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

 

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

**(Mark One)**

 
| **ý** | **ANNUAL REPORT UNDER SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------|

 

**FOR THEFISCAL YEAR ENDED DECEMBER 31, 2001.**

 
| **o** | **TRANSITION REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------|

 

**FOR THETRANSITION PERIODFROM               TO               .**

 

**Commission file number: 000-30575**

 

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**AVOCENT CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                               |   | **91-2032368**                        |
|----------------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization)            |   | (I.R.S. Employer  Identification No.) |
|                                                                       |   |                                  |
| **4991 Corporate Drive****Huntsville,  Alabama**                           |   | **35805**                             |
| (Address of  Principal Executive Offices)                                  |   | (Zip Code)                            |
|                                                                       |   |                                  |
| **256-430-4000**                                                           |
| (Registrant’s  telephone number, including area code)                 |
|                                                                       |
|  Securities registered under Section 12(b)  of the Exchange Act: None |
|                                                                       |
| Securities  registered under Section 12(g) of the Exchange Act:       |
| Common Stock,  $0.001 par value per share                                  |

 

Indicate by check mark whether the registrant:(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. Yes ý   No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andno disclosure will be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K.  ý

 

The aggregate market value of the voting common stockheld by non-affiliates of the registrant on March 15, 2002 was approximately$1,092,950,465.

 

The number of shares outstanding of the registrant’scommon stock as of March 15, 2002 was 44,882,289.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Information with respect to Part III of thisForm 10-K may be found in the definitive proxy statement to be deliveredto stockholders in connection with the 2002 Annual Meeting of Stockholders.Such information is incorporated herein by reference.

 

 

**PART I**

 

**Item 1. Business.**

 

*THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS THATINVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS ANNUAL REPORTTHAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THEMEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKINGSTATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS RELATING TO AVOCENT’SSTRATEGY, BUSINESS PROSPECTS, AND FUTURE OPERATING RESULTS, PROSPECTS FORINCREASING OEM, BRANDED, AND CHANNEL SALES, BACKLOG, RECEIVABLES, COMPETITION,NEW PRODUCT INTRODUCTIONS, DEVELOPMENT OF ADDITIONAL SUPPLIER RELATIONSHIPS,DEVELOPMENT OF DISTRIBUTOR AND RESELLER CHANNELS, PRODUCT RETURNS AND WARRANTYCLAIMS, ABILITY TO OBTAIN AND PROTECT PROPRIETARY RIGHTS, CUSTOMER SERVICE,DEVELOPMENT OF INTERNATIONAL SALES, FUTURE INVENTORY LEVELS AND FUTUREINVENTORY VALUATIONS, FUTURE RESEARCH AND DEVELOPMENT EXPENDITURES, FUTURESALES AND MARKETING EXPENSES, FUTURE GENERAL AND ADMINISTRATIVE EXPENSES, ANDFUTURE LIQUIDITY AND CAPITAL RESOURCES. ALL OF THESE FORWARD-LOOKING STATEMENTSARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE OF THIS ANNUAL REPORT. OURACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS ANNUALREPORT. THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT, ANDOTHER WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS MADE BY US FROM TIME TO TIME,ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTSTO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS.FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,THOSE DISCUSSED UNDER THE CAPTION “FACTORS THAT MAY AFFECT FUTURE RESULTS.”*

 

**Overview**

 

Avocent began operations in July 2000, by thecombination of the businesses of Apex Inc. and Cybex Computer ProductsCorporation. As a result of this merger transaction, both Apex and Cybex arenow wholly–owned subsidiaries of Avocent.

 

We (meaning Avocent and its wholly-owned subsidiaries,Apex, Cybex, Avocent International Ltd., and Equinox Systems Inc.)design, manufacture, and sell analog and digital KVM (keyboard, video, andmouse) switching systems, serial connectivity devices, extension and remoteaccess products, and display products for the computer industry. Our switchingand connectivity solutions provide IT managers with access and control ofmultiple servers and network data centers from any location.  Data center managers and networkadministrators have increasingly complex and growing server populations, andour analog, digital, and serial switching solutions, as well as our extensionand remote access products, help them manage multiple servers and seriallycontrolled devices from a single local or remote console consisting of akeyboard, video monitor, and mouse. Our switching solutions provide multipleusers, each with a separate keyboard, video monitor, and mouse, with thecapability to control thousands of computers from any location, and eliminatethe need for individual keyboards, video monitors, and mice for the controlledcomputers. Elimination of these peripheral devices can provide significant costreductions including lower initial investment, reduced utility costs, and spacesavings, as well as more efficient technical support capabilities.

 

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We provide plug and play switching systems for themany network administration, management, and storage problems faced bycorporate customers, data centers, and server farms. Our Avocent, Apex, Cybex,and Equinox branded switching products, including our *DS Series*TM*,**AutoView*TM*, OutLook®,*and*XP*®*4000 Series*products, help facilities managers and network administrators access multipleservers from one or more centralized or remote consoles and consolidatehardware requirements.  Our systemsprovide direct hardwired connections between the switch and the attachedservers to facilitate access to the servers, even when the network is down. Inaddition, our switching systems are able to work with multi-platform serverenvironments. Our switching solutions allow users to control IBM-compatible andMacintosh PCs, and Sun, Hewlett-Packard, IBM, Compaq, and Silicon Graphicsworkstations. These products are particularly useful in networking environmentswhere multiple computers are dedicated as servers and in situations where multiplecomputers need to be controlled from one location to facilitate networkmanagement.

 

Our family of extension products allows users toseparate the keyboard, video monitor, and mouse up to 500 feet from thecomputer. In addition, certain of our extension products allow multiple usersto share access to the same computer from different consoles. Our extensionproducts are particularly useful in congested work areas or where workingconditions may be hazardous to the function of the computer or the operator.Our remote access products allow users to control servers from remote locationsusing a standard modem, Internet, or network connection without the necessityof remote access hardware or software on the computers or servers beingaccessed. When used in conjunction with our switching products, our remoteaccess products permit users to control multiple attached computers remotely.

 

We also offer visual display products for highinformation-content digital display solutions. Our SMARTGLASTM technology offersusers working in time or mission critical environments simultaneous access tolarge amounts of information. This technology permits the consolidation ofinformation from multiple sources to be displayed on single or multiple flatpanel displays, forming a tiled display solution, and has been adopted by stockexchanges and trading companies globally.

 

We market and sell our products around the world to adiversified group of original equipment manufacturers, or OEMs, dealers,distributors, resellers, and end users, primarily through our inside andoutside sales and customer support staff, advertisements in trade publications,and participation in major industry trade shows. A substantial portion of oursales are to a limited number of server OEMs that purchase our switchingsystems on a private-label and branded basis. We supply switching systems andproducts to Compaq Computer Corporation, Dell Computer Corporation,Hewlett-Packard Company, IBM, and Siemens under private-label and brandedarrangements. Our end-user branded sales customers in the United States for2001 included AIG, Bank of America, Citicorp, Disney, DoubleClick, EMC, Exxon,Ford, General Motors, Intel, Merrill Lynch, Microsoft, Nokia, Novell, Pfizer,Prudential, and Wendy’s. Our international branded sales customers includedMetroRED (Brazil), CargoLifter (Germany), DaimlerChrysler (Germany), DresnerBank (Benelux), Hamburg Mannheimer (Germany), and Integra (France).

 

Apex, Avocent, AutoView, Cybex, DS1800, DSR, DSSeries, Equinox, KVM over IP, OutLook, and XP4000 are trademarks or registeredtrademarks owned by us. This annual report also includes trademarks of other companies.

