                      |         |                         |         |   |   |
| Net  increase (decrease) in cash and cash equivalents                                     |         | (19,808                      | )            | 11,750 |   |
| Cash  and cash equivalents at beginning of period                                         |         | 126,858                      |         | 105,183 |   |
| Cash  and cash equivalents at end of period                                               |         | $                            | 107,050      |   | $ | 116,933 |   |

 

See notesaccompanying these condensed consolidated financial statements.

 

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**AVOCENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 

Note 1.   Basis ofPresentation

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inconformity with United States generally accepted accounting principles andreflect all adjustments consisting of normal recurring adjustments which, inthe opinion of management, are necessary for a fair statement of the resultsfor the periods shown.  The results ofoperations for these periods are not necessarily indicative of the resultsexpected for the full fiscal year nor for any future period.  The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenue and expensesduring the reporting period.  Actualresults could differ from those estimates and assumptions.

 

The accompanyingunaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and the relatednotes contained in our Annual Report on Form 10-K for the year ended December 31,2008, which is on file with the Securities and Exchange Commission and is availableat our website, www.avocent.com. The consolidated balance sheet presented inthe accompanying condensed consolidated financial statements for December 31,2008, was derived from the audited financial statements filed in our 10-K forthe period ended December 31, 2008, but does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica.

 

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

 

Certain reclassifications have been made to the prioryear’s condensed consolidated financial statements in order to conform to the2009 presentation. These reclassifications had no effect on previously reportednet income, net cash provided by operating activities, net cash provided byinvesting activities nor total stockholders’ equity.

 

Our financialstatements are consolidated and include the accounts of Avocent Corporation andour wholly owned subsidiaries.  Allsignificant inter-company transactions and balances have been eliminated inconsolidation.

 

Note 2.   Inventories

 

Inventories consisted ofthe following at:

 
| ** **      | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------|------------|------------------------|------------|----------------------------|------------|
| ** **      | ** ** | ** **             | ** ** | ** **                 | ** ** |
| Raw materials   |       | $                      | 2,961      |                       | $          | 525 |   |
| Work-in-process |       | 1,007                  |       | 308                        |       |
| Finished goods  |       | 31,893                 |       | 30,683                     |       |
| Inventories     |       | $                      | 35,861     |                       | $          | 31,516 |   |

 

Inventoriesabove have been reduced by reserves for excess and obsolete inventories of$5,508 and $6,401 as of June 30, 2009 and December 31, 2008,respectively.

 

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**AVOCENTCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 

Note 3.   Equity and Treasury Stock

 

We issued common stock asa result of stock option exercise activity during the three and six monthsended June 30, 2009 and June 27, 2008 as follows:

 
| ** **             | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **             | ** ** | **June 30,  2009**        | ** ** | **June 27,  2008**      | ** ** | **June 30,  2009** | ** ** | **June 27,  2008** | ** ** |
|                   |       |                           |       |                         |       |   |   |   |   |
| Stock option exercises |       | 13,000                         |       | 47,000                       |       | 26,000 |   | 64,000 |   |

 

We issued common stock asa result of restricted stock unit (RSU) vesting activity during the three andsix months ended June 30, 2009 and June 27, 2008 as follows:

 
| ** **               | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|--------------------------|------------|--------------------------------|------------|------------------------------|------------|
|                     |       | **June 30,  2009**        | ** ** | **June 27,  2008**      | ** ** | **June 30,  2009** | ** ** | **June 27,  2008** |   |
| Net RSUs issued          |       |                           |       |                         |       |   |   |   |   |
| RSU’s vested        |       | 98,000                         |       | 24,000                       |       | 839,000 |   | 569,000 |   |
| Shares withheld  for tax |       | (28,000                        | )          | (9,000                       | )          | (247,000 | ) | (168,000 | ) |
| Net RSUs issued          |       | 70,000                         |       | 15,000                       |       | 592,000 |   | 401,000 |   |

 

Share repurchase activityduring the three and six months ended June 30, 2009 and June 27, 2008was as follows:

 
| ** **         | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|--------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **         | ** ** | **June 30,  2009**        | ** ** | **June 27,  2008**      | ** ** | **June 30,  2009** | ** ** | **June 27,  2008** | ** ** |
|               |       |                           |       |                         |       |   |   |   |   |
| Shares repurchased |       | —                         |       | 88,000                       |       | 1,000,000 |   | 4,000,000 |   |

 

RSUs granted — During thefirst six months of 2009, our Compensation Committee approved the grant of779,000 restricted stock units to our employees, officers and directors.  Of these grants, 479,000 were time-based and300,000 were based on market or performance conditions.  During the first six months of 2008, ourCompensation Committee approved the grant of 1,154,000 restricted stock unitsto our employees, officers and directors. Of these grants, 728,000 were time-based and 426,000 were based onmarket or performance conditions.

 

Note 4.   Accumulated Other Comprehensive Income(Loss)

 

We record our foreign currencytranslation adjustments and unrealized gains and losses on derivatives whichare cash flow hedges, net of tax, within accumulated other comprehensive income(loss), which is included as a separate component of stockholders’ equity.  Comprehensive income (loss) for the sixmonths ended June 30, 2009 and June 27, 2008 is as follows:

 
| ** **                               | ** ** | **For the  six months ended** | ** **    |
|------------------------------------------|------------|-------------------------------|---------------|
| ** **                               | ** ** | **June 30,  2009**       | ** **    | **June 27,  2008** | ** ** |
| Comprehensive  income (loss)             |       |                          |          |   |   |
| Net income  (loss)                       |       | $                             |  (63,271 | ) | $ |  4,174 |   |
| Unrealized gains  on cash flow hedge     |       | 534                           |          | 446 |   |
| Foreign currency  translation adjustment |       | 2,244                         |          | 2,367 |   |
| Total  comprehensive income (loss)       |       | $                             |  (60,493 | ) | $ |  6,987 |   |

 

As of June 30, 2009 and December 31,2008, total accumulated other comprehensive income (loss) was $1,172 and$(1,606), respectively.

 

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**AVOCENTCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 

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

 
| ** **                                                           | ** ** | **Income (Loss)  (Numerator)** | ** ** | **Shares   (Denominator)** | ** ** | **Per-Share   Amount** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------|------------|------------------------|------------|
| ** **                                                           | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** **             | ** ** |
| **For the  three months ended June 30, 2009**                   |       |                           |       |                       |       |                   |       |
| **Basic  EPS**                                                       |       |                           |       |                       |       |                   |       |
| Net loss  available to common stockholders                           |       | $                              | (3,346     | )                          | 44,320     |                   | $          | (0.08 | ) |
| **Effect  of Dilutive Securities**                                   |       |                           |       |                       |       |                   |       |
| Stock options  and unvested RSUs                                     |       | —                         |       | —                     |       | —                 |       |
| **Diluted  EPS**                                                     |       |                           |       |                       |       |                   |       |
| Net loss  available to common stockholders and assumed conversions   |       | $                              | (3,346     | )                          | 44,320     |                   | $          | (0.08 | ) |
|                                                                 |       |                           |       |                       |       |                   |       |
| **For the  three months ended June 27, 2008**                   |       |                           |       |                       |       |                   |       |
| **Basic  EPS**                                                       |       |                           |       |                       |       |                   |       |
| Net income  available to common stockholders                         |       | $                              | 3,443      |                       | 44,731     |                   | $          | 0.08 |   |
| **Effect  of Dilutive Securities**                                   |       |                           |       |                       |       |                   |       |
| Stock options  and unvested restricted stock awards                  |       | —                         |       | 647                        |       | —                 |       |
| **Diluted  EPS**                                                     |       |                           |       |                       |       |                   |       |
| Net income  available to common stockholders and assumed conversions |       | $                              | 3,443      |                       | 45,378     |                   | $          | 0.08 |   |
|                                                                 |       |                           |       |                       |       |                   |       |
| **For the  six months ended June 30, 2009**                     |       |                           |       |                       |       |                   |       |
| **Basic  EPS**                                                       |       |                           |       |                       |       |                   |       |
| Net loss  available to common stockholders                           |       | $                              | (63,271    | )                          | 44,556     |                   | $          | (1.42 | ) |
| **Effect  of Dilutive Securities**                                   |       |                           |       |                       |       |                   |       |
| Stock options  and unvested RSUs                                     |       | —                         |       | —                     |       | —                 |       |
| **Diluted  EPS**                                                     |       |                           |       |                       |       |                   |       |
| Net loss  available to common stockholders and assumed conversions   |       | $                              | (63,271    | )                          | 44,556     |                   | $          | (1.42 | ) |
|                                                                 |       |                           |       |                       |       |                   |       |
| **For the  six months ended June 27, 2008**                     |       |                           |       |                       |       |                   |       |
| **Basic  EPS**                                                       |       |                           |       |                       |       |                   |       |
| Net income  available to common stockholders                         |       | $                              | 4,174      |                       | 45,469     |                   | $          | 0.09 |   |
| **Effect  of Dilutive Securities**                                   |       |                           |       |                       |       |                   |       |
| Stock options  and unvested restricted stock awards                  |       | —                         |       | 657                        |       | —                 |       |
| **Diluted  EPS**                                                     |       |                           |       |                       |       |                   |       |
| Net income  available to common stockholders and assumed conversions |       | $                              | 4,174      |                       | 46,126     |                   | $          | 0.09 |   |

 

Anti-dilutive options to purchase common stockoutstanding were excluded from the calculations above.  Anti-dilutive options and anti-dilutive RSUstotaled 4,627 and 4,840 for the three and six months ended June 30, 2009,respectively. Anti-dilutive options and anti-dilutive RSUs totaled 4,451 and4,169 for the three and six months ended June 27, 2008, respectively.

 

Note 6.   SegmentReporting

 

In the third quarter of2008, we began the process of dissolving the Connectivity and Control businessunit and merging its products into our remaining 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 intoCorporate in the second quarter of 

 

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**AVOCENTCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 

2009.  We willfold the Pro Audio Visual product line into Managements Systems during Q32009.  Due to the immateriality of thelast remaining product line in the second quarter of 2009, we have combinedthis residual business unit’s results with Corporate and other in the tablesbelow.   As a result of these actions,all revenues and costs associated with our Connectivity and Control businessare included within either Management Systems or combined with Corporate andother in the tables below.  Additionally,historical segment results for both Management Systems and Corporate have beenadjusted to reflect these changes and the Connectivity and Control businessunit has now been effectively dissolved.

 

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

 
| ** **                        | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **June 30,  2009**        | ** ** | **June 27,  2008**      | ** ** | **June 30,  2009** | ** ** | **June 27,  2008** | ** ** |
| Net revenue:                      |       |                           |       |                         |       |   |   |   |   |
| Management  Systems               |       | $                              | 89,252     |                         | $          | 123,669 |   | $ | 178,654 |   | $ | 232,424 |   |
| LANDesk                           |       | 36,716                         |       | 31,842                       |       | 71,166 |   | 61,035 |   |
| Corporate, other  and unallocated |       | 2,663                          |       | 3,671                        |       | 4,873 |   | 7,122 |   |
| Total net revenue                 |       | $                              | 128,631    |                         | $          | 159,182 |   | $ | 254,693 |   | $ | 300,581 |   |

** **
| ** **                                          | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|-----------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                          | ** ** | **June 30,  2009**        | ** ** | **June 27,  2008**      | ** ** | **June 30,  2009** | ** ** | **June 27,  2008** | ** ** |
| Operating income (loss):                            |       |                           |       |                         |       |   |   |   |   |
| Management  Systems                                 |       | $                              | 18,133     |                         | $          | 30,100 |   | $ | 34,161 |   | $ | 57,766 |   |
| LANDesk                                             |       | 6,592                          |       | 3,931                        |       | 12,221 |   | 4,541 |   |
| Corporate, other  and unallocated costs             |       | (5,547                         | )          | (8,796                       | )          | (9,809 | ) | (17,717 | ) |
| Amortization of  intangibles and other expenses     |       | (12,082                        | )          | (10,550                      | )          | (26,753 | ) | (20,854 | ) |
| Impairment of  goodwill                             |       | —                         |       | —                       |       | (80,000 | ) | — |   |
| Restructuring,  integration and retirement expenses |       | (1,575                         | )          | (2,826                       | )          | (6,821 | ) | (5,182 | ) |
| Stock-based  compensation expense                   |       | (4,828                         | )          | (6,123                       | )          | (8,122 | ) | (10,676 | ) |
| Total income  (loss) from operations                |       | $                              | 693        |                         | $          | 5,736 |   | $ | (85,123 | ) | $ | 7,878 |   |

** **

Sales by product line forManagement Systems and LANDesk for the three and six months ended June 30,2009 and June 27, 2008 are as follows:

 
| ** **                           | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **June 30,  2009**        | ** ** | **June 27,  2008**      | ** ** | **June 30,  2009** | ** ** | **June 27,  2008** | ** ** |
| Management Systems net revenue:      |       |                           |       |                         |       |   |   |   |   |
| KVM                                  |       | $                              | 62,191     |                         | $          | 94,328 |   | $ | 124,392 |   | $ | 174,278 |   |
| Serial  management                   |       | 7,424                          |       | 13,336                       |       | 14,621 |   | 26,055 |   |
| Embedded  software and solutions     |       | 6,261                          |       | 8,405                        |       | 12,238 |   | 16,752 |   |
| Other                                |       | 13,376                         |       | 7,600                        |       | 27,403 |   | 15,339 |   |
| Total Management Systems net revenue |       | $                              | 89,252     |                         | $          | 123,669 |   | $ | 178,654 |   | $ | 232,424 |   |

 

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**AVOCENTCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 
| ** **                 | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|----------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **June 30,  2009**        | ** ** | **June 27,  2008**      | ** ** | **June 30,  2009** | ** ** | **June 27,  2008** | ** ** |
| LANDesk net revenue:       | ** ** | ** **                     | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Licenses and  royalties    |       | $                              | 17,531     |                         | $          | 18,785 |   | $ | 34,722 |   | $ | 35,827 |   |
| Maintenance and  services  |       | 19,185                         |       | 13,057                       |       | 36,444 |   | 25,208 |   |
| Total LANDesk  net revenue |       | $                              | 36,716     |                         | $          | 31,842 |   | $ | 71,166 |   | $ | 61,035 |   |

 

We sell our productsinternationally to customers in several countries; however no foreign countryaccounted for more than 10% of sales in the first six months of 2009 or 2008.

 

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

 
| ** **         | ** ** | **June 30,** | ** **   | **December** | ** ** |
|--------------------|------------|-------------------|--------------|--------------|------------|
| ** **         | ** ** | **2009**          | ** **   | **31, 2008** | ** ** |
| Long-lived assets: |       |              |         |         |       |
| United States      |       | $                 |  26,438 |         | $          |  28,176 |   |
| International      |       | 8,489             |         | 10,021       |       |
| Total              |       | $                 |  34,927 |         | $          |  38,197 |   |

** **

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

** **

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 theoffsetting gain or loss included in other income (expense) in the accompanyingconsolidated statements of income.  As ofJune 30, 2009, we had six open forward contracts with an approximate fairvalue of ($35).  As of December 31,2008, we had four open forward contracts with an approximate fair value of $26.

 

There was $140,000outstanding under our credit facility, which includes both our line of creditand term loan, as of June 30, 2009. The line of credit and term loan contain affirmative and negativecovenants, including limitations on our ability to (i) make distributions,investments, and other payments unless we satisfy certain financial tests orother criteria, (ii) incur additional indebtedness, (iii) restructureour subsidiaries, and (iv) make acquisitions and capitalexpenditures.  The financial tests includean interest coverage ratio and a total leverage ratio.  We are in compliance with these covenants andrelated tests as of June 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 June 30, 2009, the commitment feerate is 20 basis points per quarter. The fair value of our unsecured bankcredit facility approximates its carrying value at June 30, 2009, inaccordance with SFAS No. 107 *“Disclosures about FairValue of Financial Instruments.”*

 

As of June 30, 2009,we have two interest rate swaps, which are recorded on our balance sheet.  On May 1, 2008, we entered into aninterest rate swap agreement with a notional amount of $80,000.  The remaining notional amount of thisinterest rate swap was $40,000 as of June 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.   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.

