** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

**(MarkOne)**

 

| **x**      | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                         |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                   |
| ** ** | **FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008.**                                                                                                                                                                                             |
| ** ** | ** **                                                                                                                                                                                                                                   |
| **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**

 

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**AVOCENTCORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **91-2032368**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **4991  Corporate Drive**                                       | ** ** | ** **                            |
| **Huntsville,  Alabama**                                        | ** ** | **35805**                             |
| (Address of Principal  Executive Offices)                       |       | (Zip Code)                            |

 

**256-430-4000**

(Registrant’stelephone number, including area code)

 

Securitiesregistered under Section 12(b) of the Exchange Act

**Common Stock, $0.001 par value per share**

 

Securitiesregistered under Section 12(g) of the Exchange Act: **None**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes  x    No  o

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes  o    No  x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes  x    No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and disclosure will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

 

Theaggregate market value of the voting and non-voting common stock held bynon-affiliates of the registrant as of the last business day of the registrant’smost recently completed second fiscal quarter was approximately $817,773,018.

 

Thenumber of shares outstanding of the registrant’s common stock as of February 23,2009 was 45,785,907.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Informationwith respect to items 10 to 14 of Part III of this Form 10-K may befound in the definitive proxy statement to be delivered to stockholders inconnection with the 2009 Annual Meeting of Stockholders. Such information isincorporated herein by reference.

 

 

 

**Item 1.  Business.**

 

*THIS ANNUAL REPORT CONTAINSFORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ALL STATEMENTSCONTAINED IN THIS ANNUAL REPORT THAT ARE NOT PURELY HISTORICAL FACTS AREFORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THESECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  THESEFORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS RELATING TOFUTURE EVENTS, FUTURE RESULTS, AND FUTURE ECONOMIC CONDITIONS IN GENERAL ANDSTATEMENTS ABOUT:*

 

·                                          *OUR FUTURE**STRATEGY, STRUCTURE,AND BUSINESS PROSPECTS;*

 

·                                          *PLANNED**ENGINEERING AND DESIGNACTIVITIES, DEVELOPMENT AND ENHANCEMENT OF CURRENT PRODUCTS, AND INTRODUCTIONOR ACQUISITION OF NEW PRODUCTS AND TECHNOLOGIES;*

 

·                                          *THE SIZE, GROWTH, ANDLEADERSHIP OF THE POTENTIAL MARKETS FOR OUR PRODUCTS AND TECHNOLOGIES;*

 

·                                          *THE ADEQUACY AND EXPANSION OF OURRELATIONSHIPS WITH CURRENT, AND THE**DEVELOPMENT OF NEW, OEM,DISTRIBUTOR, RESELLER, AND SUPPLIER RELATIONSHIPS;*

 

·                                          *OUR FUTURE**SALES, EARNINGS,INCOME, EXPENSES, OPERATING RESULTS, TAX RATES, OPERATING AND GROSS PROFIT ANDMARGINS, INVENTORY LEVELS AND VALUATIONS, RECEIVABLES, RESERVES, AND INVESTMENTINCOME;*

 

·                                          *OUR FUTURE LIQUIDITY,THE IMPACT OF CURRENCY RATES, AND OUR PLANS REGARDING EQUITY-BASEDCOMPENSATION, CAPITAL RESOURCE NEEDS, SHARE REPURCHASES, BORROWINGS, ANDREPAYMENTS;*

 

·                                          *OUR CUSTOMERS,SEASONALITY, AND COMPETITIVE ENVIRONMENT;*

 

·                                             *OUR ABILITY TO OBTAINAND PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS;*

 

·                                             *ANTICIPATED EXPANSIONOF INTERNATIONAL SALES AND OPERATIONS; AND*

 

·                                          *POTENTIAL**ACQUISITIONS,INTEGRATION COSTS, IMPAIRMENT CHARGE, AND TRANSACTION COSTS AND ADJUSTMENTS.*

 

*ALL OF THESE FORWARD-LOOKINGSTATEMENTS ARE BASED ON INFORMATION, EXPECTATIONS, ESTIMATES, FORECASTS, ANDPROJECTIONS AVAILABLE TO US ON THE DATE OF THIS ANNUAL REPORT AND THE BELIEFSAND ASSUMPTIONS OF OUR MANAGEMENT.  WORDSSUCH AS “EXPECTS,” “ANTICIPATES,” “TARGETS,” “GOALS,” “PROJECTS,” “INTENDS,” “PLANS,”“BELIEVES,” “SEEKS,” “ESTIMATES,” “CONTINUES,” “MAY,” AND VARIATIONS OF THESEWORDS, AS WELL AS SIMILAR EXPRESSIONS, ARE INTENDED TO IDENTIFY SUCHFORWARD-LOOKING STATEMENTS.  IN ADDITION,ANY STATEMENTS THAT REFER TO PROJECTIONS OF OUR FUTURE FINANCIAL PERFORMANCE,OUR ANTICIPATED GROWTH, TRENDS IN OUR BUSINESSES, AND OTHER CHARACTERIZATIONSOF FUTURE EVENTS OR CIRCUMSTANCES ARE FORWARD-LOOKING STATEMENTS. OUR ACTUALRESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS ANNUALREPORT.  THE FORWARD-LOOKING STATEMENTSCONTAINED IN THIS ANNUAL REPORT, AND OTHER WRITTEN AND ORAL FORWARD-LOOKINGSTATEMENTS MADE BY US FROM TIME TO TIME, ARE SUBJECT TO CERTAIN RISKS,UNCERTAINTIES, AND ASSUMPTIONS THAT COULD CAUSE ACTUAL RESULTS TO DIFFERMATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS.  FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCEINCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN ITEM 1A “RISK FACTORS.”  WE UNDERTAKE NO OBLIGATION TO REVISE ORUPDATE ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON.*

 

 

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**Overview**

 

AvocentCorporation designs, manufactures, licenses, and sells software and hardwareproducts and technologies that provide connectivity and centralized managementof information technology (IT) infrastructure. We (meaning Avocent and its wholly-owned subsidiaries) provide connectivity and systems management,endpoint security, and service management products and technologies, designedto increase the efficiency of IT personnel by centralizing control of servers,desktop computers, serial devices, wireless devices, mobile devices, networkappliances, and process management. Server manufacturers resell private-labeled Avocent KVM (keyboard,video, and mouse) switches, LCD trays, and embedded software and hardwaretechnology in their systems, and companies large and small depend on oursoftware and hardware products and technologies for managing their growing ITinfrastructure.

 

Our technologicalinnovations include Internet protocol (IP) based switching, centralizedmanagement, and intuitive software interfaces. With more than two decades of experience, we have grown through productinnovations, global expansion, and strategic acquisitions.

 

We market our productsaround the world to a diversified group of original equipment manufacturers(OEMs), dealers, distributors, resellers, and end users, primarily through oursales and customer support staff, advertisements in trade publications, on-linesponsorships, and participation in major industry trade shows.  A substantial portion of our sales is tomajor server OEMs that purchase our switching systems on a private-labelor branded basis.

 

**Industry Background**

 

Information technology iscritical to most business operations as computers perform multiple and diversefunctions throughout many different types of organizations.  Many corporations have decentralizedcomputing power while sharing technology resources and providing broad accessto enterprise data.  This has resulted inthe widespread adoption of distributed network computing environments using anetwork-based architecture of interconnected computers that span from the datacenter to the corporate office. Businesses are increasingly faced with a growing number ofchallenges.  These challenges include:

 

*DataCenter Growth. *The typical data center installationconsists of a local area network (LAN), with a large number of computersoperating as servers dedicated to performing specific functions for the manyclient computers connected to the LAN and, in many cases, a wide-area network(WAN).  With the shift of softwareapplications to a web services model, the demand for servers and storage isgrowing.  Users are accessing more dataand resources using intranets and the Internet. This growth causes a proliferation of physical and virtual servers andincreases the administration, environmental, power, security, and spacechallenges of managing data centers containing growing networks of servers,consoles, peripherals, and cables, and other network devices.

 

*IncreasinglyMobile Workforce. *As the workforce continues to become moremobile, handheld devices and laptop computers are increasingly used outside ofthe corporate LAN.  This proliferation ofnetworked devices and the difficulty in controlling these devices outside ofthe corporate LAN pose many significant management and security challenges.

 

*HeterogeneousEnvironment. *Corporate IT departments may managehundreds or thousands of servers, clients, and other networked devices.  In managing these network devices, they mustidentify and access relevant devices, add or delete users, add, change, orupgrade applications, tune systems for better performance, and diagnose andcorrect network failures.  These networkdevices are generally purchased from multiple vendors and are designed tooperate as stand-alone systems, each with its own console.  IT professionals must therefore deal with alarge number of consoles and workflow processes, whether centrally located ordispersed throughout the organization, when performing administration andmanagement tasks.

 

*Always-OnInfrastructure. *Information technology resources arecritical to organizations.  Accordingly,constant availability is crucial to the operation of many businesses.  The time that an Internet service provider(ISP), an application service provider (ASP), a data center, a server farm, acorporate network, or a desktop computer, a laptop, or a mobile device is downor degraded can cause significant inconvenience, loss of productivity, andfinancial loss.  Quick and efficientdiagnosis and the correction of problems can be difficult, and the ability of afacilities manager or network administrator to quickly and efficiently diagnoseand correct the problem may be hampered by the inability to access the software.

 

*Virtualization*. Virtualization is the separation of thecomputer operating system and applications from the hardware - often supportingmultiple operating systems and applications on a single hardware platform.  As a relatively new technology, virtualizationoffers significant economic benefits to IT organizations in the form ofincreased scalability and asset utilization, but this emerging mix of virtualand physical servers and desktops adds a new layer of complexity to IT 

 

 

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management.  IT administrators need to manage and controlthese virtual machines in the same manner as physical machines, and ourmanagement software products address many of these needs. Our solutions offercombined access and control of both virtual and physical servers and desktopsthrough a secure platform while reducing the cost and complexity of managingthe IT infrastructure.

 

**Products and Technologies**

 

As of January 1,2009, we have three business units that provide the following software andhardware products and technologies.  Theproducts and technologies we provide solve many of the network administration,systems, security, device management, and storage problems faced by facilitiesmanagers, network administrators, and IT managers.

 

·                                          **The Management Systems business unit consists of our branded Avocentand OEM branded IT infrastructure management products, which include KVM, LCDconsole trays, serial console, power control, digital extension, managementappliances, management software, and our embedded manageability technologies,such as intelligent platform management infrastructure (IPMI) and embedded KVMsystems.**

 

This business unitfocuses on IT infrastructure management solutions and technologies for (i) datacenters, (ii) remote access and distributed branch office environments, (iii) mid-sizeserver rooms for the small and medium business market, and (iv)desktopswitching and universal serial bus (USB) hubs for simplified control ofdesktops, small offices, and home-based businesses. Many of our hardwareproducts contain software or firmware, and this business unit also provides thetechnology that links our embedded technologies and our DSView 3 managementsoftware.

 

The products andtechnologies offered by Management Systems include:

 

·                                          Our *DS Series*TMproducts, which allow users to access and control both physical and virtualservers from remote locations using an Internet or network connection withoutthe necessity of remote access hardware or software on the computers or serversbeing accessed.  The *DS Series *KVMproducts digitize keyboard, video, and mouse information and compress andtransport that information in packets over traditional network connectionsoptimizing performance for busy data centers. Our *DSR*® switching systems feature a digitalconsole connection that allows facilities managers and network administratorsaccess to servers utilizing standard networking infrastructure and our *KVM over IP*TM technology. Our *DS Series *appliances are managed with *DSView*® centralized managementsoftware,**providingaccess and control of servers and serial devices in the network operationscenter or from almost any location in the world using TCP/IP connectivity. IT administrators can securely manage all connected data center devicesand gain “point-and-click” access and control over these devices using abrowser interface.

 

·                                          Our *AutoView*®**switch family, which offers users a variety ofanalog and digital KVM switches.  OurAutoView switches provide small to medium size businesses with a 1U-highdesign, saving valuable rack space in the server room.  Our *AutoView switches*offer an on-screen display and a web-based interface, which means that noadditional software is required for remote server access.

 

·                                          Our *SwitchView*® switching products includes our*SwitchView**SC* family ofsecure switches, built for the secure environment and designed to restrict thetransfer of data between connected computers. Our compact, space-saving*SwitchView*desktop KVM switches support multiple computers and allow users to controlmultiple PCs and share access to a digital camera, CD-ROM, PDA, scanner,printer, speakers, and a microphone.

 

·                                          Our *AMX*TManalog matrix switching systems, which provide simpler access and easiermanageability of servers in multi-rack, multi-platform environments.  Our *AMX*switchesincrease the number of users with simultaneous access and offer efficientscalability with an architecture that makes it easy to add and supportadditional servers.

 

·                                          Our KVM extension product lines, including our CAT 5extension products, fiber optic and copper extension products, and wirelessextension products.  The *LongView*® extender allows users to extend a keyboard, monitor,mouse, speakers, microphone, and serial port up to 500 feet away from thecomputer or KVM switch with one CAT 5 UTP cable.

 

·                                          Our *ACS* appliances,which deliver secure, serial over IP access to console ports of command linedriven operating systems such as LINUX or UNIX servers and otherserially-managed devices such as power management systems, storage elements,firewalls, and network switches and routers. These serial appliances and attached devices can be centrally managedusing our *DSView 3*management software.

 

 

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·                                          Our Avocent console trays provide out-of-band accessto KVM switches for convenient access and control of servers and other devicesin the data rack.

 

·                                          Our *PM* series ofintelligent power control and distribution devices, which can monitor powerconsumption and provide control over a connected device’s AC power source.  These devices are critical in certainsituations when the connected devices require a full hardware level reset torestore operational service.  Our *PM* devices are connected to *DSR*or ACS appliances and can be managed by the user interface of these appliancesor centrally managed using our *DSView 3*management software.

 

·                                          Our embedded products, which are provided as hardware,software, firmware, or licensed technology. These products include IPMI firmware, SMASH and WS-Man interfaces, DASHfirmware, service process drivers, and development utilities.  Our remote presence products include KVM switchingand video compression technologies, virtual media firmware, and software forgraphical user interfaces (GUIs).  Ourembedded technologies are licensed to our OEM customers for inclusion in theirservers, desktops, notebooks, and other devices.  Our hardware products consist of remoteaccess, system management, and chassis management cards that are also sold toour OEMs for integration with their systems.

 

·                                          **The LANDesk business unit consists of our systems, security, andservice management software for desktops, servers, and mobile devices across anenterprise.**

 

This business unitdelivers systems, security, and service management software solutions that simplify howcorporate enterprises manage desktops, servers, mobile devices, and IT servicesand processes.  These LANDesk solutionsallow an IT staff to increase productivity and protect corporate assets from asingle, easy-to-use console while leveraging prior investments in database,application, and directory service technologies and across heterogeneous ITenvironments (Windows, Mac OS, UNIX, LINUX, handheld, and embedded deviceoperating systems).  LANDesk revenue andbookings are comprised of license-based revenue, primarily from the LANDeskManagement Suite product, and subscription-based revenue, primarily fromthe LANDesk Security Suite and LANDesk Patch Manager products and frommaintenance and support agreements related to LANDesk products.

 

The products andtechnologies offered by LANDesk include:

 

*SystemsManagement Software*

 

·                                          Our*LANDesk® Management Suite *(LDMS)software, which allows enterprise IT departments to easily and efficientlyautomate systems management tasks and see, manage, and update desktops, serversand mobile devices from a single console. LDMS provides intelligent and efficient distribution capabilities, suchas functional load balancing, fault tolerance, bandwidth minimizingtechnologies, and local access to packages previously delivered to a subnet, tominimize the impact to corporate systems. With just an Internet connection, corporate IT teams can identify andsecurely manage computer assets (including assets outside the firewall and atgeographically distributed sites), scan, define, track, and audit applications,and provide compliance and usage reports.

 

·                                          Our *LANDesk Server Manager*software, which provides enterprises with the tools to improve serverperformance, reliability, and availability through operating system (OS) andapplication provisioning, real-time hardware health monitoring, automatedpatching, imaging, and updating, historical data collection, predictive failureanalysis and prevention, and remote problem resolution, all through a singleconsole.

 

·                                          Our *LANDesk ApplicationVirtualization* software, which provides enterprises with thecapability to virtualize an application isolated from other applicationsrunning on the operating system.  Thisallows IT managers to run older applications on new operating systemplatforms.  The virtualized applicationcan be run on the local device or streamed from a remote server, and does notrequire local administration rights or a local agent to be present.

 

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·                                          Our *LANDesk Handheld andEmbedded Device Manager* software, which is designed and optimizedfor managing across the low-speed, intermittent connections characteristic ofhandheld, embedded, and wireless devices, and allows an IT staff the ability tosecure moving resources and the information on them, including the option toclear a device’s memory card, delete contacts, address book data, and e-mail,and perform a reset of the mobile device.

 

·                                          Our *LANDesk Asset LifecycleManager* software, which allows enterprises to track assets through asingle console and a structured asset repository that extends the management ofa customer’s hardware and software assets throughout an asset’s lifecycle to enablebetter planning decisions, informed business analysis, and improved businesscapacity.

 

·                                          Our *LANDesk Inventory Manager*software, which enables IT staff to discover networked computing devices,automatically maintain detailed hardware and software inventories, and gatherand track detailed hardware, software, and OS configuration data for licensecompliance, plan upgrades, identification of security issues, and determinationof purchase needs.

 

·                                          Our *LANDeskPower Manager*software delivers a simple-to-use, easy-to-deploysolution to quickly create sophisticated power management policies fornetworked PCs and to balance power savings and system availability.

 

*SecurityManagement Software*

 

·                                          Our *LANDesk Security Suite,*whichincludes software and subscription content that allows enterprises to easilyperform and automate patch, anti-spyware, and security threat management from asingle console with quarantine, antivirus enforcement, vulnerability detection,threat remediation, computer access restriction tools, and a variety ofreporting capabilities (including trend graphs, spyware reports, and anexecutive dashboard with a graphical view of critical enterprise concerns).

 

·                                          Our *LANDesk Patch Manager*software, which allows corporate IT departments to actively scan managedcomputers across heterogeneous IT environments to identify application andoperating system vulnerabilities and quickly download patches with e-mail orpager alerts when a vulnerability or a specific severity level is detected.

 

·                                          Our *LANDesk Antivirus*software, which provides enterprises with affordable, real-time virusprotection and root kit detection to user endpoints with little or no newinfrastructure.  *LANDeskAntivirus* can automatically encrypt and quarantine suspicious filesand known infections, and allows IT staffs to customize and control alerts,queries, and reports for full security.

 

·                                          Our *LANDesk Host-basedIntrusion Prevention (HIPs)* software, which provides enterprises theability to protect endpoint devices from zero-day attacks and other similarthreats. The LANDesk HIPs solution also monitors the behavior of applicationsand isolates machines on the network that are behaving erratically.

 

*ServiceManagement Software*

 

·                                          Our *LANDesk Process Manager,*whichintegrates, optimizes, and automates IT and business processes, workflow,change management, and configuration management, with a graphical processbuilder, full-featured auditing, customizable reporting capabilities, andsupport for third-party electronic forms.

 

·                                          Our *LANDesk Service Desk*software (including the products we acquired in our recent acquisition ofTouchpaper), which provides help desk and IT staff with an Internet-basedconsolidated service desk solution with process-driven incident management,role-based privilege sets, knowledge base, call logging, assignment, formdesign, and service level escalation for delivering support services.  *LANDesk Service Desk*includes an Internet-based interface that allows service providers and endusers or customers to easily and proactively report problems, log incidents,communicate and track service status, and research the intelligent knowledgebase for solutions to facilitate faster resolution.

 

 

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*ProfessionalServices*

 

·                  Our LANDesk professional services,training, which include maintenance, upgrade protection, and customer supportofferings to help customers realize the most value from their LANDesk softwareinvestment.  The LANDesk Professional Services team can drawfrom the experience, talents, and abilities of the people who developaward-winning LANDesk solutions, helping customers experience the bestimplementation possible.  In addition, customers can attend LANDesktraining courses or complete the Certified LANDesk Engineer or Administratorprograms.

 

·                                          **The Connectivity and Control business unit consists of our professionalaudio-visual products.**

 

This business unit offersmanaged audio visual (AV) infrastructure solutions for commercial digitalsignage, presentation, and rental and staging markets.  Our Emerge product family allows industryprofessionals to deliver innovative analog, IP-wired, and wireless solutionsfor AV extension, switching, distribution, and signal processingneeds.  Extension products simplifyconnectivity and control of displays, projectors, and AV source equipment.

 

The products andtechnologies offered by Connectivity and Control include:

 

·                                          Our *Emerge*TM familyof products, which provide both wired and wireless switching and extensionof video, audio, and control data for use in a range of markets.  Our *Emerge* familyof multipoint high-definition wired/wireless extenders (MPX) allows AV consultantsto design managed audio-video extension networks for commercial signage andpresentation markets.  Our *Emerge Wireless*extender is used in boardrooms, classrooms,and commercial digital signage applications, and our *Emerge MediaStreamer (EMS)* extenders offer CAT 5 wired video extension for usein similar markets.  Our digital *ECMS* products provide intra-building extension and switchingof digital media across IP networks.  OurEmerge family also incorporates a range of video processing products such asscalers and presentation switchers, which allow integrators to provide fullaudiovisual solutions when combined with our distribution and extensionproducts.

 

**Sales and Marketing**

 

We market, sell, andlicense our hardware and software products and services through our own salesforce and various distribution channels, including OEMs, system integrators,distributors, and reseller arrangements. We market our products primarily through advertisements in trade publications,online sponsorships, participation in major industry trade shows, promotionswith distributors and resellers, direct marketing, telemarketing, publicityprograms, and through our website.  Wealso devote a substantial portion of our marketing efforts to developing,monitoring, and enhancing our relationships with our network of OEMs,independent dealers, distributors, resellers, and end users.  Our sales personnel are supported by ourengineers and our customer service representatives who provide technicalsupport and advice to customers.  As of December 31,2008, we employed 851 people in sales, marketing, and customer support.  As of December 31, 2008, we were alsoworking with approximately 41 independent contractors on various sales andmarketing projects.

 

We currently sell orlicense various hardware and software products and technologies to APC, Dell,EMC, Hewlett-Packard, IBM, Intel, Lenovo, Fujitsu Components Limited, FujitsuSiemens, and other OEMs pursuant to private-label, branded, and other licensingarrangements.  These OEM customersintegrate and sell our products and technologies with or within their ownproducts, including networked servers and clients.  We devote significant sales, engineering,operations, and customer service resources to our OEM accounts.  We have significant experience in workingwith our OEMs and other system manufacturers, and we intend to use thatexperience to enter into new relationships with other computer manufacturers inthe United States, Europe, and Asia.  Webelieve that the architecture, quality, and reliability of our products andtechnologies, together with our commitment to customer service, are attractiveto computer manufacturers and software developers worldwide.

 

We have relationshipswith a variety of distributors and resellers, and systems integrators, for thedistribution and sale of Avocent, Cybex, Cyclades, Equinox, and LANDesk brandedsoftware and hardware products in the United States, and internationally.  We devote resources to educating ourdistributors and resellers about the benefits of our products and training themin the proper sales, marketing, installation and support of our products.  We will continue to devote additionalresources to increase these branded sales, and we will pursue additionalrelationships with distributors and resellers, both domestically andinternationally, who have the technical capability and market presence toassist end-user customers in developing network space management, access,control, systems management, and security products and technologies to meetcustomers’ particular needs.  Our futuresuccess will depend in part on our ability to attract, train, and motivateadditional distributors and resellers.

 

 

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We provide discounts,other special pricing arrangements, and certain return privileges to ourOEMs and our distributors and resellers. Our agreements with our distributors and resellers are generallynonexclusive and may be terminated on short notice by either party withoutcause.  Our OEMs, distributors andresellers are not within our control, are not obligated to purchase productsfrom us, and frequently offer products from several different manufacturers,including products that compete with our products.

 

International salesaccounted for approximately 48% of net sales in 2008, 44% of net sales in 2007,and 43% of net sales in 2006.  No foreigncountry accounted for more than 10% of 2008, 2007, or 2006 sales.  We are expanding our international salesefforts within Europe, Latin America, Asia, and the Pacific Rim through theutilization of our sales offices in Sydney, Australia; São Paulo, Brazil;Beijing, Guangzhou, and Shanghai, China; London, England; Paris, France;Munich, Germany; Rotterdam, Holland; Hong Kong; Shannon, Ireland; Tokyo, Japan;Mexico City, Mexico; Taipei, Taiwan; and Singapore.

 

**Customers**

 

Our customers include ourchannel partners, which is a diversified group of dealers, major distributors,resellers, and direct end users who purchase our branded products.  These customers represented 67% of net salesin 2008, 65% of net sales in 2007, and 60% of net sales in 2006.  We believe that our broad range of productssold at different price points offers us the opportunity to market our productsto customers of all sizes, in different industries, and with varying degrees oftechnical sophistication.

 

Sales to OEM customersrepresented 33% of net sales in 2008, 35% of net sales in 2007, and 40% of netsales in 2006. The declining trend in percentage of sales in recent years is duein part to the change in the mix of our business as a result of ouracquisitions.  While we have agreementswith many of our OEM customers, these agreements are generally cancellable atthe will of the OEM (generally subject to notice provisions), and none of ourOEM customers is obligated to purchase products from us except pursuant tobinding purchase orders or licensing agreements.  Consequently, any OEM customer could ceasedoing business with us at any time.  Although we are not substantiallydependent on any one OEM customer, the loss of, or material decline in ordersfrom, certain of our current OEM customers would have a material adverse effecton our business, financial condition, results of operations, and cash flow.

 

The following table identifies our customers thatexceeded 10% of our net sales for the years 2008, 2007, and 2006:

 

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

 

Sales to these customersare reported primarily through our Management Systems business unit, but alsothrough our LANDesk business unit.  Noother customer accounted for more than 10% of our net sales in 2008, 2007, or2006.

 

**Seasonality**

 

Our operating results areaffected by seasonal trends and by general conditions in the servermarket.  We have experienced, and expectto continue to experience, some degree of seasonality due to customer buying cycles.  We believe that the third and fourth quarterswill generally have higher net sales levels due to customer budgeting andprocurement cycles, which may depress net sales in other quarters.  Inaddition, we typically see a sequential decline in revenue from the fourthquarter of a year to the first quarter of the following year.  While it is difficult to predict revenue inany quarter, we expect that this pattern will continue in the future.

 

**Customer Service**

 

We emphasize customerservice by developing high quality products, encouraging customer feedbackthrough contact with our key customers, providing technical support andinformation on our website, and providing a customer hotline that offerstechnical support for the life of our hardware products.  We also offer annual software upgradeprotection and maintenance agreements for licensees of our softwareproducts.  We strive to respond quicklyto our customers’ requests for technical support and service, and ourengineering department often works with individual customers to troubleshootproblems and develop solutions.  We offerwarranties for parts and service on all of our hardware products, ranging fromone to three years (and, in the case of some of our Equinox branded products,five years).  We also offer a 30-daymoney-back

 

 

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guarantee for ourappliance products sold in North America. To date, we have not experienced any significant hardware productreturns.  For our software products, wegenerally provide a 90-day limited warranty on the media used to deliver thesoftware, which is not applicable to electronic downloads, and a 90-day limitedwarranty (except where a longer period is required by local law) that oursoftware products will function in accordance with the end user documentationprovided with the software product.  Wemay, as a result of competitive pressures or requirements in certaingeographies, change our warranty policies in the future to provide coveragethat is greater in scope and duration than the coverage we currentlyoffer.  If we were to increase ourwarranty coverage, our risk of warranty claims, and therefore our warrantyexpense and reserves, would likely increase.

 

**Development of New Products andTechnologies**

 

We believe that thetimely development of enhancements to our existing hardware and softwareproducts and technologies and of new products and technologies is essential tomaintaining and building on our competitive position.  The market for our products continues toexperience rapid technological advances, frequent new product introductions andenhancements, and significant price competition.  The introduction of products incorporatingsuperior or alternative technologies (such as the creation of virtual serversusing a combination of hardware and software, which is known asvirtualization), the creation or adoption of new technologies, the emergence ofnew industry standards, or changes in the market’s pricing structure couldrender our existing products and technologies, and the products andtechnologies we have in development, obsolete or unmarketable.

 

Our hardware productsgenerally combine components, such as printed circuit boards, semiconductors,memory, connectors, cable assemblies, power supplies, and enclosures, that aremanufactured by other companies and are generally available to our competitorsand potential competitors.  Our softwareproducts combine software and content from third parties, such as open sourcesoftware or technology, drivers, security, application virtualization, oranti-virus information, which may also be generally available to ourcompetitors and potential competitors.  Our future success will depend inlarge part upon continued innovative application of commercially available componentsand software or technologies, continued enhancements to our proprietaryhardware, software, firmware, and other technologies, the expansion andenhancement of our existing products and technologies, and the development andintroduction of new products and technologies that address changing industrytrends (including virtualization) and customer needs on a cost-effective andtimely basis.  By emphasizingcustomer-driven research and development, we have been able to developinnovative, practical, and marketable products that have had immediateapplication and acceptance.  Our failureto respond on a timely basis to technological changes or customer requirementscould have a material adverse effect on our business, financial condition,results of operations, and cash flow.  Inaddition, the acquisition of or departure from the market of one or more ofthese third party technology or component providers could have a materialadverse effect on our business, financial condition, products, results ofoperation and cash flow.

 

Due to our significantreliance on OEM relationships, some of our product development efforts arefocused on developing new hardware and software products or enhancements forOEM customers, which could delay or otherwise negatively affect our planneddelivery of non-OEM products.  At times,these new products or enhancements may not be available to, or readilymarketable to, other customers without significant modifications or delay.

 

Our engineering andproduct development efforts focus on anticipating the needs of our customers byproviding innovative, practical, and marketable products and technologies thathave immediate applications in their markets. By maintaining contact with customers throughout the installation andtechnical support process, beta-test programs, and customer advisory groups, weare better able to identify and test potential design modifications andimprovements as well as new applications and extensions for existing productsand technologies.  We expect this processwill enable us to develop new product categories and applications (includingnew uses for existing technology) to meet specific customer needs.  Many of our products and technologies aredesigned to accommodate future modifications and additional features, which webelieve facilitates the development and integration of future modifications andfeatures if we see a market need.

 

As of December 31,2008, we employed 750 people in our engineering departments.  In addition, we use independent contractorsfrom time to time.  As of December 31,2008, we were working with approximately 27 independent contractors on variousdevelopment projects.

 

A key component of ourengineering and product development strategy is the acquisition of newtechnologies and companies.  We intend tocontinue to evaluate opportunities to acquire technologies and companies, andit is likely that we will complete additional acquisitions in the future.  Acquiring new technologies and companies isinherently risky, especially if the technology or the products of the companyhave not had significant time in the market or exhibit uncertain commercialviability.  There can be no assurancethat these acquisitions will be successful, will result in the timelydevelopment or continuation of commercially viable products or technologiesthat achieve market acceptance, or will otherwise improve or benefit ourfinancial condition or operating results.

 

 

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The industry in which wecompete is subject to rapid technological developments, evolving standards,changes in customer requirements, and new product introductions andenhancements.  Our success depends inpart upon our ability to continue to enhance our existing products and todevelop and introduce new products that improve performance and reduce totalcost of ownership on a cost-effective and timely basis, and to meet thesechallenges, we expect to make substantial investments in product development in the future.  We also expect to continue to make acquisitionsand investments where appropriate to provide us with access to newtechnologies.  There can be no assurance,however, that our product development efforts will lead to commercially viableproducts or technologies, will be completed on a timely basis, or will includethe features required to achieve market acceptance.

 

**Manufacturing**

 

We do not manufacture anyof our hardware products in their entirety. Instead, we manage product planning, purchasing, and shipping, and weperform final assembly, quality assurance, and testing on some of our hardwareproducts while we outsource some or all of these functions on otherproducts.  In order to avoid the capitalinvestment required to establish and maintain in-house manufacturingcapabilities, we rely on subcontractors throughout the world for the assemblyof printed circuit board assemblies, subassemblies, chassis, and equipmentenclosures.  We believe that our chosensubcontractors can typically perform these functions at a lower cost than wecan, while maintaining our high standards for quality and delivery.  Outsourcing our manufacturing functionsallows us to concentrate our resources on research and development, productdesign, quality assurance, sales and marketing, and customer service.  We (or our subcontractors) subject our mostcritical components and products to automated testing, equipment burn-inprocedures, comprehensive quality audits, functional testing, and regulatoryscreening to assure quality and reliability. As of December 31, 2008, we employed 147 people in ourmanufacturing, supply chain management, and logistics department.

 

We currently rely onseveral third party manufacturers, including Elcoteq Network Corporation,Plexus Corp., Kontron AG, Likom Computer Products, and Sanmina-SCI forsubassembly of our hardware products. These outsourcing arrangements, and any future outsourcing arrangements,involve numerous risks, including reduced control over product quality,delivery schedules, manufacturing yields, and costs.  The acquisition or departure from the marketof one of these contract manufacturers could have a material adverse effect onour business, financial condition, products, results of operations, and cashflows.  In addition, while thesethird-party manufacturers may have certain warranty obligations, we remainprimarily responsible to our customers for warranty obligations.  We attempt to diversify our outsourcedmanufacturing operations and believe we have an adequate supply of alternativesubcontractors.

 

We generally purchaseindustry-standard parts and components, including power supplies,semiconductors, memory, cable assemblies, line filters, enclosures, and printedcircuit boards, for the assembly of our products from multiple vendors andsuppliers through a worldwide sourcing program. Custom molded cables and certain turn-key products procured from outsidesources have significant delivery times (generally 10 to 12 weeks), and failureto obtain adequate supplies could adversely affect our product deliveries.  We buy components under purchase orders andgenerally do not have long-term agreements with our suppliers.  Circuit board assemblies are currentlyobtained from a number of sources, including Elcoteq Network Corporation, PlexusCorp., Kontron AG, Likom Computer Products, and Sanmina-SCI.  We believe that there are adequatealternative sources for our product components. Any termination of, or significant disruption in, the business oraffairs of our suppliers or our third-party manufacturers or in our relationshipwith them may prevent us from filling customer orders in a timely manner sincewe generally do not maintain large inventories of our components.

 

In the past, we haveexperienced delays in the receipt of certain components, which have resulted indelays in related product deliveries.  Weattempt to manage these risks through developing alternative sources,committing internal resources to supply chain management, and maintainingquality relationships and close personal contact with each of our contract manufacturersand suppliers.  There can be noassurance, however, that delays in component and product deliveries will notoccur in the future, and the inability to obtain sufficient components or todevelop alternative sources, if and as required in the future, could result indelays or reductions in product shipments, which, in turn, could have amaterial adverse effect on our business, financial condition, results ofoperations, or cash flow.

 

**Competition**

 

The market for ourhardware and software products is highly fragmented, competitive, rapidlychanging, and we expect these market characteristics to increase in thefuture.  We compete with numerous vendorsin each of our product categories.  Inthe market for hardware switching systems, we compete with companies such asRaritan Computer, Rose Electronics, Minicom Advanced Systems, AtenInternational, Belkin, Digi International, and Lantronix, and in the market for

 

 

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our systems managementproducts we compete with companies such as Microsoft, Computer Associates, BMCSoftware, Novell, Tivoli, and Symantec. In addition, certain of our OEM customers, such as Dell,Hewlett-Packard, and IBM, offer technologies and products that are competitivewith our products, and we expect these technologies and products to remaincompetitive in the features they offer. Our products and technologies are also in competition with products andtechnologies offered by hardware manufacturers and network management companiessuch as AMI, Cisco, EMC, Intel, and Microsoft. Many of these competitors may have substantially greater financial,marketing, and technical resources than we have.

 

In the market for ourproducts, we compete primarily on the basis of technological capabilities,performance in relation to price, product features, quality, reliability,return on investment, development capabilities, product availability, andcustomer service and support.  Our futuresuccess will be highly dependent upon timely completion, introduction, anddistribution of new products, technologies, services, and features atcompetitive price and performance levels that address changing industry trendsand the evolving needs of our customers. We continually experience price competition and expect that pricingpressures could increase in the future. As we continue to grow, especially internationally, we expect that wewill encounter new competition in different geographic regions.