 

**Industry Background**

 

Information technology is critical to most businessoperations as computers perform multiple and diverse functions throughout manydifferent types of organizations. Many corporations have decentralizedcomputing power while sharing technology resources and providing broad accessto enterprise data. This has resulted in the widespread adoption of distributednetwork computing environments using a client/server architecture ofinterconnected computers. The typical client/server installation consists of alocal area network, or LAN, with multiple centralized computers operating asservers dedicated to performing specific functions for the many clientcomputers connected to the LAN and, in many cases, may include a wide-area network,or WAN.

 

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In addition, Internet service providers, or ISPs,application service providers, or ASPs, data centers, and server farms havegrown as a result of increased individual and business demand for use of andaccess to the Internet. This demand for Internet access has created additionaldemand for large scale computer networks.

 

Corporate LANs, WANs, ISPs, ASPs, server farms, anddata centers all face significant network administration and space problems.Facilities managers and network administrators, who may supervise hundreds orthousands of servers and other networked devices, must identify and accessrelevant servers and devices, add or delete users, add, change, or upgradeapplications, tune systems for better performance, and diagnose and correctnetwork failures. These servers are generally designed to operate asstand-alone systems, each with its own console, and facilities managers andnetwork administrators must therefore deal with a large number of consoles,whether centrally located or dispersed throughout the organization, whenperforming administration and management tasks.

 

Information technology resources are more critical toorganizations. Accordingly, constant availability is crucial to the operationof many businesses. The time that a corporation, ISP, ASP, data center, serverfarm, or network is down or degraded can cause significant inconvenience, lossof productivity, and financial loss. Because diagnosis and correction of abnormalnetwork behavior often requires the support personnel to physically access eachaffected server through its own console, quick and efficient fault managementcan be difficult, especially when there are a large number of dispersed serversinvolved. In addition, when a network fails, the ability of a facilitiesmanager or network administrator to quickly and efficiently diagnose andcorrect the problem is often hampered by the inability to access the softwaretools that reside on the network and that are normally used to manage networkfailures.

 

In addition to these administration and managementproblems, as organizations grow and their computing needs increase the numberof servers, consoles, and other peripherals grows. Without efficient storageand configuration, network hardware consumes substantial and often expensivefloor space, creates clutter that hampers network administration andmanagement, and increases the risk of physical damage to expensive hardware.The space management solutions available to facilities managers and networkadministrators have generally consisted of racks or cabinets designed to houseonly one type of server, and most have not been technically designed for easeof access. Organizations with distributed, heterogeneous client/server networkshave often been left with no customized solution.

 

**Products**

 

We provide a variety of solutions to many of thenetwork administration, management, and storage problems faced by facilitiesmanagers and network administrators responsible for monitoring and servicingnetwork installations:

 

•                                          Our *DS Series*TMdigitizes keyboard, video, and mouse information and compresses and transportsthe information in packets over traditional network connections using only afraction of the bandwidth required by other products and optimizing performancefor busy data centers.  Our *DS1800*TM switching solution is a digitalconsole connection that allows facilities managers and network administratorsaccess to servers utilizing standard networking infrastructure and our KVM OVERIPTM technology. Our *DSR*TMswitches, the latest in the *DS Series*,combine analog and digital connections in one switch and have an easy-to-useWindows interface. Our *DS Series*products**provideaccess and control of servers as well as serial devices in the networkoperations center or from any location in the world using TCP/IP connectivity.

 

•                                          Our high-end *XP*®*4000 Series*,which includes the *XP®4040*, the *XP®4080,*and the *XP®4400*,provides multiple users, each utilizing one console, with the capability toconfigure, monitor, and control thousands of interconnected computers andnetwork servers located up to 500 feet from the control unit. The *XP4000Series* can also be used to control terminals, routers, hubs, andother equipment. The *XP4000 Series* is hot-pluggable and thuscan be reconfigured while in operation without disruption of the operation ofthe switch or the attached computers or servers.

 

•                                          Our *AutoView*TM*200*four and eight port matrix switches are designed to allow two users access toup to 64 servers. When combined with our *LongView*® product receiver, the seconduser can be located up to 500 feet from the *AutoView 200.* Additionally, the *AutoView 400*TMeight, 16, and 24 port matrix KVM switches allow two users to access 64 serversand support Sun, USB, and PC based servers. Our *AutoView*TM*Commander*TMproduct adds computer selection through an optional on-screen menu system

 

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and adds hot-pluggable operations to the *AutoBoot*TMtechnology, which allows support personnel to automatically boot all connectedservers after a power failure or other problem without operator intervention.

 

•                                          Our *OutLook®*switches are designed for small-to-medium network configurations and provideease-of-use, reliability, and server density. Our *OutLook* switches allow one,two, or four users to access heterogeneous server populations that usedifferent platforms, such as Intel, Macintosh, IBM RS 6000, Hewlett-Packard9000, DEC Alpha and Sun Sparc, and different operating systems, such as WindowsNT, Unix, NetWare, and O/S 2, and allow information technology professionals toorganize, access, maintain, and control banks of servers from a single consoleor multiple consoles. Multiple *OutLook* switches can be integrated toprovide centralized control of up to 256 servers. *OutLook* switches offerextensive functionality, including programmable naming, scanning, security, andsystem broadcast features. With our proprietary *OSCAR*® interface, *OutLook*switches allow users to select and manage servers using an intuitive,information-rich menu.

 

•                                          Our *SwitchView*®two and four port switches are designed to switch KVM signals among up to 4computers. Our *SwitchView* products are our first products designed for massmarketing. Our *SwitchView**OSD* product is an eight port switchdesigned for small and medium-sized businesses with an on-screen display. Our *SwitchViewMP*is a four port switch thatprovides connectivity to Intel-based, Sun, and USB machines without the needfor expensive adapters or converters. Our *SwitchViewSC* isdesigned to provide secure access to up four computers but to make itimpossible to transfer data between the connected computers, an importantfactor for governmental agencies, corporate headquarters, or military officesthat need access to both secure and unsecure networks.

 

•                                          Our extensionproducts provide system design flexibility by allowing customers to locatekeyboards, video monitors, and mice up to 500 feet away from a computer orserver. Our *LongView*®product allows control of servers from distances of up to 500 feet using asingle Category 5 UTP cable. The *LongView* product features *AutoTuning*(patent pending), which automatically configures systems without requiring userintervention. Our *LongView*®*Companion*® product enables a secondworkstation to be located near a computer or server for convenient systemmaintenance. These products are particularly useful in providing access tocomputers or servers in harsh environments such as manufacturing plants whereit is not desirable to locate them on the plant floor.

 

•                                          Our *SMARTGLAS*®technology offers users working in time or mission critical environmentssimultaneous access to large amounts of information. This technology permitsthe consolidation of information from multiple sources to be displayed on asingle or multiple flat panel display, forming a tiled display solution. Our *SMARTGLAS*productsinclude an 18-inch desktop flat panel display and our *SMARTGLAS* multi-tilesolution that increases the amount of viewable information, the flexibility andformat of the information on the desktop and the consequent value of theinformation to the user.

 

•                                          Our Equinoxbranded products add high-performance, reliable, and affordable server-basedproducts for serial and dial access applications.  The Equinox *SuperSerial*product line provides serial communications for security, commercialpoint-of-sale, process control, industrial automation, data collection, remoteaccess, fax servers, Internet access, and custom applications.

 

The products described above are all part of ourconnectivity solutions, and we have no other class of products that accountsfor 10% or more of our net sales.

 

**Sales and Marketing**

 

We market and sell our products through our own salesforce and various distribution channels, including OEM and a variety ofdistributor and reseller arrangements. We market our products primarily throughdirect customer sales calls, advertisements in trade publications, onlinesponsorships, participation in major industry trade shows, promotions withdistributors and resellers, direct marketing, telemarketing, publicityprograms, and through our website. We also devote a substantial portion of ourmarketing efforts to developing, monitoring, and enhancing our relationshipswith our network of OEMs, independent dealers, distributors, resellers, and endusers. Our sales personnel are supported by our

 

 

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engineers and our customer service representatives who providetechnical support and advice to customers. As of December 31, 2001, weemployed 212 people in sales, marketing, and customer support.