 

The objective of theinterest rate swap agreements is to provide a hedge against LIBOR interest ratechanges that could have an effect on our cash flows and borrowing costs. Weanticipate these hedges will be settled upon maturity and they are accountedfor as cash flow hedges.  The interestrate swaps are recorded at fair value each reporting period with the changes inthe fair value of the hedge that take place through the date of maturityrecorded in accumulated other comprehensive income (loss).

 

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**AVOCENTCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 

Theseinterest rate swaps qualify as derivative instruments and are designated ascash flow hedges.  We do not expect any materialamounts to be reclassified into earnings, as a result of interest rate swapineffectiveness,  within the next twelvemonths. The cash flow hedges were in a liability position as of June 30,2009 and were included in other non-current liabilities in the consolidatedbalance sheet, as follows:

 
| ** **           | ** ** | **June 30, 2009** | ** ** |
|----------------------|------------|------------------------|------------|
| Cash  flow hedges:   |       |                   |       |
| Interest rate  swaps |       | $                      | 2,624      |   |
|                      |            |                        |            |  |

 

Forthe six months ended June 30, 2009, the activity related to our interestrate swaps designated as cash flow hedges is included in our condensedconsolidated financial statements as follows:

 
| ** **           | ** ** | ** **                                         | ** ** | **June 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 |       | $                                                  | 534        |                                                         | $          | —                                                    |       | $ | — |   |
|                      |            |                                                    |            |                                                              |            |                                                           |            |  |  |  |

 

**Note 8.   Goodwilland Other Intangible Assets**

** **

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

** **
| ** **                                | ** ** | **June 30, 2009**       | ** ** | **December 31, 2008**   | ** ** |
|-------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated Amortization** | ** ** | **Gross Carrying Amounts** | ** ** | **Accumulated Amortization** | ** ** |
|                                      |       |                         |       |                         |       |   |   |   |   |
| Developed  technology                     |       | $                            | 84,437     |                         | $          | 39,639 |   | $ | 86,285 |   | $ | 31,401 |   |
| Internally  developed software for resale |       | 21,900                       |       | 10,342                       |       | 21,900 |   | 8,517 |   |
| Patents  and trademarks                   |       | 31,678                       |       | 13,085                       |       | 31,236 |   | 10,915 |   |
| Customer  base                            |       | 110,900                      |       | 44,078                       |       | 116,121 |   | 39,388 |   |
| Maintenance  contracts                    |       | 17,600                       |       | 6,640                        |       | 17,600 |   | 5,280 |   |
| Non-compete  agreements                   |       | 7,225                        |       | 6,136                        |       | 11,325 |   | 8,690 |   |
|                                      |       | $                            | 273,740    |                         | $          | 119,920 |   | $ | 284,467 |   | $ | 104,191 |   |

** **

**For the threemonths ended June 30, 2009 and June 27, 2008, amortization expensefor other intangible assets was $12,255 and $10,579, respectively.  For the six months ended June 30, 2009and June 27, 2008, amortization expense for other intangible assets was $27,007and $21,033, respectively.  Theapproximate estimated annual amortization for other intangibles is as follows:**

** **
| **Years ending December 31:** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
| 2009,  remainder                   |       | $          | 23,722     |   |
| 2010                               |       | $          | 46,504     |   |
| 2011                               |       | $          | 38,170     |   |
| 2012                               |       | $          | 29,052     |   |
| 2013                               |       | $          | 16,036     |   |
| Thereafter                         |       | $          | 336        |   |

 

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**AVOCENTCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 

**In accordancewith FASB Statement No. 142, *Goodwilland Intangible Assets*(SFAS 142), we evaluate the carrying value ofgoodwill for potential impairment annually during the fourth quarter of eachyear or on an interim basis if an event occurs or circumstances change thatindicate that the fair value of a reporting unit is likely to be below itscarrying value.** Our fourth quarter 2008 impairment testconcluded that there had been no impairment of goodwill; however there were certain factors noted during the 2008testing that would require continued monitoring, especially related to anypotential future decline in our market capitalization.  During the first quarter of 2009, weconcluded that interim impairment testing was required due to the continueddeterioration in the global economic environment, the resulting decrease in ourmarket capitalization to less than the book value of our shareholders’ equity,and declining market valuations for many other companies in our peergroup.  Additionally, we revisited ourfive year forecast in light of the continuing global recession.  Based on that trend, we revised our five yearforecast to reduce our estimated revenues and expenses.

** **

**As of June 30, 2009 wehave 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 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, the fair value of our reporting units was determined throughthe use of a combination of a discounted cash flow analysis, utilizing theincome approach, and the guideline public company method, utilizing a marketapproach.  The result of each valuationwas weighted in determining the fair value of the reporting units.**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, whilecontinuing to reflect the impact of declining equity values in this highlyvolatile equity market impacting our stock price and the stock price of many ofour peers.

** **

**The results of our step onetest as of March 1, 2009 indicated that the fair value of each of ourreporting units had declined from 2008, however the estimated fair valuesexceeded their carrying value, with the exception of LANDesk.  We estimated the fair value of our largestreporting unit, Management Systems, to be $184 million higher, or approximately35%, than its carrying value of $520 million. Our remaining reporting units are not material to our financialstatements, however we estimated the combined fair value of these reportingunits to be $49 million higher, or well over double, their combined carryingvalue of $20 million.**

** **

**As a result of our step onetesting, we then performed step two testing for potential goodwill impairmenton the LANDesk business unit.  Thistesting identifies the identifiable tangible and intangible assets associatedbusiness unit and estimates the fair market value a potential acquirer wouldassign them.  Any residual amount isconsidered to be applicable to goodwill and is compared to the current carryingvalue of the related goodwill.  Anyunfavorable 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, in thousands,except share data)

 

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

 
| ** **                          | ** ** | **Management** | ** ** | ** **  | ** ** | **Corporate  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    | )          |
|                                |       |           |       |        |       |               |       |       |       |
| Other  adjustments                  |       | 27             |       | (824        | )          | —             |       | (797       | )          |
|                                |       |           |       |        |       |               |       |       |       |
| Balance as of  June 30, 2009   |       |           |       |        |       |               |       |       |       |
| Goodwill                            |       | 335,123        |       | 277,885     |       | 2,521              |       | 615,529    |       |
| Accumulated  impairment losses      |       | —         |       | (80,000     | )          | —             |       | (80,000    | )          |
|                                |       | $              | 335,123    |        | $          | 197,885            |       | $          | 2,521      |   | $ | 535,529 |   |

 

**Note 9.  ProductWarranties and Deferred Revenue**

** **

The activity within theliability for warranty returns for the six months ended June 30, 2009 wasas follows:

 
| Balance,  January 1, 2009                            |   | $      | 2,245  |   |
|-----------------------------------------------------------|--------|--------|--------|--------|
| Accruals  for product warranties issued during the period |   | 3,777  |   |
| Settlements made during  the period                       |   | (4,217 | )      |
| Balance, June 30,  2009                              |   | $      | 1,805  |   |

 

We include an accruedliability for the extended warranty program in our balance sheet withindeferred revenue. The activity within deferred revenue for our extendedwarranty program for the six months ended June 30, 2009 was follows:

 
| Balance  January 1, 2009                         |   | $      | 5,151  |   |
|-------------------------------------------------------|--------|--------|--------|--------|
|                                                  |   |   |   |
| New  extended warranty contracts                      |   | 2,538  |   |
| Earned  revenue from amortization of deferred revenue |   | (2,108 | )      |
|                                                  |   |   |   |
| Balance  June 30, 2009                           |   | $      | 5,581  |   |

 

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 June 30, 2009, deferred revenue was $72,890.  As of December 31, 2008, deferredrevenue was $75,820.

 

Note 10. Income Taxes

 

The effective taxrate for the second quarter of 2009 was 195.3% compared to an effective taxrate of 23.5% for the second quarter of 2008. The provision for income taxes was $2,213 for the second quarter of2009, compared to $1,059 for the second quarter of 2008.  The effective tax rate for the first sixmonths of 2009 was (29.9)% compared to an effective tax rate of 32.2% for thefirst six months of 2008.  The provisionfor income taxes was a benefit of $26,965 for the first six months of 2009,compared to income tax expense of $1,985 for the first six 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 a tax benefit recognized to record adeferred tax asset associated with the goodwill impairment charge (*see note 8*).

 

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**AVOCENTCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 

We have consideredFIN 18, (as amended by SFAS 109) 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 June 30, 2009 exceeds the anticipated loss for the year and thetax benefit recognized through June 30, 2009 has been limited to theamount that would be recognized based on the anticipated full year loss.  As of June 30, 2009, we have limited ourbenefit by $3,757.

 

As of June 30,2009, we had total reserves for uncertain tax positions related to grossunrecognized tax benefits of $5,821, of which $4,479, 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 $67of such expenses in the first six months of 2009.  As of June 30, 2009, we had accruedinterest payable related to the unrecognized tax benefits of $918.

 

We conductbusiness globally, and as a result our subsidiaries file income tax returns inthe U.S. federal jurisdiction and various state and foreign jurisdictions.  In the normal course of business we aresubject to examinations by taxing authorities throughout the world including theU.S.  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 June 30, 2009 the IRS had notissued any proposed adjustments for those periods.

 

Note 11. Fair Value Measurements

 

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

 

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

 

Thefollowing table provides the financial assets and liabilities carried at fairvalue measured on a recurring basis as of June 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     |       | $                          | 49         |                                                         | $          | 49 |   | — |   | — |   |
| Derivative  liabilities |       | $                          | 2,624      |                                                         | —     |   | $ | 2,624 |   | — |   |
|                         |            |                            |            |                                                              |            |  |  |  |  |  |  |  |

 

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**AVOCENTCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 

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 June 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 six monthsended June 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 for LANDesk, performed in accordance with SFAS 142,indicated that its implied fair value was less than its pre-adjusted carryingvalue of $277,885.   The fair value ofLANDesk was determined through the combination of a discounted cash flowanalysis, utilizing the income approach and a guideline public company method,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 first quarterof 2009.  Also in 2008, we began theintegration of our Ergo and Touchpaper acquisitions, each acquired in the thirdquarter of 2008.  The restructuring andintegration actions were designed to enhance competitiveness, improveefficiency, and reduce our overall cost structure.  The restructuring and integration costs,along with costs associated with our former CEO’s retirement incurred in thefirst quarter of 2008, have been separately identified as “Restructuring,integration and retirement expenses” within our operating expenses.  Restructuring and integration expensesinclude severance charges incurred for certain workforce reductions and thecosts associated with the relocation of certain functions from our Shannon,Ireland, Redmond, Washington and Shanghai, China facilities to Huntsville,Alabama.

 

We recorded $1,530and $4,730 of such costs for the three months ended June 30, 2009 and June 27,2008, respectively.  These costs includestock compensation adjustments of $(45) and $1,904 during the three monthsended June 30, 2009 and June 27, 2008, respectively.  These costs also include $1,882 ofintegration costs related to the Ergo and Touchpaper acquisitions during thethree months ended June 30, 2009. These costs include a reduction of approximately $350 of severance costsas a result of adjusting our severance cost accrual during the three monthsended June 30, 2009.  We recorded$6,825 and $7,701 of such costs for the six months ended June 30, 2009 andJune 27, 2008, respectively.  Thesecosts include stock compensation costs of $4 and $2,519 during the six monthsended June 30, 2009 and June 27, 2008, respectively.  The costs in the first quarter of 2008 alsoinclude approximately $1,400 of costs settled in cash related to the retirementof our former CEO.  The balance of costsin both periods relate to severance charges and other costs to be settled incash.

 

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**AVOCENTCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 

As of June 30,2009, we had accrued approximately $2,054 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       |   | 3,427  |   |
| Adjustments  to accrual             |   | (332   | )      |
| Settlements  made during the period |   | (4,626 | )      |
| Balance  as of June 30, 2009   |   | $      | 2,054  |   |

 

We do not expectto record additional restructuring and integration expenses related to theseactions after the second quarter of 2009. We did, however, initiate additional restructuring actions, primarilyaffecting our Fremont location, in July 2009 which are expected to resultin additional expense of approximately $2,000 in the third quarter of2009.  We expect the remaining accrualsto be paid by the beginning 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 inthe 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.  AvocentCorporation was dismissed from the lawsuit in January 2008.  In April 2008, the District Court stayedthe action pending a review of the Gemini Patent by the Patent and TrademarkOffice.

 

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

 

**Note 14. Recently Issued Accounting Pronouncements**

** **

InDecember 2007, the FinancialAccounting Standards Board (FASB) issued SFAS No. 141(R),“*Business Combinations”*(SFAS 141(R)), which replaces SFAS 141.  SFAS 141(R) establishes principlesand requirements for how an acquirer in a business combination recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any controlling interest; recognizes and measures thegoodwill acquired in the business combination or a gain from a bargainpurchase; and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination.  SFAS 141(R) isto be applied prospectively to business combinations for which the acquisitiondate is on or after an entity’s fiscal year that begins after December 15,2008.  Since we have significant acquireddeferred tax assets for which full valuation allowances were recorded at theacquisition date, SFAS 141(R) could materially affect the results ofoperations if changes in the valuation allowances occur after adoption of thestandard.  We will assess the impact ofSFAS 141(R) on future acquisitions, however the application of SFAS141(R) will result in a significant change in accounting for any suchfuture acquisitions.

 

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**AVOCENTCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, in thousands,except share data)

 

In March 2008,the FASB issued SFAS No. 161, “*Disclosures aboutDerivative Instruments and Hedging Activities*” (SFAS 161). SFAS 161requires companies with derivative instruments to disclose information thatwould enable financial statement users to understand how and why a company usesderivative instruments, how derivative instruments and related hedged items areaccounted for under SFAS No. 133, “*Accounting for DerivativeInstruments and Hedging Activities*,” (SFAS 133) and how derivativeinstruments and related hedged items affect a company’s financial position,financial performance and cash flows. The new requirements apply to derivativeinstruments and non-derivative instruments that are designated and qualify ashedging instruments and related hedged items accounted for under SFAS 133. SFAS161 is effective for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008. We adopted SFAS 161 on January 1,2009 and it did not have a material impact on our financial statements.

 

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

 

In April, 2009,the FASB issued FASB Staff Position (FSP) No. FAS 157-4 “Determining FairValue When the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly” (FSPFAS 157-4). FSP FAS 157-4 provides guidance for determining whether a market isinactive and a transaction is distressed in order to apply the existing fairvalue measurement guidance in SFAS No. 157, “Fair Value Measurements”(SFAS 157). In addition, FSP FAS 157-4 requires enhanced disclosures regardingfinancial assets and liabilities that are recorded at fair value. This FSP iseffective for interim and annual reporting periods ending after June 15,2009.  We adopted the interpretation on June 15,2009 and it did not have a material impact on our financial statements.

 

**In April 2009,the FASB released FSP Financial Accounting Standard (FAS) 107-1 and AccountingPrinciples Board (APB) Opinion No. 28-1, “*InterimDisclosures about Fair Value of Financial Instruments*” (FAS 107-1and APB 28-1). This FSP amends FASB Statement No. 107, “*Disclosures about Fair Value of Financial Instruments*,”to require disclosures about fair value of financial instruments in interimfinancial statements as well as in annual financial statements. The proposalalso amends APB Opinion No. 28, “*InterimFinancial Reporting*,” to require those disclosures in all interimfinancial statements. This FSP is effective for interim periods ending after June 15,2009. We adopted FSP FAS 107-1 and APB 28-1 in the second quarter of 2009, andhave provided the disclosures required for the period ending June 30,2009.**

** **

In June 2009,the FASB issued SFAS No. 165, “Subsequent Events” (SFAS 165). SFAS 165incorporates the subsequent events guidance contained in the auditing standardsliterature into authoritative accounting literature. It also requires entitiesto disclose the date through which they have evaluated subsequent events andwhether the date corresponds with the release of their financial statements.SFAS 165 is effective for all interim and annual periods ending after June 15,2009. We adopted SFAS 165 upon its issuance and it had no material impact onour financial statements. See Note 1 - “Basis of Presentation” for this newdisclosure.