 

**Proprietary Technology**

 

Ourfuture success is dependent in part upon our ability to develop and protect ourintellectual property and our proprietary rights in our products andtechnologies.  We seek to protect ourintellectual property rights by invoking the benefits of the patent, trademark,copyright, trade secret, and unfair competition laws of the United States andcertain foreign countries, all of which provide only limited protection.  We regularly file applications for and obtainpatents, copyrights, and trademarks in the United States and in selectedforeign countries where we believe filing for such protection isappropriate.  We have been issued over 60U.S. patents and have over 55 U.S. patent applications pending.  We have various corresponding patentapplications pending under the provisions of the Patent Cooperation Treaty,which permits the filing of corresponding foreign patent applications innumerous foreign countries within a limited time period.  We also have other foreign patentapplications pending.  There can be noassurance that any additional patents will be issued from any of our pendingapplications, that any patents will be issued in any additional countries whereour products or technologies can be sold or licensed, or that any claimsallowed in our patents or in any pending patent applications will be ofsufficient scope or strength for, or provide any meaningful protection or anycommercial advantage to, us.  Moreover,our competitors or other holders of intellectual property rights may challengethe validity of, or be able to design around, these patents or any otherpatents that may be issued to us.  Thelaws of certain foreign countries in which our products are or may bedeveloped, manufactured, or sold (particularly, countries in Asia) may not protectour products or intellectual property rights to the same extent as do the lawsof the United States and thus increase the likelihood of piracy of our productsand technologies.

 

We have in the pastfiled, and we may in the future file, lawsuits against other companiesregarding the alleged infringement of our proprietary rights.  Patent litigation, and any other litigationrelating to our intellectual property to which we become a party, is expensiveand subject to numerous risks and uncertainties, and there can be no assurancethat we will be successful in any such litigation.  There can be no assurance that the steps wetake to protect our intellectual property rights will be adequate to preventmisappropriation of our technologies or that we can use our intellectualproperty rights to successfully prevent competitors from commercializingtechnologies that are substantially equivalent or superior to our products andtechnologies.  Additionally, current orfuture competitors could develop their own proprietary technologies or obtainpatents that may prevent us from developing or selling our products andtechnologies.

 

We also seek to maintainour trade secrets and confidential information by nondisclosure policies andthrough the use of appropriate confidentiality and nondisclosure agreements.

 

**Employees**

 

As of December 31,2008, we had 1,099 full-time employees working in the United States.  Of our domestic full-time employees, 391 werein marketing, sales, and customer support, 480 were in engineering, research,and development, 90 were in manufacturing and logistical operations, and 138were in administration.  As of December 31,2008, we had 872 full-time employees working at our facilities outside of theUnited States.  Of our internationalfull-time employees, 460 were in marketing, sales, and customer support, 270were in engineering, research, and development, 57 were in manufacturing andlogistical operations, and 85 were in administration.  Our employees in Brazil (approximately 17)and the LANDesk employees in France (approximately 32) are covered bycollective bargaining agreements.  Noother employees are covered by collective bargaining agreements relating totheir employment by us.  We believe thatwe have good relations with our employees.

 

 

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**Backlog**

 

Backlog consists ofpurchase orders with delivery dates scheduled within the next six months.  None of our customers is obligated topurchase products from us except pursuant to binding purchase orders or otherlegal agreements.  Because of the timingof orders and the possibility of customer changes to delivery schedules, ourbacklog as of any particular date is not representative of actual sales for anysucceeding period.  Moreover, with recentindustry-wide initiatives by OEMs, distributors, and resellers to reduceinventories and shorten lead times, we do not view backlog as an importantindicator of our future results, and we do not believe it is a meaningfulindicator of actual sales for any succeeding period.

 

**Additional Information**

 

Our corporate Internetaddress is *www.avocent.com*.  At this website, we make available free ofcharge our annual report on Form 10-K, our annual proxy statement, ourquarterly reports on Form 10-Q, any current reports on Form 8-K, andany amendments to these reports, as soon as reasonably practicable after weelectronically file them with, or furnish them to, the Securities and ExchangeCommission (SEC).  Also available at thiswebsite are our Code of Business Conduct and Ethics, our Corporate GovernanceGuidelines, our Whistleblower Policy, the Nominating and Governance Committee’sPolicies and Procedures for Director Candidates, and the Charters for ourAcquisition and Strategy Committee, Audit Committee, Compensation Committee,and Nominating and Governance Committee. If any amendment to our Code of Business Conduct and Ethics or anywaiver granted under it is applicable to our principal executive officer, ourprincipal financial officer, our principal accounting officer or controller (orany persons performing similar functions) and relates to the code of ethicsdefinition enumerated in the SEC’s regulations, we will disclose such amendmentor waiver at this website within five business days after the date of suchamendment or waiver.  The informationfound on our website is not part of this Form 10-K.

 

ACS, Apex, AMX, AMWorks,Avocent, the Avocent logo, AutoView, Cybex, Cyclades, DSR, DSView, Emerge,Equinox, KVM over IP, LANDesk, the LANDesk logo, LongView, PM, The Power ofBeing There, SwitchView, Touchpaper, and the Touchpaper logo are trademarks orregistered trademarks owned by us. ** **This annual report also includestrademarks of other companies.

 

**Item 1A.Risk Factors.**

 

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

 

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

 

Our business andoperating results depend to a significant extent on economic conditions ingeneral and on IT spending and the server market in particular, and we expectour revenue growth rate to fluctuate in relation to economic conditions andIT-related spending trends.  Any adversechange in IT spending or in the server market due to adverse economicconditions, declining capital spending levels, or other factors could have amaterial adverse effect on our business, financial condition, and results ofoperations.  World-wide efforts to cut capital spending, general economicuncertainty, and a weakening global economy could have a material adverseeffect on us.  The current financialcrisis could have an impact on our business in a variety of ways, includinginsolvency of key suppliers resulting in product delays, inability of customersto obtain credit to finance purchases of our products, bank failure orgovernmental takeover of financial instituitions, and customer insolvencies.  In addition, we continue to see industry-wideinitiatives by OEMs and by distributors and resellers of our hardware productsto reduce their inventories and to shorten their lead times, thereby reducingearly commitments to firm orders by our major OEM and distributor and resellercustomers.  If we are unable toeffectively manage during the current challenging and changing economicconditions, our business, financial condition, and results of operations couldbe materially adversely affected.

 

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

 

A key component of ourengineering and product development strategy and our future growth is the investmentin or the acquisition of technologies and companies.  We intend to continue to execute our strategythrough the acquisition of technologies or companies or through investments incomplementary companies, products, personnel, or technologies, and it

 

 

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is likely we willcomplete such acquisitions or investments in the future.  These acquisitions and investments involvemany risks and factors outside our control, including the following:

 

·                                          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 existingagreements, 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.

 

 

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

 

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.

 

While our testing in 2008 indicated that there was nogoodwill impairment, we noted certain factors during the 2008 testing that willrequire monitoring and may require additional testing prior to our nextscheduled test in the fourth quarter of 2009.  With the broad-baseddecline in the stock market, our market capitalization has declined to lessthan the book value of our shareholders’ equity after year end and through thedate of this filing.  We believe the reduction in our marketcapitalization is a short term anomaly and is not indicative of our true valueas a whole nor the value of our individual reporting units. 

 

Although our testing indicated there was no impairmentfor our LANDesk reporting unit in the 2008 test, LANDesk carries a significantamount of goodwill and other intangible assets, including those added in therecent Touchpaper acquisition.  The value of these intangible assetsresulted in the carrying value of LANDesk being marginally below the indicatedfair value calculated through our impairment testing.

 

As aresult of these factors and due to the current recessionary environment and theresulting impact on our business, we are monitoring our stock price, controlpremium, and other conditions in relation to potential additional goodwillimpairment testing, and we intend to perform an additional test for goodwillimpairment in the first quarter of 2009.  There is a risk that there maybe an impairment in the future requiring an adjustment to the carrying value ofgoodwill and other intangible assets, and we may be required to take animpairment charge.  If so, any charge could have material adverse effecton our financial position and the results of our operations.

 

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

 

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

 

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

 

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

 

 

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Our current and potentialcompetitors may be able to respond more quickly to new or emerging technologiesor products and to changes in customer requirements or to devote greaterresources to the research, development, promotion, sale, and support of theirproducts and technologies than we do.  In addition, current and potentialcompetitors have established or may establish cooperative relationships amongthemselves or with third parties that expand or enhance the ability of theirproducts and technologies to address the needs of our current and prospectivecustomers.  Some of these competitors can also bundle hardware, software,and services together, and offer a more complete set of products and servicesthan we are able to offer. We may not be able to compete successfully againstcurrent and future competitors and competitive pressure may materially harm ourbusiness, financial condition, operating results, and cash flows, or impair ourability to achieve our desired results.

 

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

 

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

 

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

 

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

 

·                                          The ratio of OEM sales to branded sales, since 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.

 

 

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

 

** We have limited protection of proprietaryrights and face risks of third-party infringements.**

 

Our future successdepends in part upon our ability to develop and protect proprietary rights inour products and technologies.  We seek to protect our intellectualproperty rights by invoking the benefits of the patent, trademark, copyright,trade secret, and unfair competition laws of the United States and othercountries and the protections provided by confidentiality and nondisclosureagreements and other legal agreements.  These laws and practices, however,afford only limited protection.  There can be no assurance that the stepswe have taken to protect our intellectual property rights, or that the steps wetake in the future, will be adequate to prevent or detect misappropriation ofour intellectual property or technologies or that our competitors will not independentlydevelop proprietary or other technologies that are substantially equivalent orsuperior to our products or technologies. In addition, our proprietary information may be misused or improperlydisclosed by third parties entrusted with this information.  There also can be no assurance that ourproprietary rights will not be challenged, invalidated, or avoided.

 

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

 

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

 

The IT industry ischaracterized by vigorous pursuit and protection of intellectual propertyrights or positions, which has resulted in significant and often protracted andexpensive litigation.  We have in the past been, and we may from time totime in the future be, a party in litigation or other proceedings alleginginfringement of intellectual property rights owned by third parties.  Ifnecessary or desirable, we may seek licenses under such intellectual propertyrights.  However, licenses may not be offered on terms acceptable to us,or at all.  The failure to obtain a license from a third party fortechnology used by us

 

 

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could cause us to incursubstantial liabilities and to suspend or cease the manufacture of productsrequiring such technology.  In addition, current or future competitorscould obtain patents or other intellectual property rights that may prevent usfrom developing or selling our products. The result of these litigation mattersis difficult to predict and an unfavorable resolution could affect ouroperating results, business, or financial condition. The resolution oflitigation may have a negative impact on our operating results or financialcondition.

 

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

 

In fiscal July 2008, and again in January 2009,we announced a series of actions designed to enhance competitiveness, improveour efficiency, and reduce our cost structure. We initiated workforce reduction and consolidation actions designed tointensify our focus on our growth areas and improve our 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 net decrease of approximately 273positions or approximately 13% of our global workforce.  In fiscal July 2008, we also announcedthat, as part of our continued focus on core markets, we intend to sell theportion of our entrepreneurial Connectivity and Controls business unitdedicated to our Professional Audio Video and our Equinox serial products.  The restructuring activities could create uncertaintyand confusion among our employees, customers, and suppliers.  In addition, the restructuring activitiesmight not result in the cost savings or efficiencies we anticipate and may resultin temporary operational inefficiencies.  As a result, these restructuring activities could have a materialadverse effect on our business, financial condition, and results ofoperations.  The factors described above also could disrupt our product development,manufacturing, and sales, which would affect our financial results.

 

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

 

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

 

·                                          The volume, timing, pricing, and 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;

 

 

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·                                          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 resultswill continue to be affected by seasonal trends, by general conditions in theIT market, and by general economic conditions.  Depending on the severityand longevity of the current economic crisis, we may see fluctuations in ouroperating results.  In addition, we haveexperienced, and we expect to continue to experience, some degree ofseasonality due to customer buying cycles and delays in customer orders duringunfavorable economic periods.  We believe that the third and fourthquarters will generally have higher net sales levels due to customer budgetingand procurement cycles, which may depress net sales in other quarters.  Inaddition, European sales are often weaker during the summer months.  Inthe past, we have typically seen a sequential decline in revenue from thefourth quarter of a year to the first quarter of the following year, and whileit is difficult to predict revenue in any quarter, we expect that this patternwill continue in the future.  Many of the factors that create and affectseasonal trends are beyond our control.

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                                          Difficulties in replacing any lost 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;

 

 

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

 

In addition, distributorsand resellers of our hardware products often have rights of return, and in thefuture, these returns from our existing or any new distributors and resellersmay have a material adverse effect on our business, financial condition, andresults of operations.  Our agreements with our current distributors andresellers are generally nonexclusive and may be terminated on short notice byeither party without cause, and any new distributor or reseller agreements arelikely to contain similar provisions.  Distributors and resellers are notobligated to purchase products from us and frequently offer products 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.

 

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

 

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

 

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

 

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

 

Our OEM business issubject to many risks, including:

 

·                                          Contract termination or reduced 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.

 

 

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

 

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

 

We use multiple warehousesfor many of our OEM customers to fulfill their hardware orders under ajust-in-time inventory management system, which requires us to maintainsufficient inventory levels of our hardware products at each of thesewarehouses to satisfy anticipated demand from our OEM customers, and wegenerally recognize revenue only when these OEM customers take possession ofour hardware products.  We are required to plan production, ordercomponents, and undertake our manufacturing activities prior to the time that theseorders become firm or the products are accepted.  In addition, our OEMcustomers have requested, and are likely to continue to request from time totime, that we delay shipment dates or cancel orders for hardware products thatare subject to firm orders.  As a result, at any time we may be holding asignificant amount of OEM-branded hardware products in inventory, and our salesto OEMs for future quarters are difficult to predict.  The inabilityto accurately predict the timing and volume of hardware orders for our OEMcustomers during any given quarter could adversely affect operating results forthat quarter and, potentially, for future quarters.  If we underestimatesales, we may not be able to fill orders on a timely basis.  This could causecustomer dissatisfaction and loss of future business.  If we overestimatesales, we may experience increased costs from inventory storage, waste, andobsolescence.

 

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

 

The process of developingor acquiring new products, software, and technologies and enhancing existingproducts, software, and technologies is complex, costly, and uncertain, and anyfailure by us to anticipate customers’ changing needs and emergingtechnological trends accurately could significantly harm our market share andresults of operations.  Our products and technologies are characterized byrapid technological advances, frequent new product and technologicalintroductions and enhancements, and significant price competition.  If wedo not keep pace with these changes, we will lose customers, and our businesswill be adversely affected.  The introduction of products or technologiesincorporating superior alternatives such as switching software, the emergenceof new industry standards such as virtualization, or changes in pricingstructure could render our existing products and technologies and those we haveunder development obsolete or unmarketable.  New technologies offered byus or our competitors could compete with our existing products at a lowerprice, which could reduce our revenue.

 

Our future success willdepend in large part upon continued innovative application of commercially availablecomponents and software or technologies, continued enhancements to ourproprietary hardware, software, firmware, and other technologies, the expansionand enhancement of existing products and technologies, and our development andintroduction of new products and technologies that address changing industrytrends (including virtualization) and customer needs on a cost-effective andtimely basis.  If we fail to respond on a timely basis to technologicaldevelopments, changes in industry standards, customer requirements, competitiveproducts, product localization, or software innovations, we will losecustomers, and our business will be greatly harmed.  Similar results couldoccur if we experience significant delays in the development or introduction ofnew products or technologies.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

**Wemust meet the increased demands on customer service operations or customersatisfaction and sales could suffer.**

 

Continued growth of oursales is likely to be accompanied by increasing demands on our customer serviceoperations.  As a result of our commitment to a high level of customerservice, we will need to invest significant resources in the maintenance andimprovement of our customer service resources.  Any failure to maintainadequate customer service could cause customer dissatisfaction, result inreduced sales of products, reductions in the renewals of software maintenanceand support agreements for future periods, and, accordingly, materiallyadversely affect our business, financial condition, and results of operations.

 

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

 

We are working todevelop, integrate, and expand our international distribution and resellernetworks in an effort to increase international sales and availability of our products. We may not be successful in developing or expanding the internationaldistribution and reseller network or in marketing and selling products inforeign markets, particularly Asia.  If the revenue generated by ourinternational sales is not adequate to recover the expense of establishing,expanding, and maintaining an international distribution and reseller network,our business, financial condition, and results of operations 

 

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could be materiallyadversely affected.  If international sales become a more significantcomponent of net sales, our business could become more vulnerable to the risksinherent in doing business on an international level, including:

 

·                                          Difficultiesin managing foreign distributors and resellers;

 

·                                          Longerpayment cycles and problems in collecting accounts receivable;

 

·                                          Theeffects of seasonal customer demand;

 

·                                          Differinglicense terms and conditions to meet local requirements;

 

·                                          Changesin regulatory requirements;

 

·                                          Difficultiesin meeting the requirements of different international product regulations,including import and export requirements, tariffs, and other trade barriers;

 

·                                          Risksrelating to the protection of our intellectual property rights;

 

·                                          Theimpact on our marketing expenses and our research and development resources aswe localize our product offerings to meet local user requirements such aslanguage translations and hardware compatibility issues;

 

·                                          Fluctuationsin currency exchange rates; and

 

·                                          Potentiallyadverse tax consequences and political instability.

 

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

 

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

 

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

 

·                                          Ongoinginstability or changes in a country’s or region’s economic or politicalconditions, including inflation, recession, interest rate fluctuations, andactual or anticipated military or political conflicts, particularly in areaswhere we have offices or other facilities;

 

·                                          Currencyfluctuations, which could contribute to variations in sales of products andtechnologies and could also affect our reported results expressed in U.S.dollars;

 

·                                          Longeraccounts receivable cycles and financial instability among customers;

 

·                                          Tax or traderegulations, tariffs, duties, and procedures and actions affecting production,pricing, and marketing of or payments for products;

 

·                                          Local laborconditions and other regulations;

 

·                                          Differingtechnology standards or customer requirements;

 

·                                          Limited orunfavorable intellectual property protection in certain foreign countriesincluding the loss of proprietary information due to piracy ormisappropriation;

 

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·                                          Fluctuationsin freight costs and disruptions at important geographic points of exit andentry;

 

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

 

·                                          Medicalepidemics;

 

·                                          Seasonalreductions in business activity in certain foreign countries, such as thesummer months in Europe;

 

·                                          Compliancewith a wide variety of complex laws, treaties, and regulations that increasethe risks of doing business in certain foreign countries;

 

·                                          Restrictionsagainst repatriation of earnings from our international operations;

 

·                                          Difficultiesin staffing and managing international operations, including the difficulty inmanaging a geographically dispersed workforce;

 

·                                          Possiblenon-compliance with our Code of Conduct or other corporate policies due toinconsistent laws, interpretations, and/or application of corporate standardsin foreign countries;

 

·                                          Increasedfinancial accounting and reporting burdens and complexities; and

 

·                                          The need tolocalize our products.

 

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

 

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

 

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

 

Currently, a majority ofour international business is conducted in U.S. dollars.  As we expand ourinternational operations, however, it is likely that international businesswill increasingly be conducted in foreign currencies.  Fluctuations in thevalue of foreign currencies relative to the U.S. dollar have caused, and areexpected to increasingly cause, currency transaction gains and losses.  Inaddition, currency fluctuations could also affect our reported resultsexpressed in U.S. dollars.  While weattempt to hedge our foreign currency exposure, we cannot predict the effect ofexchange rate fluctuations upon future quarterly and annual operating results,and we may experience currency losses in the future.

 

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

 

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

 

·                                          Customers’budgetary constraints, fluctuations, or uncertainty, internal acceptancerequirements, and procurement procedures;

 

·                                          The actionsor announcements of our competitors and their products;

 

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·                                          Customerconcerns about the future or performance of our company; and

 

·                                          Changes ineconomic conditions generally, in the technology market specifically, and in acustomer’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 and conditionsof the legal agreements for these large opportunities are often based on ourcustomers’ purchase agreements and may contain terms that are generally lessfavorable to us than our standard terms and conditions. As a result, revenuerecognition may be delayed or otherwise negatively affected, and if we fail tomeet expectations, the price of our common stock could be negatively 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 unit basisfor such large deals can be lower than average. In addition, customers are generally provided annual maintenancediscounts for entering into long-term maintenance agreements.  Declines in our license bookings, increasesin long-term maintenance agreements, customers electing to migrate tocompetitive products or other alternatives to our products, and/or increaseddiscounting could lead to reduced software maintenance revenue and reducedgross margins.

 

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

 

Our software products aredesigned for use with specific third-party platforms, systems, andapplications.  We believe the breadth ofour integration with such platforms, systems, and applications is a significantcompetitive advantage.  Any significantchange in these third-party products could result in the loss ofinteroperability or compatibility with our products, making our products lessattractive, increasing our research and development costs in order to modifyour products, license new solutions, or develop new products, and potentiallyharming our future revenue.  Our failureto anticipate, manage and adapt to these risks could result in significantdelays in our product releases, changes in our product roadmaps, loss ofcurrent customers for whom the lost compatibility is an issue, and damage toour operating results.

 

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

 

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

 

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·                                          Ownersor licensees of third-party systems could adopt more restrictive policies orimpose unfavorable or unacceptable terms and conditions for access to theirproducts making it more difficult for us to make our products compatible withtheir products and resulting in higher research and development costs for usfor the enhancement or modification of our existing products and thedevelopment of new products;

 

·                                          Functionalityprovided by third-party code, content, or other intellectual property in ourproducts may become obsolete, defective, or incompatible with future versionsof our products, may not be adequately maintained or updated, and we may beunable to find viable alternatives or develop our own proprietary solution;

 

·                                          Quality,warranty, and support terms vary dramatically when licensing third-party code,content, or other intellectual property and we have limited ability to controlquality issues with third-party code, content, or other intellectual propertyand we must depend on our own research and development personnel to evaluateand select third-party code, content, or other intellectual property that webelieve is of the most value to our customers; and

 

·                                          Technicaldifficulties in integrating our products and third-party code, content, orother intellectual property to create a combined solution, and the risk thatcustomers will not perceive the need for such integrated solutions.

 

Any significanttermination of a third-party license, change in third-party license provisions,increase in the cost of such third-party code, content or other intellectualproperty, failure of a code, content or other intellectual property provider toremain competitive in functionality, or defect in or a quality issue coulddelay or interrupt our ability to develop and deliver software products tocustomers on a timely basis.  This coulddelay our revenue recognition and adversely affect our business, financialcondition, and results of operations and possibly expose us to claims underlicense agreements with our customers and possibly increased litigation feesand expenses.  Our failure to anticipate,manage, and adapt to these risks could result in significant delays in ourproducts releases, changes in our product roadmaps, and damage to our operatingresults.

 

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

 

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.

 

**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 research 

 

26

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and developmentcosts.  In addition, we may use free oropen 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 opensource software or technology becoming competitive with our proprietarytechnology, which could cause sales of our products to decline or force us toreduce the fees we charge for our products, which could have a material adverseimpact on our revenue and operating margins;

 

·                                          Requiringthat we make available the source code for any modifications or derivativeworks we make to or from the free or open source software, and that we licenseor contribute such modifications or derivative works under the terms of aparticular free or open source license or other license granting third partiescertain rights of further use;

 

·                                          Ourproprietary software could be combined with open source software in such a waythat we would be required to release the source code of our proprietary software;and

 

·                                          The lack ofany warranty, maintenance, or support for most open source software ortechnology.

 

We have establishedprocesses to help minimize these risks to the extent within our control,including a review process for screening requests from our developmentorganizations for the use of free or open source, but we cannot be sure thatall free or open source software, technology, or tools are submitted forapproval prior to use in our products or in the development of our products orthat all use is in compliance with our corporate policies. These risks, if noteliminated, could negatively affect our ability to sell and license ourproducts and could materially 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 his loss or the loss of services of otherkey personnel could have a material adverse effect on our business, financialcondition, and results of operations.  We have attempted to mitigate theserisks by offering key employees retention bonuses (payable only if theycontinue employment with us for specified periods) and equity awards that vestover time, but there is the risk that we could nevertheless lose keymanagement, sales, and technical employees.

 

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 could makeit more difficult or expensive for us to make equity awards to employees in thefuture.  As a result, we may incur increased compensation costs, changeour equity compensation strategy, or find it difficult to attract, retain, andmotivate employees, any of which could materially adversely affect ourbusiness.

 

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

 

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

 

27

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implement or maintaininternal systems that enable us to effectively manage our growing business andoperations worldwide, our financial results in any given period may beadversely affected and our business and financial condition could be materiallyharmed.

 

**Our credit facility couldadversely affect us and our operations.**

** **

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

 

·                                          Requiring usto dedicate a substantial portion of our cash flow from operations to paymentson our indebtedness, which would reduce the availability of our cash flow tofund internal growth through working capital and capital expenditures and forother general corporate purposes;

 

·              Increasing our vulnerability to economic downturns inour industry;

 

·                                          Increasingour vulnerability to interest rate increases to the extent any of our variablerate debt is not hedged;

 

·                                          Placing us ata competitive disadvantage compared to our competitors that have less debt inrelation to cash flow;

 

·                                          Limiting ourflexibility in planning for or reacting to changes in our business and ourindustry;

 

·                                          Limiting,among other things, our ability to borrow additional funds, refinance the lineof credit, or obtain other financing capacity; and

 

·                                          Subjecting usto a risk of noncompliance with financial and other restrictive covenants inour indebtedness.

 

**The line of credit and term loancontain affirmative and negative covenants, including limitations on ourability to (i) make distributions, investments, and other payments unlesswe satisfy certain financial tests or other criteria, (ii) incuradditional indebtedness, (iii) restructure our subsidiaries, and (iv) makeacquisitions and capital expenditures. All of these restrictions could affect our ability to operate ourbusiness and may limit our ability to take advantage of potential businessopportunities as they arise.  The failureto comply with these covenants could result in an event of default which, ifnot cured or waived, could have a material adverse effect on us.**

** **

Our ability to complywith these provisions of our line of credit and term loan may be affected bychanges in the economic or business conditions or other events beyond ourcontrol.  If we do not comply with thesecovenants and restrictions, we could be in default under our line of creditand/or the term loan, and our debt, together with accrued interest, could thenbe declared immediately due and payable. There can be no assurance that we will be able to obtain sufficientfunds to enable us to repay or refinance our debt obligations on commerciallyreasonable terms or at all.  We also faceinterest rate risk on our bank line of credit and term loan which currentlybears interest at a variable rate of LIBOR plus 150 basis points.  We have hedged this exposure to interest raterisk with interest rate swaps, which have a remaining notional amount of $170million, through Regions Bank and SunTrust Bank.

 

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

 

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

 

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

 

Section 404 of theSarbanes-Oxley Act of 2002 requires that we implement and maintain adequateinternal systems and effective internal controls over financial reporting andinformation systems.  The absence of suchcontrols could have a material adverse effect on our business, financialcondition, and results of operations.  Inaddition, correction of any “significant deficiencies” or “material weaknesses”(as defined under PCAOB guidelines) could require additional remedial measuresincluding hiring additional personnel, which could be costly andtime-consuming.  If a significantdeficiency or material weakness exists at any year-end (including a materialweakness identified prior to year-end for which there is an insufficient periodof time to evaluate and confirm the effectiveness of the corrections or relatednew procedures), our management and our auditors will be unable to reportfavorably as to the effectiveness of our control over financial reporting or informationsystems.  This could result in a loss ofinvestor confidence in the accuracy and completeness of our financial reportsand our management, which could result in a decline of our stock price, damageto 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 the marketprice of our common stock from reflecting the effects of actual or rumoredtakeover attempts and may prevent stockholders from reselling their shares ator above the price at which they purchased their shares.  These provisionsmay also prevent changes in management that stockholders may favor.  Ourcharter documents do not permit stockholders to act by written consent, limitthe ability of stockholders to call a stockholders meeting, and provide for aclassified Board of Directors, which means stockholders can only elect, orremove, a limited number of directors in any given year.  Furthermore, ourBoard of Directors has the authority to issue up to five million shares ofpreferred stock in one or more series.  The Board of Directors can fix theprice, rights, preferences, privileges, and restrictions of such preferredstock without any further vote or action by our stockholders.  Theissuance of shares of preferred stock may delay or prevent a change in controltransaction without further action by our stockholders.

 

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

 

**Ourstock price may be volatile.**

 

Our stock has experiencedsignificant volatility in price, in particular whenever there has been adifference between our actual financial results and the published expectationsof analysts.  We have also experiencedchanges in our stock price as a result of speculation in the press orinvestment community about our strategic position, financial position, resultsof operations, business, or significant transactions or acquisitions.  The stock market in general has experiencedprice and volume fluctuations that have negatively affected the market price ofmany publicly-held companies in ways seemingly unrelated to the actualoperating performance of these companies. For instance, in the past severalmonths stock prices in the U.S. have reacted dramatically in connection withrecent events in the U.S. and global economy. Our stock price has been similarly volatile, and at times, more volatilethat the market as a whole.  Thesefactors, as well as general economic and political conditions and theannouncement of proposed and completed acquisitions or other significanttransactions, or any difficulties associated with such transactions, by us orour current or potential competitors, may materially adversely affect themarket price of our common stock in the future.

 

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**Item 1B.Unresolved Staff Comments.**

 

None

 

**Item2.  Properties.**

 

Our world-wide headquarters, occupying approximately181,000 square feet and containing administrative, sales, marketing, researchand development, manufacturing, and distribution facilities, is located inHuntsville, Alabama, on a 35-acre tract of land owned by us in CummingsResearch Park.

 

Our LANDesk facility in Salt Lake City, Utah, consistsof approximately 84,000 square feet in an office building, and containsadministrative, sales, marketing, and research and development operations.  The current base rent under the lease isapproximately $1,062,000 per year, plus taxes, insurance, and maintenance ofapproximately $433,000 per year and is leased through July 2014.

 

Our primary European administrative, sales, marketing,research and development, manufacturing, and distribution operations arelocated in a 129,000 square foot building owned by us in the free trade zone inShannon, Ireland.

 

We also own a 45,000square foot building on 6.5 acres of land in Sunrise, Florida.  Our Sunrise facility contains sales, marketing,research and development operations.

 

We lease office space inFremont, California (administrative, sales, marketing, and research anddevelopment), Austin, Texas (sales, marketing, and technical), Taipei, Taiwan(administrative, sales, marketing, research and development and operations),Singapore (administrative, sales, marketing, research and development andoperations) and Beijing and Shanghai, China (sales, marketing, research anddevelopment and operations).

 

We also lease sales offices in various United Statesand international locations, none of which is material to our operations.

 

We believe that these facilities are sufficient tosupport our current operations.

 

**Item 3.  Legal Proceedings.**

** **

In January 2007,we filed a complaint for patent infringement in the United States DistrictCourt for the Western District of Washington against Aten Technology, Inc.,Aten International Co., Ltd, Belkin Corporation, Rose Electronics and itsgeneral partners, and Trippe Manufacturing Company.  The defendants filedcounterclaims alleging non-infringement, unenforceability, andinvalidity.  In May 2007, we entered into a Settlement and LicenseAgreement with Trippe Manufacturing, and dismissed Trippe from the lawsuit.  In October 2007, theDistrict Court stayed the action pending a re-examination of our patents by thePatent and Trademark Office.  That re-examination is currently underway.

 

In January 2008, wefiled a complaint for unauthorized use of patented inventions against theUnited States government in the United States Court of Federal Claims. The complaint alleges that the United States government accepted productsmanufactured and sold by Rose Electronics that are covered by patents held byus.  The United States has answered and Rose Electronics has intervened.

 

In March 2007,KBM Enterprises, formerly a contract manufacturer forAvocent, filed a complaint against Avocent in the Circuit Court of MadisonCounty, Alabama, seeking $9.5 million for costs allegedly incurred byKBM in its manufacturing efforts on behalf of Avocent.  We have filed ananswer and counterclaims against KBM and one of its principals, and discoveryis currently underway.

 

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

 

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.  Thecomplaint alleges infringement of a Gemini patent through the sale of a LANDeskproduct.  The complaint seeks injunctiverelief, damages, attorneys’ fees, and costs.  Avocent Corporation wasdismissed from the lawsuit in January 2008 though LANDesk Software, Inc.remains a party to the matter.  Theaction was stayed in April 2008 pending the Patent and Trademark Office’sreassessment of the patentability of the patent-in-suit.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders.**

 

None.

 

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**PART II**

 

**Item 5.  Market For Registrant’s Common Equity andRelated Stockholder Matters and Issuer Purchases of Equity Securities.**

 

**Price Range of Common Stock;Holders of Record**

 

Our common stock isquoted on the NASDAQ National Market System under the symbol “AVCT.” Thefollowing table shows the high and low sales prices of our common stock foreach quarterly period within the last two fiscal years as reported by theNASDAQ National Market System.

 
| ** **                             | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------|------------|----------|------------|---------|------------|
| Quarter ended  December 31, 2008  |       | $        | 21.49      |    | $          | 12.86 |   |
| Quarter ended  September 26, 2008 |       | $        | 25.20      |    | $          | 18.41 |   |
| Quarter ended  June 27, 2008      |       | $        | 21.08      |    | $          | 14.71 |   |
| Quarter ended  March 28, 2008     |       | $        | 23.13      |    | $          | 12.64 |   |
|                                   |       |     |       |    |       |
| Quarter ended  December 31, 2007  |       | $        | 35.68      |    | $          | 21.50 |   |
| Quarter ended  September 28, 2007 |       | $        | 31.82      |    | $          | 26.17 |   |
| Quarter ended  June 29, 2007      |       | $        | 29.96      |    | $          | 23.73 |   |
| Quarter ended  March 30, 2007     |       | $        | 35.64      |    | $          | 26.25 |   |

 

As of February 23,2009, Avocent had approximately 13,000 stockholders including approximately 375stockholders of record and 12,625 stockholders in nominee name.

 

**Stock Performance Graph**

 

The following graphcompares the cumulative total stockholder return data for our common stock tothe cumulative return of (i) the NASDAQ US Index and (ii) the NASDAQComputer Index for the period beginning January 1, 2004, and ending on December 31,2008.  The graph assumes that $100 wasinvested at a per share price of $36.52 on January 1, 2004, theclosing price on December 31, 2003, and the reinvestment of anydividends.  The stock price performanceon the following graph is not necessarily indicative of future stock priceperformance.

 

31

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| ** **                  | ** ** | **12/03** | ** ** | **12/04** | ** ** | **12/05** | ** ** | **12/06** | ** ** | **12/07** | ** ** | **12/08** | ** ** |
|-----------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
|                        |       |      |       |      |       |      |       |      |       |      |       |      |       |
| AVOCENT  CORPORATION        |       | 100.00    |       | 111.20    |       | 74.45     |       | 92.69     |       | 63.83     |       | 49.04     |       |
| NASDAQ STOCK  MARKET (U.S.) |       | 100.00    |       | 110.08    |       | 112.88    |       | 126.51    |       | 138.13    |       | 80.47     |       |
| NASDAQ COMPUTER  MFG’S |       | 100.00    |       | 104.95    |       | 98.58     |       | 122.27    |       | 151.90    |       | 73.66     |       |

 

The information containedabove under the caption “Stock Performance Graph” is being “furnished” to theSecurities and Exchange Commission and shall not be deemed to be “solicitingmaterial” or to be “filed” with the Securities and Exchange Commission, norshall such information be incorporated by reference into any future filingunder the Securities Act of 1933, as amended, or the Securities Exchange Act of1934, as amended, except to the extent that we specifically incorporate it byreference into such filing.

 

**Dividend Policy**

 

We have not declared norpaid any cash dividends in the past.  Forthe foreseeable future, we expect to retain earnings to finance the expansionand development of our business.  Thepayment of dividends is within the discretion of our Board of Directors andwill depend on, among other factors, our earnings, capital requirements, andoperating and financial condition.  Additionally, covenants related to our credit facility may restrict thepotential payment of dividends.