 

We currently sell various switching products to Compaq,Dell, Hewlett-Packard, IBM, and Siemens pursuant to private-label and brandedarrangements. These OEM customers integrate and sell our switches with theirown products, including network servers. We devote significant sales andcustomer service resources to our OEM accounts. We are continuing to leverageour significant experience in working with our OEM and other servermanufacturer customers to enter into new relationships with other manufacturersof servers in the United States, Europe, and Asia. We believe that thearchitecture, quality, and reliability of our products, together with ourcommitment to customer service, are attractive to server manufacturers.

 

We have relationships with a variety of distributorsand resellers, including Tech Data, Ingram Micro, Dakota, Getronics, QDS,Shanghai Aera, Digital First, and Blue Ridge, value added resellers, or VARs,and systems integrators, for the distribution and sale of Avocent, Apex, Cybex,and Equinox branded products in the United States, Europe, Asia, and elsewhere.We devote resources to educating our distributors and resellers about thebenefits of our products and training them in the proper installation andsupport of our products. We will continue devoting additional resources toincrease these branded sales, and we will pursue additional relationships withdistributors and resellers, both domestically and internationally, who have thetechnical capability and market presence to assist end-user customers indeveloping network space management, access, and control solutions to meettheir particular needs. Our future success will depend in part on our abilityto attract, train, and motivate additional distributors and resellers.

 

We provide discounts, other special pricingarrangements, and certain return privileges to our OEMs and ourdistributors and resellers. Because of these discounts and other arrangements,our gross margins on sales to OEMs and through distributors and resellersare lower than our gross margins on our direct sales. Our agreements with ourdistributors and resellers are generally nonexclusive and may be terminated onshort notice by either party without cause. Our distributors and resellers arenot within our control, are not obligated to purchase products from us, andfrequently offer products of several different manufacturers, includingproducts that compete with ours.

 

International sales accounted for approximately 38% ofnet sales in 2001, 38% of net sales in 2000, and 36% of net sales in 1999, andare made primarily through OEMs, distributors, and resellers located in Europe,Canada, Asia, and other foreign countries. We are expanding our internationalsales within Europe, Asia, and the Pacific Rim through the utilization of oursales offices in Guangzhou and Shanghai, China; London, England; Paris, France;Rotterdam, Holland; Seoul, Korea; Shannon, Ireland; Steinhagen, Germany; Tokyo,Japan; Hong Kong; and Singapore.

 

**Customers**

 

To date, a substantial portion of our net sales havebeen generated from sales of switches to OEMs for integration with theirproduct offerings. Sales to OEM customers represented 46% of net sales for2001, 46% of net sales for 2000, and 72% of net sales for 1999. While we havecontracts with certain of our existing OEM customers, none of them is obligatedto purchase products from us except pursuant to binding purchase orders.Consequently, any OEM customer could cease doing business with us at any time.The proposed merger between Compaq and Hewlett-Packard will result in a furtherconcentration of sales in our OEM customers. The loss of, or material decline in orders from, certain of our currentOEM customers would have a material adverse effect on our business, financialcondition, results of operations, or cash flow.

 

In addition to our OEM customers, our principalcustomers include a diversified group of dealers and major distributors (49% ofnet sales in 2001, 45% of net sales in 2000, and 19% of net sales in 1999) anddirect purchasers (5% of net sales in 2001, 9% of net sales in 2000, and 9% ofour net sales in 1999). We believe that our broad range of products sold atdifferent price points offers us the opportunity to market our products tocustomers of all sizes, in different industries, and with varying degrees oftechnical sophistication. Sales to Compaq represented approximately 23% of netsales in 2001, 32% of net sales in 2000, and 50% of net sales in 1999. No othercustomer accounted for more than 10% of net sales in 2001.

 

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**Seasonality**

 

Our operating results are affected by seasonal trendsand by general conditions in the server market. We have experienced, and expectto continue to experience, some degree of seasonality due to customer buyingcycles. We believe that the third and fourth quarters will generally havehigher net sales levels due to customer budgeting and procurement cycles, whichmay depress net sales in other quarters.

 

**Customer Service**

 

We emphasize customer service by developinginnovative, high quality products, encouraging customer feedback throughcontact with our key customers, providing technical support and information onour website, and providing a customer hotline that offers technical support forthe life of our products. We respond quickly to our customers’ requests fortechnical support and service, and our engineering department often works withindividual customers to troubleshoot problems and develop custom solutions. Weoffer warranties for parts and service on all of our products, ranging from oneto three years. We also offer a 30-day money-back guarantee for all of ourproducts. To date, we have not experienced significant product returns. We may,as a result of competitive pressures, change our warranty policies in thefuture to provide coverage that is greater in scope and duration than thecoverage we currently offer. If we were to increase our warranty coverage, ourrisk of warranty claims, and therefore our warranty expense and reserves, wouldlikely increase.

 

**Product Development**

 

We believe that the continued, timely development ofnew products and enhancements to our existing products is essential to buildingour competitive position. The market for our products has experienced rapidtechnological advances, frequent new product introductions and enhancements,and significant price competition. The introduction of products incorporatingsuperior or alternative technologies (such as switching software), the creationor adoption of new technologies, the emergence of new industry standards, orchanges in the market’s pricing structure could render our existing productsand products we have under development obsolete or unmarketable. Our productscombine components, such as printed circuit boards, connectors, cableassemblies, power supplies and enclosures, that are manufactured by othercompanies and are generally available to our competitors and potentialcompetitors. Our future success will depend in large part upon continuedinnovative application of such commercially available components to the expansionand enhancement of our existing products and the development and introductionof new technologies and products that address changing customer needs on acost-effective and timely basis. By emphasizing customer–driven researchand development, we have been able to develop innovative, practical, andmarketable products that have had immediate application and acceptance. Ourfailure to respond timely to technological changes or customer requirementscould have a material adverse effect on our business, financial condition,results of operations, or cash flow.

 

Due to our significant reliance on OEM relationships,some of our product development efforts are focused on developing new productsor enhancements for OEM customers. At times, these new products or enhancementsmay not be available to, or readily marketable to, other customers withoutsignificant modifications or delay.

 

Our engineering and product development efforts focuson anticipating the needs of our customers by providing innovative, practical,and marketable products that have immediate applications in their markets. Bymaintaining contact with customers throughout the installation and technicalsupport process, we are able to identify and test potential designmodifications and improvements as well as new applications and extensions forexisting products. We expect this process will enable us to develop new productcategories and applications based on existing technology developed to meetspecific customer needs. Many of our products are designed to accommodatefuture modifications and additional features, which we believe facilitates thedevelopment and integration of future modifications and features if we see amarket need.

 

Our engineering and product development expenses wereapproximately $22.5 million for 2001 (excluding $4.6 million in expensedin-process research and development expenses related to the acquisition ofEquinox), $12.9 million for 2000 (excluding $94 million in expensedin-process research and development costs related to the Apex and Cybexcombination), and $6.5 million for 1999. As of December 31, 2001, weemployed 132 people in our engineering department. In addition, we useindependent contractors from time to time. As of December 31, 2001, wewere working with approximately 12 independent contractors on variousdevelopment projects.

 

To meet the challenges of the rapidly changingtechnology in the computer industry, we expect to make substantial investmentsin product development in the future. There can be no assurance that these newor enhanced versions or any other of our product development efforts will leadto commercially viable products, will be completed on a timely basis, or willinclude the features required to achieve market acceptance.

