-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EfvelUJZ5USbybz5bLFDPYQehZki4eV8QIiV3o09Pl+yLOD39N3utzE79eu8SeCu /qNO8+RS/LTHqL5/wDvwbw== 0001157523-06-007069.txt : 20060720 0001157523-06-007069.hdr.sgml : 20060720 20060720082100 ACCESSION NUMBER: 0001157523-06-007069 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060719 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Regulation FD Disclosure ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20060720 DATE AS OF CHANGE: 20060720 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVOCENT CORP CENTRAL INDEX KEY: 0001109808 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 912032368 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-30575 FILM NUMBER: 06970501 BUSINESS ADDRESS: STREET 1: 4991 CORPORATE DRIVE CITY: HUNTSVILLIE STATE: AL ZIP: 35805 BUSINESS PHONE: 2564304000 MAIL ADDRESS: STREET 1: 4991 CORPORATE DRIVE CITY: HMTSVILLE STATE: AL ZIP: 35805 FORMER COMPANY: FORMER CONFORMED NAME: AEGEAN SEA INC DATE OF NAME CHANGE: 20000323 8-K 1 a5191920.txt AVOCENT8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) July 19, 2006 ------------------------------- AVOCENT CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 000-30575 91-2032368 - -------------------------------------------------------------------------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 4991 CORPORATE DRIVE HUNTSVILLE, AL 35805 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (256) 430-4000 ----------------------------- n/a - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Item 2.02 Results of Operations and Financial Condition. On July 19, 2006, Avocent Corporation publicly disseminated a press release announcing its financial results for its second quarter ended June 30, 2006. The information contained in the press release is incorporated herein by reference and furnished as Exhibit 99.19 hereto. In addition, Avocent is providing certain additional commentary regarding the financial results for its second quarter ended June 30, 2006. The information contained in the commentary relating to the Company's results of operations and financial condition is incorporated herein by reference and is furnished as Exhibit 99.20 hereto. Item 7.01 Regulation FD Disclosure. Avocent is also providing certain additional commentary regarding its proposed acquisition of LANDesk Group Limited. The information contained in the commentary relating to the Company's proposed acquisition of LANDesk is incorporated herein by reference and is furnished as Exhibit 99.20 hereto. Item 9.01 Financial Statements and Exhibits. (d) Exhibits. Exhibit Number Description of Exhibit -------------- ---------------------- 99.19 Press release issued July 19, 2006 99.20 Commentary Regarding Second Quarter 2006 Financial Results and Proposed LANDesk Acquisition SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AVOCENT CORPORATION Date: July 20, 2006 By: /s/ Edward H. Blankenship ------------------------------------------------- Edward H. Blankenship Senior Vice President of Finance and Chief Financial Officer EXHIBIT INDEX ------------- Exhibit Description - ------- ----------- 99.19 Press Release dated July 19, 2006 99.20 Commentary regarding the second quarter 2006 financial results EX-99.19 2 a5191920ex99_19.txt AVOCENT EXHIBIT 99.19 Exhibit 99.19 Avocent Reports Record Sales for Second Quarter HUNTSVILLE, Ala.--(BUSINESS WIRE)--July 19, 2006--Avocent Corporation (NASDAQ:AVCT) today reported that net sales for the second quarter ended June 30, 2006 were $118.0 million, an increase of 31.8% compared with the second quarter of 2005. "The strong results in the second quarter reflected renewed strength across our core product lines," stated John R. Cooper, chairman and chief executive officer of Avocent Corporation. "We are particularly pleased that the rapid integration of the Cyclades acquisition, which closed at the end of the first quarter 2006, enabled the serial management products to make the expected contribution to our revenue. We also are pleased with the increased sales of our digital KVM products and embedded software solutions and the strong growth in Asian sales." Overall Results Second quarter 2006 operational income, which is income prior to intangible amortization and stock compensation expenses, was $18.7 million, or $0.38 per diluted share, compared with operational income of $15.9 million, or $0.31 per diluted share, in the second quarter of 2005. (See "Use of Non-GAAP Financial