 

 

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**Recent Purchases of TreasuryStock**

 

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 December 31,2008, our Board has authorized a total of 19 million shares to be repurchased,including 4 million additional shares approved by our Board in January 2008.  The plan has no expiration date.  Details of purchases under the plan during2008 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,  2008 — January 25, 2008    |       | 1,587,575                                               |       | $                                                      | 15.59      |                                                                                       | 14,287,575 |                                                                 | 4,712,425  |   |
| January 26,  2008 — February 22, 2008  |       | 1,462,425                                               |       | $                                                      | 16.56      |                                                                                       | 15,750,000 |                                                                 | 3,250,000  |   |
| February 23,  2008 — March 28, 2008    |       | 862,300                                                 |       | $                                                      | 16.22      |                                                                                       | 16,612,300 |                                                                 | 2,387,700  |   |
| Quarter ended  March 28, 2008                    |       | 3,912,300                                               |       | $                                                      | 16.09      |                                                                                       |       |                                                                 |       |   |
|                                                  |       |                                                    |       |                                                   |       |                                                                                       |       |                                                                 |       |
| March 29,  2008 — April 25, 2008       |       | 87,700                                                  |       | $                                                      | 17.02      |                                                                                       | 16,700,000 |                                                                 | 2,300,000  |   |
| April 26,  2008 — May 23, 2008         |       | —                                                  |       | —                                                 |       | 16,700,000                                                                                 |       | 2,300,000                                                            |       |
| May 24,  2008 —June 27, 2008           |       | —                                                  |       | —                                                 |       | 16,700,000                                                                                 |       | 2,300,000                                                            |       |
| Quarter ended  June 27, 2008                     |       | 87,700                                                  |       | $                                                      | 17.02      |                                                                                       |       |                                                                 |       |   |
|                                                  |       |                                                    |       |                                                   |       |                                                                                       |       |                                                                 |       |
| Quarter ended  September 26, 2008                |       | —                                                  |       | $                                                      | —     |                                                                                       | 16,700,000 |                                                                 | 2,300,000  |   |
|                                                  |       |                                                    |       |                                                   |       |                                                                                       |       |                                                                 |       |
| September 27,  2008 — October 24, 2008 |       | —                                                  |       | $                                                      | —     |                                                                                       | 16,700,000 |                                                                 | 2,300,000  |   |
| October 25,  2008 — November 21, 2008  |       | 173,200                                                 |       | $                                                      | 14.60      |                                                                                       | 16,873,200 |                                                                 | 2,126,800  |   |
| November 22,  2008 — December 31, 2008 |       | 26,800                                                  |       | $                                                      | 16.01      |                                                                                       | 16,900,000 |                                                                 | 2,100,000  |   |
| Quarter ended  December 31, 2008                 |       | 200,000                                                 |       | $                                                      | 14.79      |                                                                                       |       |                                                                 |       |   |
| Year ended  December 31, 2008                    |       | 4,200,000                                               |       | $                                                      | 16.05      |                                                                                       |       |                                                                 |       |   |

 

Approximately198,000 shares were withheld as payment for employee payroll withholding taxesat the release of vested restricted stock units in 2008 (*see Note 12 to our consolidated financial statementscontained in Part I, Item 8 of this annual report on Form 10-K*).  The 198,000 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 6.  Selected Financial Data.**

(Amounts in thousands,except per share data and amounts in note (1) below.)

 
| ** **                              | ** ** | **2008** | ** ** | **2007** | ** ** | **2006**  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|-----------|------------|----------|------------|----------|------------|
| Net sales                               |       | $        | 657,134    |     | $          | 600,875   |       | $        | 519,195    |     | $          | 369,888 |   | $ | 365,255 |   |
| Net income (1)                          |       | $        | 25,473     |     | $          | 45,929    |       | $        | 45,532     |     | $          | 48,349 |   | $ | 18,040 |   |
| Basic net income  per share             |       | $        | 0.56       |     | $          | 0.91      |       | $        | 0.94       |     | $          | 0.98 |   | $ | 0.37 |   |
| Diluted net  income per share           |       | $        | 0.55       |     | $          | 0.90      |       | $        | 0.92       |     | $          | 0.96 |   | $ | 0.36 |   |
| Total assets                            |       | $        | 1,154,170  |     | $          | 1,078,433 |       | $        | 1,158,854  |     | $          | 773,751 |   | $ | 770,781 |   |
| Unsecured credit  facility, outstanding |       | $        | 170,000    |     | $          | 95,000    |       | $        | 150,000    |     | $          | — |   | $ | — |   |

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(1)                               Forthe periods presented, we recognized pre-tax charges for acquired in-processresearch and development expenses for the following acquisitions: $21.7 millionfor OSA Technologies, Inc. and $1.1 million for Sonic Mobility Inc. in2004; $2.1 million for Cyclades Corporation and $18.6 million for LANDesk GroupLimited in 2006; and  $700,000 forTouchpaper Group Limited in 2008 (*see Note 3 to theconsolidated financial statements*).

 

 

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**Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**.

 

**Overview**

 

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

 

Our technologicalinnovations include Internet Protocol (IP) based switching, centralizedmanagement, and intuitive software interfaces. With more than two decades of experience, we have grown through productinnovations, global expansion, and strategic acquisitions.  Formed as a result of the merger in 2000between Apex Inc. and Cybex Computer Products Corporation, we subsequentlyacquired Equinox Systems Inc. in 2001, 2C Computing, Inc. in 2002, Soronti, Inc.in 2003, Crystal Link Technologies, OSA Technologies, Inc., and SonicMobility, Inc. in 2004, Cyclades Corporation and LANDesk Group Limited in2006, and Touchpaper Group Limited and certain assets and liabilities of Ergo2000, Inc. in 2008.

 

Most of our revenue isderived from sales to a limited number of OEMs (who purchase our products on aprivate-label or branded basis for integration and sale with their ownproducts), sales through our reseller and distributor network, and sales to alimited number of direct customers. Sales to our OEM customers accounted for 33% of sales in 2008, 35% in2007, and 40% in 2006.  Sales to ourbranded customers accounted for 67% of sales in 2008, 65% in 2007, and 60% in2006.  We do not have contracts with manyof our branded customers, and in general, our OEM and branded businesscustomers are obligated to purchase products from us only pursuant to bindingpurchase orders.  Although we are notsubstantially dependent on any one OEM customer, the loss of, or materialdecline in orders from, these customers would have a material adverse effect onour business, financial condition, results of operations, and cash flows.  Our top five customers include both OEM andbranded distributor customers and accounted for 48% of sales in 2008, 52% in2007, and 56% in 2006.

 

We sell products toresellers, distributors, end-users, and OEMs in the United States and foreignmarkets.  Sales within the United Statesaccounted for approximately 52% of sales in 2008, 56% in 2007 and 57% in2006.  Sales outside of the United Statesaccounted for 48% of sales in 2008, 44% in 2007 and 43% in 2006.  Outside the United States, no other countryaccounted for more than 10% of 2008, 2007, or 2006 sales.

 

With continuedindustry-wide initiatives to reduce all channel inventories and to shorten leadtimes, trends with our major customers are, generally, to reduce the number ofweeks of forward-committed firm orders. This trend continues to affect our business with certain distributors,OEMs, and other server manufacturers, and we believe that it will continueto make our future sales more difficult to predict and inventory levels moredifficult to manage. We monitor inventories of our products owned by our majordistribution partners and we strive to maintain a level of inventory in our ownfacilities to service these customers, and monitor these levels to minimizepotential exposure of having excessive inventory on hand. A change in theamount of inventory held by a customer in any one period could adversely affectour revenues through reduced orders in that or a subsequent period which couldhave a material impact on our business, financial condition, results ofoperations, and cash flows.

 

We experience significantprice competition in the market for most of our products, and we expect thatpricing pressures will continue in the future. In addition, our business and operating results depend to a significantextent on economic conditions in general and on IT spending in particular, andwe expect our revenue growth rate to fluctuate in relation to economicconditions and IT related spending trends. Any adverse change in IT spending due to adverse economic conditions,declining capital spending levels, or other factors could have a materialadverse effect on our business, financial condition, and results ofoperations.  World-wide efforts to cut capital spending, general economicuncertainty, and a weakening global economy could have a material adverseeffect on us.  For example, sincemid-2007, global credit and other financial markets have suffered substantial stress,volatility, illiquidity, and disruption. This financial crisis and the currentglobal recession could have an impact on our business in a variety of ways,including insolvency of key suppliers resulting in product delays, inability ofcustomers to obtain credit to finance purchases of our products and customerinsolvencies.  As we evaluate anticipatedimpacts from the global economic uncertainties, we periodically adjust ourspending and related headcount to mitigate the overall impact on our financialresults of any anticipated negative changes. We continually monitor thefinancial health of our key suppliers and customers by constant reviews of ouraccounts receivable aging and open purchase orders to ensure our customers arepaying in a timely fashion and our suppliers are meeting our needs so that wecan service our customers.

 

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Many of our executiveofficers and directors are vested in significant amounts of options to purchaseshares of our common stock and restricted stock units (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 2008 our Board of Directors grantedtime-based, performance-based and market condition-based RSUs with two andthree year vesting periods.  During 2008 the Compensation Committee of ourBoard of Directors modified the market conditions of these awards to bettermeasure relative performance during the year.

 

During 2008, wehad the following business units:

 

·                  Management Systems, which includes our branded and OEM KVM, embeddedsoftware, serial console, power control, LCD tray, and management appliancebusinesses;

 

·                  LANDesk, which includes****systems, security,and service management solutions for desktops, servers, and mobile devicesacross the enterprise;and

 

·                  Connectivity and Control, which focuses on our serial, extension, pointof sale, and audio-visual products.

 

In the first quarter of2008, we dissolved our Desktop Solutions business unit and transferred some ofits personnel and a portion of its technology into Management Systems.  We believe our remaining business units allowus to focus on new technology and growth opportunities and to add product andshareholder value in the future.  Webelieve this structure enhances customer service, speeds delivery of productsto market and better focuses our research, development, and marketingresources.   We recently announced ourintention to sell or license the technology of the majority of our emergingConnectivity and Control Business Unit. We have divided this entrepreneurial business unit into its threeproduct lines; the Equinox branded serial business, the Broadcast business and thePro Audio Visual business.  We have foldedour Broadcast product line into Management Systems and intend to sell orlicense the technology of the remaining two parts of this business.  All revenues and costs associated with ourbroadcast business are included within Management Systems and historicalresults for both Management Systems and our other business units have beenadjusted to reflect this change.

 

**Our largest business unit on a revenuebasis, Management Systems, contributed 76% of our consolidated net revenue in2008, 78% in 2007, and 89% in 2006. LANDesk contributed 22% of our consolidated net revenue in 2008, 18% in2007 and 8% of net revenue to 2006 for the four months it was part ofAvocent.  The other business units andunallocated revenue comprised the remaining 2% of our consolidated net revenuesin 2008, 3% in 2007 and 4% in 2006.  SeeNote 14 in the notes to the c**onsolidated financialstatements containedin Item 8 of this document.

** **

**35**

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** **

**Results of Operations**

 

Our consolidated statementsof income, stockholders’ equity, and cash flows reflect the results of acquiredcompanies from the respective dates of acquisition.  The following table sets forth, for theperiods indicated, selected statement of income data expressed as a percentageof net sales:

 
| ** **                                            | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                             |       | 100.0                                       | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                         |       | 34.9                                        |       | 35.1 |   | 37.3 |   |
| Cost of sales —  amortization of intangibles     |       | 2.1                                         |       | 1.8 |   | 0.7 |   |
| Gross profit                                          |       | 63.0                                        |       | 63.1 |   | 62.0 |   |
| Operating  expenses:                                  |       |                                        |       |   |   |   |   |
| Research and  development expenses                    |       | 14.7                                        |       | 14.6 |   | 12.3 |   |
| Acquired  in-process research and development expense |       | 0.1                                         |       | — |   | 4.0 |   |
| Selling, general  and administrative expenses         |       | 35.7                                        |       | 34.7 |   | 28.6 |   |
| Restructuring,  integration and retirement expenses   |       | 2.4                                         |       | — |   | 0.8 |   |
| Amortization of  intangible assets                    |       | 5.0                                         |       | 5.4 |   | 4.4 |   |
| Total operating  expenses                             |       | 57.9                                        |       | 54.7 |   | 50.1 |   |
| Income from  operations                               |       | 5.1                                         |       | 8.4 |   | 11.9 |   |
|                                                  |       |                                        |       |   |   |   |   |
| Net investment  income                                |       | 0.3                                         |       | 0.6 |   | 1.5 |   |
| Interest expense                                      |       | (1.3                                        | )          | (1.3 | ) | (0.6 | ) |
| Other income  (expense), net                          |       | 0.3                                         |       | (0.1 | ) | (0.1 | ) |
| Income before  provision for income taxes             |       | 4.4                                         |       | 7.6 |   | 12.7 |   |
| Provision for  income taxes                           |       | 0.5                                         |       | — |   | 3.9 |   |
| Net income                                            |       | 3.9                                         | %          | 7.6 | % | 8.8 | % |

 

***YearsEnded December 31, 2008 and 2007 ($ Data in all tables presented in 000s)***

 

*Netsales.*

 

| ** **                         | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|
| ** **                         | ** ** | **2008**                          | ** ** | **% of  Sales** | ** ** | **2007** | ** ** | **% of  Sales** | ** ** |
| Net sales,  customer distribution: |       |                              |       |   | ** ** |   |   |   |   |
| Branded                            |       | $                                 | 442,951    |   | 67 | % | $ | 393,799 |   | 65 | % |
| OEM                                |       | 214,183                           |       | 33 | % | 207,076 |   | 35 | % |
|                               |       |                              |       |   |   |   |   |   |   |
|                               |       | $                                 | 657,134    |   | 100 | % | $ | 600,875 |   | 100 | % |

 

The 9% growth in our netsales in 2008 from 2007 was the result of increased branded sales across ourgeographic regions and international OEM sales. The two acquisitions we completed in the third quarter of 2008, Ergo andTouchpaper, contributed over $29 million in revenue during 2008.  The Ergo product line contributed $15.5million in 2008 while Touchpaper contributed $13.9 million in 2008.    Branded sales grew 12% in 2008 from 2007,primarily due to the contribution of Touchpaper revenue and an increase inrevenue from our secure switch products. Our OEM sales increased approximately 3% in 2008 from 2007 primarily dueto the contribution of the Ergo product revenue.  Our branded and OEM businesses grew in EMEAand Asia during 2008.  We attribute ourstrength in our foreign markets partly to the revenue from our recentacquisitions and to recent additions to our international sales force.

 

| ** **                                                         | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                         | ** ** | **2008**                          | ** ** | **% of  Sales** | ** ** | **2007** | ** ** | **% of  Sales** | ** ** |
| Business unit  net sales:                                          |       |                              |       |   |   |   |   |   |   |
| Management  Systems                                                |       | $                                 | 497,852    |   | 76 | % | $ | 470,719 |   | 78 | % |
| LANDesk                                                            |       | 144,192                           |       | 22 | % | 111,906 |   | 18 | % |
| Other business  units                                              |       | 12,304                            |       | 2 | % | 15,523 |   | 3 | % |
| Corporate and  unallocated                                         |       | 2,786                             |       | — |   | 4,601 |   | 1 | % |
| Amortization of  fair value adjustment to LANDesk deferred revenue |       | —                            |       | — |   | (1,874 | ) | — |   |
|                                                               |       |                              |       |   |   |   |   |   |   |
|                                                               |       | $                                 | 657,134    |   | 100 | % | $ | 600,875 |   | 100 | % |

 

Our Management Systemsbusiness unit includes our traditional KVM products, our serial products, ourLCD trays,  and our embedded software andsolutions products (see Note 14 in the notes to our consolidated financialstatements in Part I Item 8 of 

 

 

36

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this document).  Revenue from our Management Systems businessincreased 6% from 2007 to 2008, primarily as a result of the contribution fromour Ergo acquisition (included in “other” in the table below) and increases inthe sales of our embedded software and solutions.  Revenue by product line for ManagementSystems for the years ended December 31, 2008 and 2007 was as follows:

 

| ** **                       | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|
| ** **                       | ** ** | **2008**                          | ** ** | **2007** | ** ** |
| Management Systems  net revenue: |       |                              |       |   |   |
| KVM                              |       | $                                 | 355,944    |   | $ | 359,131 |   |
| Serial  management               |       | 51,269                            |       | 49,603 |   |
| Embedded  software and solutions |       | 35,162                            |       | 32,983 |   |
| Other                            |       | 55,477                            |       | 29,002 |   |
| Total MS net  revenue            |       | $                                 | 497,852    |   | $ | 470,719 |   |

 

LANDesk revenue iscomprised of license-based revenue, primarily from the LANDesk Management Suite (LDMS)product, and subscription-based revenue, primarily from the LANDesk Security Suite productsand from maintenance and support services related to LANDesk ManagementSuite.  LANDesk revenue also includesrevenue from our Touchpaper acquisition. The growth in subscription and maintenance revenue and the addition ofTouchpaper also results in an increase to deferred revenue recorded on thebalance sheet.  Deferred revenueincreased to $75.8 million at December 31, 2008 from $66.1 million at December 31,2007.  Revenue by product line forLANDesk for the years ended December 31, 2008 and 2007 was as follows:

 

| ** **                 | ** ** | **Years ended December 31,** | ** ** |
|----------------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | **2008**                          | ** ** | **2007** | ** ** |
| LANDesk net  revenue:      |       |                              |       |   |   |
|                       |       |                              |       |   |   |
| Licenses and royalties     |       | $                                 | 50,686     |   | $ | 42,514 |   |
| Maintenance and  services  |       | 65,215                            |       | 45,911 |   |
| Subscription  revenue      |       | 28,291                            |       | 23,481 |   |
| Total LANDesk  net revenue |       | $                                 | 144,192    |   | $ | 111,906 |   |

 

International sales grew18% in 2008 from 2007, while sales within the United States grew 2% in 2008from 2007.  As mentioned earlier, our OEMand branded business grew in EMEA and Asia, but only our branded business grewin North America.

 

| ** **                             | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|
| ** **                             | ** ** | **2008**                          | ** ** | **% of  Sales** | ** ** | **2007** | ** ** | **% of  Sales** | ** ** |
| Net sales,  geographical distribution: |       |                              |       |   |   |   |   |   |   |
| United States                          |       | $                                 | 340,838    |   | 52 | % | $ | 333,915 |   | 56 | % |
| International                          |       | 316,296                           |       | 48 | % | 266,960 |   | 44 | % |
|                                   |       |                              |       |   |   |   |   |   |   |
|                                   |       | $                                 | 657,134    |   | 100 | % | $ | 600,875 |   | 100 | % |

 

37

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*Grossprofit.*  Gross profit is affected by a variety of factors,including the ratio of sales among our distribution channels; 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 ouroutsourcing of manufacturing and assembly operations.

 

| ** **                                                         | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                         | ** ** | **2008**                          | ** ** | **Gross  Margin %** | ** ** | **2007** | ** ** | **Gross  Margin %** | ** ** |
| Management  Systems                                                |       | $                                 | 296,234    |   | 59.5 | % | $ | 283,981 |   | 60.3 | % |
| LANDesk                                                            |       | 124,296                           |       | 86.2 | % | 98,724 |   | 88.2 | % |
| Other business  units                                              |       | 4,576                             |       | 37.2 | % | 4,644 |   | 29.9 | % |
| Corporate and  unallocated                                         |       | 2,837                             |       |   |   | 4,530 |   |   |   |
| Intangible  amortization                                           |       | (14,054                           | )          |   |   | (10,985 | ) |   |   |
| Amortization of  fair value adjustment to LANDesk deferred revenue |       | —                            |       |   |   | (1,874 | ) |   |   |
| Gross profit  dollars and margin %                                 |       | $                                 | 413,889    |   | 63.0 | % | $ | 379,020 |   | 63.1 | % |

 

Gross profit increasedapproximately 9% from 2007 to 2008, while gross margin declined slightly from2007 to 2008.  The decline in grossmargin during 2008 resulted from a change in product mix as a result of theacquisitions within Management Systems and LANDesk and the price reductions oncertain older analog products (see Note 14 in the notes to our consolidatedfinancial statements in Part I Item 8 of this document).   Sales of certain secure switch products byManagement Systems also increased during 2008. These products carry lower margins than our other Management Systemsproducts; and the sales increase therefore had a direct impact on our marginsin 2008.  In addition, margins on theErgo products are much lower than margins on our legacy products.  Similarly, margins on the Touchpaper productline are lower than the legacy LANDesk product line due to Touchpaper’s highercomponent of professional services.  In2008, Ergo and Touchpaper products contributed $12.4 million to grossprofit.  As Touchpaper and Ergo becomefully integrated into Avocent, we expect margins on these acquired productlines to improve.  The increased grossprofit was partially offset by the additional costs included in cost of salesfrom amortization of other intangible assets recorded as a result of theTouchpaper acquisition related to developed technology and internally developedsoftware for resale.  We recorded $14.1million of amortization of intangibles in cost of goods sold in 2008 and $11.0million in 2007.  We recorded six monthsof intangible amortization in 2008 from Touchpaper, which was acquired in thethird quarter of 2008.

 

*Operatingexpenses.*

 

| ** **                                            | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                            | ** ** | **2008**                          | ** ** | **% of  Sales** | ** ** | **2007** | ** ** | **% of  Sales** | ** ** |
|                                                  |       |                              |       |   |   |   |   |   |   |
| Research and  development expense                     |       | $                                 | 96,723     |   | 14.7 | % | $ | 87,888 |   | 14.6 | % |
| Acquired  in-process research and development expense |       | 700                               |       | 0.1 | % | — |   | — |   |
| Selling,  general, and administrative expense         |       | 234,802                           |       | 35.7 | % | 208,783 |   | 34.7 | % |
| Restructuring,  integration and retirement expenses   |       | 15,757                            |       | 2.4 | % | — |   | — |   |
| Amortization of  intangible assets                    |       | 33,074                            |       | 5.0 | % | 32,162 |   | 5.4 | % |
|                                                  |       |                              |       |   |   |   |   |   |   |
| Total operating  expenses                             |       | $                                 | 381,056    |   | 57.9 | % | $ | 328,833 |   | 54.7 | % |

 

*Researchand development expenses.*  Research and developmentexpenses include compensation for engineers, support personnel, outsidecontracted services, and materials costs, all of which are expensed asincurred.  R&D expenses increased 10%in 2008 from 2007.  Costs related tosalaries and benefits, including costs for added headcount from theacquisitions of Touchpaper and Ergo, increased approximately $8.0 million in2008 compared to 2007.  We believe thatthe timely development of innovative products and enhancements to existingproducts is essential to maintaining our competitive position, and we willcontinue to make significant investments in research and development.  However, we will continue to evaluate andrebalance our R&D efforts to re-align our resources towards products webelieve to have higher growth opportunities.

 

 

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*Acquiredin-process research and development expense.*  Acquisitionrelated expenses for 2008 were comprised solely of the non-recurring write-offof $700,000 of in-process research and development expense related to theacquisition of Touchpaper.  There were nosuch charges during 2007.

 

*Selling,general and administrative expenses.*  Selling,general and administrative expenses include personnel, materials, services andother related costs for administration, finance, information systems, humanresources, sales and marketing and general management, rent, utilities, legaland accounting expenses, bad debts, advertising, promotional material, tradeshow expenses, and related travel costs. Selling, general and administrative expenses increased 12% in 2008 from2007. Our recent acquisitions, Ergo and Touchpaper, added over $8.3 million inSG&A costs during 2008 and were a significant component of the increasedcosts.  Our integration strategy for Ergoincluded headcount reductions and reduced facility costs, and we completed theintegration of Ergo into our operations during the fourth quarter of 2008.  For Touchpaper, our integration strategyincludes some headcount reductions and facility consolidations as well.  The increase in selling, general andadministrative expenses also resulted from increased sales commissionsresulting from increased sales for the period. Compared to 2007, salaries, commissions, bonuses and benefits, includingcosts for added headcount from the acquisitions, increased approximately $13.0million in 2008.  Stock compensation,discussed separately below, increased approximately $2.0 million in 2008.  Contracted services increased $1.8 million,primarily in relation to marketing programs to increase brand awareness andother marketing directives.  Legal feesincreased $1.4 million in 2008 from 2007 as we incurred fees in defense of ourintellectual property and to support other claims brought by and against us.

 

*Restructuring,integration and retirement expenses**. ***Restructuring, integration and retirement expenses in2008 include expenses related to severance charges incurred for certainworkforce reductions in association with the reduction in certain research anddevelopment investments, the integration of marketing functions, shifting ourAsian support operations from Shannon, Ireland to Singapore, the relocation ofcertain functions from our Redmond, Washington facility to Huntsville, Alabama,and the integration of our acquisitions into our operations. Restructuring,integration and retirement charges for 2008 also includes $2.2 million ofretirement costs for our former CEO, who left the company in March 2008.

 

*Amortizationof intangible assets.*  Amortization was $33.1 millionin 2008 and $32.2 million in 2007.  Theincrease in amortization for 2008 was due to the amortization of intangibleassets related to our acquisitions of Touchpaper and Ergo.

 

*StockCompensation. *We allocate stock-based compensationexpense based on the department in which an employee works.  Stock compensation expenses by incomestatement classification for 2008 and 2007 were as follows:

 

| ** **                                          | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                          | ** ** | **2008**                          | ** ** | **% of  Sales** | ** ** | **2007** | ** ** | **% of  Sales** | ** ** |
| Stock  compensation:                                |       |                              |       |   |   |   |   |   |   |
| Cost of sales                                       |       | $                                 | 1,218      |   |   |   | $ | 1,134 |   |   |   |
| Research and  development expense                   |       | 5,634                             |       |   |   | 5,825 |   |   |   |
| Selling, general  and administrative expense        |       | 14,661                            |       |   |   | 12,682 |   |   |   |
| Restructuring,  integration and retirement expenses |       | 3,209                             |       |   |   | — |   |   |   |
|                                                |       |                              |       |   |   |   |   |   |   |
|                                                |       | $                                 | 24,722     |   | 3.8 | % | $ | 19,641 |   | 3.3 | % |

 

Stock-basedcompensation increased 25% during 2008 compared to 2007. The increase isprimarily a result of charges associated with the accelerated vesting forcertain RSUs and other equity related charges associated with restructuringactions in 2008, listed separately in the table above.  Additionally, we recorded charges associatedwith the accelerated vesting for certain RSUs and other equity related chargesfor the retirement of our former CEO in the first quarter of 2008.

 

*Netinvestment income. *Net******investmentincome declined from $3.8 million in 2007 to $2.2 million in 2008.  This decline was primarily the result oflower interest rates during the year.

 

*Interestexpense. *Interest expense was $8.6 million in 2008 and $8.1million in 2007.  Interest expenseresults from borrowings under our $250 million unsecured line of creditobtained in the second quarter of 2006 and our $90 million term loan obtainedin the third quarter of 2008.  Interestexpense increased in 2008 compared to 2007 due to higher borrowings as weborrowed an additional $50 million to partially fund the acquisitions ofTouchpaper and Ergo in fiscal July 2008.

 

39

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*Otherincome (expense), net.*  Other income (expense), netimproved from an expense of $174,000 in 2007 to income of $2.0 million in 2008.  We recorded a gain of approximately $3.2million in the third quarter of 2008 from a foreign currency exchange gainrelated to the tax free repatriation of capital from a European subsidiary topartially fund the acquisition of Touchpaper.

 

*Provisionfor income taxes.*  The provision for income taxes was aprovision of $3.1 million in 2008 compared to a benefit of $148,000 in2007.  The effective tax rate in 2008 wasapproximately 10.7%, compared to an effective tax rate of approximately (0.3)%in 2007.  The increase in the effective tax rate was primarily due to therecognition in 2007 of a $6.5 million tax benefit attributable to the LANDeskacquisition for previously expensed in-process R&D of $18.6 million.  Additionally there was a change in our mix andamount of pre-tax profit among our U.S. and international companies in 2008compared to 2007.  The tax benefitresulted from elections made in the second quarter of 2007 under InternalRevenue Code Section 338(g) related to previously expensed in-processR&D that, until the elections were made, was nondeductible for U.S. taxpurposes.

 

*Netincome.*  Net income in 2008 was $25.5 millioncompared to $45.9 million in 2007, as a result of the above factors.  Net income as a percentage of sales for 2008was 3.9%, compared to 7.6% for 2007.

 

***YearsEnded December 31, 2007 and 2006  ($ Data in all tables presented in 000s)***

 

*Netsales.*

 

| ** **                         | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|
| ** **                         | ** ** | **2007**                          | ** ** | **% of  Sales** | ** ** | **2006** | ** ** | **% of  Sales** | ** ** |
| Net sales,  customer distribution: |       |                              |       |   |   |   |   |   |   |
| Branded                            |       | $                                 | 393,799    |   | 65 | % | $ | 311,885 |   | 60 | % |
| OEM                                |       | 207,076                           |       | 35 | % | 207,310 |   | 40 | % |
|                               |       |                              |       |   |   |   |   |   |   |
|                               |       | $                                 | 600,875    |   | 100 | % | $ | 519,195 |   | 100 | % |

 

The increase in our netsales in 2007 resulted directly from the contribution of revenue from ourCyclades acquisition, completed March 30, 2006, and our LANDeskacquisition, completed August 31, 2006, which was partially offset by adecline in revenue from certain legacy Avocent products.  Within our customer distribution channels,our branded sales (including LANDesk branded sales) increased 26% from 2006 to2007, while our OEM sales remained flat from 2006 to 2007.  A significantly smaller portion of LANDeskbusiness comes from OEM customers compared to our historical customer base,which also explains the change in the percentage mix of our sales.

 

| ** **                                                         | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                         | ** ** | **2007**                          | ** ** | **% of  Sales** | ** ** | **2006** | ** ** | **% of  Sales** | ** ** |
| Business unit  net sales:                                          |       |                              |       |   |   |   |   |   |   |
| Management  Systems                                                |       | $                                 | 470,719    |   | 78 | % | $ | 463,667 |   | 89 | % |
| LANDesk                                                            |       | 111,906                           |       | 18 | % | 40,368 |   | 8 | % |
| Other business  units                                              |       | 15,523                            |       | 3 | % | 13,169 |   | 3 | % |
| Corporate and unallocated                                          |       | 4,601                             |       | 1 | % | 3,677 |   | 1 | % |
| Amortization of  fair value adjustment to LANDesk deferred revenue |       | (1,874                            | )          | — |   | (1,686 | ) | (1 | )% |
|                                                               |       |                              |       |   |   |   |   |   |   |
|                                                               |       | $                                 | 600,875    |   | 100 | % | $ | 519,195 |   | 100 | % |

 

Revenue from ManagementSystems increased slightly from 2006 to 2007 (see Note 14 in the notes to ourconsolidated financial statements in Part I Item 8 of this document).  The slight increase was primarily due to theinclusion of a full year of Cyclades revenue in 2007 compared with threequarters of Cyclades revenue in 2006, which was offset somewhat by a decline insales certain legacy Avocent products. Revenue within Management Systems is comprised primarily of ourtraditional KVM products, our serial management products, and our embedded softwareand solutions.  Within ManagementSystems, revenues from our traditional KVM business and serial managementproducts were slightly up in 2007, but we experienced lower than expected KVMand serial revenues in the fourth quarter of 2007 as a result of slowness inour North American branded business. Revenue from our embedded software and solutions product line decreasedslightly in 2007 from 2006.  This was

 

40

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primarily due to thedeclining sales of the Agilent RMB product (acquired in March 2006) as itnears the end of its product life cycle. Revenue by product line for Management Systems for the years ended December 31,2007 and 2006 was as follows:

 

| ** **                            | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|
| ** **                            | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Management  Systems (MS) net revenue: |       |                              |       |   |   |
| KVM                                   |       | $                                 | 359,131    |   | $ | 355,891 |   |
| Serial  management                    |       | 49,603                            |       | 46,534 |   |
| Embedded  software and solutions      |       | 32,983                            |       | 33,766 |   |
| Other                                 |       | 29,002                            |       | 27,476 |   |
| Total MS net  revenue                 |       | $                                 | 470,719    |   | $ | 463,667 |   |

 

LANDesk’s revenue iscomprised of license-based revenue, primarily from the LANDesk Management Suite product,and subscription-based revenue, primarily from the LANDesk Security Suite andLANDesk Patch Manager products and from maintenance and support servicesrelated to LANDesk Management Suite. LANDesk was acquired in August 2006, which explains the largeincrease in revenues from 2006 to 2007 as we recorded a full year of revenue in2007 compared to four months of revenue in 2006.  Deferred revenue increased to $66.1 millionat December 31, 2007 from $54.5 million at December 31, 2006,primarily due to increased sales of subscription products and maintenanceservices.  Revenue by product line forLANDesk for the years ended December 31, 2007 and 2006 was as follows:

 

| ** **                 | ** ** | **Years ended December 31,** | ** ** |
|----------------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| LANDesk net revenue:       |       |                              |       |   |   |
| Licenses and  royalties    |       | $                                 | 42,514     |   | $ | 20,545 |   |
| Maintenance and  services  |       | 45,911                            |       | 13,319 |   |
| Subscription  revenue      |       | 23,481                            |       | 6,504 |   |
| Total LANDesk  net revenue |       | $                                 | 111,906    |   | $ | 40,368 |   |

 

International sales grew20% in 2007 from 2006, while sales within the United States grew 13% in 2007from 2006.  Having a full year revenuecontribution in 2007 from our Cyclades and LANDesk acquisitions, compared toonly a partial year in 2006, contributed to our revenue growth in both the U.S.and internationally.  However, thedecline in North America branded sales experienced in the fourth quarter of2007 partially offset the growth we experienced in the United States for theprior three quarters of 2007.

 

| ** **                             | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|
| ** **                             | ** ** | **2007**                          | ** ** | **% of  Sales** | ** ** | **2006** | ** ** | **% of  Sales** | ** ** |
| Net sales,  geographical distribution: |       |                              |       |   |   |   |   |   |   |
| United States                          |       | $                                 | 333,915    |   | 56 | % | $ | 295,825 |   | 57 | % |
| International                          |       | 266,960                           |       | 44 | % | 223,370 |   | 43 | % |
|                                   |       |                              |       |   |   |   |   |   |   |
|                                   |       | $                                 | 600,875    |   | 100 | % | $ | 519,195 |   | 100 | % |

 

41

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*Grossprofit.*  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 ouroutsourcing of manufacturing and assembly services.

 

| ** **                                                         | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                         | ** ** | **2007**                          | ** ** | **Gross  Margin %** | ** ** | **2006** | ** ** | **Gross  Margin %** | ** ** |
| Management  Systems                                                |       | $                                 | 283,981    |   | 60.3 | % | $ | 282,998 |   | 61.0 | % |
| LANDesk                                                            |       | 98,724                            |       | 88.2 | % | 36,853 |   | 91.3 | % |
| Other business  units                                              |       | 4,644                             |       | 29.9 | % | 3,865 |   | 29.3 | % |
| Corporate and  unallocated                                         |       | 4,530                             |       |   |   | 3,319 |   |   |   |
| Intangible amortization  LANDesk software                          |       | (10,985                           | )          |   |   | (3,577 | ) |   |   |
| Amortization of  fair value adjustment to LANDesk deferred revenue |       | (1,874                            | )          |   |   | (1,686 | ) |   |   |
| Gross profit  dollars and margin %                                 |       | $                                 | 379,020    |   | 63.1 | % | $ | 321,772 |   | 62.0 | % |

 

The improvement in grossmargin resulted primarily from the added sales of software with related serviceand maintenance revenue from our LANDesk acquisition (see Note 14 in the notesto our consolidated financial statements in Part I Item 8 of thisdocument).  The LANDesk contribution toincreased gross margin was partially offset by the additional costs included incost of sales from amortization of other intangible assets recorded as a resultof the LANDesk acquisition related to developed technology and internallydeveloped software for resale.  Werecorded $11.0 million of amortization of intangibles in cost of goods sold in2007 and $3.6 million in 2006.  As aresult of the timing of the acquisition in August 2006, we recorded fourmonths of intangible amortization in 2006 and a full year in 2007.

 

*Operatingexpenses.*

 

| ** **                                            | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                            | ** ** | **2007**                          | ** ** | **% of  Sales** | ** ** | **2006** | ** ** | **% of  Sales** | ** ** |
|                                                  |       |                              |       |   |   |   |   |   |   |
| Research and  development expense                     |       | $                                 | 87,888     |   | 14.6 | % | $ | 63,866 |   | 12.3 | % |
| Acquired  in-process research and development expense |       | —                            |       | — |   | 20,700 |   | 4.0 | % |
| Selling,  general, and administrative expense         |       | 208,783                           |       | 34.7 | % | 148,345 |   | 28.6 | % |
| Acquisition  integration expenses                     |       | —                            |       | — |   | 3,904 |   | 0.8 | % |
| Amortization of  intangible assets                    |       | 32,162                            |       | 5.4 | % | 23,049 |   | 4.4 | % |
|                                                  |       |                              |       |   |   |   |   |   |   |
| Total operating  expenses                             |       | $                                 | 328,833    |   | 54.7 | % | $ | 259,864 |   | 50.1 | % |

 

*Researchand development expenses.*  The increase in research anddevelopment expense is primarily due to having a full year impact of additionalcosts from the Cyclades and LANDesk acquisitions in 2007 compared to a partialyear impact in 2006.  LANDesk researchand development costs were $26.9 million in 2007 compared to $9.4 million in2006.  Continued investments in targetprojects to expand and enhance our existing products also contributed to theincrease in 2007 from 2006.

 

*Acquiredin-process research and development expense.*  There were noacquired in-process research and development expenses during 2007.  Acquired in-process research and developmentexpenses in 2006 were comprised solely of the write-off of in-process researchand development expenses related to our acquisitions, including $2.1 millionfor Cyclades and $18.6 million for LANDesk.

 

*Selling,general and administrative expenses.*    The increasein selling, general and administrative expenses is primarily related toincreased headcount and associated costs as a result of the acquisitions ofCyclades and LANDesk we completed during 2006 as we recorded a full year ofthese costs in 2007 versus a partial year of these expenses in 2006.  LANDesk selling, general and administrativecosts were $65.5 million in 2007 compared to $21.7 million in 2006.  We also experienced higher costs as a resultof increased equity-based compensation costs, which were $3.4 million higher in2007 than 2006, as detailed in the table below. In addition, we paid disproportionately higher commissions to LANDesksales

 

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personnel compared to theincrease in revenue as a result of higher bookings of new subscription productsales.  A substantial portion of therevenue associated with subscription bookings is deferred, while thecommissions are paid at the time of booking. We also selectively increased our participation in targeted marketingprograms and events during 2007, which added to our increased costs.