 

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**Manufacturing**

 

We do not manufacture any of our products in theirentirety. Instead, we manage product planning, purchasing, and shipping, and weperform final assembly, quality assurance, and testing on some of our productswhile we outsource some or all of these functions on other products. In orderto avoid the capital investment required to establish and maintain in-housemanufacturing capabilities, we rely on subcontractors throughout the world forthe assembly of printed circuit board assemblies, subassemblies, chassis andequipment enclosures. We believe that our chosen subcontractors can typicallyperform these functions at a lower cost than we can while maintaining our highstandards 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 (orour subcontractors) subject our most critical components and products to automatedtesting, equipment burn-in procedures, comprehensive quality audits, functionaltesting, and regulatory screening to assure quality and reliability. As ofDecember 31, 2001, we employed 173 people in our manufacturing department.

 

We currently rely on several third partymanufacturers, including Likom Computer Products, Stephenson DiversifiedIndustries, Technical Services, Inc., and ETMA, for subassembly of ourproducts. These outsourcing arrangements, and any future outsourcingarrangements, involve numerous risks, including reduced control over productquality, delivery schedules, manufacturing yields, and costs. In addition,while these third-party manufacturers have arrangements for warrantyobligations, we remain primarily responsible to our customers for warrantyobligations. We attempt to diversify our outsourced manufacturing operationsand believe we have an adequate supply of alternative subcontractors.

 

We generally purchase industry-standard parts andcomponents, including power supplies, cable assemblies, line filters,enclosures, and printed circuit boards for the assembly of our products frommultiple vendors and suppliers through a worldwide sourcing program. Custommolded cables and certain turnkey products procured from outside sources havesignificant delivery times (10 to 12 weeks), and failure to obtain adequatesupplies could adversely affect our product deliveries. We buy components underpurchase orders and generally do not have long-term agreements with oursuppliers. Circuit boards assemblies are currently obtained from a number ofsources, including Likom Computer Products, Stephenson Diversified Industries,Technical Services, Inc., and ETMA. We believe that there are adequatealternative sources for our product components. Any termination of, orsignificant disruption in, our relationship with the suppliers of our productcomponents 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 have experienced delays in the receiptof certain components, which have resulted in delays in related productdeliveries. We attempt to manage these risks through developing alternativesources, committing internal resources to supply chain management, andmaintaining relationships and close personal contact with each of our contractmanufacturers and suppliers. There can be no assurance, however, that delays incomponent and product deliveries will not occur in the future, and theinability to obtain sufficient components or to develop alternative sources ifand as required in the future, could result in delays or reductions in productshipments, which, in turn, could have a material adverse effect on ourbusiness, financial condition, results of operations, or cash flow. Some of thecomponents for our products are available from a single supplier or a limitednumber of suppliers. We attempt to maintain quality relationships and closecontact with each of our suppliers.

 

**Competition**

 

The market for our products is highly fragmented andcompetitive, and we expect competition to increase in the future. In the marketfor switching systems, we compete with third parties such as Raritan Computer,Rose Electronics, CCC Group, Minicom Advanced Systems, Aten International,CompuCable Mfg. Group, Belkin, Lightwave Communications, and StarTech ComputerAccessories, some of which may have substantially greater financial, marketing,and technical resources than we have. We also compete with other companies (suchas Microsoft) that offer alternative technologies (such as software) orproducts that compete with our switching systems.  In addition, several of our OEM customers (such as Compaq,Hewlett-Packard, and IBM) currently offer technologies and products that arecompetitive with our products, and we expect these technologies and products toremain competitive in the features they offer. Some of our OEM customers also manufacture their own switching productsand offer those supplied by our competitors.

 

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In the market for our products, we compete primarilyon the basis of technological advances, performance in relation to price,product features, quality, reliability, development capabilities, productavailability, and customer service and support. Our future success will behighly dependent upon timely completion, introduction, and distribution of newproducts and product features at competitive price and performance levels thataddress the evolving needs of our customers. We are currently experiencingincreased price competition and expect that pricing pressures will continue toincrease in the future.

 

**Proprietary Technology**

 

Our future success is dependent in part upon ourability to protect our proprietary rights in our products. We seek to protectour intellectual property rights by invoking the benefits of the patent,trademark, copyright, trade secret, and unfair competition laws of the UnitedStates, which provide only limited protection. We have been issued 36 U.S.patents and have 14 U.S. patent applications pending. We have variouscorresponding patent applications pending under the provisions of the PatentCooperation Treaty, which permits the filing of corresponding foreign patentapplications in numerous foreign countries within a limited time period. Wealso have other foreign patent applications pending. There can be no assurancethat any additional patents will be issued from any of our pendingapplications, that any patents will be issued in any additional countries whereour products can be sold, or that any claims allowed in our patents or in anypending patent applications will be of sufficient scope or strength for, orprovide any meaningful protection or any commercial advantage to, us. Moreover,our competitors may challenge the validity of, or be able to design around,these patents or any other patents that may be issued to us. The laws ofcertain foreign countries in which our products are or may be developed,manufactured, or sold may not protect our products or intellectual propertyrights to the same extent as do the laws of the United States and thus increasethe likelihood of piracy of our technology and products.

 

We believe that certain products of certaincompetitors infringe one or more of our U.S. patents. In February 1998, wefiled patent infringement lawsuits against certain companies, which weredismissed without prejudice by the agreement of the parties in early 1999 toallow certain patent issues raised in the litigation to be initially determinedby the U.S. Patent and Trademark Office Board of Appeals and Interpretations.We also filed a complaint for patent infringement in United States DistrictCourt for the Western District of Washington at Seattle against CCC on June 1,1998 seeking injunctive relief, damages, attorneys’ fees, and costs. Thecomplaint in the CCC lawsuit was filed but was never formally served on CCC,and we subsequently voluntarily dismissed the CCC lawsuit in Seattle withoutprejudice.

 

The issues raised in the Patent and Trademark Officewere subsequently resolved in our favor, and in May 2001, Apex (ourwholly-owned subsidiary) filed a complaint for patent infringement in theUnited States District Court for the Southern District of New York against RaritanComputer Inc. The Raritan complaint sought injunctive relief, damages,attorneys’ fees and costs under three Apex patents.  After a seven day bench trial in New York in January of 2002, U.S. District Judge Milton Pollack foundthat there was no infringement of three Apex patents by Raritan and orderedthat judgment be entered in favor of Raritan. We are in the process of appealing the judgment.

 

In the future, we may file additional lawsuits againstother companies regarding the alleged infringement. Patent litigation, and anyother litigation relating to our intellectual property to which we become aparty, is subject to numerous risks and uncertainties, and there can be noassurance that we will be successful in any such litigation. There can be no assurancethat the steps we take to protect our intellectual property rights will beadequate to prevent misappropriation of our technology or that we can use ourintellectual property rights to successfully prevent competitors fromcommercializing technologies that are substantially equivalent or superior toour technology. Additionally, current or future competitors could obtainpatents that may prevent us from developing or selling our products.

 

**Employees**

 

As of December 31, 2001, we had 439 full-timeemployees working in the United States. Of our domestic full-time employees,146 were in marketing, sales, and customer support, 106 were in engineering,research, and development, 138 were in manufacturing and operations, and 49were in administration. As of December 31, 2001, we had 149 full-timeemployees working at our facilities outside of the United States. Of ourinternational full-time employees, 66 were in marketing, sales, and customersupport, 26 were in engineering, research, and development, 35 were inmanufacturing and operations, and 22 were in administration. Our employees arenot covered by any collective bargaining agreements relating to theiremployment by us. We believe that we have good relations with our employees.