Measures" discussion below.) Weighted average shares outstanding declined 3.4% over the prior year to 48.7 million in the second quarter of 2006 due to Avocent's repurchase of shares under its previously-announced stock repurchase programs. GAAP net income for the second quarter of 2006 increased to $13.6 million, or $0.28 per diluted share. This compares with GAAP net income of $11.1 million, or $0.22 per diluted share, in the second quarter of 2005. Net adjustments to reconcile operational income to GAAP net income were $5.1 million in the second quarter of 2006, including $3.3 million in intangible amortization and $1.8 million in stock compensation expenses. Net adjustments to reconcile to GAAP net income were $4.3 million in intangible amortization and $510,000 in stock compensation expenses in the second quarter of 2005. "Second quarter earnings benefited from higher sales, growth in margins and the results of cost reductions implemented in the second half of 2005. Our earnings were particularly strong in light of the $2.3 million in additional costs we incurred in the second quarter related to the integration of Cyclades. In addition, last year's second quarter earnings included a one-time $5.0 million gain from the settlement of a lawsuit," noted Mr. Cooper. "We are also pleased that the Cyclades integration efforts continue to run ahead of our original internal schedule and we anticipate additional operational efficiencies to be realized during the next two quarters." Branded sales increased 54.3% from the second quarter of 2005 and accounted for 59.9% of total second quarter 2006 sales. Sales of products acquired with Cyclades were included in Branded sales for the quarter and contributed to the large increase in sales of Branded products. OEM sales increased 8.3% from the second quarter of 2005 and accounted for 40.1% of total second quarter 2006 sales. Digital product sales accounted for 57% of total sales and embedded product revenues climbed to $8.8 million, an increase of 79.1% compared with the second quarter of 2005. U.S. sales increased 27.6% to $67.3 million and international sales rose 37.9% to $50.7 million compared with the second quarter of 2005. Gross profit, excluding stock-based compensation, for the second quarter of 2006 increased 35.5% to a record $71.6 million and a 60.6% gross margin, compared with $52.8 million and a gross margin of 59.0% in the second quarter of 2005. The increase in gross profit and margin was due to higher sales and improved product mix, including increased sales of digital products and higher embedded product revenues. Research and development expenses, excluding stock-based compensation, decreased to $13.6 million, or 11.5% of sales, from $14.1 million, or 15.7% of sales, in the second quarter of 2005. "Over the last year we have systematically redirected our R&D investments from mature markets to our digital products and other faster-growing markets. We also remain focused on product enhancements and redesigns to improve our product benefits and improve manufacturing efficiencies," continued Mr. Cooper. "Our ability to absorb Cyclades' engineering organization without increasing R&D expenses is a result of the actions we took during the last half of 2005 to reduce our engineering costs in several more mature areas of development." Selling, general and administrative expenses, excluding stock-based compensation, increased 30.1% to $30.8 million compared with $23.6 million in the second quarter of 2005. Avocent had higher selling expenses in the second quarter of 2006 related to the increase in sales, the inclusion of Cyclades for a full quarter and additional marketing expenditures for recently introduced products. During the second quarter of 2006, Avocent incurred $2.3 million in severance and integration expenses related to integrating Cyclades. Operating income, excluding stock-based compensation and intangible asset amortization, increased 65.6% to $25.0 million in the second quarter of 2006 compared with $15.1 million in the second quarter of 2005. Avocent's cash flow from operations was approximately $13.5 million for the second quarter of 2006. Avocent funded the Cyclades acquisition with over $90 million in cash-on-hand. During the second quarter, Avocent announced the signing of a $250 million unsecured five-year revolving bank line of credit to fund, in part, future stock repurchases and the acquisition of LANDesk Group Limited, which Avocent expects to complete in August 