 

***Acquisitionintegration expenses***.  There were noacquisition integration expenses incurred during 2007.  We recorded acquisition integration expensesin 2006 related to costs associated with the integration of Cyclades intoAvocent.  These costs included severanceaccruals resulting from the headcount reductions associated with duplicatepositions eliminated during the year.

** **

*Amortizationof intangible assets.*  Amortization in 2007 includesprimarily the amortization of the identifiable intangible assets created as aresult of OSA, Sonic Mobility, Cyclades, and LANDesk acquisitions.  Amortization in 2006 includes primarily theamortization of the identifiable intangible assets created as a result ofEquinox, 2C, Soronti, Crystal Link, OSA, Sonic Mobility, Cyclades, and LANDeskacquisitions.  The increase inamortization expense relates primarily to a full year of amortization in 2007compared to a partial year in 2006 for the identifiable intangible assetsrecorded in the acquisitions of Cyclades and LANDesk.

 

*Stock Compensation. *We record stockcompensation expense based on the department in which an employee works.  Stock compensation expenses for 2007 and 2006were as follows:

 

| ** **                                   | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------------|------------|
| ** **                                   | ** ** | **2007**                          | ** ** | **% of  Sales** | ** ** | **2006** | ** ** | **% of  Sales** | ** ** |
| Stock compensation:                          |       |                              |       |   |   |   |   |   |   |
| Cost of sales                                |       | $                                 | 1,134      |   |   |   | $ | 978 |   |   |   |
| Research and  development expense            |       | 5,825                             |       |   |   | 4,302 |   |   |   |
| Selling, general  and administrative expense |       | 12,682                            |       |   |   | 9,307 |   |   |   |
|                                         |       |                              |       |   |   |   |   |   |   |
|                                         |       | $                                 | 19,641     |   | 3.3 | % | $ | 14,587 |   | 2.8 | % |

 

Webegan granting restricted stock units (RSUs) in 2006 and granted additionalRSUs in 2007.  Compensation expense forthese grants is recognized over the vesting periods, and these grants typicallyhave two or three year vesting periods. The increase in stock compensation is the result of the additionalgrants made in 2007.  For 2007, werecorded expense for RSUs granted in both 2006 and 2007, while in 2006 werecorded expense for RSUs granted in 2006.

 

*Netinvestment income. *Net******investmentincome declined from $7.6 million in 2006 to $3.8 million in 2007.  The decrease in investment income in 2007 wasthe result of lower cash and investments due to funding the purchase ofCyclades late in the first quarter of 2006 and the cash component of the LANDeskacquisition in the third quarter of 2006, continued purchases of treasuryshares, and repayments of our line of credit.

 

*Interestexpense. *Interest expense was $8.1 million in 2007 and $3.6million in 2006.  Interest expenseresults from our borrowings under our $250 million unsecured line of creditobtained in 2006, which we used to finance a portion of the LANDesk acquisitionand purchase treasury shares.  We had afull year of outstanding debt in 2007 versus a partial year in 2006.

 

*Provisionfor income taxes.*  The provision for income taxes was a benefitof $148,000 in 2007 compared to a provision of $20.2 million in 2006.  The effective tax rate in 2007 wasapproximately (0.3%), compared to an effective tax rate of approximately 30.7%in 2006.  The decrease in the effective tax rate was primarily due to therecognition of a $6.5 million tax benefit attributable to the LANDeskacquisition for previously expensed in-process R&D of $18.6 million and achange in our mix and amount of pre-tax profit among our U.S. and internationalcompanies.  The tax benefit resulted fromelections made in the second quarter of 2007 under Internal Revenue Code Section 338(g) relatedto previously expensed in-process R&D that, until the elections were made,was nondeductible for U.S. tax purposes. Deferred tax liabilities recorded in 2006 have also been adjusted as aresult of these elections.

 

*Netincome.*  Net income in 2007 was $45.9 millioncompared to $45.5 million in 2006, as a result of the above factors.  Net income as a percentage of sales for 2007was 7.6%, compared to 8.8% for 2006.

 

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** **

**Liquidity and Capital Resources**

 

As of December 31,2008, our principal sources of liquidity consisted of $127 million in cash andcash equivalents and a $170 million available balance from our $340 millioncredit facility that is available for general corporate purposes.  In the third quarter of 2008, we amended our$250 million unsecured line of credit by adding a $90 million term loan to theexisting facility. The balance of the entire facility is due in June 2011.  The term loan and line of credit have similarvariable interest rates. The addition to our credit facility gives usadditional capacity and provides strategic flexibility.

 

**The line of credit and term loancontain affirmative and negative covenants, including limitations on ourability to (i) make distributions, investments, and other payments unlesswe satisfy certain financial tests or other criteria, (ii) incuradditional indebtedness, (iii) restructure our subsidiaries, and (iv) makeacquisitions and capital expenditures. The financial tests include an interest coverage ratio and a totalleverage ratio.  We are currently incompliance with these covenants and related tests as of December 31,2008.  All of these restrictions couldaffect our ability to operate our business and may limit our ability to takeadvantage 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.**

** **

We used borrowings underthe credit facility in July 2008 to partially fund the acquisitions ofTouchpaper and Ergo.  In the future wemay acquire other technologies or companies that we believe will enhance orcomplement our existing products and technologies and increase our sales.  The line of credit and term loan currentlybear an interest rate of LIBOR plus 150 basis points.  There was $170 million outstanding under thecredit facility as of December 31, 2008. We classify these obligations as long-term as they mature in June 2011.  We expect to repay the borrowings throughfuture cash flows from operations.  Asummary of our cash flows is as follows:

 
| ** **                                     | ** ** | **For the years ended December 31,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Total cash  provided by (used in):             |       |                                      |       |   |   |   |   |
| Operating  activities                          |       | $                                         | 97,685     |   | $ | 139,791 |   | $ | 65,701 |   |
| Investing  activities — acquisitions      |       | (76,139                                   | )          | — |   | (294,176 | ) |
| Investing  activities — other             |       | (6,611                                    | )          | 8,352 |   | 243,044 |   |
| Financing  activities — borrowings, net   |       | 75,000                                    |       | (55,000 | ) | 150,000 |   |
| Financing  activities — share repurchases |       | (67,408                                   | )          | (77,059 | ) | (188,318 | ) |
| Financing  activities — other             |       | 1,713                                     |       | 6,046 |   | 38,251 |   |
| Effect of  exchange rate changes on cash       |       | (2,565                                    | )          | 1,752 |   | 374 |   |
| Increase in cash  and cash equivalents         |       | $                                         | 21,675     |   | $ | 23,882 |   | $ | 14,876 |   |

 

The decline in cash flows from operations in 2008 was primarily the result of working capital increases to fund the growth in our business (changes in accounts receivable, inventories, accrued wages and commissions, other accrued expenses and income taxes payable).  Cash flows from operations in 2007 benefited by significant improvements in cash collections on accounts receivable and inventory management.  During 2008, we paid approximately $8.0 million to the Internal Revenue Service to settle previously accrued federal income tax matters.  Our accounts receivable increased $5.0 million from December 31, 2007 to December 31, 2008 as a result of increased sales through December 2008.  This increase in accounts receivable was somewhat minimized by continued improved cash collections.  We also made significant progress in collecting older balances outstanding at our LANDesk location during 2007 compared to 2006, resulting in a large decrease in receivables outstanding during 2007.  Our accrued wages and commissions have increased in 2008 compared to 2007 as a result of increased sales for the comparable periods and accrued severance related to our restructuring programs.

 

Our days salesoutstanding (DSO) remained steady at 63 days at the end of 2008 compared to theend of 2007.  DSO remained constantdespite higher sales in 2008 compared to 2007 through continued improvement incash collections during 2008. Inventories decreased $1.7 million from December 31, 2007 to December 31,2008.  Our inventory turns improvedsignificantly to 7.4 at December 31, 2008 compared to 6.6 at December 31,2007.  The improvement in 2008 was due tohigher sales volume experienced in 2008 combined with continued improvements inmanaging our inventory levels as of December 31, 2008.

 

Our investing activitiesused over $82 million of cash flow in 2008, primarily to fund the Ergo andTouchpaper acquisitions that closed early in the third quarter of 2008.  We also converted matured investments to cashto help fund the repurchase of 4.2 million shares under our stock repurchaseprogram in 2008.

 

Our financing activitiesused cash provided by operations, as well as additional borrowings, torepurchase approximately 4.2 million shares of our common stock during 2008 ata cost totaling $67 million.  These treasuryshares were purchased through various brokers under the stock repurchaseprogram approved by our Board of Directors. As of December 31, 2008, we have approximately 2.1 million sharesavailable for purchase under the program.

 

44

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During the second quarterof 2008, we approved a series of restructuring activities.  As of December 31, 2008, we had accruedapproximately $3.6 million related to restructuring costs and do not expect torecord a material amount of restructuring expenses under the 2008 program infuture periods.  Most of these remainingcosts will be paid during the first quarter of 2009.

 

During January 2009,we approved another series of restructuring activities.  As of December 31, 2008, there were nocosts accrued related to this second restructuring program.  We expect to record $2.5 million to $3million of restructuring expenses in the first quarter of 2009 and anadditional $1.5 to $2.0 million in the second quarter of 2009.  We expect most of these costs will be paidduring the first and second quarters of 2009.

 

We may also use a portion of our cash and cashequivalents and our line of credit for strategic acquisitions of technologiesand companies that we believe will enhance and/or complement our existingproducts and technologies and increase our sales.

 

**Off-BalanceSheet Arrangements and Contractual Obligations**

 

In the ordinary course ofour business, we may at any point in time have a significant amount ofcontractual commitments not yet recognized in our financial statements.  These commitments relate primarily to ourneed to schedule the purchase of inventories in advance of the relatedforecasted sales to customers.  Ouractual contractual commitments are typically limited to products needed for oneto three 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.  None of our purchasecommitments requires payment beyond the next year.

 

Other than operatingleases for offices and warehouse space, we do not engage in off-balance sheetfinancing arrangements nor have any variable-interest entities. As of December 31,2008 we did not have any off-balance sheet arrangements as defined in Item303(a)(4)(ii) of SEC Regulation S-K.

 

Thefollowing table sets forth annual payments we are required to make undercontractual obligations and other commercial commitments for operating leasesand purchases of inventory and services, in thousands, as of December 31,2008.

 
| ** ** | ** ** | **Operating  Leases** | ** ** | **Purchase   Commitments** | ** ** | **Long-Term  Debt Obligations** | ** ** | **Interest  and Other** | ** ** | **Total** | ** ** |
|------------|------------|-----------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------|------------|-----------|------------|
|       |       |                  |       |                            |       |                            |       |                    |       |      |       |
| 2009       |       | $                     | 10,699     |                            | $          | 48,188                          |       | $                       | —     |      | $          | 7,463 |   | $ | 66,350 |   |
| 2010       |       | 8,363                 |       | —                          |       | —                          |       | 7,463                   |       | 15,826    |       |
| 2011       |       | 5,673                 |       | —                          |       | 170,000                         |       | 3,421                   |       | 179,094   |       |
| 2012       |       | 4,267                 |       | —                          |       | —                          |       | —                  |       | 4,267     |       |
| 2013       |       | 2,436                 |       | —                          |       | —                          |       | —                  |       | 2,436     |       |
| Thereafter |       | 150                   |       | —                          |       | —                          |       | —                  |       | 150       |       |
|       |       |                  |       |                            |       |                            |       |                    |       |      |       |
| Total      |       | $                     | 31,588     |                            | $          | 48,188                          |       | $                       | 170,000    |      | $          | 18,347 |   | $ | 268,123 |   |

 

As of December 31,2008 we had total reserves for uncertain tax positions related to grossunrecognized tax benefits of $5.3 million, of which $3.9 million if recognized,would affect our effective tax rate.  We recognize potential accruedinterest and penalties related to unrecognized tax benefits from our globaloperations within income tax expense.  Asof December 31, 2008, we had accrued interest payable related tounrecognized tax benefits of approximately $828,000.  Of these liabilitiesrecorded in relation to FIN 48, none is currently expected to be payable in2009, and therefore these liabilities are not included in the table above.  (*see Note8 in the notes to the consolidated financial statements in Part II, Item 8*).”

 

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**Goodwillimpairment testing**

 

We perform an annualimpairment test of goodwill in the fourth quarter of each year.  The tests conducted during 2008, 2007 and2006 concluded that there had been no impairment of goodwill and that noadjustments were required. However, our 2008 testing resulted in a marginalexcess fair value over the carrying value of the LANDesk reporting unit.  Additionally, our market capitalization hasdeclined significantly in 2009.  Based onthis factor, we currently intend to perform a goodwill impairment test duringthe first quarter of 2009 and as deemed necessary.  If such testing indicates impairment, itcould have a material adverse impact on our results of operations and financialcondition (*seeadditional discussion in our “Critical Accounting Policies” below andNote 6 in the notes to theconsolidated financial statements in Part II, Item 8*).

** **

**Non-GAAP Operational Measures**

 

To supplement our consolidated financialstatements presented in accordance with GAAP, we present investors with certainnon-GAAP operational measures which we use internally to manage our business,including net sales, gross profit, operating expenses, and the resultingoperating income, income before taxes, operational net income, and operationalearnings per share, all of which primarily exclude the effects of amortizationrelated to purchase accounting adjustments, stock-based compensation,restructuring, retirement and integration, and acquired in-process research anddevelopment expenses and includes the amortization of the fair value adjustmentto LANDesk deferred revenue related to the purchase accounting adjustment toreduce deferred revenue at the acquisition of LANDesk.  Specifically, we use the following non-GAAPmeasures:

 
| ** **                              | ** ** | **For the years ended   December 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------|------------|
| **Non-GAAP Operational Measures**       | ** ** | **2008**                                                   | ** ** | **2007** | ** ** |
|                                    |       |                                                       |       |   |   |
| Operational net  sales                  |       | $                                                          | 657,134    |   | $ | 602,749 |   |
| Operational  gross profit               |       | $                                                          | 429,161    |   | $ | 393,013 |   |
| Operational  operating income           |       | $                                                          | 118,098    |   | $ | 114,876 |   |
| Operational net  income                 |       | $                                                          | 90,938     |   | $ | 89,813 |   |
| Operational  diluted earnings per share |       | $                                                          | 1.98       |   | $ | 1.76 |   |

 

·                                          Thenon-GAAP net sales operational measure consists of net sales increased by thepro-forma amortization of deferred revenue of LANDesk at the date ofacquisition which was reduced to estimated fair value pursuant to purchaseaccounting under GAAP.  This deferredrevenue was completely amortized on a pro-forma basis as of the third quarterof 2007.

 

·                                          Thenon-GAAP gross profit operational measure consists of the non-GAAP net salesoperational measure described above, less cost of sales excluding the impact ofstock-based compensation and amortization related to purchase accountingadjustments as they relate to cost of sales.

 

·                                          Thenon-GAAP operating expense operational measure consists of GAAP operatingexpenses, excluding the impact of stock-based compensation, restructuring andintegration costs and amortization related to purchase accounting adjustmentsas they relate to the particular operating expense.

 

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

 

·                                          Thenon-GAAP net income operational measure consists of GAAP net income, adjustedby the non-GAAP operational measures described above and the tax effects ofthese non-GAAP operational measures, less the $6.5 million income tax benefitin the third quarter of 2007 related to previously expensed in-process researchand development costs that are now deductible for tax purposes plus the incometax benefit realized from deducting the amortization of LANDesk goodwill fortax purposes (which is not amortized under GAAP).

 

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

 

46

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We provide the followingreconciliations between GAAP and our operational measures:

 
| ** **                              | ** ** | **GAAP  Financial  Measures**                   | ** ** | **Stock-based  Compensation** | ** ** | **Purchase  Accounting  Adjustments** | ** ** | **Restructuring,  Integration  and Retirement  Expenses** | ** ** | **Non-GAAP  Operational  Measures** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------|------------|-------------------------------|------------|---------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------|------------|
|                                    |       | **For the Year Ended  December  31, 2008** |       |
|                                    |       |                                            |       |                          |       |                                  |       |                                                      |       |                                |       |   |   |
| Operational net  sales                  |       | $                                               | 657,134    |                          | —     |                                  | —     |                                                      | —     |                                | $          | 657,134 |   |
| Operational  gross profit               |       | $                                               | 413,889    |                          | 1,218      |                                  | 14,054     |                                                      | —     |                                | $          | 429,161 |   |
| Operational  operating income           |       | $                                               | 32,833     |                          | 24,722     |                                  | 47,995     |                                                      | 12,548     |                                | $          | 118,098 |   |
| Operational net  income                 |       | $                                               | 25,473     |                          | 19,757     |                                  | 35,680     |                                                      | 10,028     |                                | $          | 90,938 |   |
| Operational  diluted earnings per share |       | $                                               | 0.55       |                          | 0.43       |                                  | 0.78       |                                                      | 0.22       |                                | $          | 1.98 |   |
|                                    |       |                                            |       |                          |       |                                  |       |                                                      |       |                                |       |
|                                    |       | **For the Year Ended  December  31, 2008** |       |
| Operational net  sales                  |       | $                                               | 600,875    |                          | —     |                                  | 1,874      |                                                      | —     |                                | $          | 602,749 |   |
| Operational  gross profit               |       | $                                               | 379,020    |                          | 1,134      |                                  | 12,859     |                                                      | —     |                                | $          | 393,013 |   |
| Operational  operating income           |       | $                                               | 50,187     |                          | 19,642     |                                  | 45,047     |                                                      | —     |                                | $          | 114,876 |   |
| Operational net  income                 |       | $                                               | 45,929     |                          | 15,969     |                                  | 27,915     |                                                      | —     |                                | $          | 89,813 |   |
| Operational  diluted earnings per share |       | $                                               | 0.90       |                          | 0.31       |                                  | 0.55       |                                                      | —     |                                | $          | 1.76 |   |

 

 

We believe that excluding amortizationassociated with purchase accounting adjustments as well as the tax impact ofcertain purchase accounting elections for prior acquisitions providesmeaningful supplemental information and an alternative presentation useful toinvestors’ understanding our core operating results and trends betweenperiods.  Not only are these depreciationand amortization and tax impact adjustments based on amounts assigned inpurchase accounting, that may have little bearing on present or futurereplacement costs, but they also are based on management’s estimates ofremaining useful lives.

 

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

 

We also believe that, in excluding stock-basedcompensation and restructuring, integration and retirement expenses andamortization associated with purchase accounting adjustments (together with therelated tax effects), our non-GAAP financial measures provide investors withtransparency into the information and basis used by management and our Board ofDirectors to measure and forecast our results of operations, to compare on aconsistent basis our results of operations for the current period to that ofprior periods, to compare our results of operations on a more consistent basisagainst that of other companies in making financial and operating decisions,and to establish targets for management incentive compensation.

 

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

 

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Webelieve that each of these operational measures is useful to investors in theirassessment of our operating performance and the valuation of our company.  Operational net sales, gross profit, operating income, operational netincome, and operational earnings per share are significant measures used bymanagement for:

 

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

 

·                                          Evaluatingthe operating performance of our company;

 

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

 

·                                          Establishinginternal operating targets.

 

These non-GAAP operational measures, includingoperational net sales, operational gross profit, operational operating income,operational net income, and operational earnings per share are used by us asbroad measures of financial performance that encompass our operatingperformance, cash, capital structure, investment management, and income taxplanning effectiveness.  These operational measures are not calculated inaccordance with GAAP, and should be considered supplemental to, and not as asubstitute for, or superior to, financial measures calculated in accordancewith GAAP.  These operational measures have limitations in that they donot reflect all of the costs or reductions to revenues associated with theoperations 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-GAAPoperational measures.  We expect to continue to incur expenses similar tothe non-GAAP adjustments described above, and the exclusion or inclusion ofthese items from our non-GAAP financial measures should not be construed as aninference that these costs are unusual or infrequent.  Some of the limitations in relying on our non-GAAPfinancial measures are:

 

·                                          Thenon-GAAP net sales operational measure is a measure which we have defined forinternal and investor purposes.  Afurther limitation associated with this measure is that it includes certainrevenues and the related impact on non-GAAP gross profit, operating income,income before taxes, net income, and earnings per share operational measuresthat impact our GAAP based measures.

 

·                                          Thenon-GAAP gross profit, operating income, net income, and earnings per shareoperational measures are limited in that they do not include the impact ofstock-based compensation expense or specific costs and benefits associated withcertain purchase accounting adjustments or restructuring and retirement costs.

 

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

 

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**Critical Accounting Policies**

 

We believe the following critical accounting policiesaffect the more significant judgments and estimates used in the preparation ofour consolidated financial statements:

 

·                                          We review customer contracts to determineif all of the requirements for revenue recognition have been met prior torecording revenue from sales transactions. We generally record sales revenue for hardware products upon shipment ofour products, net of any discounts, since we generally do not have significantpost delivery obligations, the product price is fixed or determinable,collection of the resulting receivable is probable, and product returns arereasonably estimable.  We generally shipproducts upon receipt of a purchase order from a customer.  We record revenue in accordance with the applicableterms of each respective customer contract. Accordingly, revenue on products shipped FOB destination is recordedwhen the customer takes possession of the goods, and revenue on productsshipped FOB shipping point is recorded when the goods leave ourfacilities.  Shipping and handling feesare included in net sales, and the related costs are included in cost of salesin the accompanying consolidated statements of income.

 

 

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We generally recordroyalty revenue from OEMs upon shipment of the related products in which oursoftware or firmware is embedded by the OEMs, based upon shipment data providedby the OEMs.  We generally defer revenue from the sale of extendedwarranty agreements, software subscriptions, and software support andmaintenance agreements.  The deferredrevenue is amortized into income on a pro rata basis over the applicablecontract lives.

 

We accrue for salesreturns as a reduction of sales and cost of sales based on our experience fromhistorical customer returns, which we believe provides a reasonable estimate offuture returns.  The sales agreements forour hardware products generally include a one-month unconditional returnpolicy.  The license agreements for oursoftware products are generally final, and the license fees arenon-refundable.  We also allow additionalrights of return to certain distributors, which generally extend the returnperiod to 90 days.  If actual futurecustomer returns are less favorable than those projected by management,additional sales return costs may be incurred. Our allowance for sales returns totaled $5.1 million and $5.0 million atDecember 31, 2008 and 2007, respectively. The reserve is included as a reduction in the carrying value of accountsreceivable and sales in the accompanying consolidated balance sheets andstatements of income, respectively.

 

We recognize softwarerevenue in accordance with Statement of Position 97-2, “*SoftwareRevenue Recognition*” (SOP 97-2), and Statement of Position 98-9, “*Modification of SOP 97-2, Software Revenue Recognition, with Respect toCertain Transactions*” (SOP 98-9). We derive a portion of our revenue from the license of software productsunder software license agreements and subscription agreements and from thedelivery of professional services and maintenance services.  When contracts contain multiple elements, andvendor-specific objective evidence (VSOE) of fair value exists for all undeliveredelements, we account for the delivered elements in accordance with the “ResidualMethod” prescribed by SOP 98-9 when VSOE does not exist for the deliveredelement.  Multiple element arrangementsgenerally include post-contract customer support (or maintenance), and in somecases, subscriptions and other services. VSOE of fair value is generally determined by sales of the same elementor service sold separately to other customers, or with respect to maintenanceand subscriptions, through a renewal rate specified in the related arrangement.When VSOE of fair value does not exist for all undelivered elements in ourmultiple element contracts we defer revenue related to the entire arrangementuntil the earlier of the point at which (a) such sufficient VSOE doesexist or (b) all elements of the arrangement have been delivered and allother revenue recognition criteria have been met.

 

Software license revenueis recognized when persuasive evidence of an arrangement exists, the fee isfixed or determinable, collectability is probable, and delivery and customeracceptance (including the expiration of an acceptance period), if requiredunder the terms of the contract, of the software products have occurred.  In instances where vendor obligations remain,revenue is deferred until the obligation has been satisfied.

 

Revenue from professionalservices consists of non-recurring engineering services, training andimplementation services.  Non-recurringengineering and implementation service revenue is recognized as the servicesare performed for time and materials contracts or upon acceptance on fixedprice contracts.  Training revenue isrecognized as the services are performed.

 

Maintenance andsubscription revenue is recognized ratably over the term of the contract, whichis generally twelve to thirty six months. Maintenance contracts include the right to unspecified upgrades on awhen-and-if available basis.  Ongoingsupport is also available under some maintenance agreements.

 

Prior to extending creditto a new customer, we perform a detailed credit review of the customer andestablish credit limits based on the results of our credit review.  We review collection experience periodicallyto determine if the customer’s payment terms and credit limits need to berevised.  We maintain allowances fordoubtful accounts for estimated losses resulting from the inability of ourcustomers to make required payments.  Ifthe financial condition of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired.  If circumstances change withregard to individual receivable balances that had previously been determined tobe uncollectible (and for which a specific reserve had been established), areduction in our allowance for doubtful accounts may be required.  Our allowance for doubtful accounts was $4.5million and $2.5 million at December 31, 2008 and 2007, respectively.

 

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We participate incooperative advertising and market development programs with certain resellers,distributors and OEMs.  We use these programs to reimburse resellers,distributors and OEMs for the actual costs of certain forms of advertising, andin general, allow resellers, distributors and OEMs reimbursement up to aspecified percentage of net purchases. Because our costs associated with these programs are estimated andaccrued at the time of sale, we include these costs in sales and marketingexpenses in the accompanying consolidated statements of income.

 

·      Wecarry our inventory at the lower of cost or market, with cost being determinedusing the first-in, first-out method.  Weuse standard costs for material, labor, and manufacturing overhead to value ourinventory.  We review and revise ourstandard costs on a quarterly basis. Therefore, our inventory costs approximate actual costs at the end ofeach reporting period.  We write down our inventory forestimated obsolescence or unmarketable inventory to the estimated market valuebased upon assumptions about future demand and market conditions.  If actual future demand or market conditionsare less favorable than those projected by management, additional inventorywrite-downs may be required.  Our reservefor excess and obsolete inventory was $6.4 million and $7.3 million at December 31,2008 and 2007, respectively.

 

·      We provide for the estimated cost ofproduct warranties at the time revenue is recognized.  While we engage in extensive product qualityprograms and processes, including actively monitoring and evaluating the qualityof our component suppliers and contract manufacturers, our warranty obligationis affected by product failure rates, failure rates of purchased componentsintegrated into our products, material usage, and other rework costs incurredin correcting a product failure.  Shouldactual product failure rates, material usage, or other rework costs differ fromour estimates, revisions to our estimated warranty liability may berequired.  Our warranty reserve was $2.2million and $1.9 million at December 31, 2008 and 2007, respectively.

 

·      In previous years we have held investmentsin various publicly traded debt securities, including corporate bonds.  We record an investment impairment chargewhen we believe an investment has experienced a decline in value that is otherthan temporary.  Future adverse changesin market conditions or poor operating results of underlying investments couldresult in losses or an inability to recover the carrying value of theinvestments that may not be reflected in an investments current carrying value,thereby possibly requiring an impairment charge in the future.  There were no other-than-temporary impairmentcharges recorded against these investments in 2008, 2007, or 2006.

 

·      We enter into interest rate swapagreements in accordance with our risk management policy to partially reducerisks related to our floating rate line of credit which is subject to changesin the market rate of interest.  We donot use derivative instruments for trading purposes.  We record the fair value of interest rateswap agreements in other assets or liabilities on the consolidated balancesheet.  Changes in the fair value ofinterest rate swap agreements that are designated and effective as cash flowhedges are recorded in accumulated other comprehensive income (loss) (“OCI”).  Those changes are released from OCI to theconsolidated statement of income as interest expense contemporaneously with theearnings effects of the hedged item (the underlying debt agreement).  The settled amount of a swap that has beenterminated prior to its original term continues to be deferred in OCI and isrecognized in the consolidated statement of income over the term of the underlyingdebt agreement designated as the hedged item. Changes in the fair value of interest rate swap agreements that are noteffective as hedges are recorded immediately in the consolidated statement ofincome as interest expense.  We havedesignated our interest rate swap agreement as a cash flow hedge.  Cash flows from hedging activities arereported in the consolidated statement of cash flows in the same classificationas the hedged item, generally as a component of cash flows from operations.

 

**·****     **Our annualtests for goodwill impairment, performed for the fourth quarters of 2008, 2007,and 2006, determined that no adjustment for impairment was required.  As prescribed in SFAS 142, *Goodwill and Other Intangible Assets,* we test goodwill forimpairment on at least an annual basis at the reporting unit level.  For internal purposes, we prepare businessunit operating statements (operating segment level) which include revenue, costof goods sold, operating expenses and operating margin for the following threeoperating segments (or business units): Management Systems, LANDesk, andConnectivity and Control, as well as Corporate and Unallocated.

** **

**We determine the fair value of our reporting unitsthrough a discounted cash flow analysis utilizing the income approach and aguideline public company method utilizing a market approach.  We weighted the**

** **

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** **

**results of each valuation equally in determining thefair value of the reporting units in 2008. We based the discounted cash flow analysis on management’s forecasts foreach reporting unit and applied discount rates ranging from 18% to 25%, takinginto consideration the relative risk associated with each reporting unit in2008.  The guideline public companymethod utilizes comparative analysis of the reporting units with publiclytraded guideline companies in the same or similar industries.  We applied a combination of the enterprisevalue multiple to revenue and EBITDA in determining the reporting unit value.  Our testing indicated that the implied fairvalue of our reporting units exceeded their carrying value; accordingly, inaccordance with SFAS 142, no further impairment analysis was required.**

** **

**Although our testing indicated there was no goodwillimpairment, there were two primary factors noted during the 2008 testing thatrequire monitoring and may require additional testing prior to our nextscheduled fourth quarter test in 2009. Our market capitalization has declined to less than the book value ofour shareholders’ equity as of this filing. We believe this drop in market capitalization is due to the currentongoing global recession and other market conditions beyond management’scontrol.  We believe the reduction in ourmarket capitalization is a short term anomaly and is not indicative of the truevalue of the company as a whole or the value of our individual reporting units.**

** **

**Although no impairment was indicated for our LANDeskreporting unit, LANDesk does carry a significant amount of goodwill and otherintangible assets, including those added in the recent Touchpaperacquisition.  Our analysis concluded thatthe carrying value of LANDesk was only marginally below the indicated fairvalue calculated through our impairment testing. Although we believe each ofthe assumptions used to calculate LANDesk’s fair value to be reasonable,adjustments to certain assumptions within the fair value calculation could haveresulted in an indication of impairment. In the discounted cash flow calculation, we assumed LANDesk’s long-termgrowth rate to be 6%.  Assuming all othervaluation inputs remain constant, utilizing a 4% or lower long term growth ratein the valuation model would have resulted in an indication of impairment.  Also, we utilized a weighted average cost ofcapital (discount rate) of 21% in the discounted cash flow calculation.  Assuming all other valuation inputs remainconstant, utilizing a discount rate of greater than 22% in the valuation modelwould have resulted in an indication of impairment.**

** **

**During 2009, we will monitor our actual financialresults against our assumptions utilized in the valuation of our reportingunits in 2008.  If our actual resultsdiffer materially or if we revise our assumptions materially, then animpairment may be indicated and result in the need for impairment measurement.**

** **

**As a result of the previously mentioned decline inour market capitalization, we currently intend to perform an additional testfor goodwill impairment in the first quarter of 2009.  Therefore, if economic conditions deteriorateand indicators of impairment become present, an adjustment to the carryingvalue of goodwill and other intangible assets may be required and, if sodetermined, could have a material adverse effect to our financial results.**

** **

**·**                 We review long-lived assets for impairment under the guidanceprescribed by SFAS No. 144, “*Accounting for theImpairment or Disposal of Long-Lived Assets*.”  We recognize impairment losses on long-livedassets used in operations when indicators of impairment are present and theundiscounted cash flows estimated to be generated by those assets are less thanthe assets’ carrying values.  Animpairment loss would be recognized in the amount by which the recorded valueof the asset exceeds the fair value of the asset, measured by the quoted marketprice of an asset or an estimate based on the best information available in thecircumstances.  There were no such lossesrecognized during 2008, 2007, or 2006.

** **

·                  Substantially all of our financial assetsand liabilities are measured at fair value based upon Level 1 or Level 2inputs, as defined under SFAS 157.  Thefair value measurement is prepared using the closing mid-market rate/priceenvironment on December 31, 2008, using proprietary models, availablemarket data, and reasonable assumptions.

 

·                  We account for income taxes using theasset and liability method.  We provide for income taxes currently payableand, in addition, provide deferred income taxes for temporary differencesbetween the tax basis of assets and liabilities and their reported amounts inthe consolidated financial statements and for known tax contingencies. Temporary differences relate principally to the allowance for doubtfulaccounts, allowance for sales returns, liability for warranty claims,unrealized gain (loss) on investments, accumulated depreciation, loss onwrite-down of investments, inventory reserves, acquired intangible assets,operating loss, foreign tax credit, and research credit carry-forwards.  We intend to permanently reinvest earnings

 

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from our foreignsubsidiaries in our international operations and, accordingly, no provision forany incremental net U.S. federal or state income taxes has been made for theseunremitted earnings.  Valuation allowances are established when necessaryto reduce deferred tax assets to the amount expected to be realized.  Wehave approximately $7.0 million and $4.0 million of valuation allowancesrecorded against deferred tax assets arising from certain foreign subsidiariesoperating losses and certain federal and state research credits at December 31,2008 and 2007, respectively.  Taxcontingencies are recorded to address potential exposures involving taxpositions taken that could be challenged by tax authorities.  These potential exposures result from thevarying applications of statutes, rules, regulations, and interpretations.  As of December 31, 2008 we had totalreserves for uncertain tax positions related to gross unrecognized tax benefitsof $5.3 million of which $3.9 million, if recognized, would affect oureffective tax rate.

 

**RecentlyIssued Accounting Standards**

 

In September 2006, the FASB issuedStatement of Financial Accounting Standards (SFAS) No. 157, “*Fair Value Measurements”* (SFAS 157), which clarifies thatfair value estimates should be based on the assumptions market participantswould use when pricing an asset or liability and establishes a fair valuehierarchy that prioritizes the information used to develop thoseassumptions.  Under SFAS 157, fair valuemeasurements would be separately disclosed by level within the fair valuehierarchy.  SFAS 157 is effective forfiscal years beginning after November 15, 2007.  On February 12, 2008, the FASB delayedthe effective date of SFAS 157 for nonfinancial assets and liabilities, exceptfor items that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually), to fiscal years beginningafter November 15, 2008.  We adoptedSFAS 157 as of January 1, 2008, with the exception of the application ofthe statement to nonfinancial assets and nonfinancial liabilities. Refer toNote 17 to the Consolidated Financial Statements for additional discussion onfair value measurements.

 

Relative to SFAS 157, the FASB issued FASB StaffPositions (FSP) 157-1, 157-2 and 157-3. FSP 157-1 amends SFAS 157 to excludeSFAS No. 13, “*Accounting for Leases*,”(SFAS 13) and its related interpretive accounting pronouncements that addressleasing transactions, while FSP 157-2 delays the effective date of theapplication of SFAS 157 to fiscal years beginning after November 15, 2008for all nonfinancial assets and nonfinancial liabilities that are recognized ordisclosed at fair value in the financial statements on a nonrecurringbasis.  These nonfinancial items includeassets and liabilities such as reporting units measured at fair value in agoodwill impairment test and nonfinancial assets acquired and liabilitiesassumed in a business combination.  The provisions of SFAS 157 related toother nonfinancial assets and liabilities were effective for us on January 1,2009 and will be applied prospectively.FSP 157-3 clarified the application of SFAS 157 in determining the fair valueof financial assets when the markets for those assets are inactive. FSP 157-3was effective on issuance in October 2008, including periods in whichfinancial results have not been issued.  Wehave evaluated FSP 157-1 and 157-3, and do not believe they have a materialimpact on our financial statements.  Weare still evaluating FSP 157-2 and the impact it may have on our financialstatements.

 

In February 2007, the FASB issued SFAS No. 159,“*The Fair Value Option for Financial Assetsand Financial Liabilities — Including an amendment of FASB Statement No. 115”*(SFAS 159).  SFAS 159 permits anentity to elect fair value as the initial and subsequent measurement attributefor many financial assets and liabilities. Entities electing the fair value option would be required to recognizechanges in fair value in earnings. Entities electing the fair value option are required to distinguish, onthe face of the statement of financial position, the fair value of assets andliabilities for which the fair value option has been elected and similar assetsand liabilities measured using another measurement attribute.  SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007. The adjustment to reflect the difference between the fair value and thecarrying amount would be accounted for as a cumulative-effect adjustment toretained earnings as of the date of initial adoption.  We have adopted SFAS 159 and have elected notto measure any additional financial instruments or other items at fair value.

 

In December 2007, the 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 ofthe remainder 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 after the effective date.