 

In June 2009,the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”(SFAS 167). SFAS 167 amends certain requirements of FASB Interpretation No. 46(R) toimprove financial reporting by companies involved with variable interestentities and to provide more relevant and reliable information to users of financialstatements. SFAS 167 is effective for fiscal years beginning after November 15,2009. We are currently evaluating the impact that the adoption of SFAS 167 willhave on our financial statements.

 

**Note 15. SubsequentEvents**

** **

We have evaluatedsubsequent events for recognition or disclosure through August 7, 2009,which was the date we filed this Form 10-Q with the SEC.  During the period July 1, 2009, through August 7,2009, we repurchased 150,000 shares of our common stock for $2,373.  In July 2009, our Compensation Committeeapproved the grant of 580,000 restricted stock units to our employees.

 

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**Item 2.  Management’s Discussion and Analysis ofFinancial 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; STATEMENTS REGARDINGOUR PRODUCT PLATFORMS AND OUR ABILITY TO RESUME GROWTH IN OUR OVERALL BUSINESS;STATEMENTS REGARDING INCREASED SALES OF OUR DIGITAL PRODUCTS AND EMBEDDEDSOLUTIONS AND THEIR ABILITY TO OFFSET PRICE DECLINES AND COMPETITIVE FACTORS;STATEMENTS REGARDING OUR ANTICIPATED FUTURE GROSS MARGINS, RESEARCH ANDDEVELOPMENT 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**

 

Avocent Corporation designs, manufactures, licenses,and sells software and hardware products and technologies that provideconnectivity and centralized management of information technology (IT)infrastructure.  We (meaning Avocent andits wholly-owned subsidiaries) provide connectivity and systemsmanagement, endpoint security, and service management products and technologiesthat centralize 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.

 

Fora more complete description of our products, technologies and markets pleaserefer to our Form 10-K filed on February 27, 2009.

 

Mostof our revenue is derived from sales to a limited number of OEMs (who purchaseour products on a private-label or branded basis for integration and sale withtheir own products), sales through our reseller and distributor network, andsales to a limited number of direct customers. Sales to our branded customers accounted for 69% of sales in the firstsix months of 2009 and 67% of sales in the first six months of 2008.  Sales to our OEM customers accounted for 31%of sales in the first six months of 2009 and 33% of sales in the first sixmonths 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 46% and 48% of sales in the first sixmonths of 2009 and 2008, respectively.

 

Wesell products to resellers, distributors, end-users, and OEMs in the UnitedStates, Canada, Europe, and Asia as well as in other foreign markets.  Sales within the United States accounted forapproximately 50% and 55% of first six months sales in 2009 and 2008, respectively.  Outside the United States, no other countryaccounted for more than 10% of sales in the first six months of 2009 or 2008.

 

Withcontinued industry-wide initiatives to reduce all channel inventories and toshorten lead times, trends with our major customers are, generally, to reducethe number of weeks of forward-committed firm orders.  This trend continues to affect our businesswith certain distributors, OEMs, and other server manufacturers, and webelieve that it will continue to make our future sales more difficult topredict and inventory levels more difficult to manage.  We monitor inventories of our products ownedby our major distribution partners and we strive to maintain a level ofinventory in our own facilities to service these customers, and monitor theselevels to minimize potential exposure of having excessive inventory onhand.  A change in the amount ofinventory held by a customer in any one period could adversely affect ourrevenues through reduced orders in that or a subsequent period which could havea material impact on our business, financial condition, results of operations,and cash flows.

 

Weexperience significant price competition in the market for most of ourproducts, and we expect that pricing pressures will continue in thefuture.  In addition, our business andoperating results depend to a significant extent on economic conditions ingeneral and on IT spending in particular, and we expect our revenue growth rateto fluctuate in relation to economic conditions and IT related spending trends.  Any adverse change in IT spending due toadverse economic conditions, declining capital spending levels, or otherfactors could have a material adverse effect on our business, financialcondition, and results of operations.  World-wide efforts to cut 

 

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capitalspending, general economic uncertainty, and a weakening global economy couldhave a material adverse effect on us.  For example, in recent periods global creditand other financial markets have suffered substantial stress, volatility,illiquidity, and disruption.  Thisfinancial crisis and the current global recession could have an impact on ourbusiness in a variety of ways, including insolvency of key suppliers resultingin product delays, inability of customers to obtain credit to finance purchasesof our products and customer insolvencies. As we evaluate anticipated impacts from the global economicuncertainties, we periodically adjust our spending and related headcount tomitigate the overall impact on our financial results of any anticipatednegative changes.  We continually monitorthe financial health of our key suppliers and customers by constant reviews ofour accounts receivable aging and open purchase orders to ensure our customersare paying in a timely fashion and our suppliers are meeting our needs so thatwe can service our customers.

 

Manyof our executive officers and directors are vested in significant amounts ofoptions to purchase shares of our common stock and RSUs.  These officers and directors have informed usthat they have sold, and may sell additional, shares of our common stock toprovide liquidity and diversify their portfolios.  During the first and second quarters of 2009and 2008, our Board of Directors granted both time-based and market andperformance condition-based restricted stock units (RSUs) with two and threeyear vesting.

 

During the first six months of 2009, we had the following businessunits:  Management Systems, whichincludes our branded and OEM KVM, embedded software, serial console, powercontrol, LCD tray, and management appliance businesses; LANDesk, which includes****systems, security, andservice management solutions for desktops, servers, and mobile devices acrossthe enterprise; and Connectivity and Control, which focuses on ouraudio-visual products.

 

Webelieve our business units allow us to focus on new technology and growthopportunities and to add product and shareholder value in the future.  We believe this structure enhances customerservice, speeds delivery of products to market and better focuses our research,development, and marketing resources.  Inthe third quarter of 2008, we began the process of dissolving the Connectivityand Control business unit and merging its products into our remaining businessunits. We divided this business unit into its three product lines: the Equinoxbranded serial business, the Broadcast business and the Pro Audio Visualbusiness.  We folded the broadcastproduct line into Management Systems in the third quarter of 2008.  We folded the serial product line intoCorporate in the second quarter of 2009. We will fold the Pro Audio Visual product line into Managements Systemsduring Q3 2009.  Due to the immaterialityof the last remaining product line in the second quarter of 2009, we havecombined this residual business unit’s results with Corporate and other.  As a result of these actions, all revenuesand costs associated with our Connectivity and Control business are includedwithin either Management Systems or combined with Corporate and other in therelevant tables in this quarterly report. Additionally, historical segment results for both Management Systems andCorporate have been adjusted to reflect these changes and the Connectivity andControl business unit has now been effectively dissolved.

 

Our largest business unit,Management Systems, comprised 70% of our consolidated net revenue in the firstsix months of 2009 and 77% in 2008. LANDesk contributed 28% of net revenue to the first half of 2009 and 20%in 2008.  Our Corporate and unallocatedrevenue comprised the remaining percentage of our consolidated net revenue in2009 and 2008.  See Note 6 in the notesto the condensed consolidated financialstatements contained in Part I, Item 1 of this document.

 

**Results of Operations**

 

The following table sets forth, for the periods indicated, selectedstatement of income data expressed as a percentage of net sales:

 
| ** **                                                 | ** ** | **Three  months ended** | ** ** | **Six  months ended**   | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                 | ** ** | **June 30,  2009** | ** ** | **June 27,  2008** | ** ** | **June 30,  2009** | ** ** | **June 27,  2008** | ** ** |
| Net  sales                                                 |       | 100.0                   | %          | 100.0                   | %          | 100.0 | % | 100.0 | % |
| Cost  of sales                                             |       | 36.7                    |       | 37.2                    |       | 37.7 |   | 36.4 |   |
| Gross  profit                                              |       | 63.3                    |       | 62.8                    |       | 62.3 |   | 63.6 |   |
| Operating  expenses:                                       |       |                    |       |                    |       |   |   |   |   |
| Research  and development expenses                         |       | 16.4                    |       | 15.3                    |       | 16.3 |   | 15.9 |   |
| Selling,  general and administrative expenses              |       | 39.0                    |       | 36.1                    |       | 38.2 |   | 37.4 |   |
| Restructuring,  integration and retirement expenses        |       | 1.2                     |       | 3.0                     |       | 2.7 |   | 2.6 |   |
| Amortization  of intangible assets                         |       | 6.2                     |       | 4.8                     |       | 7.1 |   | 5.0 |   |
| Impairment  of goodwill                                    |       | —                  |       | —                  |       | 31.4 |   | — |   |
| Total  operating expenses                                  |       | 62.8                    |       | 59.2                    |       | 95.7 |   | 60.9 |   |
|                                                       |       |                    |       |                    |       |   |   |   |   |
| Income  (loss) from operations                             |       | 0.5                     |       | 3.6                     |       | (33.4 | ) | 2.7 |   |
|                                                       |       |                    |       |                    |       |   |   |   |   |
| Net  investment income                                     |       | 0.1                     |       | 0.4                     |       | 0.1 |   | 0.5 |   |
| Interest  expense                                          |       | (1.5                    | )          | (1.1                    | )          | (1.6 | ) | (1.2 | ) |
| Other  income (expense), net                               |       | 0.0                     |       | (0.1                    | )          | (0.5 | ) | 0.1 |   |
| Income  (loss) before provision (benefit) for income taxes |       | (0.9                    | )          | 2.8                     |       | (35.4 | ) | 2.1 |   |
| Provision  (benefit) for income taxes                      |       | 1.7                     |       | 0.6                     |       | (10.6 | ) | 0.7 |   |
| Net  income (loss)                                         |       | (2.6                    | )%         | 2.2                     | %          | (24.8 | )% | 1.4 | % |

 

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*Net sales.*  Our netsales consist of sales of keyboard, video, and mouse (KVM) console switchingsystems, 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  six months ended** | ** ** | ** **      | ** ** |
|---------------------------------------|------------|---------------------------------|------------|-----------------|------------|-------------------------------|------------|-----------------|------------|
| **(dollars presented in 000’s)** | ** ** | **June 30,  2009**         | ** ** | **% of  Sales** | ** ** | **June 27,  2008**       | ** ** | **% of  Sales** | ** ** | **June 30,  2009** | ** ** | **% of  Sales** | ** ** | **June 27,  2008** | ** ** | **% of  Sales** | ** ** |
| Net  revenue, customer distribution   |       |                            |       |            |       |                          |       |            |       |   |   |   |   |   |   |   |   |
| Branded                               |       | $                               | 92,365     |            | 72         | %                             | $          | 106,871         |       | 67 | % | $ | 176,453 |   | 69 | % | $ | 200,534 |   | 67 | % |
| OEM                                   |       | 36,266                          |       | 28              | %          | 52,311                        |       | 33              | %          | 78,240 |   | 31 | % | 100,047 |   | 33 | % |
| Total  net revenue                    |       | $                               | 128,631    |            | 100        | %                             | $          | 159,182         |       | 100 | % | $ | 254,693 |   | 100 | % | $ | 300,581 |   | 100 | % |

 

We experienced a 19% decline in sales during the second quarter of 2009from the second quarter of 2008.  Thedecline in sales was evident in both our branded sales, which were down 14%,and our OEM sales, which were down 31%. Branded sales in the U.S. were down 18%, while EMEA declined 4%and Asiadeclined 23%.  OEM sales declined 39% inthe U.S., 29% in EMEA and 22% in Asia in the second quarter of 2009.  We attribute the weakness we experienced insales this quarter primarily to decreased data center purchasing activity,especially lower server purchases, as customers continue to reduce technologyspending due to the ongoing global economic recession.  Additionally, foreign exchange ratescontributed to our revenue decline for the second quarter of 2009 compared to thesecond quarter of 2008.  If we hadexperienced the same foreign exchange rates in the second quarter of 2009 asthe second quarter a year ago, our revenues would have been approximately $4million higher.  Net sales decreased 15%for the first six months of 2009 compared to the first six months of 2008 forthe same reasons as described for the second quarter of 2009.

 
| ** **                            | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| **(dollars presented in 000’s)** | ** ** | **June 30,  2009**        | ** ** | **June 27,  2008**      | ** ** | **June 30,  2009** | ** ** | **June 27,  2008** | ** ** |
| Net revenue:                          |       |                           |       |                         |       |   |   |   |   |
| Management Systems                    |       | $                              | 89,252     |                         | $          | 123,669 |   | $ | 178,654 |   | $ | 232,424 |   |
| LANDesk                               |       | 36,716                         |       | 31,842                       |       | 71,166 |   | 61,035 |   |
| Corporate and unallocated             |       | 2,663                          |       | 3,671                        |       | 4,873 |   | 7,122 |   |
| Total net revenue                     |       | $                              | 128,631    |                         | $          | 159,182 |   | $ | 254,693 |   | $ | 300,581 |   |

 

Our Management Systems business unit is comprised of our traditionalKVM products, our serial products, and our embedded software and solutionsproducts.  Management Systems salesdecreased approximately 28% in the second quarter 2009 compared to the secondquarter 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 34% in the second quarter of 2009 fromthe second quarter of 2008, primarily as a result of the slower OEM and brandedsales across geographic regions. Management Systems “other” product category includes LCD tray productrevenue from our third quarter 2008 acquisition of the assets of Ergo 2000, Inc.Sales of our Ergo LCD trays were approximately $5.3 million in the secondquarter of 2009 and accounts for the increase in the “other” product categorywithin Management Systems noted below.  Salesby product line for Management Systems for the three and six months ended June 30,2009 and June 27, 2008 were as follows:

 
| ** **                            | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| **(dollars presented in 000’s)** | ** ** | **June 27,  2008**        | ** ** | **June 27,  2008**      | ** ** | **June 27,  2009** | ** ** | **June 27,  2008** | ** ** |
| Management Systems net  revenue:      |       |                           |       |                         |       |   |   |   |   |
| KVM                                   |       | $                              | 62,191     |                         | $          | 94,328 |   | $ | 124,392 |   | $ | 174,278 |   |
| Serial Management                     |       | 7,424                          |       | 13,336                       |       | 14,621 |   | 26,055 |   |
| Embedded software and solutions       |       | 6,261                          |       | 8,405                        |       | 12,238 |   | 16,752 |   |
| Other                                 |       | 13,376                         |       | 7,600                        |       | 27,403 |   | 15,339 |   |
| Total Management Systems  net revenue |       | $                              | 89,252     |                         | $          | 123,669 |   | $ | 178,654 |   | $ | 232,424 |   |

 

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LANDeskrevenue is comprised of license-based revenue, primarily from the LANDeskManagement Suite product, and subscription-based revenue, primarily fromthe LANDesk Security Suite products and from maintenance and supportagreements related to LANDesk Management Suite. The second quarter of 2009 LANDesk revenue also includes $5.6 million inrevenue from Touchpaper, which was acquired in the third quarter of 2008.  Compared to the second quarter of 2008,LANDesk revenues increased 15% during the second quarter of 2009, as a resultof the additional revenue from Touchpaper. Sales by product line for LANDesk for the three and six months ended June 30,2009 and June 27, 2008 were as follows:

 
| ** **                            | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| **(dollars presented in 000’s)** | ** ** | **June 30,  2009**        | ** ** | **June 27,  2008**      | ** ** | **June 30,  2009** | ** ** | **June 27,  2008** | ** ** |
| LANDesk net revenue:                  | ** ** | ** **                     | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Licenses and royalties                |       | $                              | 17,531     |                         | $          | 18,785 |   | $ | 34,722 |   | $ | 35,827 |   |
| Maintenance and services              |       | 19,185                         |       | 13,057                       |       | 36,444 |   | 25,208 |   |
| Total LANDesk net revenue             |       | $                              | 36,716     |                         | $          | 31,842 |   | $ | 71,166 |   | $ | 61,035 |   |

 