 

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**Backlog**

 

Backlog consists of purchase orders with deliver datesscheduled within the next six months. None of our customers is obligated topurchase products from us except pursuant to binding purchase orders. Becauseof the timing of orders and the possibility of customer changes to deliveryschedules, our backlog as of any particular date is not representative ofactual sales for any succeeding period. Moreover, with recent industry-wideinitiatives by OEMS, distributors, and resellers to reduce inventories andshorten lead times, we do not view backlog as an important indicator of ourfuture results, and we do not believe it is a meaningful indicator of actualsales for any succeeding period.

 

**Segment Reporting**

 

Subsequent to the merger transaction between Apex andCybex on July 1, 2000, we reported segment information on a geographical basisin which we presented sales and gross profit information for Redmond,Washington; Huntsville, Alabama; and Shannon, Ireland.  Following the merger, the previouslyseparate businesses of Apex and Cybex began to be integrated.  In recent quarters, shipments to certaininternational OEM customers that had historically originated from Redmond wereshifted to Shannon.  As this occurred,the historical comparisons by location became less meaningful.  Additionally, we have gradually realignedoperating and management responsibilities within Avocent to emphasize that weare “one company, operating around the world.” Consequently, we have evaluated the business in light of the segmentreporting requirements, and we have determined that we will report operationsas a single operating segment.  We will,however, disclose sales for the United States and the rest of the world on aquarterly and annual basis.

 

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**FACTORS THAT MAY AFFECT FUTURERESULTS**

 

*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, INCLUDING THE FOLLOWING:*

 

***Risks relating to the merger transactionbetween Apex and Cybex that resulted in the formation of Avocent.***

 

**We may not achieve the benefits expected from themerger transaction, which may have a material adverse effect on our businessand could result in loss of key personnel.**

 

Achieving the benefits expected from the mergertransaction between Apex and Cybex that resulted in the formation of Avocentwill depend in part on the successful integration of technology, operations,and personnel. The integration of Apex and Cybex has been, and will continue tobe, a complex, time-consuming, expensive, and challenging process, andmanagement believes that this challenge will continue. The continuing challengesinvolved in this integration include the following:

 

•                                          Retainingexisting customers and strategic partners of each company;

 

•                                          Retaining andintegrating management and other key employees of both Apex and Cybex;

 

•                                          Coordinatingresearch and development activities to enhance introduction of new products andtechnologies;

 

•                                          Integratingpurchasing and procurement operations and financial monitoring and reporting inmultiple locations around the world;

 

•                                          Integratinggeographically dispersed organizations;

 

•                                          Combiningproduct offerings and product lines effectively and quickly;

 

•                                          Integratingsales efforts so that customers can do business easily with us;

 

•                                          Coordinatingdomestic and foreign manufacturing operations in a rapid and efficient manner;

 

•                                          Transitioningall facilities to a common information technology system;

 

•                                          Offering theproducts and services of Apex and Cybex to each other’s customers;

 

•                                          Coordinatingmarketing efforts; and

 

•                                          Developingand maintaining uniform standards, agreements, controls, procedures, andpolicies.

 

The continuing risks to the successful integration ofApex and Cybex include:

 

•                                          Theimpairment of relationships with employees, customers, and suppliers as aresult of integration of management and other key personnel;

 

•                                          The potentialdisruption of our ongoing business and distraction of management;

 

•                                          Differentfinancial reporting and information technology systems;

 

•                                          Thedifficulty of incorporating acquired technology and rights from Apex and Cybexinto product offerings; and

 

•                                          Unanticipatedexpenses related to integration.

 

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We may not succeed in addressing these risks or anyother problems encountered in connection with the merger transaction.

 

**Ourreported financial results have been, and will continue to be, adverselyaffected as a result of purchase accounting treatment and the impact ofamortization of goodwill and other intangible assets relating to the mergertransaction between Apex and Cybex and the acquisition of Equinox.**

 

We accounted for the merger transaction as a purchaseof Cybex by Apex using the purchase method of accounting. We also accounted forthe acquisition of Equinox by Avocent using the purchase method of accounting.Under purchase accounting, we recorded the fair value of the considerationgiven for the Cybex and Equinox common stock and for the options to purchaseCybex and Equinox common stock assumed by us, plus the amount of directtransaction costs, as the cost of acquiring Cybex and Equinox. We allocatedthese costs to the individual Cybex and Equinox assets acquired and liabilitiesassumed, including various identifiable intangible assets such as acquiredtechnology, acquired trademarks and trade names, acquired workforce, andin-process research and development, based on their respective fair values.In-process research and development charges, which were valued at$94.0 million for Cybex and $4.6 million for Equinox, were expensed whenthe merger transaction between Apex and Cybex and the acquisition of Equinoxwere completed. Intangible assets, including goodwill, are being amortized overa three- to seven-year period.

 

The costs allocated to goodwill and other intangiblesin connection with the merger transaction between Apex and Cybex and theacquisition of Equinox were approximately $707 million and $38 million,respectively.  We began to amortizegoodwill and other intangible assets in equal quarterly amounts in the thirdcalendar quarter of 2000 following completion of the merger transaction betweenApex and Cybex.  We began to amortizegoodwill and other intangible assets in equal quarterly amounts in the firstcalendar quarter of 2001 following completion of the acquisition of Equinox.Amortization of goodwill and other intangibles was approximately $133 millionand $62 million in 2001 and 2000, respectively.

 

We performed a cash flowanalysis as of December 31, 2001, to determine if the remaining balance ofgoodwill resulting from the merger transaction between Apex and Cybex and theacquisition of Equinox had been impaired. The study was performed in accordance with SFAS No. 121*“Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of.” *As a result ofthis study, we recorded a $195.4 million reduction during 2001 in the carryingvalue of goodwill created by the merger transaction between Apex andCybex.  The write-off of the goodwillwas based on an analysis of projected cash flows, which were no longer deemedadequate to support the value of goodwill associated with the merger.  Weadopted SFAS No. 142, *Goodwill and Other Intangible Assets,*onJanuary 1, 2002.  Our initial test forgoodwill impairment as of January 1, 2002 determined that no adjuistment forimpairment was required. If economic conditions deteriorate and indicators ofimpairment become present, an adjustment to the carrying value of goodwill maybe required. Effective January 1, 2002, under the provisions of SFAS No. 142,goodwill ceases to be amortized.  Weexpect the amorization of other intangibles to be approximately $22 million in2002.

 

***Risks relating to our business.***

 

**Ourbusiness is dependent upon a limited number of customers that are not obligatedto continue doing business with us.**

 

A substantial portion of our sales is concentratedamong a limited number of OEM customers. Sales to these OEMs representedapproximately 46% of net sales in 2001, 46% of net sales for 2000, and 72% ofnet sales for 1999. Sales to Compaq represented approximately 23% of net salesfor 2001, 32% of net sales for 2000, and 50% of net sales for 1999.

 

Our OEM business is subject to risks, including:

 

•                                          Contracttermination or reduced or delayed orders;

 

•                                          Short ordercycles and difficulty in predicting sales, because our OEM customers do nothave long-term commitments to purchase from us;

 

•                                          Adoption ofcompeting products or technologies developed by third parties for the OEMs orby the OEMs' internal development teams; and

 

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•                                          Changes incorporate ownership, financial condition, business direction, or product mix bythe OEMs.

 

Any of these risks could have a material adverseeffect on our business, financial condition, and results of operations. We haveexperienced, and expect to continue to experience, significant reductions ordelays in orders from our OEM customers, which may in the future have amaterial adverse effect on our quarterly sales and operating results.