2006. During the second quarter of 2006, Avocent repurchased approximately 4.0 million of its common shares at a total cost of approximately $95.3 million. Second Quarter Division Results Revenues from the Management Systems Division advanced 29.1% to $103.0 million in the second quarter of 2006 from $79.8 million in the second quarter of 2005, while operating income from this division increased to $26.9 million in the second quarter of 2006 from $21.2 million in the second quarter of 2005, primarily as a result of the acquisition of Cyclades and the increase in revenues from the digital product lines. Revenues for the Embedded Software and Solutions Division grew 79.1% to $8.8 million in the second quarter of 2006 from $4.9 million in the second quarter of 2005, while operating income increased to $3.1 million in the second quarter of 2006 from $484,000 in the second quarter of 2005, primarily resulting from the increased revenue contribution of our embedded KVM solutions as adoption of these platforms by our OEM customers increases and additional revenue from the acquisition of the Agilent remote management product line in March 2006. Revenues from the three emerging businesses grew 39.1% to $5.3 million in the second quarter of 2006 compared with $3.8 million in the second quarter of 2005, while operating losses from these divisions decreased to $3.0 million in the second quarter of 2006 from $3.9 million in the second quarter of 2005. Use of Non-GAAP Financial Measures Income prior to intangible amortization, stock compensation and in-process research and development expenses, or operational income as used in the attached financial statement schedules, is not a measure of financial performance under generally accepted accounting principles (GAAP) and should not be considered a substitute for or superior to GAAP. Avocent's management uses operational income as a financial measure to evaluate performance and allocate resources within the Company. Management believes this measure presents the Company's results on a more comparable operational basis by excluding non-cash amortization expenses, non-operational expenses associated with acquisitions, and non-cash stock-based compensation expense. Avocent believes that operational income is a measure of performance used by many investment banks, analysts, investors and others to make informed investment decisions. Other companies may calculate operational income in a different manner so this measure may not be comparable to similar measures presented by other companies. A reconciliation of Avocent's results using operational measures and GAAP is set forth in the condensed consolidated statements of operations included in this press release. Conference Call and Additional Information Avocent will provide an on-line, real-time webcast and rebroadcast of its second quarter results conference call to be held July 20, 2006. The live broadcast will be available on-line at www.avocent.com as well as www.investorcalendar.com beginning at 10:00 a.m. Central time. The on-line replay will follow immediately and continue for 30 days. Avocent has also furnished additional commentary on the second quarter results simultaneously with this release on a Form 8-K filed with the SEC and on its website. About Avocent Corporation Avocent Corporation is the leading supplier of connectivity solutions for enterprise data centers, branch offices, and small to medium size businesses worldwide. Branded and OEM products include remote and local access solutions for switching, serial console, power extension, intelligent platform management interface (IPMI), mobile and video display management solutions. Additional information is available at: www.avocent.com. Forward-Looking Statements This press release contains statements that are forward-looking statements as defined within the Private Securities Litigation Reform Act of 1995. These include statements regarding future revenue and penetration of the serial-management market resulting from our acquisition of Cyclades, the development, introduction, features, and benefits of new products and technologies, the size and growth of the current and future markets for these products and technologies (including those for the Linux server market), engineering and design activities, and the integration and operation of Cyclades. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made, including the risks associated with general economic conditions, risks attributable to future product demand, sales, and expenses, risks associated with reliance on a limited number of customers, component suppliers, and single source components, risks associated with acquisitions and acquisition integration, risks associated with product design efforts and the introduction of new products and technologies, and risks associated with obtaining and protecting intellectual property rights. Other factors that could cause operating and financial results to differ are described in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 6, 2006 and our quarterly report on Form 10-Q filed with the SEC on May 10, 2006. Other risks may be detailed from time to time in reports to be filed with the SEC. Avocent does not undertake any obligation to publicly update its forward-looking statements based on events or circumstances after the date hereof. AVOCENT CORPORATION Condensed Consolidated Statements of Operations (Unaudited, in thousands, except per share data) For the Quarter Ended June 30, 2006 Stock Operational Compensation(a) Adjustments(b) GAAP ----------- --------------- -------------- --------- Net sales $ 118,005 $118,005 Cost of sales 46,430 $ 164 46,594 ----------- --------------- -------------- --------- Gross profit 71,575 (164) - 71,411 Research and development expenses 13,559 762 - 14,321 Selling, general and administrative expenses 30,771 1,796 151 32,718 Cyclades severance and integration expenses 2,269 - - 2,269 Amortization of intangible assets - - 4,901 4,901 ----------- --------------- -------------- --------- Operating income 24,976 (2,722) (5,052) 17,202 Other income (expense), net 1,778 - - 1,778 ----------- --------------- -------------- --------- Income before income taxes 26,754 (2,722) (5,052) 18,980 Provision for income taxes 8,051 (969) (1,683) 5,399 ----------- --------------- -------------- --------- Net income $ 18,703 $ (1,753) $ (3,369) $ 13,581 =========== =============== ============== ========= Earnings per share: Basic $ 0.39 $ 0.28 Diluted $ 0.38 $ 0.28 Weighted average shares and common equivalents outstanding: Basic 47,943 - - 47,943 Diluted 48,709 - - 48,709 For the Quarter Ended July 1, 2005 Stock Operational Compensation(a) Adjustments(b) GAAP ----------- --------------- -------------- --------- Net sales $ 89,538 $ 89,538 Cost of sales 36,711 36,711 ----------- --------------- -------------- --------- Gross profit 52,827 - - 52,827 Research and development expenses 14,097 $ 291 - 14,388 Selling, general and administrative expenses 23,649 219 157 24,025 Amortization of intangible assets - 6,623 6,623 ----------- --------------- -------------- --------- Operating income 15,081 (510) (6,780) 7,791 Income from settlement of lawsuit 5,000 5,000 Other income (expense), net 1,954 - (15) 1,939 ----------- --------------- -------------- --------- Income before income taxes 22,035 (510) (6,795) 14,730 Provision for income taxes 6,148 - (2,517) 3,631 ----------- --------------- -------------- --------- Net income $ 15,887 $ (510) $ (4,278) $ 11,099 =========== =============== ============== ========= Earnings per share: Basic $ 0.32 $ 0.22 Diluted $ 0.31 $ 0.22 Weighted average shares and common equivalents outstanding: Basic 49,475 - 49,475 Diluted 50,460 (43) 50,417 (a) Stock Compensation relates to expensing of stock options, restricted stock units and performance shares and amortization of deferred compensation (from the capitalization of the value of stock options assumed in acquisitions). Avocent adopted SFAS 123R effective January 1, 2006 and began recording expense related to outstanding unvested stock options on that date as well as on subsequent equity compensation grants. (b) Adjustments relate to intangibles recorded as the result of acquisitions. The calculation of weighted average shares and common equivalents outstanding differs due to excluding the average unamortized deferred compensation expense in calculating the operational diluted shares outstanding in 2005. AVOCENT CORPORATION Condensed Consolidated Statements of Operations (Unaudited, in thousands, except per share data) For the Six Months Ended June 30, 2006 Stock Operational Compensation(a) Adjustments(b) GAAP ----------- --------------- -------------- --------- Net sales $ 212,517 $212,517 Cost of sales 84,936 $ 214 85,150 ----------- --------------- -------------- --------- Gross profit 127,581 (214) - 127,367 Research and development expenses 26,467 1,063 - 27,530 Acquired in- process research and development expenses - 