 

In March 2008, theFASB issued SFAS No. 161, “*Disclosures aboutDerivative Instruments and Hedging Activities*” (SFAS 161). SFAS 161requires companies with derivative instruments to disclose information thatwould enable financial statement users to understand how and why a company usesderivative instruments, how derivative instruments and related

 

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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 derivative instruments and non-derivativeinstruments that are designated and qualify as hedging instruments and relatedhedged items accounted for under SFAS 133. SFAS 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008.  We are currently evaluating theimpact of SFAS 161, but do not expect its adoption to have a material impact onour financial statements.

 

In April 2008, theFASB issued FASB Staff Position No. 142-3, “Determination of the UsefulLives of Intangible Assets”, which amends the factors that should be consideredin developing renewal or extension assumptions used to determine the usefullife of an intangible asset.  Thisinterpretation is effective for financial statements issued for fiscal yearsbeginning after December 15, 2008 and interim periods within thoseyears.  We are currently evaluating theimpact of this staff position, but do not expect its adoption to have amaterial impact on our financial statements.

 

**Item 7A.  Quantitative and Qualitative Disclosuresabout Market Risk.**

 

Our primary market riskis the interest rate risk on our bank line of credit and term loan, 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 acollective remaining notional amount of $170 million as of December 31,2008, through Regions Bank and SunTrust Bank.

 

We also faceforeign currency exchange rate risk to the extent that the value of certainforeign currencies relative to the U.S. dollar affects our financial results.  Our international operations transact asignificant portion of our business in currencies other than the U.S. dollar,predominantly the euro, and changes in exchange rates may positively ornegatively affect our revenue, gross margins, operating expenses, and retainedearnings since these transactions are reported by us in U.S. dollars.  We occasionally purchase foreign currencyforwards aimed at limiting the impact of currency fluctuations.  These instruments provide only limitedprotection against currency exchange risks, and there can be no assurance thatsuch an approach will be successful, especially if a significant and suddendecline occurs in the value of local currencies.  As of December 31, 2008, we had fouropen forward contracts with an approximate fair value of $26,000.

 

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**Item 8.  Financial Statements.**

 

**Index toConsolidated Financial Statements**

 
| Management’s Report on Internal Control over Financial  Reporting                                                                    | 54     |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Report of Independent Registered Public Accounting  Firm                                                                                  | 55     |
|                                                                                                                                      |   |
| Consolidated Financial Statements:                                                                                                        |   |
|                                                                                                                                      |   |
| Consolidated  Balance Sheets as of December 31, 2008 and 2007                                                                        | 56     |
| Consolidated  Statements of Income for the years ended December 31, 2008, 2007 and  2006                                             | 57     |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income for the years  ended December 31, 2008, 2007 and 2006 | 58     |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2008, 2007 and  2006                                         | 59     |
| Notes to Consolidated Financial Statements                                                                                                | 60     |
| Schedule II - Valuation and Qualifying Accounts                                                                                           | 89     |

 

**Management’s Report on Internal Control overFinancial Reporting**

 

Management of AvocentCorporation is responsible for establishing and maintaining adequate internalcontrol over financial reporting.  TheCompany’s internal control over financial reporting is a process designed underthe supervision of Avocent’s principal executive and principal financialofficers to provide reasonable assurance regarding the reliability of financialreporting and the preparation of the Company’s consolidated financialstatements for external purposes in accordance with U.S. generally acceptedaccounting principles.

 

As of the end of theCompany’s 2008 fiscal year, management conducted an assessment of the Company’sinternal control over financial reporting based on the framework established inInternal Control - Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  Based on this assessment, management hasdetermined that the Company’s internal control over financial reporting as of December 31,2008 was effective.  As allowed under Section 404of the Sarbanes-Oxley Act of 2002, management has excluded Touchpaper GroupLimited from this assessment.   The Actallows the exclusion of entities acquired during a company’s fiscal year fromits assessment.  As Touchpaper wasacquired in the third quarter 2008, the Company has elected to excludeTouchpaper and its subsidiaries from this assessment.  Touchpaper revenue included in the Company’sconsolidated financial statements totaled $13.9 million in 2008, and totalassets, including acquired intangible assets, were $78.2 million at December 31,2008.

 

The Company’s internalcontrol over financial reporting includes policies and procedures that pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect transactions and dispositions of assets; provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with U.S. generally accepted accounting principles,and that receipts and expenditures are being made only in accordance withauthorizations of management and the directors of the Company; and providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the Company’s assets that could have amaterial effect on the financial statements.

 

The effectiveness of theCompany’s internal control over financial reporting as of December 31,2008 has been audited by PricewaterhouseCoopers LLP, an independent registeredpublic accounting firm, as stated in their report which is presented in thisAnnual Report on Form 10-K.

 

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### **Report of Independent Registered Public Accounting Firm**

###  

To the Board of Directorsand Stockholders of Avocent Corporation:

 

In our opinion, theaccompanying consolidated balance sheets and the related consolidatedstatements of income, stockholders’ equity and comprehensive income, and cashflows present fairly, in all material respects, the financial position ofAvocent Corporation and its subsidiaries at December 31, 2008 and December 31,2007, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2008 in conformity withaccounting principles generally accepted in the United States of America.  Inaddition, in our opinion, the financial statement schedule listed in theaccompanying index presents fairly, in all material respects, the informationset forth therein when read in conjunction with the related consolidated****financial statements. Also in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2008, based on criteria established in *Internal Control -Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  The Company’s management is responsible forthese financial statements and financial statement schedule, for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting, included in theaccompanying Management’s Report on Internal Control over FinancialReporting.  Our responsibility is toexpress opinions on these financial statements, on the financial statementschedule, and on the Company’s internal control over financial reporting basedon our integrated audits.  We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of materialmisstatement and whether effective internal control over financial reportingwas maintained in all material respects. Our audits of the financial statements included examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  Our audit of internalcontrol over financial reporting included obtaining an understanding ofinternal control over financial reporting, assessing the risk that a materialweakness exists, and testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk.  Our audits also included performing suchother procedures as we considered necessary in the circumstances. We believethat our audits provide a reasonable basis for our opinions.

 

As discussed in Note 2 tothe consolidated financial statements, the Company changed the manner in whichit accounts for uncertainty in income taxes in fiscal 2007.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

As described inManagement’s Report on Internal Control over Financial Reporting, managementhas excluded Touchpaper Group Limited (Touchpaper) from its assessment ofinternal control over financial reporting as of December 31, 2008 becauseit was acquired by the Company in a purchase business combination during2008.  We have also excluded Touchpaper from our audit of internal controlover financial reporting.  Touchpaper is a wholly-owned subsidiary whosetotal assets and total revenues represent approximately $13.9 million and $78.2million, respectively, of the related consolidated financial statement amountsas of and for the year ended December 31, 2008.

 
| /s/  PricewaterhouseCoopers LLP |   |
|---------------------------------|--------|
| Birmingham, Alabama             |   |
| February 27, 2009          |   |

 

55

----

 

**AvocentCorporation**

**Consolidated Balance Sheets**

**December 31, 2008 and 2007**

**(Inthousands, except per share data)**

 
| ** **                                                                                                                                                                               | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **ASSETS**                                                                                                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                                          |       |       |       |       |       |
| Cash and cash  equivalents                                                                                                                                                               |       | $          | 126,858    |       | $          | 105,183 |   |
| Investments  maturing within one year                                                                                                                                                    |       | —     |       | 5,943      |       |
| Accounts  receivable, less allowance for doubtful accounts of $4,548 and $2,481 at  December 31, 2008 and 2007, respectively                                                        |       | 122,133    |       | 109,851    |       |
| Other receivables                                                                                                                                                                        |       | 12,281     |       | 10,799     |       |
| Inventories                                                                                                                                                                              |       | 31,516     |       | 30,103     |       |
| Other current  assets                                                                                                                                                                    |       | 5,209      |       | 4,399      |       |
| Deferred tax  assets, net                                                                                                                                                                |       | 6,885      |       | 5,928      |       |
| Total current  assets                                                                                                                                                                    |       | 304,882    |       | 272,206    |       |
|                                                                                                                                                                                     |       |       |       |       |       |
| Property and  equipment, net                                                                                                                                                             |       | 38,197     |       | 37,298     |       |
| Goodwill                                                                                                                                                                                 |       | 616,326    |       | 584,949    |       |
| Other intangible  assets, net                                                                                                                                                            |       | 180,276    |       | 167,982    |       |
| Deferred tax  assets, non-current                                                                                                                                                        |       | 10,873     |       | 13,297     |       |
| Other assets                                                                                                                                                                             |       | 3,616      |       | 2,701      |       |
| Total assets                                                                                                                                                                             |       | $          | 1,154,170  |       | $          | 1,078,433 |   |
|                                                                                                                                                                                     |       |       |       |       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current  liabilities:                                                                                                                                                                    |       |       |       |       |       |
| Accounts payable                                                                                                                                                                         |       | $          | 17,494     |       | $          | 20,031 |   |
| Accrued wages  and commissions                                                                                                                                                           |       | 30,966     |       | 25,072     |       |
| Accrued  liabilities                                                                                                                                                                     |       | 42,027     |       | 30,630     |       |
| Income taxes  payable                                                                                                                                                                    |       | 11,678     |       | 14,950     |       |
| Deferred  revenue, current                                                                                                                                                               |       | 66,248     |       | 54,738     |       |
| Total current  liabilities                                                                                                                                                               |       | 168,413    |       | 145,421    |       |
|                                                                                                                                                                                     |       |       |       |       |       |
| Unsecured bank  credit facility                                                                                                                                                          |       | 170,000    |       | 95,000     |       |
| Deferred  revenue, non-current                                                                                                                                                           |       | 9,572      |       | 11,325     |       |
| Other  non-current liabilities                                                                                                                                                           |       | 4,028      |       | 1,025      |       |
| Total  liabilities                                                                                                                                                                       |       | 352,013    |       | 252,771    |       |
|                                                                                                                                                                                     |       |       |       |       |       |
| Commitments and  contingencies *(Note 12 and Note 20)*                                                                                                                                   | * *   | * *   | * *   | * *   | * *   |
|                                                                                                                                                                                     |       |       |       |       |       |
| 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; 2008 — 54,533 shares  issued and 44,706 outstanding; 2007 — 53,910 shares issued and 48,283  outstanding |       | 55         |       | 54         |       |
| Additional  paid-in capital                                                                                                                                                              |       | 1,230,840  |       | 1,208,674  |       |
| Accumulated  other comprehensive income (loss)                                                                                                                                           |       | (1,606     | )          | 2,130      |       |
| Accumulated  deficit                                                                                                                                                                     |       | (193,247   | )          | (218,719   | )          |
| Treasury stock,  at cost; 2008 —9,827 shares; 2007 — 5,627 shares                                                                                                              |       | (233,885   | )          | (166,477   | )          |
| Total  stockholders’ equity                                                                                                                                                         |       | 802,157    |       | 825,662    |       |
|                                                                                                                                                                                     |       |       |       |       |       |
| Total  liabilities and stockholders’ equity                                                                                                                                         |       | $          | 1,154,170  |       | $          | 1,078,433 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

56

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**AvocentCorporation**

**Consolidated Statements of Income**

**Forthe Years Ended December 31, 2008, 2007 and 2006**

**(Inthousands, except per share data)**

 
| ** **                                                                                                                                               | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales:                                                                                                                                               |       |     |       |     |       |     |       |
| Products                                                                                                                                                 |       | $        | 478,638    |     | $          | 455,419  |       | $ | 448,629 |   |
| Licenses and  royalties                                                                                                                                  |       | 108,748  |       | 98,868   |       | 55,116   |       |
| Services                                                                                                                                                 |       | 69,748   |       | 46,588   |       | 15,450   |       |
| Total net sales                                                                                                                                          |       | 657,134  |       | 600,875  |       | 519,195  |       |
|                                                                                                                                                     |       |     |       |     |       |     |       |
| Cost of sales:                                                                                                                                           |       |     |       |     |       |     |       |
| Products                                                                                                                                                 |       | 209,557  |       | 197,710  |       | 190,146  |       |
| Licenses and  royalties                                                                                                                                  |       | 2,614    |       | 2,541    |       | 494      |       |
| Services                                                                                                                                                 |       | 17,020   |       | 10,619   |       | 3,206    |       |
| Amortization of  intangibles related to licenses and royalties                                                                                           |       | 14,054   |       | 10,985   |       | 3,577    |       |
| Total cost of  sales (includes stock compensation expense of $1,218, $1,134 and $978 in  2008, 2007 and 2006, respectively)                              |       | 243,245  |       | 221,855  |       | 197,423  |       |
|                                                                                                                                                     |       |     |       |     |       |     |       |
| Gross profit                                                                                                                                             |       | 413,889  |       | 379,020  |       | 321,772  |       |
|                                                                                                                                                     |       |     |       |     |       |     |       |
| Research and  development expenses (includes stock compensation expense of $5,634, $5,825  and $4,302 in 2008, 2007 and 2006, respectively)              |       | 96,723   |       | 87,888   |       | 63,866   |       |
| Acquired  in-process research and development expense*(Note 3)*                                                                                          |       | 700      |       | —   |       | 20,700   |       |
| Selling, general  and administrative expenses (includes stock compensation expense of $14,661,  $12,682 and $9,307 in 2008, 2007 and 2006, respectively) |       | 234,802  |       | 208,783  |       | 148,345  |       |
| Restructuring,  integration and retirement expenses (includes stock compensation expense of  $3,209 in 2008)                                             |       | 15,757   |       | —   |       | 3,904    |       |
| Amortization of  intangible assets                                                                                                                       |       | 33,074   |       | 32,162   |       | 23,049   |       |
|                                                                                                                                                     |       |     |       |     |       |     |       |
| Total operating  expenses                                                                                                                                |       | 381,056  |       | 328,833  |       | 259,864  |       |
|                                                                                                                                                     |       |     |       |     |       |     |       |
| Income from  operations                                                                                                                                  |       | 32,833   |       | 50,187   |       | 61,908   |       |
|                                                                                                                                                     |       |     |       |     |       |     |       |
| Net investment  income                                                                                                                                   |       | 2,242    |       | 3,831    |       | 7,571    |       |
| Interest expense                                                                                                                                         |       | (8,552   | )          | (8,063   | )          | (3,621   | )          |
| Other income  (expense), net                                                                                                                             |       | 2,002    |       | (174     | )          | (166     | )          |
|                                                                                                                                                     |       |     |       |     |       |     |       |
| Income before  provision for (benefit from) income taxes                                                                                                 |       | 28,525   |       | 45,781   |       | 65,692   |       |
|                                                                                                                                                     |       |     |       |     |       |     |       |
| Provision for  (benefit from) income taxes                                                                                                               |       | 3,053    |       | (148     | )          | 20,160   |       |
|                                                                                                                                                     |       |     |       |     |       |     |       |
| Net income                                                                                                                                               |       | $        | 25,472     |     | $          | 45,929   |       | $ | 45,532 |   |
|                                                                                                                                                     |       |     |       |     |       |     |       |
| Net income per  common share:                                                                                                                            |       |     |       |     |       |     |       |
| Basic                                                                                                                                                    |       | $        | 0.56       |     | $          | 0.91     |       | $ | 0.94 |   |
|                                                                                                                                                     |       |     |       |     |       |     |       |
| Diluted                                                                                                                                                  |       | $        | 0.55       |     | $          | 0.90     |       | $ | 0.92 |   |
|                                                                                                                                                     |       |     |       |     |       |     |       |
| Weighted average  common shares outstanding:                                                                                                             |       |     |       |     |       |     |       |
| Basic                                                                                                                                                    |       | 45,124   |       | 50,207   |       | 48,548   |       |
|                                                                                                                                                     |       |     |       |     |       |     |       |
| Diluted                                                                                                                                                  |       | 45,907   |       | 51,089   |       | 49,475   |       |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

57

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**AvocentCorporation**

**Consolidated Statements ofStockholders’ Equity and Comprehensive Income**

**Forthe Years Ended December 31, 2008, 2007 and 2006**

**(Inthousands)**

 
| ** **                                          | ** ** | ** **        | ** ** | ** **                | ** ** | **Accumulated**   | ** ** | **Retained**     | ** ** | ** **   | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|---------------------------|------------|-------------------|------------|------------------|------------|--------------|------------|------------|------------|
| ** **                                          | ** ** | ** **        | ** ** | ** **                | ** ** | **Other**         | ** ** | **Earnings**     | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **Common  Stock** | ** ** | **Additional Paid-** | ** ** | **Comprehensive** | ** ** | **(Accumulated** | ** ** | **Treasury** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **Shares**        | ** ** | **Amount**                | ** ** | **In  Capital**   | ** ** | **Income**       | ** ** | **Deficit)** | ** ** | **Stock**  | ** ** | **Total** | ** ** |
| Balance,  December 31, 2005                    |       | 51,612            |       | $                         | 52         |              | $          | 1,104,899        |       | $            | (497       | )          | $          | (307,503 | ) | $ | (81,629 | ) | $ | 715,322 |   |
| Acquisition of  LANDesk Group Limited               |       | —            |       | —                    |       | 23,408            |       | —           |       | —       |       | 180,529    |       | 203,937 |   |
| Net income                                          |       | —            |       | —                    |       | —            |       | —           |       | 45,532       |       | —     |       | 45,532 |   |
| Change in  accumulated other comprehensive income   |       | —            |       | —                    |       | —            |       | 562              |       | —       |       | —     |       | 562 |   |
| Issuances of  common stock, net                     |       | 1,770             |       | 1                         |       | 37,645            |       | —           |       | —       |       | —     |       | 37,646 |   |
| Income tax  benefit from exercise of stock options  |       | —            |       | —                    |       | 4,575             |       | —           |       | —       |       | —     |       | 4,575 |   |
| Stock-based  compensation                           |       | —            |       | —                    |       | 14,587            |       | —           |       | —       |       | —     |       | 14,587 |   |
| Purchase of 7,038  shares of treasury stock         |       | —            |       | —                    |       | —            |       | —           |       | —       |       | (188,318   | )          | (188,318 | ) |
| Balance,  December 31, 2006                    |       | 53,382            |       | 53                        |       | 1,185,114         |       | 65               |       | (261,971     | )          | (89,418    | )          | 833,843 |   |
| Implementation of  FIN 48                           |       | —            |       | —                    |       | —            |       | —           |       | (2,677       | )          | —     |       | (2,677 | ) |
| Adjustment to  acquisition of LANDesk Group Limited |       | —            |       | —                    |       | 1,435             |       | —           |       | —       |       | —     |       | 1,435 |   |
| Net income                                          |       | —            |       | —                    |       | —            |       | —           |       | 45,929       |       | —     |       | 45,929 |   |
| Change in  accumulated other comprehensive income   |       | —            |       | —                    |       | —            |       | 2,065            |       | —       |       | —     |       | 2065 |   |
| Issuances of  common stock, net                     |       | 528               |       | 1                         |       | 1,669             |       | —           |       | —       |       | —     |       | 1,670 |   |
| Income tax  benefit from exercise of stock options  |       | —            |       | —                    |       | 815               |       | —           |       | —       |       | —     |       | 815 |   |
| Stock-based  compensation                           |       | —            |       | —                    |       | 19,641            |       | —           |       | —       |       | —     |       | 19,641 |   |
| Purchase of 2,887  shares of treasury stock         |       | —            |       | —                    |       | —            |       | —           |       | —       |       | (77,059    | )          | (77,059 | ) |
| Balance,  December 31, 2007                    |       | 53,910            |       | 54                        |       | 1,208,674         |       | 2,130            |       | (218,719     | )          | (166,477   | )          | 825,662 |   |
| Net income                                          |       | —            |       | —                    |       | —            |       | —           |       | 25,472       |       | —     |       | 25,472 |   |
| Change in accumulated  other comprehensive income   |       | —            |       | —                    |       | —            |       | (3,736           | )          | —       |       | —     |       | (3,736 | ) |
| Issuances of  common stock, net                     |       | 623               |       | 1                         |       | (2,635            | )          | —           |       | —       |       | —     |       | (2,634 | ) |
| Income tax  benefit from exercise of stock options  |       | —            |       | —                    |       | 86                |       | —           |       | —       |       | —     |       | 86 |   |
| Stock-based  compensation                           |       | —            |       | —                    |       | 24,715            |       | —           |       | —       |       | —     |       | 24,715 |   |
| Purchase of 4,200  shares of treasury stock         |       | —            |       | —                    |       | —            |       | —           |       | —       |       | (67,408    | )          | (67,408 | ) |
| Balance,  December 31, 2008                    |       | 54,533            |       | $                         | 55         |              | $          | 1,230,840        |       | $            | (1,606     | )          | $          | (193,247 | ) | $ | (233,885 | ) | $ | 802,157 |   |

 

| ** **                                                         | ** ** | **For the years ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Comprehensive  income**                                          | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                         |       | $                                         | 25,472     |   | $ | 45,929 |   | $ | 45,532 |   |
| Changes in  unrealized gain (loss) on investments, net of tax      |       | (1                                        | )          | 91 |   | 412 |   |
| Changes in  unrealized gain (loss) interest rate swaps, net of tax |       | (1,797                                    | )          | 66 |   | (456 | ) |
| Changes in  foreign currency translation adjustment                |       | (1,938                                    | )          | 1,908 |   | 606 |   |
| Total  comprehensive income                                        |       | $                                         | 21,736     |   | $ | 47,994 |   | $ | 46,094 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

58

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**AvocentCorporation**

**Consolidated Statements of Cash Flows**

**Forthe Years Ended December 31, 2008, 2007 and 2006**

**(Inthousands)**

 
| ** **                                                                              | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                                                  |       |     |       |     |       |     |       |
| Net income                                                                              |       | $        | 25,472     |     | $          | 45,929   |       | $ | 45,532 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:      |       |     |       |     |       |     |       |
| Depreciation                                                                            |       | 9,188    |       | 9,690    |       | 8,689    |       |
| Amortization of  intangible assets                                                      |       | 47,669   |       | 43,629   |       | 26,626   |       |
| Stock-based  compensation                                                               |       | 24,715   |       | 19,641   |       | 14,587   |       |
| Acquired  in-process research and development expenses                                  |       | 700      |       | —   |       | 20,700   |       |
| Amortization of  premium (discount) on investments and net loss on sales of investments |       | —   |       | (156     | )          | 41       |       |
| Net loss on  sales of property and equipment                                            |       | 523      |       | 404      |       | —   |       |
| Deferred income  taxes                                                                  |       | (8,605   | )          | (14,816  | )          | (8,261   | )          |
| Excess tax benefit  from stock-based compensation                                       |       | (86      | )          | (815     | )          | (4,575   | )          |
| Changes in  operating assets and liabilities (net of effects of acquisitions):          |       |     |       |     |       |     |       |
| Accounts  receivable, net                                                               |       | (5,026   | )          | 16,689   |       | (29,696  | )          |
| Inventories, net                                                                        |       | 1,654    |       | 11,697   |       | (13,758  | )          |
| Other assets                                                                            |       | 1,243    |       | 1,983    |       | (1,339   | )          |
| Accounts payable                                                                        |       | (4,684   | )          | 3,768    |       | (12,387  | )          |
| Accrued  liabilities, wages and commissions                                             |       | 4,912    |       | (439     | )          | 8,347    |       |
| Income taxes,  receivable and payable                                                   |       | (1,198   | )          | (3,894   | )          | (4,527   | )          |
| Other  liabilities                                                                      |       | 2,439    |       | 6,481    |       | 15,722   |       |
| Net cash provided  by operating activities                                              |       | 98,916   |       | 139,791  |       | 65,701   |       |
| Cash flows from  investing activities:                                                  |       |     |       |     |       |     |       |
| Purchase of  Ergo, net of cash acquired                                                 |       | (28,443  | )          | —   |       | —   |       |
| Purchase of  Touchpaper, net of cash acquired                                           |       | (47,113  | )          | —   |       | —   |       |
| Purchase of  LANDesk, net of cash acquired (1) (2)                                 |       | (583     | )          | —   |       | (202,194 | )          |
| Purchase of  Cyclades, net of cash acquired                                             |       | —   |       | —   |       | (91,982  | )          |
| Purchase of  other intangibles                                                          |       | (2,066   | )          | (3,791   | )          | (5,329   | )          |
| Purchases of  property and equipment                                                    |       | (10,487  | )          | (9,025   | )          | (4,750   | )          |
| Purchases of  available-for-sale investments                                            |       | —   |       | (75,512  | )          | (159,799 | )          |
| Proceeds from  maturities and sales of available-for-sale investments                   |       | 5,942    |       | 96,680   |       | 412,922  |       |
| Net cash  provided by (used in) investing activities                                    |       | (82,750  | )          | 8,352    |       | (51,132  | )          |
| Cash flows from  financing activities:                                                  |       |     |       |     |       |     |       |
| Repayment of  short-term debt assumed in acquisitions                                   |       | —   |       | —   |       | (1,965   | )          |
| Borrowings  (payments) under unsecured line of credit, net                              |       | (15,000  | )          | (55,000  | )          | 150,000  |       |
| Borrowings under  unsecured term loan                                                   |       | 90,000   |       | —   |       | —   |       |
| Payment of debt  financing costs                                                        |       | (1,231   | )          | —   |       | (2,005   | )          |
| Excess tax  benefit from stock-based compensation                                       |       | 86       |       | 815      |       | 4,575    |       |
| Proceeds from  employee stock option exercises                                          |       | 1,627    |       | 5,231    |       | 37,646   |       |
| Purchases of  treasury stock                                                            |       | (67,408  | )          | (77,059  | )          | (188,318 | )          |
| Net cash  provided by (used in) financing activities                                    |       | 8,074    |       | (126,013 | )          | (67      | )          |
|                                                                                    |       |     |       |     |       |     |       |
| Effect of  exchange rate changes on cash and cash equivalents                           |       | (2,565   | )          | 1,752    |       | 374      |       |
|                                                                                    |       |     |       |     |       |     |       |
| Net increase in  cash and cash equivalents                                              |       | 21,675   |       | 23,882   |       | 14,876   |       |
| Cash and cash  equivalents, beginning of year                                           |       | 105,183  |       | 81,301   |       | 66,425   |       |
|                                                                                    |       |     |       |     |       |     |       |
| Cash and cash  equivalents, end of year                                                 |       | $        | 126,858    |     | $          | 105,183  |       | $ | 81,301 |   |
|                                                                                    |       |     |       |     |       |     |       |
| Supplemental  disclosures of cash flow information:                                     |       |     |       |     |       |     |       |
| Cash paid during  the year for income taxes                                             |       | $        | 12,856     |     | $          | 18,562   |       | $ | 26,788 |   |
|                                                                                    |       |     |       |     |       |     |       |
| Cash paid during  the year for interest                                                 |       | $        | 6,710      |     | $          | 7,273    |       | $ | 2,986 |   |

----

(1)          Supplemental disclosure 2008 — The adjustments to LANDesk purchaseconsideration is the result of the earn-out amendment which resulted in apayable to the former shareholders of LANDesk (*see note 6*).****An additional $1,700 is payable as of December 31,2008, and was paid subsequently in the first quarter 2009.  The 2008 cash flows exclude this non-cashtransaction.

 

(2)          Supplemental disclosure 2006 — In addition to the cash paid at theclosing, we issued 7,073 shares of our common stock valued at $199,528 toLANDesk shareholders in 2006. The issuance of common stock was recorded asnon-cash consideration for the acquisition.

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

59

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**AvocentCorporation**

**Notes to Consolidated FinancialStatements**

**Forthe Years Ended December 31, 2008, 2007 and 2006**

**(InThousands, except per share data)**

 

**1.**                                      Nature of Business and Basis ofPresentation

** **

Avocent Corporation designs, manufactures, licenses, and sellssoftware and hardware products and technologies that provide connectivity andcentralized management of information technology (IT) infrastructure.  We (meaning Avocent and its wholly-ownedsubsidiaries) provide connectivity and systems management products andtechnologies that centralize control of servers, desktop computers, serialdevices, wireless devices, mobile devices, and network appliances, thusincreasing the efficiency of IT resources. Server manufacturers resell private-labeled Avocent KVM (keyboard,video, and mouse) switches and embedded software and hardware technology intheir systems, and companies large and small depend on our software andhardware products and technologies for managing their growing ITinfrastructure.

 

We report our annual results based on years ending December 31.  In the past, we reported our quarterlyresults for the first three interim periods based on 13 week periods ending onFridays and for the fourth interim period ending on December 31.  Beginning January 1, 2009, we willreport our quarterly periods based on the calendar month end.

 

Theresults of acquired companies are included in the consolidated results from therespective dates of acquisition, including Touchpaper Group Limited, which wasacquired on June 30, 2008 (in our fiscal third quarter), and the assetsand certain liabilities of Ergo 2000 Inc., which was acquired July 10,2008, Cyclades Corporation (“Cyclades”), which was acquired on March 30,2006, and LANDesk Group Limited (“LANDesk”), which was acquired on August 31,2006.

 

**2.**                                      Summary of Significant AccountingPolicies

** **

Ourprincipal accounting policies are as follows:

 

**Principlesof Consolidation**— Our consolidated financial statements include all our wholly-ownedsubsidiaries.  All significantintercompany accounts and transactions have been eliminated in consolidation.

 

**Cash andCash Equivalents**— We consider all highly liquid instruments with an original maturity of threemonths or less when purchased to be cash equivalents, except that certaininvestments with original maturities of less than 90 days are classified asshort term investments when such investments are a part of our investmentportfolio.

 

**Inventories** — Raw materials, work in process andfinished goods inventories are recorded using the lower of cost or market, withcost being determined using the first-in first-out (FIFO) method.  We use standard costs for material, labor andoverhead to value our inventory and review and revise our standards on aquarterly basis. Therefore, inventory costs approximate actual costs at the endof each reporting period.  We write down inventory for estimatedobsolescence or unmarketable inventory to the estimated market value based uponassumptions about future demand and market conditions.

 

**FinancialInstruments**— The carrying amounts reported in the balancesheets for cash equivalents, short-term investments, accounts receivable andaccounts payable approximate fair value because of the immediate or short-termmaturity of these financial instruments. Our unsecured bank line of credit bears a variable interest rate;therefore, the carrying value of the debt obligation approximates fairvalue.  Our interest rate swap and shortterm forward contracts are reported at fair value in the consolidated financialstatements.

 

**UnsecuredCredit Facility**—We classify the entire obligation under our unsecured credit facility as longterm as it carries a five year term and has no payment obligations prior to theend of the term.

 

**Investments**—****Ourinvestments consist primarily of bank deposits, corporate bonds, and U.S.government agency securities.  Debtsecurities that we have the positive intent and ability to hold to maturity areclassified as held-to-maturity securities and are reported at amortized cost.  Debt and equity securities not classified aseither held-to-maturity securities or trading securities and that have readilydeterminable fair values are classified as available-for-sale securities andare reported at fair value, with unrealized gains and losses excluded fromearnings and reported as a separate component of stockholders’ equity, net ofdeferred income taxes.  All investmentswere classified as available-for-sale securities at December 31, 2007. Thefair value of these investments approximated their cost.  We held no such investments as of December 31,2008.  Unrealized losses are chargedagainst earnings when a decline in fair value is determined to be other thantemporary.  Certain investments withoriginal maturities of less than 90 days are classified as short terminvestments when such are a part of our investment portfolio.  Realized gains and losses are accounted foron the specific identification method.

 

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**Propertyand Equipment** —Property and equipment are carried at cost, less accumulated depreciation, andinclude expenditures that substantially increase the useful lives of existingassets.  Maintenance and repairs arecharged to current operations as incurred Upon sale, retirement, or other disposition of these assets, the costand related accumulated depreciation are removed from the respective accounts,and any gain or loss on the disposition is included in income from operations.

 

Depreciationexpense is computed using the straight-line method over the following estimateduseful lives:

 

| **Description**                  | ** ** | **Useful Life**                      | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| Land  improvements               |       | 30 years                             |       |
| Buildings                        |       | 39 years                             |       |
| Leasehold  improvements          |       | Lesser of lease term or  useful life |       |
| Computer  software and equipment |       | 3 — 5 years                     |       |
| Other equipment                  |       | 3 — 5 years                     |       |

 

**OtherIntangible Assets**— Other intangible assets include acquired intangible assets and capitalizedcosts directly incurred in obtaining an intangible.  Other intangible assets are amortized on astraight-line basis over the following estimated useful lives:

 

| **Description**                  | ** ** | **Useful Life**            | ** ** |
|----------------------------------|------------|----------------------------|------------|
| Developed  technology            |       | 3 — 5 years           |       |
| Core technology                  |       | 6 years                    |       |
| Patents and  trademarks          |       | 5 — 7 years           |       |
| Customer base  and certification |       | 3 — 7 years           |       |
| Maintenance  contracts           |       | 5 years                    |       |
| Non-compete agreements           |       | 3 years (contract  period) |       |
| Other intangible  assets         |       | 3 — 7 years           |       |

 

**Long-LivedAssets —** Werecognize impairment losses on long-lived assets used in operations whenindicators of impairment are present and the undiscounted cash flows estimatedto be generated by those assets are less than the assets’ carrying values.  An impairment loss would be recognized in theamount by which the recorded value of the asset exceeds the fair value of theasset, measured by the quoted market price of an asset or an estimate based onthe best information available in the circumstances.  There were no such losses recognized during2008, 2007, or 2006.

 

**Goodwill** — We record goodwill when the cost of anacquired entity exceeds the net amounts assigned to the assets acquired(including other identified intangible assets) and liabilities assumed.  We performed an annual impairment test ofgoodwill in the fourth quarters of 2008, 2007, and 2006.  The tests conducted during 2008, 2007, and2006 concluded that there had been no impairment of goodwill and that noadjustments were required. However, our 2008 testing resulted in a marginalexcess fair value over the carrying value of the LANDesk reporting unit.  Additionally, our market capitalization hasdeclined significantly in 2009.  Based onthis factor, we currently intend to perform a goodwill impairment test duringthe first quarter of 2009 and as deemed necessary until we determine that thepotential risk of impairment is minimal. If such testing indicates impairment, it could have an adverse impact onour results of operations and financial condition (*see Note 6*).

 

**Allowancefor Doubtful Accounts**— Prior to extending credit to anew customer, we perform a detailed credit review of the customer and establishcredit limits based on the results of the credit review.  We review collection experience periodicallyto determine if the customer’s payment terms and credit limits need to berevised.  We maintain allowances fordoubtful accounts for estimated losses resulting from the inability of ourcustomers to make required payments.  Ifthe financial condition of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may be required.  If circumstances change with regard toindividual receivable balances that had previously been determined to beuncollectible (and for which a specific reserve had been established), areduction in our allowance for doubtful accounts may be required.

** **

**Allowancefor Sales Returns**—Our hardware sales generally include a one-month unconditional returnpolicy.  We also allow additional rightsof return to certain of our distributors, which generally extend the returnperiod to 90 days.  We reserve forestimated sales returns as a reduction of revenue and cost of sales at the timethe product revenue is recognized based on historical sales return experience,which management believes provides a reasonable estimate of futurereturns.  The 

 

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allowancefor sales returns totaled approximately $5,088 and $5,016 at December 31,2008 and 2007, respectively. The reserve is included as a reduction in thecarrying value of accounts receivable and sales in the accompanyingconsolidated balance sheets and statements of income, respectively.

 

**Liabilityfor Warranty Returns**— Our hardware products generally include warranties of one to three years forproduct defects.  We accrue for warrantyreturns at cost to repair or replace products. We also offer extended warranties to customers and recognize the revenueassociated with the extended warranties over the life of the warranty *(see Note 7*).  Theliability for warranty returns totaled approximately $2,245 and $1,854 at December 31,2008 and 2007, respectively.  Theseliabilities are included in accrued liabilities in the accompanyingconsolidated balance sheets.

 

**Stock-BasedCompensation**—****On January 1, 2006, we adopted SFAS 123 (revised2004), “*Share-Based Payment”*,(SFAS 123R), which requires the measurement and recognition of compensationexpense for all share-based payment awards made to employees and directorsbased on estimated fair values.  SFAS123R requires companies to estimate the fair value of share-based paymentawards on the date of grant using an option pricing model for stock options orusing the current share price for awards of time-based or performance-basedrestricted stock units.  The value of theportion of the award that is ultimately expected to vest will be recognized asexpense over the requisite service periods in our consolidated statements ofincome.  Compensation expense for allstock option and time-based restricted stock unit payment awards are recognizedusing the ratable single-option approach. Compensation expense for performance-basedrestricted stock unit payment awards is recognized using the FIN 28tranche-based approach based on an estimate of expected outcomes and isadjusted prospectively as new information about the expected outcome becomesavailable.  Stock-based compensationexpense recognized in our consolidated statements of income is based on awardsultimately expected to vest; therefore, the expense has been reduced forestimated forfeitures.  SFAS 123Rrequires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates.