Internationalsales declined by 14% in the second quarter of 2009 from the second quarter of2008, while sales within the United States declined approximately 23% over thesame period.  As mentioned previously,the global recession negatively affected both our U.S. and internationalrevenue in the second quarter of 2009. Our international sales would have experienced a greater decline if notfor to the inclusion of Touchpaper revenue in the second quarter of 2009.  Touchpaper’s revenue is comprised almostentirely of sales in countries outside the United States.

 
| ** **                            | ** ** | **For the three months ended** | ** ** | ** **      | ** ** | **For the six months ended** | ** ** | ** **      | ** ** |
|---------------------------------------|------------|--------------------------------|------------|-----------------|------------|------------------------------|------------|-----------------|------------|
| **(dollars presented in 000’s)** | ** ** | **June 30,  2009**        | ** ** | **% of  Sales** | ** ** | **June 27,  2008**      | ** ** | **% of  Sales** | ** ** | **June 30,  2009** | ** ** | **% of  Sales** | ** ** | **June 27,  2008** | ** ** | **% of  Sales** | ** ** |
| Net  revenue, geographic region       |       |                           |       |            |       |                         |       |            |       |   |   |   |   |   |   |   |   |
| United  States                        |       | $                              | 66,988     |            | 52         | %                            | $          | 87,149          |       | 55 | % | $ | 126,594 |   | 50 | % | $ | 161,367 |   | 54 | % |
| International                         |       | 61,643                         |       | 48              | %          | 72,033                       |       | 45              | %          | 128,099 |   | 50 | % | 139,214 |   | 46 | % |
| Total  net revenue                    |       | $                              | 128,631    |            | 100        | %                            | $          | 159,182         |       | 100 | % | $ | 254,693 |   | 100 | % | $ | 300,581 |   | 100 | % |

 

*Gross profit.* Gross profit is affected by a variety offactors, including the ratio of sales among our distribution channels, as OEMsales typically have lower gross margins than our branded sales; absorption offixed costs as sales levels fluctuate; product mix and component costs; laborcosts; new product introductions by us and by our competitors; increasing salesof our software products which tend to have higher gross margins; and our outsourcingof manufacturing and assembly services. Gross profits and margins as apercentage of sales for the three and six months ended June 30, 2009 and June 27,2008 were as follows:

 
| ** **                                       | ** ** | **For the three months ended** | ** ** | ** **        | ** ** | **For the six months ended** | ** ** | ** **        | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|
| **(dollars presented in 000’s)**            | ** ** | **June 30,  2009**        | ** ** | **Gross  Margin** | ** ** | **June 27,  2008**      | ** ** | **Gross  Margin** | ** ** | **June 30,  2009** | ** ** | **Gross  Margin** | ** ** | **June 27,  2008** | ** ** | **Gross  Margin** | ** ** |
| Management  Systems                              |       | $                              | 52,981     |              | 59.4       | %                            | $          | 73,356            |       | 59.3 | % | $ | 103,962 |   | 58.2 | % | $ | 140,427 |   | 60.4 | % |
| LANDesk                                          |       | 30,991                         |       | 84.4              | %          | 27,854                       |       | 87.5              | %          | 60,679 |   | 85.3 | % | 53,193 |   | 87.2 | % |
| Corporate,  other and unallocated                |       | 1,781                          |       |              |       | 1,704                        |       |              |       | 3,143 |   |   |   | 3,438 |   |   |   |
| Stock-based  compensation                        |       | (238                           | )          |              |       | (257                         | )          |              |       | (461 | ) |   |   | (500 | ) |   |   |
| Intangible  amortization – LANDesk software |       | (4,132                         | )          |              |       | (2,768                       | )          |              |       | (8,690 | ) |   |   | (5,535 | ) |   |   |
| Gross  profit and margin                         |       | $                              | 81,383     |              | 63.3       | %                            | $          | 99,889            |       | 62.8 | % | $ | 158,633 |   | 62.3 | % | $ | 191,023 |   | 63.6 | % |

 

The improvement in gross margin in the second quarter 2009 resultedprimarily from costs savings realized from our supply chain realignment programand from higher sales of our software products, primarily through LANDesk.  LANDesk sales grew 15% in the second quarterof 2009, primarily as a result of the Touchpaper acquisition, compared to thesame period in 2008. The decline in overall gross profit was the result oflower sales volume, primarily from our Management Systems business unit.  Management Systems revenue decreased almost28% in the second quarter of 2009 compared to the second quarter of 2008.  The decline in gross profit for the sixmonths ended 2009 resulted primarily from reasons similar to that of the secondquarter.  The decline in gross margin forthe first six months of 2009 from the same period in 2008 is primarily theresult of weak sales in the first quarter of 2009 and the resulting impact onour gross margin that was not offset by the higher margin we experienced in thesecond quarter of 2009 as a result of our supply chain realignment program andhigher software sales.

 

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*Operating expenses.*

 
| ** **                                          | ** ** | **For the three months ended** | ** ** | ** **      | ** ** | **For the six months ended** | ** ** | ** **      | ** ** |
|-----------------------------------------------------|------------|--------------------------------|------------|-----------------|------------|------------------------------|------------|-----------------|------------|
| **(dollars presented in 000’s)**               | ** ** | **June 30,  2009**        | ** ** | **% of  Sales** | ** ** | **June 27,  2008**      | ** ** | **% of  Sales** | ** ** | **June 30,  2009** | ** ** | **% of  Sales** | ** ** | **June 27,  2008** | ** ** | **% of  Sales** | ** ** |
| Research  and development expenses                  |       | $                              | 21,038     |            | 16.4       | %                            | $          | 24,361          |       | 15.3 | % | $ | 41,529 |   | 16.3 | % | $ | 47,728 |   | 15.9 | % |
| Selling,  general and administrative expenses       |       | 50,172                         |       | 39.0            | %          | 57,445                       |       | 36.1            | %          | 97,339 |   | 38.2 | % | 112,564 |   | 37.4 | % |
| Restructuring,  integration and retirement expenses |       | 1,530                          |       | 1.2             | %          | 4,730                        |       | 3.0             | %          | 6,825 |   | 2.7 | % | 7,701 |   | 2.6 | % |
| Amortization  of intangible assets                  |       | 7,950                          |       | 6.2             | %          | 7,617                        |       | 4.8             | %          | 18,063 |   | 7.1 | % | 15,152 |   | 5.0 | % |
| Impairment  of goodwill                             |       | —                         |       |            |       | —                       |       |            |       | 80,000 |   | 31.4 | % | — |   |   |   |
|                                                |       | $                              | 80,690     |            | 62.7       | %                            | $          | 94,153          |       | 59.2 | % | $ | 243,756 |   | 95.7 | % | $ | 183,145 |   | 60.9 | % |

 

*Research and development expenses.*  Research and development expenses includecompensation for engineers, support personnel, outside contracted services, andmaterials costs, all of which are expensed as incurred.  R&D decreased 14% in the second quarterof 2009 from the second quarter of 2008. The decrease in R&D expense is primarily attributable to the effectof our re-alignment, restructuring and cost-cutting efforts first implementedat the end of the second quarter of 2008. Salaries and wages decreased approximately $2.2 million and contractedservices declined $1.3 million from the second quarter of 2008 to the secondquarter of 2009 as a result of these activities.  R&D decreased 13% from the first sixmonths of 2008 compared to the first six months of 2009 for similar reasons asthat experienced in the second quarter of 2009. We continue to invest in targeted integrated R&D projects thatleverage technology from both Management Systems and LANDesk.  We believe that the timely development ofinnovative products and enhancements to existing products is essential tomaintaining our competitive position, and we will continue to make significantinvestments in research and development.

 

*Selling, general andadministrative expenses.* Selling, general and administrative expenses include personnel,materials, services and other related costs for administration, finance,information systems, human resources, sales and marketing and generalmanagement, rent, utilities, legal and accounting expenses, bad debts,advertising, promotional material, trade show expenses, and related travelcosts.  Selling, general andadministrative expenses decreased 13% in the second quarter of 2009 from the secondquarter of 2008.  The decrease inselling, general and administrative expenses was attributed to the effect ofour cost-cutting efforts first implemented at the end of the second quarter of2008 and lower sales commissions incurred as a result of lower sales volume ona comparative basis.  The results of ourcost cutting measures were evident in reduced trade show and travel costs.  Trade show expenses and travel-related expensesdecreased approximately $2.9 million in the second quarter of 2009 compared tothe same period in 2008.  SG&Aexpenses decreased 14% in the first six months of 2009 from the first sixmonths of 2008 for similar reasons as that experienced in the second quarter of2009.

 

*Restructuring, integration and retirement expenses.*  Restructuring, integration and retirementexpenses of $1.5 million for the second quarter of 2009 and $4.7 million in forthe second quarter of 2008 relate to severance charges incurred for workforcereductions in connection with our realignment of resources, integration ofmarketing functions, and integration of our 2008 acquisitions into ouroperations.  Restructuring, integrationand retirement expenses of $6.8 million for the first six months of 2009 and$7.7 million for the first six months of 2008 were comprised of charges similarto those incurred during the second quarter periods.  In addition to the second quarter charges,restructuring and retirement charges for the first six months of 2008 includesthe retirement costs for our former CEO of $2.2 million.

 

*Amortization of intangibleassets*.  Amortization was $8.0 millionand $7.6 million for the three months ended June 30, 2009 andJune 27, 2008, respectively. Amortization was $18.1 million and $15.2 million for the six monthsended June 30, 2009 and June 27, 2008, respectively.  The increase in amortization for 2009 was dueto the amortization of intangible assets related to our acquisitions ofTouchpaper and Ergo, completed early in the third quarter of 2008.

 

*Impairment of goodwill.*  The $80.0 million impairment of goodwillrelates entirely to the write-off of a portion of goodwill associated with theLANDesk business unit in the first quarter of 2009.  As prescribed under Statement of FinancialAccounting Standard No. 142, we performed an impairment review during thefirst quarter of 2009 as a result of the continued decline in our stock priceand those of comparable companies.  Theresulting impairment analysis determined that the goodwill associated withLANDesk was impaired by $80.0 million. No other business unit was determined to have an impairment at the timeof the impairment analysis. (See updates to critical accounting policieselsewhere 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.

 

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*Stock-based Compensation. *We allocate stock-based compensation expense based onthe functional area in which an employee works. Stock compensation expenses for the periods ending June 30, 2009and June 27, 2008 were as follows:

 
| ** **                                   | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| **(dollars presented in 000’s)**        | ** ** | **June 30,  2009**        | ** ** | **% of  Sales**              | ** ** | **June 27,  2008** | ** ** | **% of  Sales** | ** ** | **June 30,  2009** | ** ** | **% of  Sales** | ** ** | **June 27,  2008** | ** ** | **% of  Sales** | ** ** |
|                                         |       |                           |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost  of sales                               |       | $                              | 238        |                         |       |   | $ | 257 |   |   |   | $ | 461 |   |   |   | $ | 500 |   |   |   |
| Research  and development expense            |       | 1,282                          |       |                         |       | 1,340 |   |   |   | 1,859 |   |   |   | 2,355 |   |   |   |
| Selling,  general and administrative expense |       | 3,353                          |       |                         |       | 2,622 |   |   |   | 5,798 |   |   |   | 5,302 |   |   |   |
| Restructuring  and retirement expense        |       | (45                            | )          |                         |       | 1,904 |   |   |   | 4 |   |   |   | 2,519 |   |   |   |
|                                         |       | $                              | 4,828      |                         | 3.8        | % | $ | 6,123 |   | 3.8 | % | $ | 8,122 |   | 3.2 | % | $ | 10,676 |   | 3.6 | % |

 

Stock-based compensationdecreased 21% in the second quarter 2009 from the second quarter 2008 primarilyas a result of recording $1.9 million of charges associated with theacceleration of vesting for certain RSUs and other equity related charges in2008, while similar charges resulted in a net reduction of $45,000 to stockcompensation in the second quarter of 2009. Additionally, our Compensation Committee approved the grant oftime-based and market condition-based restricted stock units to our officers inthe first quarter of 2008 while such grants were made at the end of the secondquarter of 2009 (following shareholder approval of amendments to our equityplan in June 2009).  This delayfurther reduced stock-based compensation in the second quarter of 2009, howeverwe expect to incur stock-based compensation in future periods.  Stock-based compensation decreased 24% in thefirst six months of 2009 from the first six months of 2008 for reasons similarto that of the second quarter.

 

*Net investment income**.** *Net******investmentincome decreased to $134,000 in the second quarter of 2009 as compared to$671,000 in the second quarter of 2008. Net******investment income decreasedto $285,000 in the first six months of 2009 as compared to $1.6 million in thefirst six months of 2008.

 

*Interest expense.*Interest expense increasedto $2.0 million in the second quarter 2009, compared to $1.8 million in thesecond quarter of 2008.  Interest expenseincreased to $4.2 million in the first six months of 2009, compared to $3.6million in the first six months of 2008. Interest expense increased in 2009 compared to 2008 due to higherborrowings as we borrowed an additional $50 million to partially fund theacquisitions of Touchpaper and Ergo in July 2008.

 

*Other income (expense), net.*  Net other income (expense) increased slightlyto income of $32,000 in the second quarter of 2009 from expense of $95,000 inthe second quarter of 2008.  Net otherincome (expense) declined to an expense of $1.2 million in the first six monthsof 2009 from income of $360,000 in the first six months of 2008.  The increase in expense for the first sixmonths of 2009 is primarily the result of increased net foreign currencytransaction losses of approximately $1.1 million over the comparative period in2008, primarily as a result of changes in the both the euro and British pound.

 

*Provision for income taxes.*  The effective tax rate for the second quarterof 2009 was 195.3% compared to an effective tax rate of 23.5% for the secondquarter of 2008.  The provision forincome taxes was $2.2 million for the second quarter of 2009, compared to $1.1million for the second quarter of 2008. The effective tax rate for the first six months of 2009 was (29.9)%compared to 32.2% for the first six months of 2008.  The benefit for income taxes was $26.9million for the first six months of 2009, compared to a provision of $2.0million for the first six 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. Further, we have considered FIN 18, (as amended by SFAS 109) 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 June 30, 2009 exceedsthe anticipated loss for the year and the tax benefit recognized through June 30,2009 has been limited to the amount that would be recognized based on theanticipated full year loss.  As of June 30,2009, we have limited our benefit by $3.8 million.  As of June 30, 2009, we had totalreserves for uncertain tax positions related to gross unrecognized tax benefitsof $5.8 million, of which $4.5 million if recognized would affect the effectivetax rate.

 

*Net income (loss).*  Net loss for the second quarter of 2009 was$3.3 million compared to net income $3.4 million for the second quarter of2008, as a result of the factors detailed in the above discussion.  Net income (loss), as a percentage of salesfor the second quarter of 2009 was (2.6)%, compared to 2.2% for the secondquarter of 2008.  Net loss for the firstsix months of 2009 was $63.3 million compared to net income of $4.2 million forthe first six months of 2008, as a result of the factors detailed in the abovediscussion.  Net income (loss), as apercentage of sales for the first six months of 2009 was (24.8)%, compared to1.4% for the first six months of 2008.

 

**Liquidity and Capital Resources**

 

Asof June 30, 2009, our principal sources of liquidity consisted of $107million in cash and cash equivalents and $200 million available from our $340million credit facility 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.

 

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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 June 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.

 

Theline of credit and term loan currently bear an interest rate of LIBOR plus 150basis points.  There was $140 millionoutstanding under the credit facility as of June 30, 2009.  We classify these obligations as long-term asthey mature in June 2011.  We expectto repay the borrowings through future cash flows from operations.   A summary of our cash flows is as follows:

 
| ** **                                       | ** ** | **For the six months ended** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|
| ** **                                       | ** ** | **June 30,  2009**      | ** ** | **June 27,  2008** | ** ** |
| Total cash provided by (used in):                |       |                         |       |   |   |
| Operating activities                             |       | $                            | 28,009     |   | $ | 38,877 |   |
| Investing activities                             |       | (5,641                       | )          | (990 | ) |
| Financing activities                             |       | (44,016                      | )          | (28,807 | ) |
| Effect of exchange rate changes on cash          |       | 1,840                        |       | 2,670 |   |
| Increase (decrease) in cash and cash equivalents |       | $                            | (19,808    | ) | $ | 11,750 |   |

 

The decline in cash flow from operations in the first six 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 combined with an increase in inventory.  These changes were offset somewhat by increased collections of accounts receivable.  Accrued wages and commissions were lower at June 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.