2,100 2,100 Selling, general and administrative expenses 53,514 2,286 302 56,102 Cyclades severance and integration expenses 2,269 - 2,269 Amortization of intangible assets - - 7,252 7,252 ----------- --------------- -------------- --------- Operating income 45,331 (3,563) (9,654) 32,114 Other income (expense), net 4,795 - - 4,795 ----------- --------------- -------------- --------- Income before income taxes 50,126 (3,563) (9,654) 36,909 Provision for income taxes 14,002 (1,231) (2,376) 10,395 ----------- --------------- -------------- --------- Net income $ 36,124 $ (2,332) $ (7,278) $ 26,514 =========== =============== ============== ========= Earnings per share: Basic $ 0.74 $ 0.55 Diluted $ 0.73 $ 0.54 Weighted average shares and common equivalents outstanding: Basic 48,515 - - 48,515 Diluted 49,336 - - 49,336 For the Six Months Ended July 1, 2005 Stock Operational Compensation(a) Adjustments(b) GAAP ----------- --------------- -------------- --------- Net sales $ 166,343 $166,343 Cost of sales 69,934 69,934 ----------- --------------- -------------- --------- Gross profit 96,409 - - 96,409 Research and development expenses 28,274 581 - 28,855 Selling, general and administrative expenses 45,552 438 315 46,305 Amortization of intangible assets - 13,245 13,245 ----------- --------------- -------------- --------- Operating income 22,583 (1,019) (13,560) 8,004 Income from settlement of lawsuit 5,000 5,000 Other income (expense), net 3,909 - (30) 3,879 ----------- --------------- -------------- --------- Income before income taxes 31,492 (1,019) (13,590) 16,883 Provision for income taxes 8,285 - (4,335) 3,950 ----------- --------------- -------------- --------- Net income $ 23,207 $ (1,019) $ (9,255) $ 12,933 =========== =============== ============== ========= Earnings per share: Basic $ 0.47 $ 0.26 Diluted $ 0.46 $ 0.25 Weighted average shares and common equivalents outstanding: Basic 49,859 - 49,859 Diluted 50,870 (51) 50,819 (a) Stock Compensation relates to expensing of stock options, restricted stock units and performance shares and amortization of deferred compensation (from the capitalization of the value of stock options assumed in acquisitions). Avocent adopted SFAS 123R effective January 1, 2006 and began recording expense related to outstanding unvested stock options on that date as well as on subsequent equity compensation grants. (b) Adjustments relate to acquired in-process research and development expense from the Cyclades acquisition and intangibles recorded as the result of acquisitions. The calculation of weighted average shares and common equivalents outstanding differs due to excluding the average unamortized deferred compensation expense in calculating the operational diluted shares outstanding in 2005. AVOCENT CORPORATION Condensed Consolidated Balance Sheets (Unaudited, in thousands) June 30, December 31, 2006 2005 ----------- ----------- Cash, cash equivalents and short-term investments $ 163,454 $ 293,903 Accounts receivable, net 78,399 68,712 Inventories, net 31,849 21,178 Other current assets 10,902 10,524 Deferred income tax 6,532 4,054 ----------- ----------- Total current assets 291,136 398,371 Investments 30,335 51,939 Property and equipment, net 37,954 36,801 Goodwill 332,946 269,992 Other intangible assets, net 53,761 15,763 Other assets 13,030 885 ----------- ----------- Total assets $ 759,162 $ 773,751 =========== =========== Accounts payable and other accrued expenses $ 32,269 $ 23,569 Income tax payable 10,188 11,270 Other current liabilities 27,779 18,908 ----------- ----------- Total current liabilities 70,236 53,747 Line of credit 12,005 - Other non-current liabilities 28,933 4,682 ----------- ----------- Total liabilities 111,174 58,429 Total stockholders' equity 647,988 715,322 ----------- ----------- Total liabilities and stockholders' equity $ 759,162 $ 773,751 =========== =========== AVOCENT CORPORATION Additional Financial Information (Unaudited, in thousands) Quarter Ended Six Months Ended Revenue by Product Line June 30, July 1, June 30, July 1, 2006 2005 2006 2005 -------- ------- -------- -------- KVM $ 83,806 $75,486 $161,797 $141,144 Serial Management 13,817 732 14,810 1,857 Other 20,382 13,320 35,910 23,342 -------- ------- -------- -------- Total $118,005 $89,538 $212,517 $166,343 ======== ======= ======== ======== Quarter Ended Six Months Ended Revenue by Distribution Channel June 30, July 1, June 30, July 1, 2006 2005 2006 2005 -------- ------- -------- -------- Branded $ 70,642 $45,796 $118,597 $ 82,523 OEM 47,363 43,742 93,920 83,820 -------- ------- -------- -------- Total $118,005 $89,538 $212,517 $166,343 ======== ======= ======== ======== Quarter Ended Six Months Ended Revenue by Division June 30, July 1, June 30, July 1, 2006 2005 2006 2005 -------- ------- -------- -------- Management Systems $102,995 $79,804 $187,360 $149,644 Embedded Software and Solutions 8,828 4,928 14,961 8,708 Other business units 5,251 3,775 8,272 6,960 Corporate and unallocated 931 1,031 1,924 1,031 -------- ------- -------- -------- Total $118,005 $89,538 $212,517 $166,343 ======== ======= ======== ======== Quarter Ended Six Months Ended Operating Profit by Division June 30, July 1, June 30, July 1, 2006 2005 2006 2005 -------- ------- -------- -------- Management Systems $ 26,920 $21,181 $ 51,636 $ 37,104 Embedded Software and Solutions 3,090 484 4,493 (95) Other business units (3,019) (3,858) (6,779) (8,973) Corporate and unallocated (4,737) (3,237) (7,578) (6,472) -------- ------- -------- -------- Total $ 22,254 $14,570 $ 41,772 $ 21,564 ======== ======= ======== ======== Quarter Ended Six Months Ended Cash Flow Highlights June 30, July 1, June 30, July 1, 2006 2005 2006 2005 -------- ------- -------- -------- Cash provided by operations $ 13,527 $21,153 $ 30,091 $ 31,307 Depreciation expense 2,200 1,702 3,974 3,278 Capital expenditures 1,468 1,595 3,157 2,603 Purchase of treasury shares 95,303 28,408 122,255 50,271 CONTACT: Avocent Corporation, Huntsville Edward H. Blankenship, 256-217-1301 EX-99.20 3 a5191920ex99_20.txt AVOCENT EXHIBIT 99.20 Exhibit 99.20 AVOCENT CORPORATION COMMENTS BY MANAGEMENT ON FINANCIAL RESULTS FOR THE QUARTER ENDED JUNE 30, 2006 AND OTHER MATTERS Concurrently with the filing of this information, Avocent Corporation has issued a press release containing financial information for the quarter ended June 30, 2006. The following commentary should be read in conjunction with that press release (and the financial information attached to it). About the Quarter We were pleased with our results for the quarter. Revenue of $118 million was within our guidance range and represents an increase of 31.8% from the second quarter of 2005 and an increase of 25.7% from the first quarter of this year. The Management Systems Division recorded revenue of $103 million, up 29.1% from the second quarter of last year and up 22.1% from the first quarter of this year. For the second quarter, revenue from the sale of KVM products was approximately $84 million, while revenue from serial products was approximately $14 million. Integration efforts with respect to the Cyclades acquisition went well. As we previously announced, our engineers were able to accomplish the first integration of the primary Cyclades products into our DSView Suite at the beginning of the quarter, and this aided our sales efforts. We also were able to move quickly on the integration of the two sales forces with people trained and territories realigned for most of the quarter. We quickly identified areas of workforce redundancy as a result of the acquisition and notified all the affected employees within 30 days of the closing regarding our plans for their position. We felt informing employees of their status as soon as possible was important out of respect for the people whose jobs were eliminated and to focus the attention of those remaining with us on the task of integration. Just as important, we made good progress with the integration of the external parts of our sales organization (systems integrators, VARs, resellers, etc.) during the quarter. Our operations group made significant progress in transferring the Cyclades product lines. Completion of the transfer of the Cyclades products to the Avocent contract manufacturing network remains on schedule to be completed by the end of the year. We also continue on schedule with the integration of the finance, administrative and human resources functions from Cyclades. We expect all of those areas to be fully integrated by the end of the third quarter. Other divisions met or exceeded expectations during the quarter. AESS exceeded its revenue target and continues to be profitable. Our three other, smaller divisions 1 improved their revenue performance over the first quarter although we need to make clear that we continue to consider their efforts "entrepreneurial" in nature and do not expect profits from them at this time. The quarter was characterized by more than normal product shortage issues, primarily