 

We use the Black-Scholesoption pricing model (the “Black-Scholes Model”) for the purpose of determiningthe estimated fair value of stock options on the date of grant under SFAS123R.  In addition, we use a Monte CarloSimulation pricing model (the “Monte Carlo Model”) for the purpose ofdetermining the estimated fair value of RSU’s with market based conditions onthe date of grant under SFAS 123R.  Ourpricing models require the input of certain assumptions that involvejudgment.  Because our employee stockoptions have characteristics significantly different from those of tradedoptions, and because changes in the input assumptions can materially affect thefair value estimate, existing models may not provide reliable measures of fairvalue of our employee stock options.  Wewill continue to assess the assumptions and methodologies used to calculateestimated fair value of stock-based compensation.  If circumstances change, and additional databecomes available over time, we may change our assumptions and methodologies,which may materially impact the fair value determination.

 

**Concentrationsof Customer Base and Credit Risk —**Financial instruments that potentially subject us toconcentrations of credit risk consist primarily of cash and cash equivalents,investments held within our trust funds and escrow accounts, accountsreceivable and derivative instruments. We make efforts to control our exposureto credit risk associated with these instruments by (i) placing our assetsand other financial interests with a diverse group of credit-worthy financialinstitutions; (ii) holding high-quality financial instruments whilelimiting investments in any one instrument; and (iii) maintaining strictpolicies over credit extension that include credit evaluations, credit limitsand monitoring procedures, although generally we do not have collateralrequirements.

 

Thefollowing identifies our customers that exceeded 10% of our sales for the years2008, 2007 and 2006:

 
| ** **                                  | ** ** | **For the years ended December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|------------|------------|
| ** **                                  | ** ** | **2008**                                  | ** ** | ** ** | ** ** | **2007** | ** ** | ** ** | ** ** | **2006** | ** ** | ** ** | ** ** |
| Customers  greater than 10% of sales:       |       |                                      |       |       |       |   |   |   |   |   |   |   |   |
| Dell                                        |       | $                                         | 73,310     |       | 11         | % | $ | 76,990 |   | 13 | % | $ | 71,926 |   | 14 | % |
| Hewlett-Packard  (2)                        |       | —                                    |       |       |       | 70,341 |   | 12 | % | 72,640 |   | 14 | % |
| Ingram Micro (1)                            |       | 84,860                                    |       | 13         | %          | — |   |   |   | — |   |   |   |
| Tech Data (2)                               |       | —                                    |       |       |       | 67,642 |   | 11 | % | 64,143 |   | 12 | % |
| Total customers  greater than 10% of sales: |       | $                                         | 158,170    |       | 24         | % | $ | 214,973 |   | 36 | % | $ | 208,709 |   | 40 | % |

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*(1) Sales to this customer were less than 10% of sales in 2007 and2006.*

*(2) Sales to these customers were less than 10% of sales in 2008.*

 

 

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Salesto these customers are reported primarily through Management Systems, but alsoare reported through LANDesk.  Accountsreceivable from these customers represented approximately 25% and 26% of tradereceivables at December 31, 2008 and 2007, respectively.  Our top five customers, which include threeOEMs and two distributors, accounted for 48% of sales in 2008, 52% in 2007, and56% in 2006.

 

We place cash andinvestments in several high-quality financial institutions and seek to limitthe credit exposure from any one institution, issuer or instrument.  We also face interest rate risk on our bankcredit facility which currently bears interest at a variable rate of LIBOR plus150 basis points.  We have hedged thisexposure to interest rate risk with interest rate swaps, which have a combinednotional amount of $170 million, through Regions Bank and SunTrust Bank.

 

**IncomeTaxes** — Weaccount for income taxes using the asset and liability method.  We provide for income taxes currently payableand, in addition, provide deferred income taxes for temporary differencesbetween the tax basis of assets and liabilities and their reported amounts inthe consolidated financial statements and for known tax contingencies.  Temporary differences relate principally tothe allowance for doubtful accounts, allowance for sales returns, liability forwarranty claims, unrealized gain (loss) on investments, accumulateddepreciation, loss on write-down of investments, inventory reserves, acquiredintangible assets, operating losses, goodwill amortized for tax purposes butnot GAAP, and state research credit carry forwards.  We intend to permanently reinvest ourearnings from foreign subsidiaries in our international operations and,accordingly, no provision for any incremental net U.S. federal or state incometaxes has been made for these unremitted earnings.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to berealized.  We have approximately $7,000and $4,000 of valuation allowances recorded against deferred tax assets arisingfrom certain foreign subsidiaries operating losses and certain federal andstate research credits at December 31, 2008 and 2007, respectively.  Tax contingencies are recorded to addresspotential exposures involving tax positions taken which could be challenged bytax authorities.  These potentialexposures result from the varying applications of statutes, rules, regulations,and interpretations.  As of December 31,2008, we had total reserves for uncertain tax positions related to grossunrecognized tax benefits of $5,300 of which $3,900, if recognized, wouldaffect the effective tax rate.  As of December 31,2007, we had total reserves for uncertain tax positions related to grossunrecognized tax benefits of $10,700 of which $8,900, if recognized, wouldaffect the effective tax rate.

 

**ForeignCurrency** — Werecord transactions denominated in foreign currencies on a monthly basis usingthe average monthly exchange rate. Assets and liabilities denominated in foreign currencies are translatedat the balance sheet dates using the closing rates of exchange between thoseforeign currencies and the U.S. Dollar with any transaction gains or lossesreported in other income (expense). Adjustments from translating financial statements of internationalsubsidiaries are recorded as a separate component of stockholders’ equity.

 

We useforward contracts to reduce our foreign currency exposure related to the netcash flows from our European and Asian operations. The majority of thesecontracts are short-term contracts (three months or less) and aremarked-to-market each quarter and included in receivables or payables, with theoffsetting gain or loss included in other income (expense) in the accompanyingconsolidated statements of income. At December 31, 2008, we had four suchcontracts outstanding with a fair value of $26. At December 31, 2007, we had three such contracts outstanding witha fair value of $8.

 

**Derivative Instruments and Hedging Activities**— We enter into interest rate swapagreements in accordance with our risk management policy to partially reducerisks related to our cash flows associated with our floating rate line ofcredit which is subject to changes in the market rate of interest.  We do not use derivative instruments fortrading purposes.  We record the fairvalue of interest rate swap agreements in other assets or liabilities on theconsolidated balance sheet.  Changes inthe fair value of interest rate swap agreements that are designated andeffective as cash flow hedges are recorded in accumulated other comprehensiveincome (loss) (“OCI”).  Those changes arereleased from OCI to the consolidated statement of income as interest expensecontemporaneously with the earnings effects of the hedged item (the underlyingdebt agreement).  The settled amount of aswap that has been terminated prior to its original term continues to bedeferred in OCI and is recognized in the consolidated statement of income overthe term of the underlying debt agreement designated as the hedged item.  Changes in the fair value of interest rateswap agreements that are not effective as hedges are recorded immediately inthe consolidated statement of income as interest expense.  We have designated our interest rate swapagreements as cash flow hedges.  Cashflows from hedging activities are reported in the consolidated statement ofcash flows in the same classification as the hedged item.

 

**RevenueRecognition** — Wegenerally record sales of our hardware products upon shipment of the relatedproduct, net of any discounts as we generally have no significant post deliveryobligations, the product price is fixed or determinable, collection of theresulting receivable is probable, and product returns are reasonably estimable.Product shipments occur upon receipt of a purchase order from a customer.Revenue on products shipped FOB destination is recorded when the customer takespossession of the goods, and revenue on products shipped FOB shipping point isrecorded when the goods leave our facilities. Our shipping and handling feesare included in net sales, and the related costs are included in cost of sales inthe accompanying consolidated statements of income.

 

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Wegenerally record royalty revenue from OEMs upon shipment of the relatedproducts in which our software or firmware is embedded by the OEMs, based uponshipment data provided by the OEMs.  We generally record license revenuefrom sales of our software upon shipment or electronic transfer of thesoftware.  We generally defer revenuefrom the sale of extended warranty agreements, software subscriptions, andsoftware support and maintenance agreements. The deferred revenue is amortized into income on a pro rata basis overthe applicable contract lives.

 

We recognize softwarerevenue in accordance with Statements of Position 97-2, “Software RevenueRecognition” (SOP 97-2), and 98-9, “Modification of SOP 97-2, Software RevenueRecognition, with Respect to Certain Transactions” (SOP 98-9). We deriverevenue from the license of software products under software license agreementsand subscription agreements and from the delivery of professional services andmaintenance services. When contracts contain multiple elements, andvendor-specific objective evidence (VSOE) of fair value exists for allundelivered elements, we account for the delivered elements in accordance withthe “Residual Method” prescribed by SOP 98-9 when VSOE does not exist for thedelivered element. Multiple element arrangements generally includepost-contract customer support (or maintenance), and in some cases,subscriptions and other services. VSOE of fair value is generally determined bysales of the same element or service sold separately to other customers, orwith respect to maintenance and subscriptions, through a renewal rate specifiedin the related arrangement. When VSOE of fair value does not exist for allundelivered elements in our multiple element contracts we defer revenue relatedto the entire arrangement until the earlier of the point at which (a) suchsufficient VSOE does exist or (b) all elements of the arrangement havebeen delivered and all other revenue recognition criteria have been met.

 

Software license revenueis recognized when persuasive evidence of an arrangement exists, the fee isfixed or determinable, collectability is probable, and delivery and customeracceptance (including the expiration of an acceptance period), if requiredunder the terms of the contract, of the software products have occurred.  In instances where vendor obligations remain,revenue is deferred until the obligation has been satisfied.

 

Revenue from professionalservices consists of non-recurring engineering, training and implementationservices. Non-recurring engineering and implementation service revenue isrecognized as the services are performed for time and materials contracts orupon acceptance on fixed price contracts. Training revenue is recognized as theservices are performed.

 

Maintenance andsubscription revenue is recognized ratably over the term of the contract, whichis generally twelve to thirty six months. Maintenance contracts include theright to unspecified upgrades on a when-and-if available basis, and ongoingsupport.

 

**Researchand Development Expense** — Research and development costs are expensed as incurred.  In-process research and development obtainedthrough acquisitions of other companies is expensed upon consummation of theacquisition.

 

**SoftwareDevelopment Costs**— Development costs for software to be sold, integrated into our other productsor otherwise marketed are included in research and development costs and areexpensed as incurred. Production costs for software incurred aftertechnological feasibility is established and until such time as the software isavailable for general release to customers are capitalized. The capitalizedcosts are then amortized on a straight-line basis over the estimated productlife, or using the ratio of current revenue to total projected product revenue,whichever is greater. To date, the period between achieving technologicalfeasibility, which we have defined as the establishment of a working modelwhich typically occurs when beta testing commences, and the generalavailability of such software has been short and software production costsqualifying for capitalization have been insignificant. Accordingly, through December 31,2008, we have not capitalized any software production costs.  Certain developed software costs included inother intangible assets as a result of business combinations are amortized as acomponent of cost of sales in the accompanying statements of income.

 

**AdvertisingExpense****—** Advertising costs are expensed as incurred and areincluded as a component of selling, general and administrative expenses.Advertising expense totaled approximately $6,315, $7,829, and $7,807 for theyears ended December 31, 2008, 2007, and 2006, respectively.  We participate in cooperative advertising andmarket development programs with certain resellers, distributors and OEMs. These programs are used by us to reimburse resellers, distributors and OEMs forthe actual costs of certain forms of advertising, and generally allowresellers, distributors and OEMs reimbursement up to a specified percentage ofnet purchases. Our costs associated with these programs are estimated andaccrued at the time of sale, and are included in sales and marketing expensesin the accompanying consolidated statements of income.

 

**NetInvestment Income**—****Net investment income includes incomefrom interest, dividends, rental property held for lease and accretion of bondpremiums and discounts, net of related expenses.

 

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**InterestExpense —**Interestexpense****consists of interest and amortizationof debt issuance costs related to the bank line of credit, and includes theeffects of the Company’s interest rate swap hedges.

 

**Loan Origination Costs****—**We recordcosts incurred directly related to obtaining the line of credit in accordancewith APB 21, “*Interest on Receivables andPayables.”  *Under this method, we capitalize loan originationcosts and amortize the costs over the life of the agreement under thestraight-line method as the related interest expense is not materiallydifferent than the expense calculated under the interest method.

 

**OtherIncome (Expense), net —**Other income (expense) consists primarily of foreign currency exchangegains or losses.

 

**ComprehensiveIncome —**Comprehensiveincome includes all changes in equity (net assets) during a period fromnon-owner sources. Items included in comprehensive income include net income,foreign currency translation adjustments, unrealized gains and losses onavailable-for-sale securities, and changes in the fair value of interest rateswaps.

 

**EarningsPer Share —**Earningsper common share, and earnings per common share assuming dilution, are based onthe weighted average number of common and common equivalent, when dilutive,shares outstanding during the year (see *Note 10*).

 

**Use ofEstimates**— Thepreparation of our consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosures of contingent assets andliabilities at the dates of the financial statements and reported amounts ofrevenue and expenses during the reporting periods. Actual results could differfrom those estimates.

 

**Reclassifications**— Certainreclassifications have been made to the prior year’s consolidated financialstatements in order to conform to the 2008 presentation. Thesereclassifications had no effect on previously reported net income, net cashprovided by operating activities, net cash used in investing activities nortotal stockholders’ equity.

 

**Recently Issued AccountingStandards** — In September 2006,the FASB issued SFAS No. 157, “*Fair Value Measurements”*(SFAS 157), which clarifies that fair value estimates should be based on theassumptions market participants would use when pricing an asset or liabilityand establishes a fair value hierarchy that prioritizes the information used todevelop those assumptions.  Under SFAS157, fair value measurements would be separately disclosed by level within thefair value hierarchy.  SFAS 157 iseffective for fiscal years beginning after November 15, 2007.  On February 12, 2008, the FASB delayedthe effective date of SFAS 157 for nonfinancial assets and liabilities, exceptfor items that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually), to fiscal years beginningafter November 15, 2008.  We adoptedSFAS 157 as of January 1, 2008, with the exception of the application ofthe statement to nonfinancial assets and nonfinancial liabilities. Refer toNote 18 to the Condensed Consolidated Financial Statements for additional discussionon fair value measurements.

 

Relative to SFAS 157, the FASB issued FASB StaffPositions (FSP) 157-1, 157-2 and 157-3. FSP 157-1 amends SFAS 157 to excludeSFAS No. 13, “*Accounting for Leases*,” (SFAS 13)and its related interpretive accounting pronouncements that address leasingtransactions, while FSP 157-2 delays the effective date of the application ofSFAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancialassets and nonfinancial liabilities that are recognized or disclosed at fairvalue in the financial statements on a nonrecurring basis. These nonfinancialitems include assets and liabilities such as reporting units measured at fairvalue in a goodwill impairment test and nonfinancial assets acquired andliabilities assumed in a business combination. The provisions of SFAS 157 related to other nonfinancial assets andliabilities were effective for us on January 1, 2009 and will be appliedprospectively.  FSP 157-3 clarified theapplication of SFAS 157 in determining the fair value of financial assets whenthe markets for those assets are inactive. FSP 157-3 was effective on issuancein October 2008, including periods in which financial results have not beenissued.  We have evaluated FSP 157-1 and157-3, and do not believe they have a material impact on our financialstatements.  We are still evaluating FSP157-2 and the impact it may have on our financial statements. 

 

In February 2007,the FASB issued SFAS No. 159, “*The FairValue Option for Financial Assets and Financial Liabilities — Including anamendment of FASB Statement No. 115”* (SFAS 159).  SFAS 159 permits an entity to elect fairvalue as the initial and subsequent measurement attribute for many financialassets and liabilities.  Entities electingthe fair value option would be required to recognize changes in fair value inearnings.  Entities electing the fairvalue option are required to distinguish, on the face of the statement offinancial position, the fair value of assets and liabilities for which the fairvalue option has been elected and similar assets and liabilities measured usinganother measurement attribute. SFAS 159 is effective for fiscal years beginning after November 15,2007.  The adjustment to reflect thedifference between the fair value and the carrying amount would be accountedfor as a cumulative-effect adjustment to retained earnings as of the date ofinitial adoption.  We have adopted SFAS159 and have elected not to measure any additional financial instruments orother items at fair value.

 

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 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 of operationsif changes in the valuation allowances occur after adoption of the standard.  We will assess the impact of SFAS 141(R) onfuture acquisitions, however the application of SFAS 141(R) will result ina significant change in accounting for any such future acquisitions after theeffective date.

 

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

 

In April 2008, theFASB issued FASB Staff Position No. 142-3, “Determination of the UsefulLives of Intangible Assets”, which amends the factors that should be consideredin developing renewal or extension assumptions used to determine the usefullife of an intangible asset.  Thisinterpretation is effective for financial statements issued for fiscal yearsbeginning after December 15, 2008 and interim periods within thoseyears.  We are currently evaluating the impactof this staff position, but do not expect its adoption to have a materialimpact on our financial statements.

 

**3.**                                      Acquisitions

** **

**TouchpaperGroup Limited** —On June 30, 2008 (in our fiscal third quarter), we acquired TouchpaperGroup Limited, a privately-held company based in Woking, U.K.(Touchpaper).  Touchpaper employedapproximately 200 people, located primarily in the UK.  We acquired Touchpaper for $45,740 in cashconsideration plus assumed liabilities and acquisition costs.   The Touchpaper product lines includesoftware for incident management, problem management and service deskmanagement.  We believe the acquisitionof Touchpaper and its products will enhance and expand our IT OperationsManagement solutions and products.  Theresults of Touchpaper’s operations have been included in the consolidatedfinancial statements since the date of acquisition.

 

The acquisition wasrecorded under the purchase method of accounting, and the purchase cost wasallocated based on the fair value of the assets acquired and liabilitiesassumed.  In accordance with generallyaccepted accounting principles, purchased research and development costsallocated to patented and patent-pending technology were capitalized and willbe amortized over the respective estimated useful lives.  The remaining amounts of purchased researchand development were expensed upon the closing of the transaction.  The goodwill recorded as a result of theacquisition will not be amortized but will be allocated to our LANDesk businessunit (see Note 6) and will be included in Avocent’s annual review of goodwillfor impairment.  The amortization of theother intangible assets acquired and the goodwill recorded is not taxdeductible.   A summary of the total purchaseconsideration, excluding cash received, is as follows:

 

| Cash paid for  outstanding shares  |   | $      | 45,740 |   |
|------------------------------------|--------|--------|--------|--------|
| Acquisition  costs paid by Avocent |   | 4,248  |   |
|                               |   |   |   |
| Total purchase  consideration      |   | $      | 49,988 |   |

 

We funded theacquisition through available cash and through borrowings on our credit facility.  On the closing of the Touchpaper transaction,we acquired $2,875 in cash held by Touchpaper. The purchase consideration was allocated, on a preliminary basis, to theestimated fair values of the assets acquired and liabilities assumed, asfollows:

 
| ** **                             | ** ** | **Purchase  Price  Allocation** | ** ** | **Amortization  Period** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|--------------------------|------------|
| Tangible assets                        |       | $                               | 14,583     |                     | —     |   |
| In-process  research and development   |       | 700                             |       | —                   |       |
| Developed  technology                  |       | 29,000                          |       | 5 years                  |       |
| Maintenance  contracts                 |       | 8,000                           |       | 5 years                  |       |
| Customer base                          |       | 2,000                           |       | 5 years                  |       |
| Trademarks and  non-compete agreements |       | 225                             |       | 3 years                  |       |
| Goodwill                               |       | 23,767                          |       | —                   |       |
| Deferred taxes                         |       | (10,921                         | )          | —                   |       |
| Assumed  liabilities                   |       | (17,366                         | )          | —                   |       |
|                                   |       |                            |       |                     |       |
|                                   |       | $                               | 49,988     |                     |       |   |

 

66

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The capitalized amountsfor intangibles will be amortized on a straight-line basis over the estimatedlife of the respective intangibles.  Anescrow account with approximately $11,200 in cash is being held forindemnifiable claims for a period of 24 months after the acquisition.

 

The $700 in fair value ofall of the in-process research and development (“IPR&D”) received in theacquisition was determined using a form of the discounted cash flow methodknown as the multi-period excess earnings method.  These amounts were for particular researchand development projects that have no alternative future uses and weretherefore expensed rather than capitalized at the time of purchase.  Touchpaper’s in-process research anddevelopment activities consisted of the development of its IT BusinessManagement Version 7.2.6 software product. This product was completed during October 2008.

 

The new generations ofproducts under development are projected to sell through sales channels and tocustomers that are substantially the same as current and historical saleschannels and customers.  Pricing andmargins will not differ significantly from historical pricing and margins.  Revenue for the project under development wasprojected through 2017.  Net incomeattributable to IPR&D was calculated by applying Touchpapers’ projected gross,operating, and net profit margins to IPR&D revenue, while consideringAvocent’s historical results and industry prospects.  This product has an estimated economic lifeof approximately 7 years.  The discountrate used to value IPR&D was 21%.

 

**Ergo 2000, Inc.****—**On July 10, 2008, weacquired certain assets and assumed certain liabilities of Ergo 2000, Inc.(Ergo), a privately held provider of rack-mounted LCD consoles withapproximately 35 employees based in Fullerton, California, for approximately$29,000 plus acquisition costs paid by Avocent. Ergo’s products were integrated into the Management Systems businessunit as part of that unit’s overall product offering and related operatingresults were included in the consolidated financial statements since the dateof acquisition.

 

The acquisitionwas recorded under the purchase method of accounting, and the purchase pricewas allocated based on the fair value of the assets acquired and liabilitiesassumed.  The goodwill recorded as aresult of the acquisition will be allocated to our Management Systems unit andwill not be amortized but will be included in our annual review of goodwill forimpairment.  Amortization of the otherintangible assets acquired and the goodwill recorded is tax deductible.   A summary of the total purchaseconsideration, excluding cash received, is as follows:

 

| Cash  consideration paid to owners      |   | $   | 29,005 |   |
|-----------------------------------------|--------|-----|--------|--------|
| Acquisition  costs paid by Avocent      |   | 307 |   |
| Total estimated  purchase consideration |   | $   | 29,312 |   |

 

Wefunded the acquisition through available cash and borrowings from our creditfacility.  On the closing of the Ergotransaction, we acquired $869 in cash held by Ergo.

 

Thepurchase consideration was allocated, on a preliminary basis, to the estimatedfair values of the assets acquired and liabilities assumed, as follows:

 

| ** **              | ** ** | **Purchase  Price  Allocation** | ** ** | **Amortization  Period** | ** ** |
|-------------------------|------------|---------------------------------|------------|--------------------------|------------|
| Tangible assets         |       | $                               | 6,973      |                     | —     |   |
| Customer base           |       | 18,400                          |       | 5 years                  |       |
| Non-compete  agreements |       | 1,000                           |       | 3 years                  |       |
| Goodwill                |       | 5,081                           |       | —                   |       |
| Assumed  liabilities    |       | (2,142                          | )          | —                   |       |
|                    |       | $                               | 29,312     |                     |       |   |

 

The capitalized amountswill be amortized on a straight-line basis over the estimated life of theintangibles.  An escrow account with$3,500 in cash is being held for indemnifiable claims until February 1,2010.

 

**Cyclades Corporation** — On March 30, 2006, we acquiredCyclades Corporation, a privately-held company based in Fremont, California,with additional operations primarily in Sao Paulo, Brazil and Munich,Germany.  Cyclades employed approximately 325 people in 19 locationsaround the world.  The Cyclades productlines included serial, KVM and power management products.  The acquisition of Cyclades enhances ourposition in the Linux server and networking infrastructure management market,provides complementary products to our product lines, and allows us to providecustomers a more integrated platform for managing their IT infrastructure.  The results of Cyclades’ operations have beenincluded in the consolidated financial statements since the date ofacquisition.

 

67

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The acquisitionwas recorded under the purchase method of accounting, and the purchase pricewas allocated based on the fair value of the assets acquired and liabilitiesassumed.  In accordance with generallyaccepted accounting principles, purchased research and development costsallocated to patented and patent-pending technology were capitalized and willbe amortized over the respective estimated useful lives.  The remaining amounts of purchased researchand development were expensed upon the closing of the transaction.  The goodwill recorded as a result of theacquisition will not be amortized but will be included in our annual review ofgoodwill for impairment.  Additionally,amortization of the other intangible assets acquired and the goodwill recordedis not tax deductible.  A summary of thetotal purchase consideration, excluding cash received, is as follows:

 

| Cash paid for  outstanding shares  |   | $      | 92,700 |   |
|------------------------------------|--------|--------|--------|--------|
| Acquisition  costs paid by Avocent |   | 1,690  |   |
|                               |   |   |   |
| Total  acquisition cost            |   | $      | 94,390 |   |

 

We funded theacquisition through available cash.  Onthe closing of the Cyclades transaction, we acquired $2,408 in cash held byCyclades.

 

The acquisitioncost was allocated to the estimated fair values of the assets acquired andliabilities assumed, as follows:

 

| ** **                           | ** ** | **Purchase  Price  Allocation** | ** ** | **Amortization  Period** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|--------------------------|------------|
| Tangible assets                      |       | $                               | 23,232     |                     | —     |   |
| In-process  research and development |       | 2,100                           |       | —                   |       |
| Developed  technology                |       | 19,000                          |       | 5 years                  |       |
| Customer base                        |       | 12,100                          |       | 5 years                  |       |
| Trademarks                           |       | 3,100                           |       | 5 years                  |       |
| Non-compete  agreements              |       | 4,100                           |       | 3 years                  |       |
| Goodwill                             |       | 62,420                          |       | —                   |       |
| Deferred taxes                       |       | (14,472                         | )          | —                   |       |
| Assumed  liabilities                 |       | (17,190                         | )          | —                   |       |
|                                 |       |                            |       |                     |       |
|                                 |       | $                               | 94,390     |                     |       |   |

 

An escrow account with$14,700 of the above consideration was established to be held for indemnifiableclaims for an initial period of 21 months after the acquisition closingdate.  The length of the initial escrowterm was extended pending resolution of certain escrow claims we have made.

 

The $2,100 in fair valueof the in-process research and development (“IPR&D”) received in theacquisition was determined using a form of the discounted cash flow methodknown as the multi-period excess earnings method.  These amounts were for particular researchand development projects that have no alternative future uses and weretherefore expensed rather than capitalized at the time of purchase.

 

Cyclades’ in-processresearch and development activities consisted of the development of its KVM/net3.0 product line and its PM45 product lines. KVM/Net 3.0 is the nextgeneration KVM over IP technology that leverages DSP processing technology andsoftware-based compression algorithms. PM45 is an intelligent power distribution unit that provides highcurrent on a 3-phase main power source. The KVM/Net 3.0 projectwas completed on schedule during 2006. The PM45 project was completed as originally planned in late 2006.  The development scope was altered before thePM45 was released in the fourth quarter of 2006, but the revised productwas completed and released during 2007.

 

**We recorded approximately $3,904 ofcosts associated with the integration of Cyclades people, processes, andproducts into Avocent during 2006.  Thesecosts also include severance accruals resulting from headcount reductions associatedwith duplicate positions eliminated since the acquisition in March.  There were no such costs recorded in 2007.**

** **

**LANDeskGroup Limited —**On August 31, 2006, we acquired LANDesk Group Limited, aprivately-held company based in Ireland with the majority of its operations inSalt Lake City, Utah.  LANDesk employedapproximately 600 people, located

** **

**68**

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** **

**primarily in the United States, China,and Europe.  The LANDesk product linesinclude software for the centralized management and protection of informationtechnology assets.  The acquisitionagreement provided for total initial consideration of approximately $407,382including $199,528 in stock, $202,010 in cash, and $5,844 in estimated fairvalue of assumed unvested employee stock options.  As specified within the acquisitionagreement, the potential of an earn-out payment to prior shareholders existedhad LANDesk achieved certain full year 2006 revenue targets.  Based on LANDesk’s 2006 revenue results, weinitially concluded that LANDesk did not achieve the minimum revenue targetrequired to cause any earn-out payment and that no earn-out was earned norpayable.  The Shareholder Representative for the former shareholders ofLANDesk instituted the arbitration procedure described in the acquisitionagreements, challenging our conclusion that no earn-out was earned or payable.We resolved the earn-out matter during the fourth quarter of 2008 and accruedadditional consideration and associated costs of approximately $2,268 as aresult of the resolution (*see Note 6*),the majority of was paid during our first quarter 2009. The LANDesk acquisitionagreements also allow for additional consideration to be paid to unvestedoption holders equal to the per share amounts ultimately released to the formerLANDesk shareholders from escrow.  Weexpect to incur future compensation expense related to the amounts expected tobe paid to unvested holders deemed to be attributable to future service.**

** **

The acquisitionwas recorded under the purchase method of accounting, and the purchase cost wasallocated based on the fair value of the assets acquired and liabilitiesassumed.  In accordance with generallyaccepted accounting principles, purchased research and development costs allocatedto patented and patent-pending technology were capitalized and will beamortized over the respective estimated useful lives.  The remaining amounts of purchased researchand development were expensed upon the closing of the transaction.  The goodwill recorded as a result of theacquisition will not be amortized but will be included in Avocent’s annualreview of goodwill for impairment.  Wehave made certain elections that allow amortization of the other intangibleassets acquired and the goodwill recorded to be tax deductible.  We have indemnified former LANDeskshareholders for any personal tax consequences as a result of theseelections.  Our initial allocation of theacquisition cost did not take into consideration the tax impacts should theseelections have been made within the required time period (*see notes 7and 9*).  A summary of thetotal acquisition cost, excluding cash received, is as follows:

 
| Cash paid for  outstanding shares                                             |   | $       | 202,010 |   |
|-------------------------------------------------------------------------------|--------|---------|---------|--------|
| Avocent common  stock issued for outstanding shares                           |   | 199,528 |    |
| Acquisition  costs paid by Avocent                                            |   | 12,083  |    |
| Estimated value  of unvested options assumed related to prior service periods |   | 5,844   |    |
| Amendment to  earn-out                                                        |   | 2,268   |    |
| Total  acquisition cost                                                       |   | $       | 421,733 |   |

 

Theacquisition cost was allocated to the estimated fair values of the assetsacquired and liabilities assumed, as follows:

 
| ** **                                | ** ** | **Purchase  Price  Allocation** | ** ** | **Amortization  Period** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|--------------------------|------------|
| Tangible assets                           |       | $                               | 36,673     |                     | —     |   |
| In-process  research and development      |       | 18,600                          |       | —                   |       |
| Developed  technology                     |       | 35,400                          |       | 5 years                  |       |
| Internally  developed software for resale |       | 21,900                          |       | 6 years                  |       |
| Customer base                             |       | 78,400                          |       | 7 years                  |       |
| Trademarks                                |       | 23,600                          |       | 7 years                  |       |
| Maintenance  contracts                    |       | 9,600                           |       | 5 years                  |       |
| Non-compete  agreements                   |       | 6,100                           |       | 3 years                  |       |
| Goodwill                                  |       | 254,942                         |       | —                   |       |
| Deferred taxes                            |       | (9,271                          | )          | —                   |       |
| Assumed  liabilities                      |       | (54,211                         | )          | —                   |       |
|                                      |       | $                               | 421,733    |                     |       |   |

 

We funded the acquisitionthrough available cash, borrowings from our line of credit and the issuance of7,073 shares of common stock.  On theclosing of the LANDesk transaction, we acquired $10,312 in cash held by LANDesk.  An escrow account with $60,000 of the abovestock consideration (based on the stock value determined at the time of theacquisition) was established to be held for indemnifiable claims for a periodof 18 months after the acquisition closing date.  The escrow was released to the prior ownersin January 2009.

 

69

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The$18,600 in fair value of all of the in-process research and development(IPR&D) received in the acquisition was determined using a form of thediscounted cash flow method known as the multi-period excess earningsmethod.  These amounts were deemed to befor particular research and development projects that have no alternativefuture uses and were therefore expensed rather than capitalized at the time ofpurchase.

 

LANDesk’s in-processresearch and development activities consisted of the development of thefollowing products: Virtualization, Hostbase Intrusion Prevention Services(HIPS) and Configuration Management Database (CMDB) product lines.  Virtualizationis a technology that presents a logical grouping of computing resources so thataccess can be provided in ways that enhance utilization over the originalresource configuration.  HIPS technologyis used to monitor computer and network activities to look for signs of intrusioninto the computer system, which allows system administrators to identifypotential system security threats and weaknesses.  CMDB is a repository for information about acompany’s IT services and infrastructures and their relationships to eachother, allowing IT professionals the ability to assess the current state of theIT infrastructure at any time.  In 2008,the CMDB project evolved into the development of our Asset Lifecycle Manager,which was completed and began shipping in October 2008.  Boththe Virtualization and HIPS products were completed in 2007.

 

**Pro FormaFinancial Information —**The following unaudited pro forma summary combines the results ofoperations of Avocent as if the acquisitions had occurred at the beginning ofeach period presented.  Certainadjustments have been made to reflect the impact of the purchase transactions.These pro forma results have been prepared for the years ended December 31,2008 and 2007 for comparative purposes only and do not purport to be indicativeof what would have occurred had the acquisitions been made at the beginning ofeach period presented, or of results which may occur in the future.

 

| ** **                | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |
| Net sales                 |       | $        | 691,925    |     | $          | 667,619 |   |
| Net income                |       | $        | 22,473     |     | $          | 39,872 |   |
| Income per basic  share   |       | $        | 0.50       |     | $          | 0.79 |   |
| Income per  diluted share |       | $        | 0.49       |     | $          | 0.78 |   |

 

**The above amounts exclude acquiredin-process research and development expense of $700 related to the acquisitionof Touchpaper in 2008.**

** **

**4.**                                      Inventories

** **

Inventoriesconsist of the following at December 31, 2008 and 2007:

 

| ** **      | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw materials   |       | $        | 525        |     | $          | 1,394 |   |
| Work in process |       | 308      |       | 1,058    |       |
| Finished goods  |       | 30,683   |       | 27,651   |       |
|            |       |     |       |     |       |
| Inventories     |       | $        | 31,516     |     | $          | 30,103 |   |

 

As of December 31, 2008 and 2007, inventoriesabove have been reduced by reserves for excess and obsolete inventories of$6,401 and $7,328, respectively.

 

**5.**                                      Property and Equipment

** **

Propertyand equipment consists of the following at December 31, 2008 and 2007:

 

70

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| ** **                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Land and land  improvements      |       | $        | 7,322      |     | $          | 6,819 |   |
| Buildings                        |       | 20,962   |       | 21,088   |       |
| Leasehold  improvements          |       | 6,193    |       | 3,562    |       |
| Computer  software and equipment |       | 40,491   |       | 33,980   |       |
| Other equipment                  |       | 20,501   |       | 17,533   |       |
| Construction in  progress        |       | 724      |       | 905      |       |
|                             |       |     |       |     |       |
|                             |       | 96,193   |       | 83,887   |       |
| Less accumulated  depreciation   |       | (57,996  | )          | (46,589  | )          |
|                             |       |     |       |     |       |
| Property and  equipment, net     |       | $        | 38,197     |     | $          | 37,298 |   |

 

Depreciation expense was$9,188, $9,690, and $8,689 for the years ended December 31, 2008, 2007 and2006, respectively.