 

The loss of one or more large OEM customers couldmaterially harm our business. While we have contracts with some of our existingOEM customers, none of our OEM customers is obligated to purchase products fromus except pursuant to binding purchase orders. Consequently, any OEM customercould cease doing business with us at any time. Our dependence upon a fewOEMs also results in a significant concentration of credit risk, thus asubstantial portion of our trade receivables outstanding from time to time maybe concentrated among a limited number of customers. In addition, OEM customershave longer payment cycles that increase the likelihood of aged or problemaccounts receivable.  The proposedmerger between Compaq and Hewlett-Packard will increase these risks.  The loss of, or material decline in ordersfrom, any of these customers could have a material adverse effect on ourbusiness, financial condition, and results of operations.

 

**Ourrevenue may decline.**

 

Although Apex’s and Cybex’s revenues grewsubstantially in the quarters prior to the merger transaction that formedAvocent, our “as if” combined revenue (i.e., the actual calendar year revenuesfor Apex and Cybex on a combined basis in 2000 and the actual calendar yearrevenues for Apex, Cybex, and Equinox in 2001) grew from $217 million in1999 to $294 million in 2000 but then declined to $256 million in 2001.

 

As our business matures, it is highly unlikely thatrevenue will grow at the rapid pace it grew prior to the merger. In addition,general economic conditions are not as favorable as they were in prior years,and our revenue could continue to decline. If our revenue declines or does notincrease at or above the rate equity research analysts expect, the tradingprice for our common stock may decline. Our future growth rates will depend ongeneral economic conditions and on our ability to expand sales of our existingproducts and develop and market new products, which will require significantexpenses that we may not have sufficient resources to undertake.

 

**We are likely to experience fluctuations in operatingresults.**

 

Prior to the merger transaction that formed Avocent,both Apex and Cybex experienced substantial fluctuations in operating results,on a quarterly and an annual basis. We have experienced these fluctuationssince the merger, and we expect these fluctuations will continue in the future.Our operating results will be affected by a number of factors, including, butnot limited to:

 

•                                          The volumeand timing of orders, particularly from OEM and other large customers;

 

•                                          The timing ofshipments;

 

•                                          The timing ofnew product introductions and enhancements by us and by our competitors;

 

•                                          Changes inproduct or distribution channel mixes;

 

•                                          Changes inpricing policies or price reductions;

 

•                                          Competitionand price reductions by competitors;

 

•                                          Theavailability and cost of supplies and components;

 

•                                          Sales andmarketing expenses related to entering into new markets, introducing newproducts, and retaining current OEM and other large customers; and

 

•                                          Fluctuationsin sales of servers due to changes in economic conditions or capital spendinglevels.

 

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Our operating results will be affected by seasonaltrends, by general conditions in the server market, and by general economicconditions. We have experienced, and we expect to continue to experience, somedegree of seasonality due to customer buying cycles. We believe that the thirdand fourth quarters will generally have higher net sales levels due to customerbudgeting and procurement cycles, which may depress net sales in other quarters.Because our business and operating results depend to a significant extent onthe general conditions in the server market, any adverse change in the servermarket due to adverse economic conditions, declining capital spending levels orother factors could have a material adverse effect on our business, financialcondition, and results of operations. Moreover, we are currently seeingindications that the rate of growth in capital spending for informationtechnology equipment has slowed. In addition, we have recently seenindustry-wide initiatives by OEMs and by distributors and resellers to reducetheir inventories and to shorten their lead times, thereby reducing earlycommitments to firm orders by our major OEM and our distributor and resellercustomers.

 

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

 

**A substantial portion of our business consists of sales toOEM customers, which vary significantly from quarter to quarter. A substantialdrop in OEM sales could greatly harm our business**.

 

A substantial portion of our sales are to OEMcustomers. We have experienced, and we expect to continue to experience,period-to-period variability in sales to OEM customers. Any cancellation,rescheduling, or reduction of orders by OEM customers in the future couldmaterially adversely affect our operating results. Although our OEM customerstypically place orders for products up to several months prior to scheduledshipment dates, these orders are subject to cancellation generally up to sixweeks prior to the scheduled shipment date. We use multiple warehouses for manyof our OEM customers to fulfill their orders under a just-in-time inventorymanagement system, which requires us to maintain sufficient inventory levels ofour products at each of these warehouses to satisfy our OEM’s anticipatedcustomer demand, and we generally recognize revenue only when these OEMcustomers take possession of our products. We are required to plan production,order components, and undertake our manufacturing activities prior to the timethat these orders become firm or the products are accepted. In addition, ourOEM customers have requested, and are likely to continue to request, that wedelay shipment dates or cancel orders for branded products that are subject tofirm orders. Accordingly, our sales to OEMs for future quarters areincreasingly difficult to predict. The inability to accurately predict thetiming and volume of orders for our OEM customers during any given quartercould adversely affect operating results for such quarter and, potentially, forfuture periods. If we underestimate sales, we will not be able to fill orderson a timely basis. This could cause customer dissatisfaction and loss of futurebusiness. If we overestimate sales, we will experience increased costs frominventory storage, waste, and obsolescence.

 

**A substantial portion of our business consists of sales ofbranded products, which are difficult to forecast. Failure to accuratelyforecast these sales could lead to costly overproduction or product shortages.**

 

A substantial portion of our sales consists of salesof branded products. We expect these sales to increase in the future. If wesucceed in increasing branded sales as a percentage of net sales, our quarterlysales and operating results will become more dependent upon the volume andtiming of branded product orders received during the quarter. Because manycustomers of our branded products typically place orders shortly before theirrequested shipment date, revenues from branded sales are difficult to forecast.With recent industry-wide initiatives by distributors and resellers to reducetheir inventories and to shorten their lead times, our major distributor andreseller customers are reducing early commitments to firm orders. Furthermore,many purchasers typically require prompt delivery of products. This results ina limited backlog of orders for these products and requires us to maintainsufficient inventory levels to satisfy anticipated customer demand. Theinability to accurately forecast the timing and volume of orders for brandedproducts during any given quarter could adversely affect operating results forsuch quarter and, potentially, for future periods. If we underestimate sales,we will not be able to fill orders on a timely basis. This could cause customerdissatisfaction and loss of future business. If we overestimate sales, we willexperience increased costs from inventory storage, waste, and obsolescence.

 

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

 

Gross margins may vary significantly fromperiod-to-period depending on a number of factors, including:

 

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•                                          The ratio ofOEM sales to branded sales, since OEM sales typically have lower gross marginsthan branded sales;

 

•                                          Product mix,because sales of some of our products will have lower gross margins than salesof other products;

 

•                                          Raw materialsand labor costs;

 

•                                          New productintroductions by us and by our competitors; and

 

•                                          The level ofoutsourcing of our manufacturing and assembly services.

 

Our gross margins may decline in the future primarilydue to increased competition and the introduction of new technologies that mayaffect product prices.

 

**Ourproducts are subject to warranty claims and returns. Increased warranty claimsor returns could harm our business.**

 

Cybex historically offered a 30-day unconditionalmoney-back guarantee and a twelve to fifteen month limited warranty for all ofits products and allowed additional rights of return to certain of itscustomers. Apex typically offered a one to three year limited warranty for allof its products and allowed additional rights of return to certain of itscustomers. We offer warranties for parts and service on all our products,ranging from one to three years (and, in the case of some of Equinox’sproducts, five years). Although our historical return experience has not beensignificant, our returns may increase in the future. An increase in returnswould have an adverse effect on our sales and could negatively affect ourfinancial results.

 

**Intense competition from new and existing competitors couldimpair our ability to grow our business and sell our products.**

 

The markets for our Avocent, Apex, Cybex, and Equinoxproducts are highly fragmented and intensely competitive. Increased competitionfrom both hardware and software products could result in price reductions andloss of sales, which would materially harm our business. Our business is becomingincreasingly sensitive to new product introductions, price changes, andmarketing efforts by competitors. Accordingly, our future success will behighly dependent upon timely completion and introduction of new products andproduct features at competitive prices and performance levels that address theevolving needs of our customers. We are currently experiencing increased pricecompetition and increased customer sensitivity to price for our switchingsystems and our extension and remote access products, and pricing pressures onus will continue to increase in the future. Because of this competition, we maynot be successful in gaining additional OEM or server manufacturer customers.