 

Our days sales outstanding (DSO) increased to 67 days at the end of the second quarter 2009 compared to 64 days at the end of the second 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 second quarter of 2009 compared to the second quarter of 2008.  Inventories increased $4.3 million from December 31, 2008 to June 30, 2009.  Consequently, our inventory turns declined to 4.5 at the end of the first second quarter of 2009 compared to 7.6 at the end of the second quarter of 2008, primarily as a result of our lower sales volume experienced in 2009.

 

Our investing activitiesused $5.6 million of cash flow in the first six months of 2009, primarily topay an additional $4.1 million of consideration previously accrued for LANDeskand Touchpaper.  Our investing activitiesused $1.0 million of cash flow in the first six months of 2008, as we convertedmatured investments to cash in the first half of 2008 to prepare for partiallyfunding the Touchpaper and Ergo acquisitions with available cash.

 

Our financing activitiesused cash to repay $30 million of borrowings from our line of credit and torepurchase 1 million shares of our common stock during the first six months of2009 at a cost totaling $12 million.  Ourfinancing activities used the cash provided by operations and investingactivities, as well as additional borrowings, to repurchase approximately 4million shares of our common stock during the first half of 2008 at a costtotaling $64 million.  These treasuryshares were purchased through various brokers under the stock repurchaseprogram approved by our Board of Directors. As of June 30, 2009 we have approximately 1.1 million sharesavailable for purchase under the program.

 

Wemay use a portion of our cash and cash equivalents or our line of credit forstrategic acquisitions of technologies and companies that we believe willenhance and complement our existing technologies and help increase our sales.

 

In fiscal July 2008, inJanuary 2009, and again in July 2009 we announced a series of actionsdesigned to enhance competitiveness, improve our efficiency, and reduce ourcost structure.  We initiated workforcereduction and consolidation actions designed to intensify our focus on ourgrowth areas and improve our operating efficiency.  The restructuring included actions toincrease our organizational efficiency, reduce certain research and developmentinvestments in lower growth product areas, integrate our marketing functions,and shift support for our Asian operations from Shannon, Ireland, to ourrecently-established regional hub in Singapore. We also relocated certain functions from Redmond, Washington toHuntsville, Alabama.

 

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**Off-Balance Sheet Arrangements and Contractual Obligations**

 

In the ordinary course of our business, we may at any point in timehave a significant amount of contractual commitments not yet recognized in ourfinancial statements.  These commitmentsrelate primarily to our need to schedule the purchase of inventories in advanceof the related forecasted sales to customers. We have longer lead times for the products we purchase from suppliersbased in Asia than we have for the products we purchase from our U.S. andEuropean based suppliers.  Our actualcontractual commitments are typically limited to products needed for one tothree months of forecasted sales.  Theliabilities for these inventory purchases, along with the related inventoryassets, are typically recognized upon our receipt of the products.  We also have, at any point in time, a varietyof short term contractual commitments for services such as advertising,marketing, accounting, legal, and research and development activities.  The liabilities for these services and therelated expenses are typically recognized upon our receipt of the relatedservices.  In our 2008 Form 10-K, wedisclosed our contractual obligations in the section entitled “Off-Balance Sheet Arrangements andContractual Obligations” in Part II Item 7. At June 30, 2009,there have been no material changes to contractual obligations outside theordinary course of business.  We reducedour debt balance $30 million to $140 million at June 30, 2009, down from$170 million at December 31, 2008.

 

Otherthan operating leases for offices and warehouse space, we do not engage inoff-balance sheet financing arrangements or have any variable-interestentities. As of June 30, 2009 we did not have any off-balance sheetarrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

 

**Non-GAAPOperational Measures**

 

To supplement ourconsolidated financial statements presented in accordance with GAAP, we presentinvestors with certain non-GAAP operational measures which we use internally tomanage our business, including gross profit, operating expenses, and theresulting operating income, income before taxes, operational net income, andoperational earnings per share, all of which primarily exclude the effects ofamortization related to purchase accounting adjustments, goodwill impairmentexpense, stock-based compensation, and restructuring, integration and retirementexpenses.  Specifically, we use thefollowing non-GAAP measures:

 
| ** **                              | ** ** | **Three  months ended** | ** ** | **Six  months ended** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|----------------------------|------------|
| **Non-GAAP  Operational Measures**      | ** ** | **June 30,  2009**      | ** ** | **June 27,  2008**    | ** ** | **June 30,  2009** | ** ** | **June 27,  2008** | ** ** |
| *(dollars  presented in 000’s)*    |       |                         |       |                       |       |   |   |   |   |
| Operational  gross profit               |       | $                            | 85,753     |                       | $          | 102,914 |   | $ | 167,784 |   | $ | 197,058 |   |
| Operational  operating income           |       | $                            | 19,178     |                       | $          | 25,235 |   | $ | 36,753 |   | $ | 44,590 |   |
| Operational  net income                 |       | $                            | 14,048     |                       | $          | 18,387 |   | $ | 25,266 |   | $ | 32,851 |   |
| Operational  diluted earnings per share |       | $                            | 0.32       |                       | $          | 0.41 |   | $ | 0.56 |   | $ | 0.71 |   |

 

·                  The non-GAAP gross profit operational measure consistsof net sales, less cost of sales, excluding the impact of stock-basedcompensation and amortization related to purchase accounting adjustments asthey relate to cost of sales.

 

·                  The non-GAAP operating expense operational measureconsists of GAAP operating expenses, excluding the impact of stock-basedcompensation, restructuring, integration and retirement expenses, goodwillimpairment expense and amortization related to purchase accounting adjustmentsas they relate to the particular operating expense.

 

·                  The non-GAAP operating income operational measureconsists of GAAP operating income, adjusted for the non-GAAP operationalmeasures described above.

 

·                  The non-GAAP net income operational measure consistsof GAAP net income, adjusted by the non-GAAP operational measures describedabove and the tax effects of these non-GAAP operational measures plus theincome tax benefit realized from deducting the amortization of LANDesk goodwillfor tax purposes (which is not amortized under GAAP).

 

·                  The non-GAAP earnings per share operational measure iscalculated by dividing the non-GAAP net income operational measure describedabove by GAAP weighted average basic and diluted shares outstanding.

 

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We provide the followingreconciliations between GAAP and our operational measures:

 
| ** **                                         | ** ** | **GAAP  Financial  Measures** | ** ** | **Stock-based  Compensation** | ** ** | **Purchase  Accounting  Adjustments** | ** ** | **Restructuring  and Retirement****Expenses** | ** ** | **Non-GAAP  Operational  Measures** | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------|------------|
| **For the three months ended  June 30, 2009** |       |                          |       |                          |       |                                  |       |                                          |       |                                |       |
| Operational gross profit                           |       | $                             | 81,383     |                          | 238        |                                  | 4,132      |                                          | —     |                                | $          | 85,753 |   |
| Operational operating income                       |       | $                             | 693        |                          | 4,828      |                                  | 12,082     |                                          | 1,575      |                                | $          | 19,178 |   |
| Operational net income                             |       | $                             | (3,346     | )                             | 3,909      |                                  | 12,210     |                                          | 1,275      |                                | $          | 14,048 |   |
| Operational diluted earnings per share             |       | $                             | (0.08      | )                             | 0.09       |                                  | 0.28       |                                          | 0.03       |                                | $          | 0.32 |   |
|                                               |       |                          |       |                          |       |                                  |       |                                          |       |                                |       |
| **For the three months ended  June 27, 2008** |       |                          |       |                          |       |                                  |       |                                          |       |                                |       |
| Operational gross profit                           |       | $                             | 99,889     |                          | 257        |                                  | 2,768      |                                          | —     |                                | $          | 102,914 |   |
| Operational operating income                       |       | $                             | 5,736      |                          | 6,123      |                                  | 10,550     |                                          | 2,826      |                                | $          | 25,235 |   |
| Operational net income                             |       | $                             | 3,443      |                          | 4,691      |                                  | 8,088      |                                          | 2,165      |                                | $          | 18,387 |   |
| Operational diluted earnings per share             |       | $                             | 0.08       |                          | 0.10       |                                  | 0.18       |                                          | 0.05       |                                | $          | 0.41 |   |
|                                               |       |                          |       |                          |       |                                  |       |                                          |       |                                |       |
| **For the six months ended  June 30, 2009**   |       |                          |       |                          |       |                                  |       |                                          |       |                                |       |
| Operational gross profit                           |       | $                             | 158,633    |                          | 461        |                                  | 8,690      |                                          | —     |                                | $          | 167,784 |   |
| Operational operating income                       |       | $                             | (85,123    | )                             | 8,122      |                                  | 106,753    |                                          | 6,821      |                                | $          | 36,573 |   |
| Operational net income                             |       | $                             | (63,271    | )                             | 6,523      |                                  | 76,536     |                                          | 5,478      |                                | $          | 25,266 |   |
| Operational diluted earnings per share             |       | $                             | (1.42      | )                             | 0.14       |                                  | 1.72       |                                          | 0.12       |                                | $          | 0.56 |   |
|                                               |       |                          |       |                          |       |                                  |       |                                          |       |                                |       |
| **For the six months ended  June 27, 2008**   |       |                          |       |                          |       |                                  |       |                                          |       |                                |       |
| Operational gross profit                           |       | $                             | 191,023    |                          | 500        |                                  | 5,535      |                                          | —     |                                | $          | 197,058 |   |
| Operational operating income                       |       | $                             | 7,878      |                          | 10,676     |                                  | 20,854     |                                          | 5,182      |                                | $          | 44,590 |   |
| Operational net income                             |       | $                             | 4,174      |                          | 8,181      |                                  | 16,525     |                                          | 3,971      |                                | $          | 32,851 |   |
| Operational diluted earnings per share             |       | $                             | 0.09       |                          | 0.18       |                                  | 0.36       |                                          | 0.08       |                                | $          | 0.71 |   |

 

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

 

Similarly, we believethat excluding stock-based compensation and restructuring, integration andretirement expenses provides meaningful supplemental information and analternative presentation useful to investors’ understanding of our coreoperating results and trends, especially when comparing those results on aconsistent basis to results for previous periods and anticipated results forfuture periods.

 

We also believe that, inexcluding stock-based compensation and restructuring, integration andretirement expenses, goodwill impairment expense and amortization associatedwith purchase accounting adjustments (together with the related tax effects),our non-GAAP financial measures provide investors with transparency into theinformation and basis used by management and our Board of Directors to measureand forecast our results of operations, to compare on a consistent basis ourresults of operations for the current period to that of prior periods, tocompare our results of operations on a more consistent basis against that ofother companies in making financial and operating decisions, and to establishtargets for management incentive compensation.

 

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These non-GAAPoperational measures have historically been used as key performance metrics byour senior management as they evaluate both the performance of the consolidatedfinancial results as well as those of individual business segments.  These non-GAAP operational measures arereviewed individually as well as in total in measuring our performance againstinternal and external expectations for the period and the expectations for suchkey non-GAAP operational measures are the basis for any financial guidanceprovided by management for future periods. We believe that the use of each of these non-GAAP financial measuresprovides enhanced consistency and comparability with our past financialreports, and also facilitates comparisons with other companies in our industry,many of which use similar non-GAAP financial measures to supplement their GAAPresults.  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 ofthese operational measures is useful to investors in their assessment of ouroperating performance and the valuation of our company.   Operational netsales, 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-GAAPoperational measures, including operational net sales, operational grossprofit, operational operating income, operational net income, and operationalearnings per share are used by us as broad measures of financial performancethat encompass our operating performance, cash, capital structure, investmentmanagement, and income tax planning effectiveness.  These operationalmeasures are not calculated in accordance with GAAP, and should be consideredsupplemental to, and not as a substitute for, or superior to, financialmeasures calculated in accordance with GAAP.  These operational measureshave limitations in that they do not reflect all of the costs associated withthe operations of our business as determined in accordance with GAAP.  In addition, these operational measures maynot be comparable to non-GAAP financial measures reported by othercompanies.  As a result, one should not consider these measures inisolation or as a substitute for analysis of our results as reported underGAAP.  We compensate for these limitations by analyzing current and futureresults on a GAAP basis as well as a non-GAAP basis, prominently disclosingGAAP results and providing reconciliations from GAAP results to non-GAAP operationalmeasures.  We expect to continue to incur expenses similar to the non-GAAPadjustments described above, and the exclusion or inclusion of these items fromour non-GAAP financial measures should not be construed as an inference thatthese costs are unusual or infrequent. One of the limitations in relying on our non-GAAP financial measures isthat the non-GAAP gross profit, operating income, net income, and earnings pershare operational measures are limited in that they do not include the impactof stock-based compensation expense or specific costs and benefits associatedwith certain purchase accounting adjustments or, restructuring, integrationand retirementexpenses.

 

We compensate for theselimitations by prominently disclosing the reported GAAP results and providinginvestors with reconciliations from GAAP to the non-GAAP measures in thefinancial tables above.

 

**Recently Issued AccountingStandards and Regulatory Standards**

 

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

 

In December 2007,the FASB issued SFAS No. 141(R), “*BusinessCombinations”* (SFAS 141(R)), which replaces SFAS 141.  SFAS 141(R) establishes principlesand requirements for how an acquirer in a business combination recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any controlling interest; recognizes and measures thegoodwill acquired in the business combination or a gain from a bargainpurchase; and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of the businesscombination.  SFAS 141(R) is tobe applied prospectively to business combinations for which the acquisitiondate is on or after an entity’s fiscal year that begins after December 15,2008.  Since we have significant acquireddeferred tax assets for which full valuation allowances were recorded at the 

 

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acquisition date, SFAS 141(R) could materiallyaffect the results of operations if changes in the valuation allowances occurafter adoption of the standard.  We willassess the impact of SFAS 141(R) on future acquisitions, however theapplication of SFAS 141(R) will result in a significant change inaccounting for any such future acquisitions.

 

InMarch 2008, the FASB issued SFAS No. 161, “*Disclosuresabout Derivative Instruments and Hedging Activities*” (SFAS 161).SFAS 161 requires companies with derivative instruments to disclose informationthat would enable financial statement users to understand how and why a companyuses derivative instruments, how derivative instruments and related hedgeditems are accounted for under SFAS No. 133, “*Accountingfor Derivative Instruments and Hedging Activities*,” (SFAS 133) andhow derivative instruments and related hedged items affect a company’sfinancial position, financial performance and cash flows. The new requirementsapply to derivative instruments and non-derivative instruments that aredesignated and qualify as hedging instruments and related hedged itemsaccounted for under SFAS 133. SFAS 161 is effective for financial statementsissued for fiscal years and interim periods beginning after November 15,2008. We adopted SFAS 161 on January 1, 2009 and it did not have amaterial impact on our financial statements.

 

InApril 2008, the FASB issued FASB Staff Position No. 142-3,“Determination of the Useful Lives of Intangible Assets”, which amends thefactors that should be considered in developing renewal or extension assumptionsused to determine the useful life of an intangible asset.  This interpretation is effective forfinancial statements issued for fiscal years beginning after December 15,2008 and interim periods within those years. We adopted the interpretation on January 1, 2009 and it did nothave a material impact on our financial statements.

 

OnApril 9, 2009, the (FASB) issued FASB Staff Position (FSP) No. FAS157-4 “Determining Fair Value When the Volume and Level of Activity for theAsset or Liability Have Significantly Decreased and Identifying TransactionsThat Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4 provides guidance fordetermining whether a market is inactive and a transaction is distressed inorder to apply the existing fair value measurement guidance in SFAS 157 .  FSP FAS 157-4 also requires enhanceddisclosures regarding financial assets and liabilities that are recorded atfair value. This FSP is effective for interim and annual reporting periodsending after June 15, 2009.  Weadopted the interpretation on June 15, 2009 and it did not have a materialimpact on our financial statements.