 

**6.**             **Goodwill and Other Intangible Assets**

 

**Other intangible assets subject toamortization, including the intangible assets from our acquisitions detailed inNote 3, are as follows:**

 

| ** **                                | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **Gross  Carrying  Amounts**    | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** |
| Developed  technology                     |       | $                               | 86,285     |                            | $          | 31,401 |   | $ | 56,840 |   | $ | 17,292 |   |
| Internally  developed software for resale |       | 21,900                          |       | 8,517                           |       | 21,900 |   | 4,867 |   |
| Patents and  trademarks                   |       | 31,236                          |       | 10,915                          |       | 30,670 |   | 6,590 |   |
| Customer base  and certification          |       | 116,121                         |       | 39,388                          |       | 99,878 |   | 25,496 |   |
| Maintenance  contracts                    |       | 17,600                          |       | 5,280                           |       | 9,600 |   | 2,560 |   |
| Non-compete  agreements                   |       | 11,325                          |       | 8,690                           |       | 10,624 |   | 5,432 |   |
| Other assets                              |       | —                          |       | —                          |       | 2,310 |   | 1,603 |   |
|                                      |       | $                               | 284,467    |                            | $          | 104,191 |   | $ | 231,822 |   | $ | 63,840 |   |

 

**For the years ended December 31,2008, 2007 and 2006, amortization expense for other intangible assets was$47,669, $43,629 and $26,626, respectively. The approximate future annual amortization for other intangible assetsis as follows:**

 

| **Years ending December 31:** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
| 2009                               |       | $          | 50,445     |   |
| 2010                               |       | 46,444     |       |
| 2011                               |       | 38,110     |       |
| 2012                               |       | 28,992     |       |
| 2013                               |       | 15,976     |       |
| Thereafter                         |       | 309        |       |
| Total                              |       | $          | 180,276    |   |

 

71

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**The changes in the carrying amount of goodwill for the yearended December 31, 2008, are as follows:**

 

| ** **                                            | ** ** | **Management** | ** ** | ** **  | ** ** | **Other Business** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|----------------|------------|-------------|------------|--------------------|------------|------------|------------|
| ** **                                            | ** ** | **Systems**    | ** ** | **LANDesk** | ** ** | **Units**          | ** ** | **Total**  | ** ** |
|                                                  |       |           |       |        |       |               |       |       |       |
| Balance as of  January 1, 2008                   |       | $              | 328,011    |        | $          | 252,355            |       | $          | 4,583      |   | $ | 584,949 |   |
|                                                  |       |           |       |        |       |               |       |       |       |
| Acquisition of  Touchpaper                            |       | —         |       | 23,767      |       | —             |       | 23,767     |       |
|                                                  |       |           |       |        |       |               |       |       |       |
| Acquisition of  Ergo                                  |       | 5,081          |       | —      |       | —             |       | 5,081      |       |
|                                                  |       |           |       |        |       |               |       |       |       |
| Transfer of  Broadcast goodwill to Management Systems |       | 2,062          |       | —      |       | (2,062             | )          | —     |       |
|                                                  |       |           |       |        |       |               |       |       |       |
| Additions  related to LANDesk earn-out amendment      |       | —         |       | 2,268       |       | —             |       | 2,268      |       |
|                                                  |       |           |       |        |       |               |       |       |       |
| Other  adjustments                                    |       | (58            | )          | 319         |       | —             |       | 261        |       |
|                                                  |       |           |       |        |       |               |       |       |       |
|                                                  |       |           |       |        |       |               |       |       |       |
| Balance as of  December 31, 2008                 |       | $              | 335,096    |        | $          | 278,709            |       | $          | 2,521      |   | $ | 616,326 |   |

 

**The adjustmentsto LANDesk goodwill are primarily the result of an earn-out amount payable tothe former shareholders of LANDesk (*see note 19*).  The goodwill transfer from our other businessunits to Management Systems resulted from the transfer of our Broadcast productline (*see Note 14*).  We allocated goodwill related to Connectivityand Control to its three products lines based on their relative fairvalues.  Approximately $2,062 wasallocated to the Broadcast product line and transferred to Management Systems.Additionally, during 2008 we adjusted goodwill for the release of certainR&D tax credits and non-preservable NOL related to certain acquisitions.**

** **

**The changes inthe carrying amount of goodwill for the year ended December 31, 2007, areas follows:**

 

| ** **                            | ** ** | ** **             | ** ** | ** **   | ** ** | **Embedded**             | ** ** | ** **         | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------------------|------------|--------------|------------|--------------------------|------------|--------------------|------------|------------|------------|
| ** **                            | ** ** | ** **             | ** ** | ** **   | ** ** | **Software**             | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Management Systems** | ** ** | **LANDesk**  | ** ** | **and   Solutions** | ** ** | **Other Business** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Division**           | ** ** | **Division** | ** ** | **Divisions**            | ** ** | **Units**          | ** ** | **Total**  | ** ** |
|                                  |       |                   |       |         |       |                     |       |               |       |       |       |
| Balance as of  January 1, 2007   |       | $                      | 316,430    |         | $          | 274,613                  |       | $                  | 11,862     |       | $          | 4,583 |   | $ | 607,488 |   |
|                                  |       |                   |       |         |       |                     |       |               |       |       |       |
| Reallocation  from segment changes    |       | 11,862                 |       | —       |       | (11,862                  | )          | —             |       | —     |       |
|                                  |       |                   |       |         |       |                     |       |               |       |       |       |
| Adjustments  during the year          |       | (281                   | )          | (22,258      | )          | —                   |       | —             |       | (22,539    | )          |
|                                  |       |                   |       |         |       |                     |       |               |       |       |       |
| Balance as of  December 31, 2007 |       | $                      | 328,011    |         | $          | 252,355                  |       | $                  | —     |       | $          | 4,583 |   | $ | 584,949 |   |

 

**The adjustments to LANDesk goodwill arethe primarily the result of the finalization of the purchase price allocationand the elections made under Internal Revenue Code Section 338(g) during2007.**

** **

**We performed an annual impairment testof goodwill in the fourth quarter of 2008, 2007 and 2006.  The test in the fourth quarter of each yearconcluded that there had been no impairment of goodwill and that no adjustmentswere required. **Asprescribed in SFAS 142, *Goodwill and OtherIntangible Assets,* goodwill is to be tested for impairment on atleast an annual basis at the reporting unit level. For internal purposes, weprepare business unit operating statements (operating segment level) whichinclude revenue, cost of goods sold, operating expenses and operating marginfor the following three operating segments 

** **

**72**

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** **

**(or business units): ManagementSystems (MS), LANDesk, and Connectivity and Control, as well as Corporate andUnallocated.   Fair value of ourreporting units was determined through a discounted cash flow analysisutilizing the income approach and the guideline public company method utilizinga market approach.  The result of eachvaluation was weighted equally in determining the fair value of the reportingunits.  The discounted cash flow analysiswas based on management’s assumptions for each reporting unit and applyingdiscount rates ranging from 18% to 25%, taking into consideration the relativerisk associated with each entity.   Theguideline public company method utilizes comparative analysis of the reportingunits with publicly traded guideline companies in the same or similarindustries. We applied a combination of the enterprise value multiple torevenue and EBITDA in determining the reporting unit value.  Our testing indicated that the implied fairvalue of our reporting units exceeded their carrying value; accordingly, inaccordance with SFAS 142, no further impairment analysis was required.**

** **

**Although our testing indicated there was no goodwillimpairment, there were certain factors noted during the 2008 testing thatrequire monitoring and may require additional testing prior to our nextscheduled fourth quarter test in 2009. Our market capitalization has declined to less than the book value ofour shareholders’ equity after year end and through the date of thisfiling.  We believe this decline is dueto the current ongoing global recession and other market conditions beyondmanagement’s control.  We believe thereduction in our market capitalization is a short term anomaly and is notindicative of the true value of the company as a whole or the value of ourindividual reporting units.**

** **

**Although no impairment was indicated for our LANDeskreporting unit, LANDesk does carry a significant amount of goodwill and otherintangible assets, including those added in the recent Touchpaperacquisition.  Our analysis concluded thatthe carrying value of LANDesk was only marginally below the indicated fairvalue calculated through our impairment testing.**

** **

**As a result of the previously mentioned decline inour market capitalization, we currently intend to perform an additional testfor goodwill impairment in the first quarter of 2009. If economic conditionsdeteriorate and indicators of impairment become present, an adjustment to thecarrying value of goodwill and other intangible assets may be required**and, if so determined, could have amaterial adverse effect to our financial results.

** **

**7.             Product Warranties**

** **

The activity within theliability for warranty returns in 2008 and 2007 is as follows:

 

| ** **                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                      |       |     |       |     |       |
| Balance,  beginning of year                               |       | $        | 1,854      |     | $          | 2,486 |   |
|                                                      |       |     |       |     |       |
| Accruals for  product warranties issued during the period |       | 9,274    |       | 5,973    |       |
| Assumed on the  acquisition of Ergo                       |       | 35       |       | —   |       |
| Settlements made  during the period                       |       | (8,918   | )          | (6,605   | )          |
|                                                      |       |     |       |     |       |
| Balance, end of  year                                     |       | $        | 2,245      |     | $          | 1,854 |   |

 

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 years ended December 31, 2008, and December 31,2007 was as follows:

 

| ** **                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                  |       |     |       |     |       |
| Balance,  beginning of year                           |       | $        | 5,388      |     | $          | 4,545 |   |
|                                                  |       |     |       |     |       |
| New extended  warranty contracts                      |       | 3,873    |       | 4,597    |       |
| Earned revenue  from amortization of deferred revenue |       | (4,110   | )          | (3,754   | )          |
|                                                  |       |     |       |     |       |
| Balance, end of  year                                 |       | $        | 5,151      |     | $          | 5,388 |   |

 

We defer revenue forsubscription, service and maintenance contracts until earned, which isgenerally over the term of the contract or when services are performed.  Deferred revenue was $75,820 as of December 31,2008 and $66,063 as of December 31, 2007.

 

73

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**8.****                                     ****Income Taxes**

 

Theincome before income tax (benefit) and provision for (benefit from) incometaxes for the years ended December 31, 2008, 2007 and 2006 are comprisedof the following:

 

| ** **                                                                       | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                             |       |     |       |     |       |     |       |
| Income before  income tax (benefit) expense and intercompany transactions:       |       |     |       |     |       |     |       |
| U.S.                                                                             |       | $        | 21,561     |     | $          | 1,267    |       | $ | 41,595 |   |
| Foreign                                                                          |       | 6,964    |       | 44,514   |       | 24,097   |       |
|                                                                             |       |     |       |     |       |     |       |
| Total income  before income tax (benefit) expense and intercompany transactions. |       | $        | 28,525     |     | $          | 45,781   |       | $ | 65,692 |   |
|                                                                             |       |     |       |     |       |     |       |
| Current income  tax expense:                                                     |       |     |       |     |       |     |       |
| U.S. Federal                                                                     |       | $        | 5,758      |     | $          | 5,771    |       | $ | 19,574 |   |
| U.S. State                                                                       |       | 598      |       | 802      |       | 1,745    |       |
| Foreign                                                                          |       | 5,302    |       | 8,095    |       | 7,102    |       |
|                                                                             |       |     |       |     |       |     |       |
|                                                                             |       | 11,658   |       | 14,668   |       | 28,421   |       |
| Deferred income  tax expense (benefit):                                          |       |     |       |     |       |     |       |
| U.S. Federal                                                                     |       | (7,764   | )          | (13,995  | )          | (5,647   | )          |
| U.S. State                                                                       |       | (1,699   | )          | (338     | )          | (919     | )          |
| Foreign                                                                          |       | 858      |       | (483     | )          | (1,695   | )          |
|                                                                             |       |     |       |     |       |     |       |
|                                                                             |       | (8,605   | )          | (14,816  | )          | (8,261   | )          |
|                                                                             |       |     |       |     |       |     |       |
| Total provision  for (benefit from) income taxes                                 |       | $        | 3,053      |     | $          | (148     | )          | $ | 20,160 |   |

 

The provision for(benefit from) federal income taxes differs from the amount computed byapplying the statutory rate of 35% to taxable income as follows:

 

| ** **                                                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                               |       |     |       |     |       |     |       |
| Expected federal  income tax provision                             |       | $        | 9,984      |     | $          | 16,023   |       | $ | 22,993 |   |
| Add (deduct):                                                      |       |     |       |     |       |     |       |
| Extraterritorial  income exclusion benefit                         | * *   | *—* | * *   | *—* |       | (89      | )          |
| State income tax  (benefit), net of federal tax                    |       | (2,026   | )          | 302      |       | 541      |       |
| Tax effect  resulting from foreign operations taxed at lower rates |       | (8,708   | )          | (8,787   | )          | (5,789   | )          |
| Acquired  in-process research and development                      |       | 245      |       | (6,510   | )          | 3,060    |       |
| Compensation  expense                                              |       | 27       |       | (287     | )          | (1,126   | )          |
| Municipal bond  interest income                                    |       | (1       | )          | (57      | )          | (739     | )          |
| Subpart F income                                                   |       | 265      |       | 1,543    |       | 923      |       |
| Foreign tax  credit                                                |       | (399     | )          | (860     | )          | (258     | )          |
| Research credit                                                    |       | (2,016   | )          | (2,386   | )          | (930     | )          |
| Royalties                                                          |       | 1,092    | * *   | *—* |       | —   |       |
| Valuation  allowance                                               |       | 3,201    |       | 429      |       | 1,135    |       |
| Stock  compensation charge to foreign subsidiaries                 |       | (611     | )          | (928     | )          | —   |       |
| Change in FIN 48  contingencies reserve                            |       | 1,092    |       | 241      |       | —   |       |
| Meals and  entertainment                                           |       | 348      |       | 224      |       | 196      |       |
| Other                                                              |       | 560      |       | 905      |       | 243      |       |
|                                                               |       | $        | 3,053      |     | $          | (148     | )          | $ | 20,160 |   |

 

74

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The componentsof the net deferred income tax assets and liabilities at December 31, 2008and 2007, are as follows:

 

| ** **                                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net current  deferred income tax assets:                        |       |     |       |     |       |
| Allowance for  doubtful accounts                                |       | $        | 640        |     | $          | 533 |   |
| Allowance for  sales returns and liability for warranty returns |       | 1,615    |       | 1,289    |       |
| Inventory  reserves                                             |       | 2,862    |       | 2,841    |       |
| Operating loss  carryforwards                                   |       | 232      |       | 847      |       |
| Other                                                           |       | 2,255    |       | 1,570    |       |
|                                                            |       |     |       |     |       |
|                                                            |       | $        | 7,604      |     | $          | 7,080 |   |
|                                                            |       |     |       |     |       |
| Net noncurrent  deferred income tax assets (liabilities):       |       |     |       |     |       |
| Accumulated depreciation                                        |       | $        | (511       | )        | $          | (1,289 | ) |
| Acquired  intangible assets                                     |       | (3,753   | )          | 3,083    |       |
| Operating loss  carryforwards                                   |       | 7,119    |       | 4,895    |       |
| Capital loss  carryforward                                      | * *   | *—* |       | 489      |       |
| Research credit  carryforward                                   |       | 1,815    |       | 1,262    |       |
| Allowance for  impairment on investments                        |       | 1,455    |       | 1,461    |       |
| Foreign tax  credit carryforward                                |       | 2,359    | * *   | *—* | * *   |
| Stock-based  compensation expense                               |       | 7,829    |       | 6,173    |       |
| Other                                                           |       | 863      |       | 57       |       |
|                                                            |       | 17,176   |       | 16,131   |       |
|                                                            |       |     |       |     |       |
| Less valuation  allowances                                      |       | (7,021   | )          | (3,986   | )          |
|                                                            |       |     |       |     |       |
|                                                            |       | $        | 10,155     |     | $          | 12,145 |   |
|                                                            |       |     |       |     |       |
| Net deferred  income tax asset                                  |       | $        | 17,759     |     | $          | 19,225 |   |

 

The net change in thevaluation allowance for deferred tax assets was an increase of $3,035 in 2008primarily due to allowances recorded against deferred tax assets attributableto research credit, and state and foreign operating loss carry-forwards.

 

We intend to permanentlyreinvest our undistributed earnings of our foreign subsidiaries, approximately$124,684 as of December 31, 2008. If our intent changes, additional incometax expense would likely be recorded due to the differential in tax ratesbetween the U.S. and the international jurisdictions as we repatriate suchforeign subsidiary earnings.

 

For federal and stateincome tax purposes, at December 31, 2008, we have approximately $3,169and $59,419, respectively, of net operating loss carry forwards available tooffset future taxable income.  Thesefederal and state net operating loss carry-forwards are subject to certainlimitations.  If not utilized, the Federalnet operating loss carry-forwards will expire from 2021 to 2027 and the statenet operating loss carry-forwards will expire from 2012 to 2028.  For foreign income tax purposes, we haveapproximately $15,126 of net operating loss carry-forwards available to offsetfuture taxable income in certain jurisdictions. The carry-forward period for a significant portion is unlimited.

 

The 2008 increase in theeffective tax rate compared to 2007 was primarily due to the recognition in2007 of a $6,500 tax benefit attributable to the LANDesk acquisition forpreviously expensed in-process R&D of $18,600 and a change in our mix andamount of pre-tax profit among our U.S. and international operations.  The tax benefit results from the taxelections made in the second quarter of 2007 discussed below.  Prior to those deductions, the in-processresearch and development expense was non-deductible for U.S. tax purposes.

 

During the second quarterof 2007, we made elections under Internal Revenue Code Section 338(g) relatedto the August 2006 acquisition of LANDesk. As a result of the election, the acquisition is treated as an assetacquisition for U.S. tax purposes, where we stepped up the tax basis in assetsand liabilities previously recorded in the initial purchase accounting.  We previously accounted for this acquisitionas a qualified stock purchase, with carryover tax basis in the assets andliabilities recorded.  Our preliminarypurchase price allocation was based upon the initial structure of thetransaction and did not take into consideration the tax impacts, should theseelections be made within the required time period, including the tax impactsassociated with the amount assigned to acquired in-process research anddevelopment that was charged to expense at acquisition.

 

75

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In 2007, we re-measuredthe deferred taxes related to this business combination to take intoconsideration the tax impacts of the elections made.  As a result, we adjusted the deferred taxaccounts with the offsetting reduction to goodwill previously recorded fromthis transaction.  We have indemnifiedformer LANDesk shareholders for any incremental personal tax consequencesshould this election create incremental tax obligations for these formershareholders.  As a result, we recordedan accrued liability in 2007 of $6,246 with the offsetting increase to goodwillpreviously recorded from this transaction. As of the fourth quarter of 2008 no payments have been made as a resultof this indemnification, however, it is expected that such payments will bemade over the next 12 to 18 months.

 

As of December 31,2008, we had total reserves for uncertain tax positions related to grossunrecognized tax benefits of $5,256, of which $3,900, if recognized, wouldaffect the effective tax rate.  We recognize potential accrued interestand penalties related to unrecognized tax benefits from our global operationswithin income tax expense.  As of December 31,2008, we had accrued interest payable related to the unrecognized tax benefitsof approximately $828.  A reconciliationof the beginning and ending amount of unrecognized tax benefits is as follows:

 

| ** **                                                | ** ** | **2008** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|
| Balance at  January 1,                               |       | $        | 10,707     |   |
|                                                      |       |     |       |
| Additions based  on tax positions related to current year |       | 659      |       |
| Additions for  tax positions of prior years               |       | 2,510    |       |
| Reductions for  tax positions of prior years              |       | (2,022   | )          |
| Settlements                                               |       | (6,598   | )          |
|                                                      |       |     |       |
| Balance at  December 31,                             |       | $        | 5,256      |   |

 

As of December 31,2007 we had total reserves for uncertain tax positions related to grossunrecognized tax benefits of $10,707 of which $8,945, if recognized, wouldaffect the effective tax rate.  We recognize potential accrued interestand penalties related to unrecognized tax benefits from our global operationswithin income tax expense.  We recorded$896 of such expenses within our 2007 income tax expense.  As of December 31, 2007, we had accruedinterest payable related to the unrecognized tax benefits of $3,055.  A reconciliation of the beginning and endingamount of unrecognized tax benefits is as follows:

 

| ** **                                                | ** ** | **2007** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|
| Balance at  January 1,                               |       | $        | 11,400     |   |
|                                                      |       |     |       |
| Additions based  on tax positions related to current year |       | 234      |       |
| Additions for  tax positions of prior years               |       | 729      |       |
| Reductions for  tax positions of prior years              |       | (1,380   | )          |
| Settlements                                               |       | (276     | )          |
|                                                      |       |     |       |
| Balance at  December 31,                             |       | $        | 10,707     |   |

 

We conduct business globally,and as a result, our subsidiaries file income tax returns in the U.S. federaljurisdiction and various state and foreign jurisdictions.  In the normalcourse of business, we are subject to examinations by taxing authoritiesthroughout the world, including the U.S.  With few exceptions, we are nolonger subject to U.S. federal, state, and local, or non-U.S. income taxexaminations for periods before 2005. The Internal Revenue Service (IRS) commenced an examination in 2006 ofour U.S. income tax returns for 2004 and 2005. During the first quarter of 2008, we reached a settlement with the IRSconcerning those periods.  A payment foradditional tax, including interest was made of $6,600 during the first quarterof 2008.  This payment did not result ina material change to our financial position. The IRS is currently examining our 2006 and 2007 income taxreturns.  As of December 31, 2008the IRS had not issued any proposed adjustments for those periods.

 

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**9.             Treasury Stock**

** **

As ofDecember 31, 2008, we may repurchase a total of 19,000 shares under theshare repurchase program approved by our Board of Directors. We have purchased16,900 shares through December 31, 2008, while 2,100 shares are availablefor purchase as of December 31, 2008 under the share repurchase program.Share repurchase activity during the years ended December 31, 2008, 2007,and 2006 was as follows:

 

| ** **          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |     |       |
| Shares  repurchased |       | 4,200    |       | 2,887    |       | 7,038    |       |
|                |       |     |       |     |       |     |       |

 

**10.          Earnings Per Share**

** **

Asummary of the calculation of basic and diluted earnings per share (EPS) forthe years ended December 31, 2008, 2007, and 2006, is as follows:

 
| ** **                                      | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Earnings  Per-Share** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|-------------------------|------------|
| **For the  Year Ended December 31, 2008**  | ** ** | ** **              | ** ** | ** **                | ** ** | ** **              | ** ** |
| **Basic  EPS**                                  | ** ** | ** **              | ** ** | ** **                | ** ** | ** **              | ** ** |
| Net income                                      |       | $                       | 25,472     |                      | 45,124     |                    | $          | 0.56 |   |
| **Effect  of Dilutive Securities**              | ** ** | ** **              | ** ** | ** **                | ** ** | ** **              | ** ** |
| Stock options  and restricted stock units (RSU) |       |                    |       | 783                       |       |                    |       |
| **Diluted  EPS**                                | ** ** | ** **              | ** ** | ** **                | ** ** | ** **              | ** ** |
| Net income and  assumed conversions             |       | $                       | 25,472     |                      | 45,907     |                    | $          | 0.55 |   |
|                                            |       |                    |       |                      |       |                    |       |
| **For the  Year Ended December 31, 2007**  | ** ** | ** **              | ** ** | ** **                | ** ** | ** **              | ** ** |
| **Basic  EPS**                                  | ** ** | ** **              | ** ** | ** **                | ** ** | ** **              | ** ** |
| Net income                                      |       | $                       | 45,929     |                      | 50,207     |                    | $          | 0.91 |   |
| **Effect  of Dilutive Securities**              | ** ** | ** **              | ** ** | ** **                | ** ** | ** **              | ** ** |
| Stock options  and restricted stock units (RSU) |       |                    |       | 882                       |       |                    |       |
| **Diluted  EPS**                                | ** ** | ** **              | ** ** | ** **                | ** ** | ** **              | ** ** |
| Net income and  assumed conversions             |       | $                       | 45,929     |                      | 51,089     |                    | $          | 0.90 |   |
|                                            |       |                    |       |                      |       |                    |       |
| **For the  Year Ended December 31, 2006**  | ** ** | ** **              | ** ** | ** **                | ** ** | ** **              | ** ** |
| **Basic  EPS**                                  | ** ** | ** **              | ** ** | ** **                | ** ** | ** **              | ** ** |
| Net income                                      |       | $                       | 45,532     |                      | 48,549     |                    | $          | 0.94 |   |
| **Effect  of Dilutive Securities**              | ** ** | ** **              | ** ** | ** **                | ** ** | ** **              | ** ** |
| Stock options  and restricted stock units (RSU) |       |                    |       | 926                       |       |                    |       |
| **Diluted  EPS**                                | ** ** | ** **              | ** ** | ** **                | ** ** | ** **              | ** ** |
| Net income and  assumed conversions             |       | $                       | 45,532     |                      | 49,475     |                    | $          | 0.92 |   |

 

Anti-dilutiveoptions to purchase common stock outstanding and anti-diluted RSUs wereexcluded from the calculations above.  AtDecember 31, 2008, 2007 and 2006, RSUs and options to purchase 3,980,2,279 and 2,242 shares of common stock, respectively, were outstanding but werenot included in the computation of diluted earnings per share because inclusionof such RSUs and options would have been anti-dilutive.

 

77

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**11.          Commitments and Contingencies**

** **

Welease buildings and certain equipment under various operating leases. Rentexpense under these leases totaled approximately $9,339, $7,269 and $4,868 forthe years ended December 31, 2008, 2007 and 2006, respectively.  Future minimum rental payments undernon-cancelable operating leases are approximately as follows:

 

| **Years ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
|                               |       |       |       |
| 2009                               |       | $          | 10,699     |   |
| 2010                               |       | 8,363      |       |
| 2011                               |       | 5,673      |       |
| 2012                               |       | 4,267      |       |
| 2013                               |       | 2,436      |       |
| Thereafter                         |       | 150        |       |
|                               |       |       |       |
|                               |       | $          | 31,588     |   |

 

In the ordinary course of our business, we may at any pointin time have a significant amount of contractual commitments not yet recognizedin our financial statements.  Thesecommitments totaled $48,188 as of December 31, 2008 and are all due withintwelve months of year end. These commitments relate primarily to our need toschedule the purchase of inventories in advance of the related forecastedsales to customers. We also have, at any point in time, a variety of short-termcontractual commitments for services such as advertising, marketing,accounting, legal, and research and development activities. The liabilities forthese services and the related expenses are typically recognized upon thereceipt of the related services.

 

We have been involved, from time to time, in litigation inthe normal course of business. (*See Note 19*).

 

**12.**                               Equity Compensation and Stock PurchasePlans

** **

Wehave equity compensation plans covering substantially all of our employees anddirectors.  Generally, options vest overthree to four years and typically expire 10 years from the grant date.

 

Wegrant equity incentive awards under both the Avocent Corporation 2005 EquityIncentive Plan (the 2005 Plan) and the Avocent Corporation 2008 InducementEquity Incentive Plan (the 2008 Plan, collectively the Equity Plans).  As approved by the stockholders, the 2005Plan authorizes a total of 4,750 shares of common stock for issuance, plus (i) anyshares remaining available for issuance under previous equity incentive plansup to a maximum of 1,187 shares and (ii) any shares subject to anyoutstanding options under our stock option plans that subsequently expireunexercised or are forfeited.  New options may no longer be granted underany former plans.  As approved by ourBoard of Directors, the 2008 Plan authorizes a total of 700 shares of commonstock for issuance to recruit new employees, including 163 restricted stockunits awarded during 2008.

 

OurEquity Plans allow for options, restricted stock, restricted stock units, stockappreciation rights, performance shares, performance units, deferred stockunits, and dividend equivalents, and options granted under the Equity Plans maybe either incentive stock options or nonqualified stock options. Nonqualified stock options, restricted stock, restricted stock units,performance shares, performance units, stock appreciation rights, deferredstock units, and dividend equivalents may be granted under the Equity Plans toour directors, employees, or consultants, but incentive stock options may begranted only to our employees.  Options may not be granted at less thanthe fair market value on date of grant and may not have a term of greater than10 years.  We issue new shares to satisfy stock options exercised.  During 2008, we granted restricted stockunits under our Equity Plans.  We did notgrant stock options under any plans in 2008.

 

The following schedulesummarizes the stock option activity in our stock-based compensation plans asfollows: 

| ** **                                   | ** ** | **Number of  Options** | ** ** | **Range of  Exercise  Prices** | ** **     | **Weighted  Average  Exercise  Price** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|-------------------------------------|----------------|----------------------------------------|------------|
| Options  outstanding, December 31, 2007 |       | 4,538                       |       | $                                   | 1.31 to $70.94 |                                   | $          | 34.44 |   |
| Options granted                              |       | —                      |       | —                              |           | —                                 |       |
| Options  forfeited and cancelled             |       | (382                        | )          | $                                   | 1.31 to $67.12 |                                   | $          | 41.12 |   |
| Options  exercised                           |       | (151                        | )          | $                                   | 1.31 to $22.36 |                                   | $          | 10.73 |   |
|                                         |       |                        |       |                                |           |                                   |       |
| Options  outstanding, December 31, 2008 |       | 4,005                       |       | $                                   | 1.31 to $70.94 |                                   | $          | 34.69 |   |

 

The total pretax intrinsic value ofoptions exercised during the years ended December 31, 2008, 2007 and 2006 was$3,123, $3,431 and $22,074, respectively.

 

 

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The following tablesummarizes information about stock options outstanding at December 31,2008:

 
| ** **                              | ** ** | **Outstanding** | ** ** | **Exercisable**                                                  | ** ** |
|-----------------------------------------|------------|-----------------|------------|------------------------------------------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | **Number**      | ** ** | **Weighted Avg.  Remaining   Contractual   Life** | ** ** | **Intrinsic   Value** | ** ** | **Weighted   Avg.   Exercise   Price** | ** ** | **Number** | ** ** | **Weighted   Avg.   Exercise   Price** | ** ** | **Intrinsic   Value** | ** ** |
| $1.31 - $22.36                          |       | 881             |       | 3.0                                                              |       | $ | 1,700 |   | $ | 18.54 |   | 870 |   | $ | 18.57 |   | $ | 1,675 |   |
| $22.53 - $27.25                         |       | 1,145           |       | 3.5                                                              |       | — |   | 26.61 |   | 1,145 |   | 26.61 |   | — |   |
| $27.30 - $46.94                         |       | 746             |       | 3.7                                                              |       | — |   | 36.81 |   | 704 |   | 37.11 |   | — |   |
| $52.44                                  |       | 1,226           |       | 1.3                                                              |       | — |   | 52.44 |   | 1,226 |   | 52.44 |   | — |   |
| $53.00 - $70.94                         |       | 7               |       | 1.8                                                              |       | — |   | 57.71 |   | 7 |   | 57.71 |   | — |   |
|                                    |       | 4,005           |       | 2.8                                                              |       | $ | 1,700 |   | $ | 34.70 |   | 3,952 |   | $ | 34.78 |   | $ | 1,675 |   |

 

The options above wereissued with exercise prices that approximated fair value of our common stock atthe date of grant.

 

The aggregate intrinsicvalue in the preceding table represents the total pretax intrinsic value, basedon our closing price of $17.91 as of December 31, 2008, which would havebeen received by option holders had all option holders exercised their optionson that date.  The weighted averageremaining contractual term for exercisable options was 2.70 years at December 31,2008.  The total number of in-the-moneyoptions exercisable as of December 31, 2008 was 266.  At December 31, 2008, 401 options or 201RSUs are available for grant under our 2005 plan.

 

*RestrictedStock Units*

 

Our2005 and 2008 Plans permit the granting of restricted stock units to eligibleemployees and directors.  Awards grantedduring 2008 typically become fully vested over two or three year periods.  Restricted stock units are payable in sharesof our common stock upon vesting.

 

Thefollowing table presents a summary of the activity in our nonvested restrictedstock units during the year ended December 31, 2008:

 
| **Nonvested stock units**              | ** ** | **Number of   Stock Units** | ** ** | **Weighted-  Average   Grant-Date   Fair Value** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------------------|------------|
| Nonvested stock  units at December 31, 2007 |       | 1,306                                      |       | $                                                               | 27.20      |   |
| Granted                                          |       | 1,202                                      |       | 16.96                                                           |       |
| Vested                                           |       | (668                                       | )          | 27.13                                                           |       |
| Forfeited                                        |       | (124                                       | )          | 23.92                                                           |       |
| Nonvested stock  units at December 31, 2008 |       | 1,716                                      |       | $                                                               | 18.93      |   |

 

Asof December 31, 2008, there was approximately $21,274 of totalunrecognized compensation cost related to nonvested share-based compensationarrangements granted under the 2005 Plan. That cost is expected to be recognized over an estimated weightedaverage recognition period of approximately one year.  In the first quarter of 2009, a total of 741shares vested.  At the release of theseshares, 219 shares were withheld for taxes, resulting in a net issuance of 522shares.

 

*Performance— Based Restricted Stock Units*

 

Certainrestricted stock units contain both service and performance conditions thataffect the quantity of awards that will vest. Performance-based restricted stock units begin vesting upon thecompletion of a specified service period and the achievement of certainperformance targets (which can include individual and company measures) and areconverted into shares of our common stock upon vesting, typically over a threeyear period.  The fair value is based onthe market price of our common stock on the grant date and assumes that thetarget payout level will be achieved. Compensation cost is adjusted in future periods for subsequent changesin the expected outcome of the performance related conditions until the vestingdate.  All performance-based restrictedstock unit activity is included in the nonvested stock unit table of activityabove.

 

*MarketCondition — Based Restricted Stock Units*

 

Certainrestricted stock units contain both service and market conditions that affectthe quantity of awards that will vest. Market condition-based restricted stock units begin vesting upon thecompletion of a specified service period and the achievement of certain marketconditions (our stock performance measured against certain indexes performance)and are converted into shares of our common stock upon vesting, typically overa three year period.  The fair value isbased on the 

 

 

79

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values calculatedunder the Monte Carlo simulation model, discussed below, on the grantdate.  Compensation cost is not adjustedin future periods for subsequent changes in the expected outcome of marketrelated conditions.  During the fourthquarter 2008 the Compensation Committee or our Board of Directors modified themarket conditions that these awards are to be measured against to bettermeasure relative performance during the year. The modification affectedawards to approximately 40 employees and resulted in additional stockcompensation expense of approximately $4,400 to be recognized over the term ofthe awards.  New valuationsof the affected awards were prepared and the recorded expense in 2008 reflectsthe modified values and the summary of assumptions table below includes themodified valuation assumptions in calculating the weighted average.  We granted 551 of such awards in 2008 and 262of these awards were deemed earned under the modified terms.  The earned awards are included in thenonvested stock unit table of activity above, however, the remaining 289 ofunearned awards have been excluded.

 

*Valuationand Expense Information*

 

The following tablesummarizes stock-based compensation expense related to employee stock optionsand restricted stock units under SFAS 123R for the years ended December 31,2008, 2007 and 2006, which was allocated as follows:

 
| ** **                                                       | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                       | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                             |       |                              |       |   |   |   |   |
| Cost of sales                                                    |       | $                                 | 1,218      |   | $ | 1,134 |   | $ | 978 |   |
|                                                             |       |                              |       |   |   |   |   |
| Research and  development                                        |       | 5,634                             |       | 5,825 |   | 4,302 |   |
| Selling, general  and administrative                             |       | 14,661                            |       | 12,682 |   | 9,307 |   |
| Restructuring,  retirement and integration                       |       | 3,209                             |       | — |   | — |   |
|                                                             |       |                              |       |   |   |   |   |
| Stock-based  compensation expense included in operating expenses |       | 23,504                            |       | 18,507 |   | 13,609 |   |
|                                                             |       |                              |       |   |   |   |   |
| Total  stock-based compensation expense                          |       | 24,722                            |       | 19,641 |   | 14,587 |   |
| Tax benefit                                                      |       | (4,965                            | )          | (3,673 | ) | (4,862 | ) |
|                                                             |       |                              |       |   |   |   |   |
| Total  stock-based compensation expense, net of tax              |       | $                                 | 19,757     |   | $ | 15,968 |   | $ | 9,725 |   |

 

We estimate the fairvalue of options using the Black-Scholes Model. This model requires the input of assumptions regarding a number ofcomplex and subjective variables that will usually have a significant impact onthe fair value estimate.  These variablesinclude, but are not limited to, the volatility of our stock price and employeeexercise behaviors.  The assumptions andvariables used for the current period grants were developed based on SFAS 123Rand SEC guidance contained in SEC Staff Accounting Bulletin No. 107, “*Share Based Payment*.” The weighted-average estimated fair value of stock options granted toemployees during the years ended December 31, 2007 and 2006 was $9.23 and$13.07 per share, respectively.  We didnot issue stock options to employees during 2008.  We calculated the weighted average fair valueof stock options granted in 2007 and 2006 using the Black-Scholes Model withthe following weighted-average assumptions:

 
| ** **                | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| Expected  volatility      |       | 42.04    | %          | 44.23    | %          |
| Risk-free  interest rate  |       | 4.72     | %          | 4.85     | %          |
| Expected  dividend yield  |       | —   |       | —   |       |
| Expected life  (in years) |       | 3.2      |       | 4.3      |       |

 

 

80

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We estimate the fairvalue of market condition-based awards using the Monte Carlo Simulation Model. This model requires the input of assumptions regarding a number ofcomplex and subjective variables that will usually have a significant impact onthe fair value estimate.  These variablesinclude, but are not limited to, the volatility of our stock price and employeeexercise behaviors.  The assumptions andvariables used for the current period grants were developed based on SFAS 123Rand SEC guidance contained in SAB 107. The weighted-average estimated fair value of market condition-basedawards granted to employees during the year ended December 31, 2008 was$16.72 per share.  We did not issuemarket condition-based awards to employees during 2007 or 2006.  We calculated the weighted average fair valueof market conditioned-based awards granted in 2008 using the Monte Carlo Simulation Model with thefollowing weighted-average assumptions:

 
| ** **                | ** ** | **2008** | ** ** |
|---------------------------|------------|----------|------------|
| Expected  volatility      |       | 52.63    | %          |
| Risk-free interest  rate  |       | 1.37     | %          |
| Expected  dividend yield  |       | —   |       |
| Expected term  (in years) |       | 2.04     |       |

 

We based our estimate ofexpected volatility used in the options and market-based RSU pricing models forthe years ended December 31, 2008, 2007, and 2006 on the sequential historicaldaily trading data of our common stock for a period equal to the expected lifeof the options granted.  The selection ofthe historical volatility approach was based on available data indicating ourhistorical volatility is as equally representative of our future stock pricetrends as is implied volatility. The risk-free interest rate assumption isbased upon implied yields of U.S. Treasury zero-coupon bonds on the date ofgrant having a remaining term equal to the expected life of the options granted.  The dividend yield is based on our historicaland expected dividend payouts. The expected life of our employee stock optionsis based upon historical exercise and cancellation activity of previouslystock-based grants with a ten-year contractual term. Stock-based compensationexpense recognized in our consolidated statements of income for the years endedDecember 31, 2008, 2007 and 2006 is based on options and restricted stockunits ultimately expected to vest, and has been reduced for estimated forfeitures.  These estimates were based upon historicalforfeiture experience.