 

We compete for sales of switching systems andextension products with companies such as Raritan, Rose Electronics, CCC Group,Minicom Advanced Systems, Aten International, CompuCable Mfg. Group, Belkin,Lightwave Communications, and StarTech Computer Accessories. We also facecompetition from software providers, who are able to offer software solutionsat a much lower cost or even bundled for free, and server manufacturers, whoare able to offer their competitive technology or products at the time of theserver sale. These software and hardware solutions address many of the problemsour switching systems, extension products, and remote access products aredesigned to address.

 

Current and potential competitors may be able torespond more quickly to new or emerging technologies and changes in customerrequirements or to devote greater resources to the development, promotion, andsale of their products than we do. In addition, current and potentialcompetitors have established or may establish cooperative relationships amongthemselves or with third parties that enhance the ability of their products toaddress the needs of our prospective customers. We may not be able to competesuccessfully against current and future competitors and competitive pressuremay materially harm our business.

 

Certain of our customers, such as Compaq or Microsoft,presently offer competitive hardware and/or software products, technologies,and solutions that address many of the problems our products address. Thesecustomers could decide to manufacture their own switching or remote accessproducts, enhance their own internally–developed switching solutions ortechnologies, or offer products supplied by competitors. Companies with networkmanagement products, many of which are substantially larger than we are andhave significantly more financial resources, may also compete

 

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with us. Established companies with network management experience couldoffer new products, new technologies, or new solutions that compete with ourproducts.

 

**Our failure to respond to rapid technological change or tointroduce new products may result in lost sales and revenue which would impairour operating results.**

 

Sales of switching, extension, and remote accessproducts are characterized by rapid technological advances, frequent newproduct introductions and enhancements, and significant price competition. Ifwe do not keep pace with these changes, we will lose customers, and ourbusiness will be harmed. The introduction of products incorporating superior oralternative technologies such as switching software, the emergence of newindustry standards, or changes in pricing structure could render existingproducts and products under development obsolete or unmarketable.

 

Our products combine components, such as printedcircuit boards, connectors, cable assemblies, power supplies and enclosures,that are manufactured by other companies and are generally available tocompetitors and potential competitors. Our future success will depend in largepart upon continued innovative application of such commercially availablecomponents to the expansion and enhancement of existing products and thedevelopment and introduction of new products that address changing customerneeds on a cost-effective and timely basis. If we fail to respond on a timelybasis to technological developments, changes in industry standards, customerrequirements, or software innovations, we will lose customers, and our businesswill be greatly harmed. Similar results could occur if we experiencesignificant delays in new product development or introduction.

 

Due to our significant reliance on OEM relationships,our product development efforts may often be focused on developing new productsor enhancements for OEM customers. As a result, our OEM relationships maynegatively affect our ability to develop new and enhanced products for ournon-OEM customers. Moreover, these new products or enhancements for OEMcustomers may not be available to, or readily marketable to, other customerswithout significant modification and delay. The termination or significantdisruption of our relationship with certain OEMs or other customers forwhom we devote significant product development resources is likely to result inlost opportunities with respect to the development of products or enhancementsfor our other customers.

 

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

 

The principal components of our products areelectronic components, power supplies, cable assemblies, line filters,enclosures, and printed circuit boards, all of which are purchased from outsidevendors. We generally buy components under purchase orders and generally do nothave long-term agreements with our suppliers. Also, we generally do notmaintain large inventories of components. Any termination of, or significantdisruption of, our relationships with our suppliers of product components mayprevent us from filling customer orders in a timely manner which could resultin customer dissatisfaction and lost sales.

 

Prior to the merger transaction that formed Avocent,both Apex and Cybex purchased a number of the components for products from asingle supplier or a limited number of suppliers. Apex, Cybex, and Avocent haveoccasionally experienced, and we may in the future experience, delays indelivery of components. Although alternate suppliers are available for most ofthe 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 depend upon suppliers to deliver components thatare free from defects, competitive in functionality and cost and in compliancewith specifications and delivery schedules. Disruption in supply, a significantincrease in the cost of one or more components, failure of a third partysupplier to remain competitive in functionality or price, or the failure of asupplier to comply with any of our procurement needs could delay or interruptour ability to manufacture and deliver our products to customers on a timelybasis, thereby adversely affecting our business, financial condition, andresults of operations.

 

We rely on third party manufacturers for subassemblyof products and for final assembly, quality assurance, and testing of some ofour products. These outsourcing arrangements and any future outsourcingarrangements involve numerous risks, including reduced control over productquality, delivery schedules, manufacturing yields, and costs.

 

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Moreover, althougharrangements with such manufacturers may contain provisions for warrantyobligations on the part of such manufacturers, we are primarily responsible toour customers for warranty obligations.

 

**If the client/server market does not continue to grow or ifnetwork reliability and tools do not continue to develop, our business will begreatly harmed.**

 

Our business is dependent on the continued acceptanceof the client/server model of network computing. Although distributed networkcomputing utilizing client/server architecture has gained increasingacceptance, use of this networking model may not continue to grow or may bereplaced by new technologies. This would render our products obsolete. Inaddition, sales of switching and remote access products are driven in part bythe inherent unreliability of client/server networks. As client/server networkscontinue to proliferate, however, server manufacturers and software developersor providers may develop greater reliability and better tools for managingnetworks. To the extent that greater reliability and better network managementtools are successfully developed, our products could be rendered obsolete,which could materially harm our business.

 

**Wewill need to expand sales through distributors and resellers in order todevelop our business and increase revenue.**

 

We expect to rely increasingly on distributors andresellers, VARs, and systems integrators for the distribution and sale of ourbranded products. Our strategy contemplates the expansion of our distributorand reseller network both domestically and internationally. Our future successwill depend in part on our ability to attract, train and motivate newdistributors and resellers and expand our relationships with currentdistributors and resellers. We may not be successful in expanding our distributorand reseller relationships. We will be required to invest significantadditional resources in order to expand these relationships, and the cost ofthis investment may exceed the margins generated from this investment.

 

**Distributor and reseller sales have lower margins than directsales and do not provide for commitments for future sales.**

 

We provide and expect to continue to provide discountsand other special pricing arrangements to our distributors and resellers. As aresult of these discounts and other arrangements, gross margins on salesthrough distributors and resellers are lower than gross margins on directsales. In addition, our distributors and resellers often have significantrights of return, and in the future, these returns may have a material adverseeffect on our business, financial condition, and results of operations.

 

Our agreements with our distributors and resellers aregenerally nonexclusive and may be terminated on short notice by either partywithout cause. These distributors and resellers are not obligated to purchaseproducts from us and frequently offer products of several differentmanufacturers, including competitor’s products. These distributors andresellers may give higher priority to the sale of other products. A reductionin sales efforts by our resellers could lead to a reduction in our sales andcould materially adversely affect our business, financial condition, andresults of operations.

 

**Executive officers and other key personnel may depart, whichcould harm our ability to grow the business.**

 

We are greatly dependent on the ability to retain keymanagement and technical personnel. In March, 2002, our Board of Directorselected John R. Cooper as President and Chief Executive Officer with Stephen F.Thornton remaining as Chairman. Mr. Cooper has never been President and CEO ofa publicly-traded corporation, and our future success is dependent upon thepersonal efforts of Mr. Cooper and upon a successful management transition. Ourfuture success is also highly dependent upon the personal efforts of othermanagement and technical personnel, and the loss of services of any one of themcould have a material adverse effect on our business, financial condition, andresults of operations. Many of our key management and technical personnel wereawarded stock options with exercise prices that are substantially above thecurrent trading price of our common stock and therefore currently have novalue. We may need to grant new options to these employees in the future inorder to provide new incentive and thus retain them. Our success will also bedependent in part upon our ability to attract, retain, and motivate highlyskilled employees. Competition for employees with the skills required,particularly engineering and other technical personnel, is intense, and therecan be no assurance that we will be able to attract and retain highly skilledemployees in sufficient numbers to sustain our current business or to supportfuture growth.