 

InJune 2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS165). SFAS 165 incorporates the subsequent events guidance contained in theauditing standards literature into authoritative accounting literature. It alsorequires entities to disclose the date through which they have evaluatedsubsequent events and whether the date corresponds with the release of theirfinancial statements. SFAS 165 is effective for all interim and annual periodsending after June 15, 2009. We adopted SFAS 165 upon its issuance and ithad no material impact on our consolidated financial statements.

 

InJune 2009, the FASB issued SFAS No. 167, “Amendments to FASBInterpretation No. 46(R)” (SFAS 167). SFAS 167 amends certain requirementsof FASB Interpretation No. 46(R) to improve financial reporting bycompanies involved with variable interest entities and to provide more relevantand reliable information to users of financial statements. SFAS 167 iseffective for fiscal years beginning after November 15, 2009. We arecurrently evaluating the impact that the adoption of SFAS 167 will have on ourconsolidated financial statements.

 

**Updates to Critical AccountingEstimates**

 

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

 

·                  As discussed below and in Note 11 to theCondensed Consolidated Financial Statements, we have adopted SFAS 157 as of January 1,2009 as it applies to the application of the statement to nonfinancial assetsand nonfinancial liabilities. During the first quarter of 2009 we measured ourgoodwill at fair value based upon Level 3 inputs, as defined under SFAS157.  We determine the fair value of our reporting units through a discountedcash flow analysis, utilizing the income approach, and a guideline public companymethod, utilizing a market approach, and weight the results of each valuationin determining the fair value of the reporting units.

 

·                  The $80.0 million adjustmentto LANDesk goodwill was the result of an impairment charge recorded during thethree months ended March 31, 2009. In accordance with FASB Statement No. 142, *Goodwill and Intangible Assets*(SFAS 142),we evaluate the carrying value of goodwill for potential impairment annuallyduring the fourth quarter of each year or on an interim basis if an eventoccurs or circumstances change that indicate that the fair value of a reportingunit is likely to be below its 

 

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carryingvalue.  Our fourth quarter 2008impairment test concluded that there had been no impairment of goodwill;however there were certain factors noted during the 2008 testing that wouldrequire continued monitoring, especially related to any potential futuredecline 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. Additionally, we revisited our five year forecast in light of thecontinuing global recession.  Based onthat trend, we revised our five year forecast to reduce estimated revenues andprofits.

 

Asof June 30, 2009 we had three reporting units: Management Systems (MS),LANDesk and AESS, which is combined with MS for segment reportingpurposes.   We perform our goodwillimpairment 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.

 

Forpurposes of the interim step one analysis, the fair value of our reportingunits was determined through the use of a combination of a discounted cash flowanalysis, utilizing the income approach, and the guideline public companymethod, utilizing a market approach.  Theresult of each valuation was weighted in determining the fair value of thereporting units. Under the market approach, the fair value of each reportingunit is determined based upon comparisons to public companies engaged insimilar businesses. Under the income approach, the fair value of each reportingunit was based on the present value of estimated future cash flows. The incomeapproach is dependent on a number of significant management assumptionsincluding estimated demand in each geographic market and the discount rate. Thediscount rate is commensurate with the risk inherent in the projected cashflows and reflects the estimated rate of return required by an investor in thecurrent economic conditions.  Based onour assessment 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 ourstock price and the stock price of many of our peers.

 

Theresults of our step one test as of March 1, 2009 indicated that the fairvalue of each of our reporting units had declined from 2008, however, with theexception of LANDesk, the estimated fair values exceeded their carryingvalue.  We estimated the fair value ofour largest reporting unit, Management Systems, to be $184 million higher, orapproximately 35%, than its carrying value of $520 million.  Our remaining reporting units are notmaterial to our financial statements, however we estimated the combined fairvalue of these reporting units to be $49 million higher, or approximately 250%,their combined carrying value of $20 million.

 

Otherthan these changes, there have been no significant changes in our criticalaccounting estimates during the first six months of 2009.

 

**Item 3.**  **Quantitative andQualitative Disclosures About Market Risk.**

 

Ourprimary market risk is the interest rate risk on our credit facility, whichcurrently bears interest at a variable rate of LIBOR plus 150 basispoints.  We have partially hedged thisexposure to interest rate risk with interest rate swaps, which have a remainingaggregate notional amount of $130 million, with Regions Bank and SunTrust Bank.

 

We also face foreign currency exchange rate risk to the extent that thevalue of certain foreign currencies relative to the U.S. dollar affects ourfinancial results.  Our internationaloperations transact a significant portion of our business in currencies otherthan the U.S. dollar, predominantly the euro and British pound, and changes inexchange rates may positively or negatively affect our revenue, gross margins,operating expenses, and retained earnings since these transactions are reportedby us in U.S. dollars.  We occasionallypurchase foreign currency forwards aimed at limiting the impact of currencyfluctuations.  These instruments provideonly limited protection against currency exchange risks, and there can be noassurance that such an approach will be successful, especially if a significantand sudden decline occurs in the value of local currencies.  As of June 30, 2009, we had six openforward contracts with an approximate fair value of $(35,300).

 

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

 

(a) *Evaluation of disclosure controls and procedures.*    Based on their evaluation as of June 30,2009, our Chief Executive Officer and Chief Financial Officer have concludedthat our disclosure 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 June 30, 2009that materially affected or are reasonably likely to materially affect, ourinternal controls over financial reporting.

 

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**PART II— OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

In January 2007, we filed a complaint for patent infringementin the United States District Court for the Western District of Washingtonagainst Aten Technology, Inc., Aten International Co., Ltd, BelkinCorporation, Rose Electronics and its general partners, and TrippeManufacturing Company.  The defendantsfiled counterclaims alleging non-infringement, unenforceability, andinvalidity.  In May 2007, we enteredinto a Settlement and License Agreement with Trippe Manufacturing, anddismissed Trippe from the lawsuit.  In October 2007,the District Court stayed the action pending a re-examination of our patents bythe Patent and Trademark Office. 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 in the PTO against two of the three patents at issue inthe litigation.

 

InJanuary 2008, Avocent Redmond Corp. filed a complaint for unauthorized useof patented inventions against the United States government in the UnitedStates Court of Federal Claims.  The complaint alleges that the UnitedStates government accepted products manufactured and sold by Rose Electronicsthat are covered by patents held by Avocent Redmond.  The United Stateshas answered, Rose Electronics has intervened, and a trial has been scheduledfor June 2010.

 

InMarch 2007, KBM Enterprises, formerly a contract manufacturerfor Avocent, filed a complaint against Avocent in the Circuit Court ofMadison County, Alabama, seeking $9,500 for costs allegedly incurredby KBM in its manufacturing efforts on behalf of Avocent.  We have filed an answer and counterclaimsagainst KBM and one of its principals. Discovery is currently underway.

 

InNovember 2007, Gemini IP, LLC filed a complaint for patent infringement inthe United States District Court for the Eastern District of Texas, ShermanDivision, against Avocent 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.

 

**Item 1A.  Risk Factors.**

 

*THIS QUARTERLY REPORT**CONTAINSFORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULDCAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN THISQUARTERLY REPORT.  THESE RISKS AND UNCERTAINTIES INCLUDE THE FOLLOWING:*

 

**Difficulties encountered during challenging and changingeconomic conditions could adversely affect our results of operations.**

 

Ourbusiness and operating results depend to a significant extent on economicconditions in general and on IT spending and the server market in particular,and we expect our revenue growth rate to fluctuate in relation to economicconditions and IT-related spending trends. Any adverse change in IT spending or in the server market due to adverseeconomic conditions, declining capital spending levels, or other factors couldhave a material adverse effect on our business, financial condition, andresults of operations.  World-wide efforts to cut capital spending,general economic uncertainty, and a weakening global economy could have amaterial adverse effect on us.  Thecurrent financial crisis could have an impact on our business in a variety ofways, including insolvency of key suppliers resulting in product delays,inability of customers to obtain credit to finance purchases of our products,bank failure or governmental 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 haveacquired, and expect to continue to acquire, technologies and companies andthese acquisitions could disrupt our business or expose us to other risks.**

 

Akey component of our engineering and product development strategy and ourfuture growth is the investment in or the acquisition of technologies andcompanies.  We intend to continue toexecute our strategy through the acquisition of technologies or companies orthrough investments in complementary companies, products, personnel, ortechnologies, and it is likely we will complete such acquisitions orinvestments in the future.  Theseacquisitions and investments involve many risks and factors outside ourcontrol, including the following:

 

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·              Difficulty integrating the acquired company’spersonnel, distribution channels, products, product roadmaps, technologies,systems, processes, and operations, including product development, productdelivery, order management, and information systems;

 

·              Difficulty in conforming the acquired company’sfinancial 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 and disruption ofour current business and the challenges associated with managing the resultinglarger company following any acquisition;

 

·              Difficulty in combining product and technologyofferings and entering into new markets or geographical areas in which we haveno or limited direct experience and where our competitors may have strongermarket positions;

 

·              Loss (at either Avocent or in the acquired company) ofmanagement, sales, technical, or other key personnel or the loss of customers,distributors, resellers, vendors, or other business relationships as a resultof the acquisition;

 

·              Revenue or deferred revenue from the acquired companynot meeting our expectation, and the potential loss of the acquired company’scustomers, distributors, resellers, suppliers, or other partners;

 

·              Delays or difficulties and the attendant expense inevaluating, coordinating, and combining administrative, manufacturing, researchand development, operations, facilities, and relationships with third partiesin accordance with local laws and other obligations while maintaining adequatestandards, controls and procedures, including financial controls and controlsover information systems;

 

·              Difficulty in completing projects associated withacquired in-process research and development;

 

·              Incurring amortization expense related to certainintangible assets and recording goodwill and non-amortizable assets that willbe subject to impairment testing and possible impairment charges;

 

·              Dilution of existing stockholders as a result ofissuing equity securities, including the assumption of any stock options orother equity issued by the acquired company;

 

·              Overpayment for any acquisition or investment orunanticipated costs or liabilities;

 

·              Assumption of liabilities of the acquired company,including any potential intellectual property infringement or other litigationclaims, the liabilities and obligations under the acquired company’s existing agreements,and any unrecorded tax obligations; and

 

·              Incurring substantial write-offs, restructuringcharges, interest expense, amortization, and transactional expenses.

 

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.

 

**We recorded an impairment charge inthe first quarter of 2009, and our impairment testing may require us to take anadditional impairment charge in the future.**

 

As required by generally accepted accountingprinciples, we have performed an annual impairment test of goodwill in each ofthe fourth quarter of 2008, 2007, and 2006.  Our testing in the fourthquarter of each year concluded that there had been no impairment of goodwilland that no adjustments were required.

 

Our fourth quarter 2008 impairment test concluded thatthere had been no impairment of goodwill and that no adjustments wererequired.  While our testing in 2008 indicated there was no goodwill impairment for any ofour reporting units, there were certain factors we noted during the 2008testing that would require continued monitoring, especially related to anypotential decline in our 

 

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market capitalization.  During the first quarter of 2009 our marketcapitalization declined to less than the book value of our shareholders’equity.  In addition, market valuationsfor many companies in our peer group declined significantly during the quarter.  As a result, we determined goodwill impairment testing should beperformed during the first quarter of 2009.  We revisited our five-yearforecast in light of the continuing global recession.  Based on that trend, we revised our five-yearforecast, and we recorded an impairment charge for LANDesk goodwill of $80.0million during the three months ended March 31, 2009.

 

As a result of thecontinued uncertainty in the stock market and due to the current recessionaryenvironment and the resulting impact on our business, we are monitoring ourstock price, control premium, and other conditions in relation to potentialadditional goodwill impairment testing.  There is a risk that there may bean additional impairment in the future requiring an adjustment to the carryingvalue of goodwill and other intangible assets, and we may be required to takean additional impairment charge.  If so, any charge could have materialadverse effect on our financial position and the results of our operations.

 

**Intense competition from new andexisting competitors or consolidation in the industry could impair our abilityto grow our business, to sustain our profitability, and to sell our productsand technologies.**

 

The markets for our products and technologies arehighly fragmented, rapidly evolving, and intensely competitive, and we expectthese characteristics to continue and increase.  Aggressive competitionfrom both hardware and software products and technologies could lengthen thecustomer evaluation process and result in price reductions and loss of sales,which would materially harm our business.  Our business is highlysensitive to the introduction of new products and technologies (such asvirtualization), price changes, and marketing efforts by numerous and varied competitors. Accordingly, our future success will be highly dependent upon our timelycompletion and introduction of new products, technologies, and features atcompetitive prices and performance levels that address changing industry trendsand the evolving needs of our customers.  We continue to experienceaggressive price competition and increased customer sensitivity to productprices, and pricing and margin pressures are likely to increase in thefuture.  Because of this competition, we may have to continue to lower theprices of many of our products and technologies or offer greater functionalitywithin our products without increasing prices to deliver greater value tocustomers to stay competitive, while at the same time trying to maintain orimprove our revenue and gross margin.  Because our business model is basedon providing innovative and high quality products, we may spend aproportionately greater amount on research and development than some of ourcompetitors.  If we cannot proportionately decrease our cost structure ona timely basis in response to competitive price pressures and the loss ofrevenue, our gross and operating margins and profitability could be adverselyaffected.  In addition, if our pricing, functionality, and other factorsare not sufficiently competitive, or if there is an adverse reaction to ourproduct decisions, we may lose market share in certain areas, which couldadversely affect our revenue and prospects.

 

We compete for sales of switching systems andextension products with companies such as Raritan Computer, Rose Electronics,Minicom Advanced Systems, Aten International, Belkin, Digi International, andLantronix.  These products also face competition from software providers(such as Microsoft, Computer Associates, Tivoli, Symantec, Novell, AMI, and BMCSoftware), who may be able to offer software products competitive with ourhardware products at a much lower cost or even bundled for free with theirother products, and from server manufacturers (including our OEM customers), whoare able to offer their competitive technologies or products at the time of theserver sale.  These competitive software and hardware products addressmany of the problems our switching systems and technologies, extensionproducts, and remote access products are designed to address.

 

We compete for sales of our systems management andsecurity products with companies such as Microsoft, Computer Associates, BMCSoftware, Novell, and Symantec, many of whom have greater financial, technical,and marketing resources, a larger customer base, a longer operating history,greater name recognition, and more established relationships in the industrythan we do, and may offer their own or third-party competitive softwareproducts at a lower cost or bundled for free with their other products. Microsoft, in particular, has delivered competitive products and announced itsintention to continue to develop competitive software, and if it is successfulin delivering software products that are competitive with our products, ourability to grow our software business may be limited.

 

Our current and potential competitors may be able torespond more quickly to new or emerging technologies or products and to changesin customer requirements or to devote greater resources to the research,development, promotion, sale, and support of their products and technologiesthan we do.  In addition, current and potential competitors haveestablished or may establish cooperative relationships among themselves or withthird parties that expand or enhance the ability of their products andtechnologies 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.

 

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Certain of our customers, such as Dell,Hewlett-Packard, IBM, Microsoft, and Symantec presently offer competitivehardware and/or software products and technologies that address many of theproblems our products and technologies address.  These customers coulddecide to manufacture or enhance their own switching, IPMI, or other embeddedtechnologies, or systems management, security, and service desk products, oroffer products or technologies supplied by competitors.  Companies withhardware manufacturing experience or network management products, many of whichare substantially larger than we are and have significantly more financialresources than we do, also offer products or technologies that compete withus.  Established companies with hardware manufacturing or networkmanagement experience (such as Intel, Cisco, or EMC) could also offer newproducts, new technologies (such as virtualization), or new solutions thatcompete with, or reduce the demand for, our products and technologies.

 

There has been consolidation in the markets in whichwe compete, which we believe will continue and could lead to increased pricecompetition and other forms of competition as companies attempt to maintain orextend their market positions in the rapidly changing IT industry.  In addition, we may face competition in thefuture from large established companies or from emerging companies that havenot previously entered the market or that do not currently have products thatdirectly compete with our products.  Thiscould lead to more variability in our operating results for a variety ofreasons including the lengthening of the customer evaluation process and/or theloss of business to these competitors, which may adversely affect our business,financial condition, and results of operations.