 

We will continue toassess the assumptions and methodologies used to calculate estimated fair valueof stock-based compensation.  Ifcircumstances change, and additional data becomes available over time, we maychange our assumptions and methodologies, which may materially impact our fairvalue determination for future grants.

 

*EmployeeStock Purchase Plan*

 

On December 6,2000, our stockholders approved an employee stock purchase plan for all of ouremployees (the AESPP), through which qualified employees may participate incommon stock ownership. The AESPP qualifies as a non-compensatory plan under Section 423of the Internal Revenue Code. We have reserved 1,500 shares of common stock forissuance under the AESPP. Our Board of Directors suspended our AESPP in 2005,but the Board reinstated participation in the AESPP for the period beginning January 1,2009.  The price of stock purchased underthe AESPP is generally 90% of the fair market value of our common stock at theend of the six month purchase period. The AESPP administrator interprets andadministers all rules and regulations applicable to the AESPP.  No shares were issued under the AESPP duringthe years 2008, 2007, and 2006.

 

**13.**                              Retirement Plans

** **

We sponsor a 401(k) savingsplan covering substantially all U.S. employees and a profit-sharing plancovering substantially all international employees.  Under the 401(k) savings plan, we makediscretionary contributions to match 50% of an employee’s contributions up to6% of the employee’s compensation. We may also elect to make additionaldiscretionary contributions as determined by our Board of Directors.  We made only discretionary matchingcontributions, during the years ended December 31, 2008, 2007 or 2006under the 401(k) savings plan. Our expense for contributions under theseplans totaled approximately $3,439, $3,245 and $2,022 for the years ended December 31,2008, 2007 and 2006, respectively.

 

**14.**                              Segment Reporting

** **

In the first quarter of2008, we dissolved our Desktop Solutions business unit and transferred some ofits personnel and a portion of its technology into Management Systems.  We believe our business unit structure allowsus to better focus on new technology and growth opportunities and to addproduct and shareholder value in the future. We believe this structure enhances customer service, speeds delivery ofproducts to market and better focuses our research, development, and marketingresources.   We recently announced ourintention to sell the majority of our emerging Connectivity and Controlbusiness unit.  We have divided thisentrepreneurial business unit into its three product lines: the Equinox brandedserial business, the Broadcast business and the Pro Audio Visual business.  We have folded our broadcast product lineinto Management Systems and intend to sell (or license the technology of) theremaining two parts of this business.  Allrevenues and costs associated with our broadcast business are included withinManagement Systems and historical segment results for both Management Systemsand our other business units have been adjusted to reflect this change.

 

 

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In thefirst quarter of 2007, we merged the Mobile Technologies Division into theLANDesk Division as their products consist primarily of software sold tosimilar customer groups.  Also in thefirst quarter of 2007, we merged the Embedded Software and Solutions Divisioninto the Management Systems Division as they are serving similar customers andmarket segments. As a result of merging these two divisions we re-evaluated oursegment disclosures and identified two reportable segments.

 

Accordingly,we have provided revenue and operating income (loss) below under the newsegment structure and have retroactively adjusted the segment informationpreviously disclosed for the years ended December 31, 2007 and 2006 toconform to the current segment disclosures. In addition, as a result of the merger of divisions, we reallocatedgoodwill among our reporting units (*see Note 6*).

 

We evaluate theperformance of our segments based on revenue and operating profit, which iscalculated before corporate and unallocated costs, stock-based compensationcosts, amortization of intangibles gained through acquisitions and otherpurchase accounting adjustments, restructuring, integration and retirementexpenses, and acquired in-process research and development expense.  We do not track or use assets by segment as ameasure of performance and, therefore, have not presented assets by segment.The other business units do not qualify for individual presentation nor do theyqualify for aggregation into another business unit.  The following is a presentation ofinformation for our two reportable segments (Management Systems and LANDesk):

 
| ** **                                                         | ** ** | **For the years ended December 31,**  | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2008**                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenues:                                                      |       |                                                      |       |   |   |   |   |
| Management  Systems                                                |       | $                                                         | 497,852    |   | $ | 470,719 |   | $ | 463,667 |   |
| LANDesk                                                            |       | 144,192                                                   |       | 111,906 |   | 40,368 |   |
| Other business  units                                              |       | 12,304                                                    |       | 15,523 |   | 13,169 |   |
| Corporate and  unallocated                                         |       | 2,786                                                     |       | 4,601 |   | 3,677 |   |
| Amortization of  fair value adjustment to LANDesk deferred revenue |       | —                                                    |       | (1,874 | ) | (1,686 | ) |
| Total net  revenues                                                |       | $                                                         | 657,134    |   | $ | 600,875 |   | $ | 519,195 |   |
|                                                               |       |                                                      |       |   |   |   |   |
| ** **                                                         | ** ** | **For the years ended  December 31,** | ** ** |
| ** **                                                         | ** ** | **2008**                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Operating income  (loss):                                          |       |                                                      |       |   |   |   |   |
| Management  Systems                                                |       | $                                                         | 129,293    |   | $ | 136,797 |   | $ | 144,372 |   |
| LANDesk                                                            |       | 20,708                                                    |       | 3,983 |   | 5,270 |   |
| Other business  units                                              |       | (4,308                                                    | )          | (11,727 | ) | (12,256 | ) |
| Corporate and  unallocated costs                                   |       | (27,595                                                   | )          | (14,178 | ) | (11,276 | ) |
| Stock-based  compensation                                          |       | (24,722                                                   | )          | (19,641 | ) | (14,587 | ) |
| Amortization of  intangibles and other expenses                    |       | (47,295                                                   | )          | (43,173 | ) | (27,229 | ) |
| Acquired  in-process research and development expense              |       | (700                                                      | )          | — |   | (20,700 | ) |
| Restructuring,  integration and retirement expenses                |       | (12,548                                                   | )          | — |   | — |   |
| Amortization of  fair value adjustment to LANDesk deferred revenue |       | —                                                    |       | (1,874 | ) | (1,686 | ) |
| Total income  from operations                                      |       | $                                                         | 32,833     |   | $ | 50,187 |   | $ | 61,908 |   |

 

**Revenue and operating income forManagement Systems includes the operating results of Ergo and Cyclades from thedate of the acquisitions (*See Note 3*).  Revenue and operating income for LANDeskincludes the operating results of LANDesk and Touchpaper from the date of theacquisitions (*See Note 3*).**

** **

** **

**82**

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** **

Sales by product line forManagement Systems and LANDesk for the years ended December 31,  2008, 2007 and 2006 are as follows:

 
| ** **                            | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Management  Systems (MS) net revenue: |       |     |       |     |       |     |       |
| KVM                                   |       | $        | 355,944    |     | $          | 359,131  |       | $ | 355,891 |   |
| Serial management                     |       | 51,269   |       | 49,603   |       | 46,534   |       |
| Embedded  software and solutions      |       | 35,162   |       | 32,983   |       | 33,766   |       |
| Other                                 |       | 55,477   |       | 29,002   |       | 27,476   |       |
| Total MS net  revenue                 |       | $        | 497,852    |     | $          | 470,719  |       | $ | 463,667 |   |
|                                  |       |     |       |     |       |     |       |
| ** **                            | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| LANDesk net  revenue:                 |       |     |       |     |       |     |       |
| Licenses and royalties                |       | $        | 50,686     |     | $          | 42,514   |       | $ | 20,545 |   |
| Maintenance and  services             |       | 65,215   |       | 45,911   |       | 13,319   |       |
| Subscription  revenue                 |       | 28,291   |       | 23,481   |       | 6,504    |       |
| Total LANDesk  net revenue            |       | $        | 144,192    |     | $          | 111,906  |       | $ | 40,368 |   |

 

Following is apresentation of sales by geographic region for the years ended December 31,2008, 2007, and 2006:

 
| ** **               | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales:               |       |     |       |     |       |     |       |
| United States            |       | $        | 340,838    |     | $          | 333,915  |       | $ | 295,825 |   |
| International            |       | 316,296  |       | 266,960  |       | 223,370  |       |
|                     |       |     |       |     |       |     |       |
| Total geographic  region |       | $        | 657,134    |     | $          | 600,875  |       | $ | 519,195 |   |

 

**We sell our products internationally tocustomers in several countries.  Outsideof the United States, no other country accounted for more than 10% of sales in2008, 2007 or 2006.**

** **

Following is apresentation of sales by customer type for the years ended December 31,2008, 2007, and 2006:

 
| ** **           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales:           |       |     |       |     |       |     |       |
| Branded              |       | $        | 442,951    |     | $          | 393,799  |       | $ | 311,885 |   |
| OEM                  |       | 214,183  |       | 207,076  |       | 207,310  |       |
|                 |       |     |       |     |       |     |       |
| Total customer  type |       | $        | 657,134    |     | $          | 600,875  |       | $ | 519,195 |   |

 

Following is apresentation of long-lived assets as of December 31, 2008 and 2007:

 
| ** **          | ** ** | ** ** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------|------------|------------|------------|----------|------------|----------|------------|
| Long-lived  assets: |       |       |       |     |       |     |       |
| United States       |       |       |       | $        | 28,176     |     | $          | 26,266 |   |
| International       |       |       |       | 10,021   |       | 11,032   |       |
| Total               |       |       |       | $        | 38,197     |     | $          | 37,298 |   |

 

**15.**                               Credit Facility and Interest Rate Swaps

** **

On June 16,2006, we entered into a $250,000 unsecured, five-year revolving bank line ofcredit (the Credit Agreement).  We used$150,000 under the line of credit to fund a portion of the LANDesk acquisition(*See Note 3*).  Further, we have used and plan to continue touse borrowings for the purchase of shares under our stock repurchase program (*See Note 12*) and other business purposes.  Direct costs incurred from obtaining the lineof credit were capitalized and are being amortized over the term of theagreement.  In July 2008, wemodified our credit facility by adding a $90,000 term loan to the existingrevolver loan.  The term loan maturescoincident to the revolver on June 16, 2011.  The term loan bears a variable rate similarto our revolver.  The average interestrate for the entire credit facility is approximately 2.84% at December 31,2008.  The addition of the term loan toour credit facility provides extra capacity and strategic flexibility. Wereduced the balance outstanding on our revolving line of credit by $90,000 withthe proceeds from the term loan. Our revolver and term loan bear an interestrate of LIBOR plus a credit spread and carries no set principal repaymentschedule, other than any outstanding amount being due at the end of the fiveyear term.  The credit spread iscontractually based on a leverage ratio computation. As of December 31,2008, the credit spread is 150 basis points.

 

 

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Therewas $170,000 and $95,000 outstanding under the credit facility as of December 31,2008 and 2007, respectively.  The line ofcredit and term loan contain affirmative and negative covenants, includinglimitations on our ability to (i) make distributions, investments, andother payments unless we satisfy certain financial tests or other criteria, (ii) incuradditional indebtedness, (iii) restructure our subsidiaries, and (iv) makeacquisitions and capital expenditures. The financial tests include an interest coverage ratio and a totalleverage ratio.  We believe we are incompliance with these covenants and related tests as of December 31, 2008.****The failure to comply with these covenants could result inan event of default which, if not cured or waived, could have a materialadverse 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 December 31, 2008, the commitmentfee rate is 20 basis points per anum.

 

As of December 31,2008, we have two interest rate swaps, which are recorded on our balancesheet.  In 2006, we entered into aninterest rate swap agreement with a notional amount of $125,000, which expiredon December 31, 2008.    On May 1,2008, we entered into an interest rate swap agreement with a notional amount of$80,000.  The notional amount of theinterest rate swap was $80,000 as of December 31, 2008.  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 interest rate swap agreement with a notional amount of$90,000.  The notional amount of theinterest rate swap will remain at $90,000 until the termination on June 16,2011.   The swap was effective on December 31,2008.  The swap calls for us to make fixed rate payments of 2.75% over theterm of the hedge and to receive floating rate payments based on LIBOR(matching the LIBOR rate in the line of credit above) from the counter-party.

 

The objective of theinterest rate swap agreements is to provide a hedge against rising LIBORinterest rates that would have a negative effect on our cash flows due tochanges in interest rates on our credit agreements. We anticipate these hedgeswill be settled upon maturity and are being accounted for as cash flowhedges.  The interest rate swaps arerecorded at fair value each reporting period with the changes in the fair valueof the hedge that take place through the date of maturity recorded inaccumulated other comprehensive income.

 

AtDecember 31, 2008, we recorded an unrealized loss on the swaps, net oftax, of $1,797 in accumulated other comprehensive income. There was no materialineffectiveness in 2008.

 

**16.**                               Restructuring, Integration and Retirement

** **

During the third quarterof 2008, we announced a series of restructuring actions and began theintegration of our Ergo and Touchpaper acquisitions.  The restructuring and integration actions aredesigned to enhance competitiveness, improve efficiency, and reduce our overallcost structure.  The restructuring andintegration costs along with costs associated with our former CEO’s retirementincurred in the first quarter of 2008, have been separately identified as “Restructuring,integration and retirement expenses” within our operating expenses.  Restructuring and integration expensesinclude severance charges incurred for certain workforce reductions, costsassociated with the reduction of certain research and development investments,cost associated with the integration of marketing functions, and the costsassociated with the relocation of certain functions from our Redmond,Washington facility to Huntsville, Alabama.

 

We recorded $15,757 ofsuch costs for the year ended December 31, 2008.  These costs include stock compensation costsof $3,209 during 2008.  These costs alsoinclude $1,575 of integration costs related to the Ergo and Touchpaperacquisitions during 2008 and approximately $1,400 of costs settled in cashrelated to the retirement of our CEO in the first quarter of 2008.  The balance of these costs relates toseverance charges and other costs to be settled in cash.  As of December 31, 2008, we had accruedapproximately $3,585 related to severance costs, which was included in accruedwages and commissions in our consolidated balance sheet.  All costs associated with our restructuringand integration program were carried at the corporate level, and none of thesecosts 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, 2008   |   | $      | — |   |
|---------------------------------------|--------|--------|--------|--------|
| Accruals for  severance costs         |   | 9,298  |   |
| Adjustments to  accrual               |   | (847   | )      |
| Settlements made  during the period   |   | (4,866 | )      |
| Balance as of  December 31, 2008 |   | $      | 3,585  |   |

 

We do not expect to record a material amount for restructuring andintegration expenses related to the actions initiated in 2008 in future periods(*see Note 20*).  We expect most of these costs will be paidduring the first quarter of 2009.

 

 

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**17**.                               **Fair Value Measurements**

 

In September 2006,the FASB issued SFAS No. 157, “*Fair Value Measurements,*”(SFAS 157), which was effective for fiscal years beginning after November 15,2007 and for interim periods within those years. This statement defines fairvalue, establishes a framework for measuring fair value, and expands therelated disclosure requirements. This statement applies under other accountingpronouncements that require or permit fair value measurements. The statementindicates, among other things, that a fair value measurement assumes that thetransaction to sell an asset or transfer a liability occurs in the principalmarket for the asset or liability or, in the absence of a principal market, themost advantageous market for the asset or liability. SFAS 157 defines fairvalue based upon an exit price model. We adopted SFAS 157 as of January 1,2008, with the exception of the application of the statement to nonfinancialassets and nonfinancial liabilities. Nonfinancial assets and nonfinancialliabilities for which we have not applied the provisions of SFAS 157 includethose measured at fair value in goodwill impairment testing, indefinite livedintangible assets measured at fair value for impairment testing, and thoseinitially measured at fair value in a business combination.

 

Relative to SFAS 157,the FASB issued FASB Staff Positions (FSP) 157-1, 157-2 and 157-3. FSP 157-1amends SFAS 157 to exclude SFAS No. 13, “*Accountingfor Leases*,” (SFAS 13) and its related interpretive accountingpronouncements that address leasing transactions, while FSP 157-2 delayed theeffective date of the application of SFAS 157 to fiscal years beginning after November 15,2008 for all nonfinancial assets and nonfinancial liabilities that arerecognized or disclosed at fair value in the financial statements on anonrecurring basis.   FSP 157-3 clarifiedthe application of SFAS 157 in determining the fair value of financial assetswhen the markets for those assets are inactive. FSP 157-3 was effective onissuance in October 2008, including periods in which financial resultshave not been issued.

 

SFAS 157 establishes avaluation hierarchy for disclosure of the inputs to valuation used to measurefair value. This hierarchy prioritizes the inputs into three broad levels asfollows. Level 1 inputs are quoted prices (unadjusted) in active markets foridentical assets or liabilities. Level 2 inputs are quoted prices for similarassets and liabilities in active markets or inputs that are observable for theasset or liability, either directly or indirectly through market corroboration,for substantially the full term of the financial instrument. Level 3 inputs areunobservable inputs based on our own assumptions used to measure assets andliabilities at fair value. A financial asset or liability’s classificationwithin the hierarchy is determined based on the lowest level input that issignificant to the fair value measurement.

 

Thefollowing table provides the assets and liabilities carried at fair valuemeasured on a recurring basis as of December 31, 2008:

 
| ** **              | ** ** | ** **               | ** ** | **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     |       | $                        | 21,031     |                                                  | $          | 21,031 |   | — |   | — |   |
| Derivative  liabilities |       | $                        | 3,471      |                                                  | —     |   | $ | 3,471 |   | — |   |
|                         |            |                          |            |                                                       |            |  |  |  |  |  |  |  |

 

The fair market value ofour money market funds is measured at fair value using quoted prices in activemarkets. These fair value measurements are classified within Level 1 of thevaluation hierarchy.

 

The fair market value of“over-the-counter” derivatives is measured at fair value using expected cashflows over the life of the trade. The fair value measurement is prepared usingthe closing mid-market rate/price environment on December 31, 2008, usingproprietary models, available market data and reasonable assumptions andincludes a consideration of credit risk. These fair value measurements areclassified within Level 2 of the valuation hierarchy.

 

 

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**18.**                               Summarized Quarterly Financial Data (Unaudited)

** **

The following tablepresents unaudited quarterly consolidated operating results for each of ourlast eight fiscal quarters. This information has been prepared on a basisconsistent with our audited consolidated financial statements and includes alladjustments, consisting only of normal recurring adjustments that we considernecessary for a fair presentation of the data.

 

 
| ** **                 | ** ** | **Three Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **March 28,  2008**         | ** ** | **June 27,  2008** | ** ** | **September 26,  2008** | ** ** | **December 31,  2008** | ** ** |
| Net sales                  |       | $                                | 141,399    |   | $ | 159,182 |   | $ | 183,048 |   | $ | 173,505 |   |
| Gross profit               |       | $                                | 91,134     |   | $ | 99,889 |   | $ | 114,047 |   | $ | 108,819 |   |
| Income from  operations    |       | $                                | 2,142      |   | $ | 5,736 |   | $ | 13,786 |   | $ | 11,169 |   |
| Net income (2)             |       | $                                | 731        |   | $ | 3,443 |   | $ | 10,961 |   | $ | 10,337 |   |
| Net income per  share (1): |       |                             |       |   |   |   |   |   |   |
| Basic                      |       | $                                | 0.02       |   | $ | 0.08 |   | $ | 0.24 |   | $ | 0.23 |   |
| Diluted                    |       | $                                | 0.02       |   | $ | 0.08 |   | $ | 0.24 |   | $ | 0.23 |   |
|                       |       |                             |       |   |   |   |   |   |   |
| ** **                 | ** ** | **Three Months Ended** | ** ** |
| ** **                 | ** ** | **March 30,  2007**         | ** ** | **June 29,  2007** | ** ** | **September 28,  2007** | ** ** | **December 31,  2007** | ** ** |
| Net sales                  |       | $                                | 133,151    |   | $ | 150,225 |   | $ | 162,072 |   | $ | 155,427 |   |
| Gross profit               |       | $                                | 81,015     |   | $ | 95,082 |   | $ | 103,590 |   | $ | 99,333 |   |
| Income from  operations    |       | $                                | 2,512      |   | $ | 13,870 |   | $ | 20,438 |   | $ | 13,367 |   |
| Net income (2)             |       | $                                | 746        |   | $ | 15,000 |   | $ | 16,117 |   | $ | 14,066 |   |
| Net income per  share (1): |       |                             |       |   |   |   |   |   |   |
| Basic                      |       | $                                | 0.01       |   | $ | 0.30 |   | $ | 0.32 |   | $ | 0.29 |   |
| Diluted                    |       | $                                | 0.01       |   | $ | 0.29 |   | $ | 0.32 |   | $ | 0.28 |   |

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(1)                     The net income per share for each quarterwithin a fiscal year does not equal the total net income per share for theparticular fiscal year due to variations in the price of our common stockduring the year and the effect these variations had on the weighted averageshares outstanding from common equivalents calculation.

 

(2)                     The income from operations and net incomefor the quarter ended September 26, 2008 include a non-recurring charge of$700 for acquired in-process research and development related to the Touchpaperacquisition A tax benefit of $6,510 is included in the quarter ended June 29,2007 as a result of certain tax elections related to the LANDesk in-processresearch and development expense recorded in the third quarter of 2006 (*see note 8*).

 

**19.****                              ****Litigation**

 

In January 2007, we filed a complaint forpatent infringement in the United States District Court for the WesternDistrict of Washington against Aten Technology, Inc., Aten InternationalCo., Ltd, Belkin Corporation, Rose Electronics and its general partners, andTrippe Manufacturing Company. The defendants filed counterclaims allegingnon-infringement, unenforceability, and invalidity. In May 2007, weentered into a Settlement and License Agreement with Trippe Manufacturing, anddismissed Trippe from the lawsuit. In October 2007, the District Courtstayed the action pending a re-examination of our patents by the Patent andTrademark Office. That re-examination is currently underway.

 

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

 

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

 

In April 2007, wefiled a complaint for declaratory judgment against Aten International Co., Ltd.in the United States District Court for the Northern District of Alabama. We are seeking a declaratory judgment that two patents owned by Aten andasserted against Avocent are invalid and that certain of products alleged byAten to infringe do not infringe these patents.  In August 2007, Aten’smotion to dismiss for lack of personal jurisdiction was granted. We appealedthe District Court’s dismissal order to the Federal Circuit Court of Appeals,and the dismissal was affirmed by the Federal Circuit Court of Appeals. We havepetitioned the Federal Circuit Court of Appeals for a rehearing en banc.

 

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 

 

 

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complaintalleges infringement of a Gemini 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 stayed the action pending a review of the Gemini Patent bythe Patent and Trademark Office.

 

Weintend to vigorously defend each of these matters, but the outcome of anyclaim, litigation, or proceeding is always inherently uncertain. Based on thefacts and circumstances currently known to us, we believe that resolutionof the foregoing matters will not materially affect our operations, financialcondition, or cash flows.

 

**20.****                             ****Subsequent Events**

 

During the first quarter of 2009, we approved an additional series ofrestructuring activities. As of December 31, 2008, there were no costsaccrued related to this restructuring program. We expect restructuring costs toconsist primarily of severance payments and expect these restructuring costswill be paid during the first and second quarters of 2009.

 

During the period from January 1,2009 through February 23, 2009, we purchased 450 additional shares of ourcommon stock for a total cost of $5,840. As of February 23, 2009 therewere 1,650 shares available for repurchase under the program.

 

 

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**Item 9.  Changes in and Disagreements With Accountantson Accounting and Financial Disclosure.**

 

None.

 

**Item 9A.Controls and Procedures.**

 

(a) *Evaluation of disclosure controls and procedures.*  Based on their evaluation as of December 31,2008 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 controls*.  We completed an upgrade of our ERP system andadded software revenue recognition functionality to the system during ourfourth quarter of 2008.  This hasenhanced our internal control over financial reporting through the automationand standardization of certain controls and processes, as our financiallysignificant locations are now performing software revenue recognitionaccounting under the same ERP system.

 

Management’s Report onInternal Control over Financial Reporting and the Report of IndependentRegistered Public Accounting Firm is included in Part II, Item 8 ofthis Annual Report on Form 10-K.

 

**Item 9B.Other.**

 

None.

 

**PART III**

 

Information with respectto Items 10 through 14 of this Part III may be found in the definitiveproxy statement to be delivered to stockholders in connection with the 2009Annual Meeting of Stockholders. Such information is incorporated herein byreference.

 

 

88

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**PART IV**

 

**Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.**

 

**(a) FinancialStatement Schedule**

 

**Schedule of Valuation and Qualifying Accounts**

*For theyears ended December 31, 2008, 2007 and 2006 (in thousands)*

 
| ** **                            | ** ** | **Beginning Balance** | ** ** | **Assumed on  Acquisitions(1)** | ** ** | **Charged to  Income** | ** ** | **Deductions from  Reserves** | ** ** | **Ending Balance** | ** ** |
|---------------------------------------|------------|----------------------------|------------|--------------------------------------|------------|-----------------------------|------------|------------------------------------|------------|-------------------------|------------|
|                                  |       |                       |       |                                 |       |                        |       |                               |       |                    |       |
| Year ended  December 31, 2006:   |       |                       |       |                                 |       |                        |       |                               |       |                    |       |
| Allowance for  doubtful accounts      |       | $                          | 1,129      |                                 | 840        |                        | 480        |                               | —     |                    | $          | 2,449 |   |
| Allowance for  inventory obsolescence |       | $                          | 4,558      |                                 | 1,131      |                        | 6,151      |                               | (6,262     | )                       | $          | 5,578 |   |
| Allowance for  sales returns          |       | $                          | 2,877      |                                 | 3,140      |                        | 9,061      |                               | (9,040     | )                       | $          | 6,038 |   |
| Liability for  warranty returns       |       | $                          | 2,536      |                                 | 158        |                        | 155        |                               | (363       | )                       | $          | 2,486 |   |
| Valuation  allowance for income taxes |       | $                          | 554        |                                 | 2,486      |                        | 1,135      |                               | —     |                    | $          | 4,175 |   |
| Year ended  December 31, 2007:   |       |                       |       |                                 |       |                        |       |                               |       |                    |       |
| Allowance for  doubtful accounts      |       | $                          | 2,449      |                                 | —     |                        | 1,234      |                               | (1,202     | )                       | $          | 2,481 |   |
| Allowance for  inventory obsolescence |       | $                          | 5,578      |                                 | —     |                        | 7,209      |                               | (5,459     | )                       | $          | 7,328 |   |
| Allowance for  sales returns          |       | $                          | 6,038      |                                 | —     |                        | 14,368     |                               | (15,390    | )                       | $          | 5,016 |   |
| Liability for  warranty returns       |       | $                          | 2,486      |                                 | —     |                        | 5,974      |                               | (6,606     | )                       | $          | 1,854 |   |
| Valuation allowance  for income taxes |       | $                          | 4,175      |                                 | —     |                        | 429        |                               | (618       | )                       | $          | 3,986 |   |
| Year ended  December 31, 2008:   |       |                       |       |                                 |       |                        |       |                               |       |                    |       |
| Allowance for  doubtful accounts      |       | $                          | 2,481      |                                 | 1,622      |                        | 854        |                               | (409       | )                       | $          | 4,548 |   |
| Allowance for  inventory obsolescence |       | $                          | 7,328      |                                 | 147        |                        | 3,000      |                               | (4,074     | )                       | $          | 6,401 |   |
| Allowance for  sales returns          |       | $                          | 5,016      |                                 | —     |                        | 9,339      |                               | (9,267     | )                       | $          | 5,088 |   |
| Liability for  warranty returns       |       | $                          | 1,854      |                                 | 35         |                        | 9,274      |                               | (8,918     | )                       | $          | 2,245 |   |
| Valuation  allowance for income taxes |       | $                          | 3,986      |                                 | —     |                        | 3,201      |                               | (166       | )                       | $          | 7,021 |   |

----

(1)          Amounts represent balances assumed from the acquisitionof Cyclades and LANDesk in 2006 and Ergo and Touchpaper in 2008.

 

 

89

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**(b) Exhibits**

 
| ** **         | ** ** | ** **                                                                                                                                                                                        | ** ** | **Incorporated by Reference** |
|--------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|
| **Exhibit Number** | ** ** | **Exhibit Description**                                                                                                                                                                      | ** ** | **Form**                      | ** ** | **Entity(1)** | ** ** | **Date** | ** ** | **Number** | ** ** | **Included** |
| 3.1                |       | Certificate of Incorporation of Aegean Sea Inc.                                                                                                                                              |       | S-4                           |   | AGI |   | 3/31/00 |   | Ex. 3.1 |   |   |
| 3.1.1              |       | Certificate of Amendment of Certificate of  Incorporation (changing name from Aegean Sea Inc. to Avocent  Corporation)                                                                       |       | 10-K                          |   | AVCT |   | 3/27/01 |   | Ex 3.1.1 |   |   |
| 3.2                |       | Amended and Restated Bylaws of Avocent Corporation                                                                                                                                                |       | 10-Q                          |   | AVCT |   | 11/5/08 |   | Ex. 3.2 |   |   |
| 10.1               |       | Form of Amended and Restated Employment and  Noncompetition Agreement for Executive Officers                                                                                                 |       |                          |   |   |   |   |   |   |   | X |
| 10.2               |       | Amended and Restated Amendment Agreement among the  Company, Avocent Employment Services Company, Cybex Computer Products  Corporation and Stephen F. Thornton                                    |       | 10-Q                          |   | AVCT |   | 8/9/02 |   | Ex. 10.30.1 |   |   |
| 10.3               |       | Form of Avocent Corporation Indemnification  Agreement for Directors and Executive Officers                                                                                                  |       | 10-Q                          |   | AVCT |   | 8/6/08 |   | Ex. 10.13 |   |   |
| 10.4               |       | Avocent Corporation 2005 Equity Incentive Plan, as  amended                                                                                                                                       |       | 8-K                           |   | AVCT |   | 6/15/06 |   | Ex. 99.16 |   |   |
| 10.5               |       | Avocent Corporation 2008 Inducement Equity Incentive  Plan, as amended                                                                                                                            |       | 8-K/A                         |   | AVCT |   | 8/4/08 |   | Ex. 99.18 |   |   |
| 10.6               |       | Form of Revised Equity Agreements for Avocent  Corporation 2005 Equity Incentive Plan and Avocent Corporation 2008  Inducement Equity Incentive Plan                                         |       | 10-Q                          |   | AVCT |   | 11/5/08 |   | Ex. 99.20 |   |   |
| 10.7               |       | Amended Notice of Grant of Restricted Stock Units  and Amended and Restated Restricted Stock Unit Agreement for Directors                                                                         |       |                          |   |   |   |   |   |   |   | X |
| 10.8               |       | Avocent Corporation Employee Stock Purchase Plan, as  amended                                                                                                                                     |       | 10-Q                          |   | AVCT |   | 11/5/08 |   | Ex. 99.21 |   |   |
| 10.9               |       | Corporation Deferred Compensation Plan                                                                                                                                                            |       |                          |   |   |   |   |   |   |   | X |
| 10.10              |       | $250,000,000 Credit Agreement dated June 16,  2006, among Avocent Corporation, the Guarantors Party thereto, the Lenders  Party thereto, and Regions Bank                                    |       | 8-K                           |   | AVCT |   | 6/20/06 |   | Ex. 99.18 |   |   |
| 10.11              |       | First Amendment to Credit Agreement dated  July 28, 2008 among Avocent Corporation, the Guarantors Party thereto,  the Lenders Party thereto, and Regions Bank                               |       | 10-Q                          |   | AVCT |   | 8/6/08 |   | Ex. 99.20 |   |   |
| 10.12              |       | Summary of Avocent Corporation 2009 Executive Cash  Bonus Program                                                                                                                                 |       | 8-K                           |   | AVCT |   | 1/28/09 |   | Ex. 99.3 |   |   |
| 10.13              |       | Retirement and General Release Agreement dated  January 23, 2008, among Avocent Huntsville Corp., the Company, and John R. Cooper                                                                 |       | 10-Q                          |   | AVCT |   | 2/21/08 |   | Ex. 10.2.2 |   |   |
| 21.1               |       | Subsidiaries of Avocent Corporation                                                                                                                                                               |       |                          |   |   |   |   |   |   |   | X |
| 23.1               |       | Consent of PricewaterhouseCoopers LLP, Independent  Registered Public Accounting Firm                                                                                                             |       |                          |   |   |   |   |   |   |   | X |
| 24.1               |       | Power of Attorney(2)                                                                                                                                                                              |       |                          |   |   |   |   |   |   |   | X |
| 31.1               |       | Sarbanes-Oxley Act of 2002  Section 302(a) Certification of the Chief Executive Officer                                                                                                 |       |                          |   |   |   |   |   |   |   | X |
| 31.2               |       | Sarbanes-Oxley Act of 2002  Section 302(a) Certification of the Chief Financial Officer                                                                                                 |       |                          |   |   |   |   |   |   |   | X |
| 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 |       |                          |   |   |   |   |   |   |   | X |

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(1)          The following abbreviations are used toidentify corporate entities:

 

AVCT — AvocentCorporation and AGI = Aegean Sea Inc. (now known as AvocentCorporation)

 

(2)          Set forth on the signature page andincorporated herein by reference.

 

**(c)  Reports on Form 8-K**

 

None

 

90

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|   | **AVOCENT CORPORATION** |
|--------|-------------------------|
|   |                    |   |
|   |                    |   |
|   | By:                     | /s/ Michael J. Borman |
|   |                    | Michael J. Borman, Chief Executive Officer |
|   |                    | Date: February 27, 2009 |

 

**POWER OFATTORNEY**

 

KNOW ALL PERSONS BY THESEPRESENTS:

 

That the undersignedofficers and directors of Avocent Corporation do hereby constitute and appointEdward H. Blankenship, Samuel F. Saracino, and Doyle C. Weeks, andeach of them, the lawful attorney and agent with power and authority to do anyand all acts and things and to execute any and all instruments which saidattorneys and agents, or either of them, determine may be necessary oradvisable or required to enable Avocent Corporation to comply with theSecurities Exchange Act of 1934, as amended, and any rules or regulationsor requirements of the Securities Exchange Act of 1934, as amended, and any rules orregulations or requirements of the Securities and Exchange Commission inconnection with this Form 10-K Report. Without limiting the generality ofthe foregoing power and authority, the powers granted include the power andauthority to sign the names of the undersigned officers and directors in thecapacities indicated below to this Form 10-K Report of amendments orsupplements thereto, and each of the undersigned hereby ratifies and confirmsall that said attorneys and agents or either of them, shall do or cause to bedone by virtue hereof. This Power of Attorney may be signed in severalcounterparts.

 

IN WITNESS WHEREOF, eachof the undersigned has executed this Power of Attorney as of the date indicatedopposite his name.

 

In accordance with the ExchangeAct, this report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated.

 
| **Signature**                    | ** ** | **Title**                                                                                | ** ** | **Date**               |
|----------------------------------|------------|------------------------------------------------------------------------------------------|------------|------------------------|
|                             |       |                                                                                     |       |                   |
| /s/ Michael J. Borman            |       | Chief Executive Officer                                                                  |       | February 27, 2009 |
| Michael J. Borman                |       | (Principal Executive Officer)                                                            |       |                   |
|                             |       |                                                                                     |       |                   |
| /s/ Edward H.  Blankenship       |       | Senior Vice President of Finance, Chief Financial  Officer, and Assistant Secretary |       |                   |
| Edward H. Blankenship            |       | (Principal Financial and Accounting Officer)                                             |       | February 27, 2009 |
|                             |       |                                                                                     |       |                   |
| /s/ Edwin L. Harper              |       | Chairman of the Board of Directors                                                       |       | February 27, 2009 |
| Edwin L. Harper                  |       |                                                                                     |       |                   |
|                             |       |                                                                                     |       |                   |
| /s/ Harold D. Copperman          |       | Director                                                                                 |       | February 27, 2009 |
| Harold D. Copperman              |       |                                                                                     |       |                   |
|                             |       |                                                                                     |       |                   |
| /s/ Francis A.  Dramis, Jr. |       | Director                                                                                 |       | February 27, 2009 |
| Francis A. Dramis, Jr.      |       |                                                                                     |       |                   |
|                             |       |                                                                                     |       |                   |
| /s/ William H. McAleer           |       | Director                                                                                 |       | February 27, 2009 |
| William H. McAleer               |       |                                                                                     |       |                   |
|                             |       |                                                                                     |       |                   |
| /s/ Stephen F. Thornton          |       | Director                                                                                 |       | February 27, 2009 |
| Stephen F. Thornton              |       |                                                                                     |       |                   |
|                             |       |                                                                                     |       |                   |
| /s/ David P. Vieau               |       | Director                                                                                 |       | February 27, 2009 |
| David P. Vieau                   |       |                                                                                     |       |                   |
|                             |       |                                                                                     |       |                   |
| /s/ Doyle C. Weeks               |       | President and Director                                                                   |       | February 27, 2009 |
| Doyle C. Weeks                   |       |                                                                                     |       |                   |

 

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