related to the effects of RoHS and related issues. Gross Margin Total gross profit was $71.6 million for the quarter. Our gross margin, at 60.6% for the second quarter, was up 1.3 percentage points compared to 59.3% for the first quarter of 2006, and was up 1.6 percentage points when compared to 59.0% for Q2 2005. Our gross margin continues to be positively affected by higher digital product sales and increased revenue from our Embedded Software and Solutions Division. In addition, Cyclades products carry higher gross margins since they are concentrated in branded markets. We continue to experience good results from our efforts to engineer additional value into our products and our operations group does an excellent job of controlling our manufacturing costs. Our sales of new products which were introduced or significantly refreshed during the past 12 months contributed approximately $30 million to revenue in the quarter at a combined gross margin significantly higher than our average gross margin. Operating Expenses R&D costs were $13.6 million and represented 11.5% of sales. Sequentially, R&D costs increased $650,000 as result of a full quarter's Cyclades expense, which was somewhat offset by the savings from the R&D site closings and headcount reductions completed last year. Compared to Q2 of 2005, R&D expenses decreased $538,000, primarily due to the reduced headcount and site closings. Selling, General and Administrative expenses were $30.8 million, or 26.1% of sales, and increased by $8.0 million from the first quarter of 2006. As expected, we experienced higher costs as a result of a full quarter of Cyclades selling, general and administrative expenses and higher legal fees associated with the protection of our intellectual property rights, particularly as we approach the trial in the ClearCube case. We also had increased advertising and promotion costs in Q2 to promote our newer products and to promote the addition of Cyclades products. We expensed almost $2.3 million in the second quarter of 2006 for integration costs and severance charges related to the acquisition of Cyclades. 2 Other Income Statement Items Our operating profit increased $9.9 million compared to the second quarter of 2005 and increased $4.6 million, compared to the first quarter of 2006, to $25.0 million resulting in an operating margin of 21.2% for the second quarter of 2006. Other income was $1.8 million for Q2, down $1.2 million over Q1, and down $175,000 over Q2 2005. The reduction in other income is related directly to our reduced amounts available for investment as we funded the acquisition of Cyclades at the end of the first quarter of 2006. Also, we used approximately $95.3 million of cash during the second quarter of 2006 for our share repurchase program. We recorded a one-time $5.0 million gain during the second quarter of 2005 as a result of a settled patent infringement lawsuit. Our effective tax rate for the quarter was 30.1% compared to 25.5% for Q1 2006 and 27.9% for Q2 2005. The mix of pretax profit among our U.S. and foreign companies affects the rate. Our pretax profits for the remainder of the year are expected to be more heavily weighted towards our domestic operations and will cause our effective tax rate for the year to increase. Income before the effects of intangible asset amortization, stock-based compensation and acquisition-related charges was $18.7 mi1lion or 15.8 % of sales. This compares to $17.4 million for the first quarter of 2006. Earnings per share, before the effects of intangibles amortization, stock-based compensation and acquisition-related charges amounted to 38 cents per diluted share for the quarter versus 31 cents for the same quarter in 2005. Our diluted shares decreased year over year by about 1.8 million to 48.7 million this quarter. During the quarter, we bought back 3,963,000 shares of Avocent stock. As of July 18, 2006, we have repurchased approximately 8,063,000 shares of the 10 million shares authorized for repurchase under our repurchase programs. Balance Sheet Items At the end of the second quarter we had approximately $194 million in cash and investments. Cash flow from operations was approximately $13.5 million for the quarter. Our accounts receivable balance increased, as did our DSO (to 60.5), due to an increased amount of sales occurring in the last month of the quarter and adding Cyclades customer balances which tend to have longer payment terms than legacy Avocent balances have. Our inventories