 

**Our gross margins are expected tovary and may decline.**

 

Gross margins may vary or decline fromperiod-to-period and may be adversely affected by a number of factors,including:

 

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

 

·              The ratio of sales through indirect channels to directsales, since indirect sales typically have lower gross margins than directsales;

 

·              The ratio of sales in established markets to sales innew markets with different pricing and cost structures;

 

·              Sales of lower margin products or other changes in ourproduct mix, because sales of some of our products and technologies will havelower gross margins than sales of other products or technologies (e.g. oursoftware products tend to have higher gross margins);

 

·              Increased price competition;

 

·              Changes in product costs and sales discounts;

 

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

 

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

 

·              The level of and costs for third-party technology andcode used in our software products; and

 

·              The level of and costs for outsourcing of ourmanufacturing and assembly services for our hardware products and the impactthis can have on our inventory valuation of older products.

 

We expect that our gross margins may vary and maydecline in the future primarily due to the factors listed above and toincreased competition and the introduction of new products and technologiesthat may affect product prices and demand for our products.

 

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

 

Our future success depends in part upon our ability todevelop and protect proprietary rights in our products and technologies. We seek to protect our intellectual property rights by invoking the benefits ofthe patent, trademark, copyright, trade secret, and unfair competition laws ofthe United States and other countries and the protections provided by confidentialityand nondisclosure agreements and other legal agreements.  These laws andpractices, however, afford only limited protection.  There can be noassurance that the steps we have taken to protect our intellectual propertyrights, or that the steps we take in the future, will be adequate to prevent ordetect misappropriation of our intellectual property or technologies or thatour competitors will not independently develop proprietary or othertechnologies that are substantially equivalent or superior to our products ortechnologies.  In addition, ourproprietary information may be misused or improperly disclosed by third partiesentrusted with this information.  Therealso can be no assurance that our proprietary rights will not be challenged,invalidated, or avoided.

 

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The U.S. Patent and Trademark Office has issuedseveral patents to us for various aspects of our products.  We havevarious corresponding patent applications pending under the provisions of thePatent Cooperation Treaty, which permits the filing of corresponding foreignpatent applications in numerous foreign countries within a limited time period. We also have other United States and foreign patent applications pending. There can be no assurance that any additional patents will be issued from anyof those pending applications or that any patents will be issued in anyadditional countries where our products can be sold.  Claims allowed inour patents or in any pending patent applications may not be of sufficientscope or strength for, or provide meaningful protection or any commercialadvantage to us or such claims may not be upheld if challenged.  Also,competitors may develop their own intellectual property or technologies, obtaintheir own patents, or challenge the validity of, or be able to design around,our patents.  The laws of certain foreign countries in which our productsare or may be developed, manufactured, or sold (particularly certain countriesin Asia) may not protect our products or intellectual property rights to thesame extent as do the laws of the United States and thus increase thelikelihood of piracy of our technologies and products.

 

We may initiate claims or litigation against otherthird parties for infringement of proprietary rights or to establish thevalidity of proprietary rights.  Similarly, our competitors or other thirdparties may initiate claims or litigation against us alleging infringement oftheir proprietary rights or improper use of their intellectual property, andfrom time to time, third parties notify us that our products may infringe theirintellectual property rights, which regardless of merit, requires our time andresources to evaluate and respond.  Existing litigation, and any other litigation relating to intellectualproperty to which we become a party, is subject to numerous risks anduncertainties, including the risk of counterclaims or other litigation againstus, and we may not be successful in any such litigation.  Dealing withadverse claims and litigation is very expensive, and the existing litigation orany other litigation by or against us could result in significant additionalexpense, divert the efforts of technical and management personnel, whether ornot such litigation results in a favorable determination, harm ourrelationships with existing customers, and deter future customers frompurchasing or licensing our products.  In the event of an adverse resultin any such litigation, we could be required to pay substantial damages,suspend or cease the development, manufacture, use, marketing, and sale of anyinfringing products, expend significant resources to redesign products ordevelop non-infringing technology, discontinue the use of certain processes, orobtain licenses to the infringing technology.  There can be no assurancethat we would be successful in such development or that such licenses would beavailable on reasonable terms, or at all, and any such development or licensecould require us to expend substantial time and other resources.  In theevent that any third party makes a successful claim against us, or ourcustomers, and a license is not made available on commercially reasonableterms, our business, financial condition, and results of operations could beadversely affected.  In addition, anydispute involving our intellectual property could result in our customers,distributors, or resellers becoming involved in the litigation, which couldtrigger indemnification obligations in certain of our sales, license, orservice agreements.

 

The IT industry is characterized by vigorous pursuitand protection of intellectual property rights or positions, which has resultedin significant and often protracted and expensive litigation.  We have inthe past been, and we may from time to time in the future be, a party inlitigation or other proceedings alleging infringement of intellectual propertyrights owned by third parties.  If necessary or desirable, we may seeklicenses under such intellectual property rights.  However, licenses maynot be offered on terms acceptable to us, or at all.  The failure toobtain a license from a third party for technology used by us could cause us toincur substantial liabilities and to suspend or cease the manufacture ofproducts requiring such technology.  In addition, current or futurecompetitors could obtain patents or other intellectual property rights that mayprevent us from developing or selling our products. The result of theselitigation matters is difficult to predict and an unfavorable resolution couldaffect our operating results, business, or financial condition. The resolutionof litigation may have a negative impact on our operating results or financialcondition.

 

**Ourrecently-announced restructuring may disrupt our operations and adverselyaffect our operating and financial results.**

 

Infiscal July 2008, in January 2009, and again in July 2009, weannounced a series of actions designed to enhance competitiveness, improve ourefficiency, and reduce our cost structure. We initiated workforce reduction and consolidation actions designed tointensify our focus on our growth areas and improve our operating efficiency.  The restructuring includes actions toincrease our organizational efficiency, reduce certain research and developmentinvestments in lower growth product areas, integrate our marketing functions,and shift support for our Asian operations from Shannon, Ireland, to ourrecently-established regional hub in Singapore. We are also relocating certain functions from Redmond, Washington toHuntsville, Alabama.  The impact of theseorganizational improvements will result in a decrease of approximately 330positions or approximately 15% of our global workforce.  In fiscal July 2008, we also announcedthat, as part of our continued focus on core markets, we intended to sell theportion of our entrepreneurial Connectivity and Control business unit dedicatedto our Professional Audio Video and our Equinox serial products.  In June of 2009, we dissolved theremaining portions of our Connectivity and Control business and absorbed theProfessional Audio Video products into Management Systems and serial productsinto corporate.  The dissolution of thisunit resulted in a net 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.

 

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**We are likely to experiencefluctuations in operating results.**

 

We have in the past experienced substantialfluctuations in revenue, bookings, and operating results, on a quarterly and anannual basis, and we expect these fluctuations will continue in thefuture.  Our operating results will be affected by a number of factors,including, but not limited to:

 

·              The volume, timing, pricing, and contractual terms oforders, particularly from OEMs, resellers, and other large customers, asignificant portion of which tend to occur late in each quarter;

 

·              The timing of shipments;

 

·              The unpredictable nature of the sales cycle forsoftware products and the timing and completion of delivery of softwareproducts and any related services;

 

·              The timing of new product introductions, newtechnologies, 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 accurately predictproduct or distribution and reseller channel mixes, including changes in themix of software licenses in which revenue is recognized upfront as opposed tosubscription licenses that are deferred over time and changes in the mix ofrevenue attributable to higher-margin products as opposed to lower-margin salesor services;

 

·              Changes in demand for our products and services;

 

·              Changes in pricing policies, price reductions, andchannel programs;

 

·              Changes in laws, regulations, or other governmentrequirements;

 

·              Changes in renewal rates for software upgradeprotection or maintenance;

 

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

 

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

 

·              Compatibility or interoperability of our products withthird-party systems and applications;

 

·              Sales and marketing expenses related to entering intonew markets, introducing new products, new technologies, and retaining currentOEMs, resellers, and other large customers;

 

·              Fluctuations in sales of servers and personalcomputers due to changes in technology (such as virtualization), economicconditions, or capital spending levels;

 

·              The amount and timing of operating expenses andcapital expenditures relating to the expansion of our business and operations;and

 

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

 

Our operating results will continue to be affected byseasonal trends, by general conditions in the IT market, and by generaleconomic conditions.  Depending on the severity and longevity of thecurrent economic crisis, we may see fluctuations in our operating results.  In addition, we have experienced, and weexpect to continue to experience, seasonality due to customer buying cycles anddelays in customer orders during unfavorable economic periods.  We believethat the third and fourth quarters will generally have higher net sales levelsdue to customer budgeting and procurement cycles, which may depress net sales inother quarters.  In addition, European sales are often weaker during thesummer months.  In the past, we have typically seen a sequential declinein revenue from the fourth quarter of a year to the first quarter of thefollowing year, and while it is difficult to predict revenue in any quarter, weexpect that this pattern will continue in the future.  Many of the factorsthat create and affect seasonal trends are beyond our control.

 

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Our quarterly sales have also reflected a pattern inwhich a disproportionate percentage of each quarter’s total sales occur towardthe end of the quarter, and this trend has become more pronounced in recentperiods.  Our increased focus on thesoftware market continues this trend with a greater proportion of our softwarerevenue coming from software license and subscriptions booked in the last weeksor days of each quarter.  This uneven sales pattern makes prediction ofrevenue, earnings, and working capital for each financial period difficult,increases the risk of unanticipated variations in quarterly results andfinancial condition, and places pressure on our hardware inventory managementand logistics systems.  If predicted demand for hardware is substantiallygreater than orders, there will be excess inventory.  Alternatively, ifhardware orders substantially exceed predicted demand, we may not be able tofulfill all of the orders received in the last few weeks of each quarter. Other developments late in a quarter, such as a systems failure, componentpricing movements, actions or announcements from our competitors, globallogistics disruptions, or large sales opportunities not being completed whenpredicted, could adversely impact inventory levels and results of operations ina manner that is disproportionate to the number of days in the quarteraffected.  In addition, accountingrequirements associated with satisfying the various elements necessary torecognize software revenue may result in significant fluctuations in ourquarterly results.

 

In order to remain competitive and provide ourincreasingly sophisticated customers with more options, we have made and expectto continue to make new products and new software purchasing and licensingoptions available to our customers. These new products and options may result in an increase in contractswhere software revenue is deferred or cash is received over time as opposed torecognition of revenue or payment at or about the time of the purchase orlicense.

 

We believe that quarter-to-quarter comparisons of ourhistorical financial results are not meaningful indicators of our futureoperating results, and you should not rely on them as an indication of ourfuture performance.  If our quarterly operating results fail to meet theexpectations of equity research analysts, the price of our common stock couldbe negatively affected.

 

**A large portion of our businessconsists of sales to a limited number of resellers and distributors that arenot obligated to continue doing business with us, and these sales varyconsiderably from quarter to quarter.**

 

A large portion of oursales consists of sales of our branded products to a limited number of resellersand 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 to increasethe marketing of competing products or reduced marketing of our products, ourability to grow our business will be negatively impacted and will impair one ofour substantial revenue sources.

 

Our reseller and distributor business is subject tomany risks, including:

 

·              Concentration of business in a limited number ofresellers and distributors could result in significant damage to our businessupon the termination of a reseller relationship;

 

·              Termination of reseller and distributor agreements orreduced or delayed orders;

 

·              Difficulty in predicting sales to resellers anddistributors who do not have long-term commitments to purchase from us, whichrequires us to maintain sufficient inventory levels to satisfy anticipateddemand;

 

·              Lack of visibility of end user customers and revenuerecognition and channel inventory issues related to sales by resellers anddistributors;

 

·              Resellers and distributors electing to resell orincrease their marketing of competing products or technologies or reducedmarketing of our products; and

 

·              Changes in corporate ownership, financial condition,credit worthiness, payment patterns, business direction, sales compensationrelated to our products, or product mix by the resellers and distributors.

 

Any of these risks could have a material adverseeffect on our business, financial condition, and results of operations. We have experienced, and expect to continue to experience, pricing pressuresand significant variability in orders from our resellers and distributors,which may in the future have a material adverse effect on our quarterly salesand operating results.

 

The loss of one or more large resellers ordistributors could materially harm our business.  While we have resellerand distributor agreements, none of our resellers or distributors are obligatedto purchase products from us.  Consequently, any reseller or distributorcould cease doing business with us at any time.  Our dependence upon a fewresellers and distributors could result in a 

 

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significant concentration of credit risk, thus a substantial portion ofour trade receivables outstanding from time to time may be concentrated among alimited number of customers.  In addition, the inability to accuratelyforecast the timing and volume of orders for sales of branded products toresellers and distributors during any given quarter could adversely affectoperating results for such quarter and, potentially, for future periods. If we underestimate sales, we will not be able to fill orders on a timelybasis.  This could cause customer dissatisfaction and loss of futurebusiness.  If we overestimate sales, we will experience increased costsfrom inventory storage, waste, and obsolescence.

 

**We will need to expand our salesdistribution channels in order to develop our business and increase revenue.**

 

We expect to rely increasingly on distributors andresellers, VARs, and systems integrators for the distribution and sale of ourbranded hardware and software products.  Our strategy contemplates theexpansion of our distributor and reseller networks both domestically andinternationally, particularly in Asia, and an increase in the number of customerslicensing our products through these expanded channels.  Our futuresuccess will depend in part on our ability to attract, train, and motivate newdistributors and resellers and expand our sales distribution channels.  Wemay not be successful in expanding our distributor and resellerrelationships.  We will be required to invest significant additionalresources in order to expand these relationships, and the cost of thisinvestment may exceed the margins generated from this investment.  Conducting business through indirect saleschannels presents a number of risks, including:

 

·              Difficulties in replacing any lost or terminateddistributors or resellers;

 

·              Existing or new distributors and resellers may not beable to effectively sell our current or future products or services;

 

·              Potential distributors and resellers deciding not toenter into relationships with us because of our existing relationships withother distributors and resellers with which they compete;

 

·              Our ability to provide proper training and technicalsupport to our distributors and resellers;

 

·              The possibility of damage or impairment to our marketposition, brands or trademarks as a result of the actions of our distributorsand resellers;

 

·              Distributors and resellers electing to place greateremphasis on products or services offered by our competitors; and

 

·              The lack of direct control over the businesspractices, marketing, sales and services offered by distributors and resellers.

 

As we expand our distribution and reseller channels,we will also need to expand our sales organization and invest substantialresources toward this expansion.  We mayexperience difficulty in recruiting, training, and retaining qualified salespersonnel, and any failure to obtain, train, and keep qualified personnel couldlimit our ability to sell products.

 

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

 

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**A large portion of our businessconsists of sales to a limited number of OEM customers that are not obligatedto continue doing business with us, and these sales vary considerably fromquarter to quarter.**

 

A large portion of our sales is concentrated among alimited number of OEM customers.  Aggregate sales to these OEMs representedapproximately 33% of our net sales in 2008, 35% of net sales in 2007, and 40%of net sales in 2006.   Thefollowing table identifies our customers that exceeded 10% of our net sales forthe 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, and we expect to continue toexperience, period-to-period variability in sales to these OEM customers. Any cancellation, rescheduling, or reduction of orders by OEM customers in thefuture could materially adversely affect our operating results.  Althoughour OEM customers typically place orders for products up to several monthsprior to scheduled shipment dates, these orders are subject to cancellation.

 

Our OEM business is subject to many risks, including:

 

·              Contract termination or reduced or delayed orders;

 

·              Short order cycles and difficulty in predicting salesbecause our OEM customers do not have long-term commitments to purchase fromus;

 

·              Changes in the OEMs’ internal product life cyclesincluding the delay of planned new product introductions and uncertainty overproduct end-of-life decisions;

 

·              Adoption of competing products or technologiesdeveloped by third parties for the OEMs, acquisition or internal development ofcompeting products or technologies by the OEMs, or changes in the OEMs’marketing of competing products or reduced marketing of our products; and

 

·              Changes in corporate ownership, financial condition,credit worthiness, payment patterns, business direction, sales compensationrelated to our products, or product mix by the OEMs.

 

Any of these risks could have a material adverseeffect on our business, financial condition, and results of operations. We have experienced, and expect to continue to experience, pricing pressuresand significant variability in orders from our OEM customers, which may in thefuture have a material adverse effect on our quarterly sales and operatingresults.

 

Although we are not substantially dependent on any oneOEM customer, the loss of one or more large OEM customers would materially harmour business.  While we have agreements with some of our OEM customers,these agreements are generally cancellable at the will of the OEM (generallysubject to notice provisions), and none of our OEM customers is obligated topurchase products from us except pursuant to binding purchase orders orlicensing agreements.  Consequently, anyOEM customer could cease doing business with us at any time.  Our volume of sales from just a fewOEMs also results in a significant concentration of credit risk, thus alarge portion of our trade receivables outstanding from time to time may beconcentrated among a limited number of customers.  In addition, OEMcustomers have longer payment cycles that increase the likelihood of aged orproblem accounts receivable.

 

We use multiple warehouses for many of our OEMcustomers to fulfill their hardware orders under a just-in-time inventorymanagement system, which requires us to maintain sufficient inventory levels ofour hardware products at each of these warehouses to satisfy anticipated demandfrom our OEM customers, and we generally recognize revenue only when these OEMcustomers take possession of our hardware products.  We are required toplan production, order components, and undertake our manufacturing activitiesprior to the time that these orders become firm or the products areaccepted.  In addition, our OEM customers have requested, and are likelyto continue to request from time to time, that we delay shipment dates orcancel orders for hardware products that are subject to firm orders.  As aresult, at any time we may be holding a significant amount of OEM-brandedhardware products in inventory, and our sales to OEMs for future quartersare difficult to predict.  The inability to accurately predict the timingand volume of hardware orders for our OEM customers during any given quartercould adversely affect operating results for that quarter and, potentially, forfuture quarters.  If we underestimate sales, we may not be able to fillorders on a timely basis.  This could cause customer dissatisfaction andloss of future business.  If we overestimate sales, we may experienceincreased costs from inventory storage, waste, and obsolescence.

 

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**Our failure to respond to rapidtechnological change or to introduce successful new products and technologiesmay result in reduced revenue or revenue growth.**

 

The process of developing or acquiring new products, software, andtechnologies and enhancing existing products, software, and technologies iscomplex, costly, and uncertain, and any failure by us to anticipate customers’changing needs and emerging technological trends accurately could significantlyharm our market share and results of operations.  Our products andtechnologies are characterized by rapid technological advances, frequent newproduct and technological introductions and enhancements, and significant pricecompetition.  If we do not keep pace with these changes, we will losecustomers, and our business will be adversely affected.  The introductionof products or technologies incorporating superior alternatives such asswitching software, the emergence of new industry standards such asvirtualization, or changes in pricing structure could render our existingproducts and technologies and those we have under development obsolete orunmarketable.  New technologies offered by us or our competitors couldcompete with our existing products at a lower price, which could reduce our revenue.

 

Our future success will depend in large part uponcontinued innovative application of commercially available components andsoftware or technologies, continued enhancements to our proprietary hardware,software, firmware, and other technologies, the expansion and enhancement ofexisting products and technologies, and our development and introduction of newproducts and technologies that address changing industry trends (includingvirtualization) and customer needs on a cost-effective and timely basis. If we fail to respond on a timely basis to technological developments, changesin industry standards, customer requirements, competitive products, productlocalization, or software innovations, we will lose customers, and our businesswill be greatly harmed.  Similar results could occur if we experiencesignificant delays in the development or introduction of new products ortechnologies.

 

**We are dependent upon third-partysuppliers and outsourced manufacturing for our hardware products. Disruption of our access to these supplies and services, or problems with thequality of supplies or services, could prevent us from filling customer ordersand harm our business.**

 

The principal components of our hardware products areelectronic components, power supplies, semiconductors, memory, cableassemblies, line filters, enclosures, and printed circuit boards, all of whichare purchased from outside vendors.  We generally buy components underpurchase orders and generally do not have long-term agreements with our suppliers. Also, we generally do not maintain large inventories of components.  Anytermination of, or significant disruption of, our relationships with thesuppliers of our product components may prevent us from filling customer ordersin a timely manner which could result in customer dissatisfaction and lostsales.

 

We have occasionally experienced, and we may in thefuture experience, shortages or delays in delivery of components. Although alternate suppliers are available for most of the components and servicesneeded to produce our products, the number of suppliers of some components islimited, and qualifying a replacement supplier and receiving components fromalternate suppliers could take several months.

 

We have limited ability to control quality issues(particularly with respect to faulty components manufactured by third parties),and we depend upon suppliers to deliver components that are free from defects,competitive in functionality and cost, and in compliance with specificationsand delivery schedules.  Disruption in supply, a significant increase inthe cost of one or more components, failure of a third-party supplier to remaincompetitive in functionality or price, or the failure of a supplier to complywith any of our procurement needs could delay or interrupt our ability tomanufacture and deliver our products to customers on a timely basis, therebydelaying our revenue recognition and adversely affecting our business,financial condition, and results of operations.

 

We rely on third-party manufacturers for subassemblyof products and for final assembly, quality assurance, and testing of many ofour products.  These outsourcing arrangements and any future outsourcingarrangements involve numerous risks, including the economic and financialviability of these manufacturers, reduced control over product quality,delivery schedules, manufacturing yields, and costs.  Moreover, althougharrangements with such manufacturers may contain provisions for warrantyobligations on the part of such manufacturers, we are primarily responsible toour customers for warranty obligations.

 

**Our hardware products are subject towarranty claims and returns.  Increased warranty claims or returns couldharm our business.**

 

We typically offer a 30-day unconditional money-backguarantee on our appliance products sold in North America.  We also offerwarranties for parts and service on our hardware products, ranging from one tothree years (and, in the case of some of our Equinox branded products, fiveyears).  Although our historical return experience has not beensignificant, our returns may increase in the future.  An increase inreturns would have an adverse effect on our sales and could negatively affectour financial results.

 

For our software products, sales are final and we donot generally allow any returns.  Weprovide a 90-day limited warranty on the media used to deliver the software,which is not applicable to electronic downloads, and we generally provide a90-day limited warranty (except where a longer period is required by law) thatour products will function in accordance with the user documentation.

 

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In the future, we may, as a result of competitivepressures, requirements in certain geographies, or customer demands, change ourwarranty policies or our warranty terms to provide coverage that is greater inscope and duration than the coverage we currently offer.  If we were toincrease our warranty coverage, our risk of warranty claims, and therefore ourwarranty expense and reserves, would likely increase.

 

**If we are unable to successfullydevelop our international distribution and reseller networks and internationalsales efforts, results of operations may suffer.**

 

We are working to develop, integrate, and expand ourinternational distribution and reseller networks in an effort to increaseinternational sales and availability of our products.  We may not besuccessful in developing or expanding the international distribution andreseller network or in marketing and selling products in foreign markets,particularly Asia.  If the revenue generated by our international sales isnot adequate to recover the expense of establishing, expanding, and maintainingan international distribution and reseller network, our business, financialcondition, and results of operations could be materially adverselyaffected.  If international sales become a more significant component ofnet sales, our business could become more vulnerable to the risks inherent indoing business on an international level, including:

 

·              Difficulties in managing foreign distributors andresellers;

 

·              Longer payment cycles and problems in collectingaccounts receivable;

 

·              The effects of seasonal customer demand;

 

·              Differing license terms and conditions to meet localrequirements;

 

·              Changes in regulatory requirements;

 

·              Difficulties in meeting the requirements of differentinternational product regulations, including import and export requirements,tariffs, and other trade barriers;

 

·              Risks relating to the protection of our intellectualproperty rights;

 

·              The impact on our marketing expenses and our researchand development resources as we localize our product offerings to meet localuser requirements such as language translations and hardware compatibilityissues;

 

·              Fluctuations in currency exchange rates; and

 

·              Potentially adverse tax consequences and politicalinstability.

 

The existence or occurrence of any one or more of these factors couldhave a material adverse effect on our business, financial condition, andresults of operations.

 

**Due to the international nature ofour business, political or economic changes or other factors could harm ourfuture revenue, increase our costs and expenses, and impair our financialcondition.**

 

We are a global company with sales, manufacturing, andresearch and development efforts around the world.  Sales outside the United States generateapproximately half of our revenue, over half of our manufacturing takes placeoutside the United States, and we have research and development centers inseveral locations outside the United States.  Accordingly, our business,operating results, future revenue, gross margin, expenses, and financialcondition could suffer due to a variety of international factors, including:

 

·              Ongoing instability or changes in a country’s orregion’s economic or political conditions, including inflation, recession,interest rate fluctuations, and actual or anticipated military or politicalconflicts, particularly in areas where we have offices or other facilities;

 

·              Currency fluctuations, which could contribute tovariations in sales of products and technologies and could also affect ourreported results expressed in U.S. dollars;

 

·              Longer accounts receivable cycles and financialinstability among customers;

 

·              Tax or trade regulations, tariffs, duties, andprocedures and actions affecting production, pricing, and marketing of orpayments for products;

 

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·              Local labor conditions and other regulations;

 

·              Differing technology standards or customerrequirements;

 

·              Limited or unfavorable intellectual propertyprotection in certain foreign countries including the loss of proprietaryinformation due to piracy or misappropriation;

 

·              Fluctuations in freight costs and disruptions atimportant geographic points of exit and entry;

 

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

 

·              Medical epidemics;

 

·              Seasonal reductions in business activity in certainforeign countries, such as the summer months in Europe;

 

·              Compliance with a wide variety of complex laws,treaties, and regulations that increase the risks of doing business in certainforeign countries;

 

·              Restrictions against repatriation of earnings from ourinternational operations;

 

·              Difficulties in staffing and managing internationaloperations, including the difficulty in managing a geographically dispersedworkforce;

 

·              Possible non-compliance with our Code of Conduct orother corporate policies due to inconsistent laws, interpretations, and/orapplication of corporate standards in foreign countries;

 

·              Increased financial accounting and reporting burdensand complexities; and

 

·              The need to localize our products.

 

The factors described above also could disrupt ourproduct development and manufacturing, key suppliers, and OEMs and resellerslocated outside of the United States.  For example, we rely onmanufacturers in Asia and Europe for the assembly and manufacture of many ofour hardware products, and we conduct substantial software development andtesting operations in China and Taiwan. Accordingly, we are directly affected by economic, political, andmilitary conditions in the regions where we have operations, including Chinaand Taiwan.  In particular, anyinterruption or curtailment of trade between China and its present tradingpartners could materially adversely affect our product development, productreleases, support, business, operating results, and financial condition.

 

Continued or increased international politicalinstability, evidenced by the threat or occurrence of terrorist attacks,enhanced national security measures in the United States or other countries,sustained military action or other conflicts, or strained internationalrelations may impair our ability to do business, increase our costs andadversely 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.

 

**Fluctuations in the value of foreigncurrencies could result in currency exchange losses.**

 

Currently, a majority of our international business isconducted in U.S. dollars.  As we expand our international operations,however, it is likely that international business will increasingly beconducted in foreign currencies.  Fluctuations in the value of foreigncurrencies relative to the U.S. dollar have caused, and are expected toincreasingly cause, currency transaction gains and losses.  In addition,currency fluctuations could also affect foreign denominated investment valuesand reported results expressed in U.S. dollars. While we attempt to hedge some foreign currency exposure, we cannoteffectively hedge all exposures, nor predict the effect of exchange ratefluctuations upon future operating results, and we may experience currencylosses in the future.

 

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

 

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

 

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

 

·                                          The actions or announcements of ourcompetitors and their products;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our software products aredesigned for use with specific third-party platforms, systems, andapplications.  We believe the breadth ofour integration with such platforms, systems, and applications is a significantcompetitive advantage.  Any significantchange in these third-party products could result in the loss 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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As we expand ourinternational operations, we will be required to recruit and retain experiencedmanagement, sales and technical personnel in our international offices, and weexpect that the identification, recruitment, training and retention of such personnelwill require significant management time and effort and resources.  Competition for employees with the skillsrequired, particularly management, engineering and other technical personnel,is intense, and there can be no assurance that we will be able to attract andretain highly skilled employees in sufficient numbers to sustain our currentbusiness or to support future growth.  We may need to pay recruiting oragency fees and offer additional compensation or incentives to attract andretain these and other employees, resulting in an increase to our operatingexpenses.

 

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.

 

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

 

In the second quarter of2006, we obtained a $250 million unsecured, five-year, revolving, bank line ofcredit, and we used borrowings under this line of credit to fund a portion ofthe LANDesk acquisition and the purchase of our shares under ourrecently-expanded stock repurchase program. In July 2008, we amended the line of credit and borrowed anadditional $90 million under a three-year term note.  We may increase this bank debt or seek otherbank debt in the future.  The balanceoutstanding on our debt agreements was $140 million as of June 30,2009.  Interest expense on borrowingsunder the term loan and additional future borrowings under the line of creditcould adversely affect our future net income, margins, expenses, and financialconditions by:

 

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

 

·                                          Increasing our vulnerability to economicdownturns in our industry;

 

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

 

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

 

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

 

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

 

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

 

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

 

Our ability to complywith these provisions of our line of credit and term loan may be affected bychanges in the economic or business conditions or other events beyond ourcontrol.  If we do not comply with thesecovenants and restrictions, we could be in default under our line of creditand/or the term loan, and our debt, together with accrued interest, could thenbe declared immediately due and payable. There can be no assurance that we will be able to obtain sufficientfunds to enable us to repay or refinance our debt obligations on commerciallyreasonable terms or at all.  We also faceinterest rate risk on our bank line of credit and term loan which currentlybears interest at a variable rate of LIBOR plus 150 basis points.  We have hedged this exposure to interest raterisk with interest rate swaps, which have a remaining aggregate notional amountof $130 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 beadversely affected by changes in the mix of earnings in countries withdiffering statutory 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” 

 

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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 ourstockholders.

 

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

 

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

 

In the fourth quarter of2004 our Board of Directors approved a stock repurchase program whereby we may,from time to time, purchase our common stock in the open market, in privatelynegotiated transactions or otherwise, at prices that we deem appropriate.  Since the program’s initial approval through June 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 six months ended June 30, 2009 are as follows:

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

 

Therewere no shares repurchased during the three months ended June 30,2009.  Approximately 247,000 shares werewithheld as payment for employee payroll withholding taxes at the release ofvested restricted stock units in the first six months of 2009 (*see Note 3 to our condensed consolidated financialstatements contained in Part I, Item 1 of this quarterly report*).  The 247,000 shares were considered to betreasury shares; however, these treasury shares were immediately retired andare not considered in the table above.

 

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**Item 4.****          ****Submission of Matters to a Voteof Security Holders.**

 

On June 11, 2009, we held our Annual Meeting ofStockholders.  The matters voted on atthe meeting and the results of these votes are as follows:

 

1.                                             Election of Class IIIDirector.

 
| ** **            | ** ** | **Votes for** | ** ** | **Votes Withheld** | ** ** |
|-----------------------|------------|---------------|------------|--------------------|------------|
| 1.  Francis A. Dramis |       | 39,723,223    |       | 2,035,872          |       |

 

2.                                             RatifyPricewaterhouseCoopers LLP as independent auditors for year ended December 31,2009.

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Votes Abstained** | ** ** |
|---------------|------------|-------------------|------------|---------------------|------------|
| 40,860,480    |       | 880,203           |       | 18,412              |       |

 

3.                                             Proposal toapprove the amended and restated Avocent Corporation 2005 Equity IncentivePlan.

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Votes Abstained** | ** ** |
|---------------|------------|-------------------|------------|---------------------|------------|
| 30,768,747    |       | 6,452,676         |       | 23,909              |       |

 

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

 

(a) Exhibits

 
| 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 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: August 7,  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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