increased and our inventory turns decreased (to 5.1) as we added more inventories in anticipation of the transition of Cyclades purchasing, warehousing and order fulfillment functions from Fremont to Huntsville in the United States and from 3 Germany to Shannon in Europe. In addition, planned product transitions in relation to the integration of the Avocent and Cyclades product roadmaps and introduction of RoHS-compliant products affected inventories. During the quarter we invested approximately $1.5 million for capital expenditures related to software acquisitions, implementing additional software modules for internal use, upgrading an engineering test facility and various other smaller projects. During the second quarter of 2006, we obtained a five year unsecured revolving bank line of credit facility. At June 30, 2006, the balance outstanding on this line was approximately $12 million. We expect to borrow $100 to $125 million at the date of closing the LANDesk acquisition. Additionally, we may borrow additional amounts under the line to repurchase Avocent shares to offset the new shares issued to the LANDesk shareholders. The line of credit currently bears interest at LIBOR plus 112.5 basis points. LANDesk No amounts relating to LANDesk results are included in the amounts reported by Avocent for the second quarter. The closing date had been anticipated to be late July. That date now looks more like the second half of August as we await the necessary governmental approvals. However, we are aware that there is significant interest in the results LANDesk posted for the second quarter, so that will be addressed in this section. LANDesk management has told us that, on an unaudited basis, LANDesk posted revenue of $25.6 million, reflecting growth of 25.5% over the second quarter of 2005 and 15.6% over the first quarter of 2006. LANDesk management has informed us that they believe they would have seen even more significant growth had they not experienced some hesitation in parts of their overseas sales channels due to uncertainties surrounding the pending acquisition. The slowness seemed to be a little more pronounced in European and Asian markets. LANDesk reported EBITDA of approximately $2.0 million for the second quarter of 2006, up from $1.2 million for the second quarter of 2005. LANDesk showed a growth rate in revenue of 25.4% from the first half of 2005. If that rate of growth were to continue for the full year, the earnout due the LANDesk shareholders would be approximately $36.2 million, bringing the total amount paid for LANDesk to approximately $452.2 million, composed of $200 million cash to be paid at closing, $200 million of Avocent common stock (of which $60 million will be held in escrow), approximately $16 million for the estimated intrinsic value of unvested options to be assumed by Avocent, and $36.2 million to be paid in cash for the earnout. Forward-Looking Statements This commentary contains statements that are forward-looking statements as defined within the Private Securities Litigation Reform Act of 1995. These include statements regarding the acquisition and the expected closing, earnout, and purchase price of 4 LANDesk, the integration, operation, and synergies expected from the Cyclades and LANDesk operations, products, and businesses, future cash needs and borrowings under our line of credit, the size and growth of the current and future markets our products and technologies. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made, including the risks associated with general economic conditions, risks attributable to future product demand, sales, and expenses, risks associated with reliance on a limited number of customers, component suppliers, and single source components, risks associated with acquisitions and acquisition integration, risks associated with product design efforts and the introduction of new products and technologies, and risks associated with obtaining and protecting intellectual property rights. Other factors that could cause operating and financial results to differ are described in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 6, 2006 and our quarterly report on Form 10-Q filed with the SEC on May 10, 2006. Other risks may be detailed from time to time in reports to be filed with the SEC. Avocent does not undertake any obligation to publicly update its forward-looking statements based on events or circumstances after the date hereof. 5 -----END PRIVACY-ENHANCED MESSAGE-----