 

 

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**Difficulties encountered managing our growth could adverselyaffect our results of operations.**

 

In the periods prior to the merger transaction thatformed Avocent, Apex and Cybex experienced rapid revenue and customer growthand expansion in the number of employees, product offerings, and the scope andcomplexity of their financial systems. This growth placed significant strain onthe managerial, operational, and financial resources of both companies andresulted in new and increased responsibilities for management personnel. Thesestrains have continued, and possibly worsened, since the merger. There can beno assurance that our management, personnel, systems, procedures, and controlsare, or will be, adequate to support our existing and future operations.

 

Our ability to effectively manage this recent growthand any future growth will require us to continue to implement and improve ouroperational, financial, and information systems and internal controls and willlikely require additional management personnel. In addition, we believe that wemust continue to develop greater engineering, marketing, sales, and customerservice capabilities in order to develop new products and product enhancements,secure new customers at a rate necessary to achieve desired growth, andeffectively serve the evolving needs of present and future customers. We maynot be successful in strengthening these capabilities. Without adequatemanagement, engineering, product development, marketing, sales, and customerservice capabilities, our ability to effectively manage growth, expand andenhance our product lines, further penetrate existing markets, and develop newmarkets will be significantly limited. If management is unable to effectivelymanage this growth, our business, financial condition, and results ofoperations could be materially adversely affected.

 

**We have limited protection of proprietary rights and facerisks of third party infringements.**

 

Our future success is dependent in part upon ourability to protect proprietary rights in our products. Prior to the mergertransaction, Apex and Cybex sought to protect intellectual property rights byinvoking the benefits of the patent, trademark, copyright, trade secret, andunfair competition laws of the United States, and we have continued to do so.These laws, however, afford only limited protection. There can be no assurancethat the steps Apex and Cybex have taken to protect their intellectual propertyrights, or that the steps we take in the future, will be adequate to preventmisappropriation of our technology or that our competitors will notindependently develop technologies that are substantially equivalent orsuperior to our technology.

 

The U.S. Patent and Trademark Office has issuedseveral patents to us for various aspects of our products. We have variouscorresponding patent applications pending under the provisions of the PatentCooperation Treaty, which permits the filing of corresponding foreign patentapplications in numerous foreign countries within a limited time period. Wealso have other United States and foreign patent applications pending. Therecan be no assurance that any additional patents will be issued from any ofthose pending applications or that any patents will be issued in any additionalcountries where our products can be sold. Also, claims allowed in our patentsor in any pending patent applications may not be of sufficient scope orstrength for, or provide meaningful protection or any commercial advantage tous. Also, competitors may challenge the validity of, or be able to designaround, the U.S. patents or any other patents that may be issued to us. Thelaws of certain foreign countries in which our products are or may bedeveloped, manufactured, or sold may not protect our products or intellectualproperty rights to the same extent as do the laws of the United States and thusincrease the likelihood of piracy of our technology and products.

 

                In May 2001, Apex (our wholly-owned subsidiary) fileda complaint for patent infringement in the United States District Court for theSouthern District of New York against Raritan Computer Inc. The Raritancomplaint sought injunctive relief, damages, attorney's fees and costs underthree Apex patents. After a seven day bench trial in New York in January of 2002,U.S. District Judge Milton Pollack found that there was no infringement ofthree Apex patents by Raritan and ordered that judgment be entered in favor ofRaritan. We are in the process of appealing the judgement.  We have capitalized $1.8 million of patentdefense costs which are included with intangible assets in our consolidatedbalance sheet as of December 31, 2001. If we are not successful in our appeal, the patent defense costs must bewritten off, which would have a material adverse impact on our business,financial condition, and results of operations.

 

We may initiate claims or litigation against otherthird parties for infringement of proprietary rights or to establish thevalidity of proprietary rights. 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 such litigation.Existing litigation or other litigation by or against us could result insignificant expense and divert the efforts of technical and managementpersonnel, whether or not such litigation results in a favorable determination.In the event of an adverse result in any such litigation, we could be requiredto pay substantial damages, suspend or cease the manufacture, use, and sale ofany infringing products, expend significant resources to develop non-infringingtechnology, discontinue the use of certain processes, or obtain licenses to theinfringing technology. There can be no assurance that we would be successful insuch development or that such licenses would be available on reasonable terms,or at all, and any such development or license could require us to expendsubstantial time and other resources. In the event that any third party makes asuccessful claim against us, or our customers, and a license is not madeavailable on commercially reasonable terms, our business, financial condition,and results of operations could be adversely affected.

 

The network server, electronics, and relatedindustries are characterized by vigorous pursuit and protection of intellectualproperty rights or positions, which has resulted in significant and oftenprotracted and expensive litigation. Apex and Cybex have in the past been, andwe may from time to time in the future be, a party in proceedings alleging

 

18

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infringement 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 atall. The failure to obtain a license from a third party for technology used byus could cause us to incur substantial liabilities and to suspend or cease themanufacture of products requiring such technology. Additionally, current orfuture competitors could obtain patents that may prevent us from developing orselling our products.

 

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

 

Continued growth of our sales is likely to beaccompanied by increasing demands on customer service operations. As a resultof our commitment to a high level of customer service, we will need to investsignificant resources in the maintenance and improvement of our customerservice resources. Any failure to maintain adequate customer service couldcause customer dissatisfaction, result in reduced sales of products and, accordingly,materially adversely affect business, financial condition, and results ofoperations.

 

**If we are unable to successfully integrate our internationaldistribution networks and international sales efforts, results of operationsmay suffer.**

 

We have to develop, integrate, and expand ourinternational distribution networks in an effort to increase internationalsales of switching, extension, remote access, and other products. We may not besuccessful in developing, integrating, or expanding the internationaldistribution network or in marketing and selling products in foreign markets.If the revenues generated by our international sales are not adequate torecover the expense of establishing, expanding, integrating, and maintaining aninternational distribution network, our business, financial condition, andresults of operations could be materially adversely affected. If internationalsales become a more significant component of net sales, our business couldbecome more vulnerable to the risks inherent in doing business on aninternational level, including:

 

•                                          Difficultiesin managing foreign resellers;

 

•                                          Longerpayment cycles and problems in collecting accounts receivable;

 

•                                          The effectsof seasonal customer demand;

 

•                                          Changes inregulatory requirements;

 

•                                          Difficultiesin meeting the requirements of different international product regulations; 

 

•                                          Risksrelating to intellectual property rights;

 

•                                          The impact onour R&D resources as we localize our product offerings to meet local userrequirements such as language translations and hardware compatibility issues;

 

•                                          Exportrestrictions, tariffs and other trade barriers;

 

•                                          Fluctuationsin currency exchange rates; and

 

•                                          Potentiallyadverse tax consequences and political instability.

 

The existence or occurrence of any one of thesefactors could have a material adverse effect on our business, financialcondition, and results of operations.

 

**Fluctuations in the value of foreign currencies could resultin currency exchange losses.**

 

Currently, a majority of our international business isconducted in U.S. dollars. However, as we expand our international operations,it is likely that international business will increasingly be conducted inforeign currencies. Fluctuations in the value of foreign currencies relative tothe U.S. dollar have caused, and are expected to increasingly cause, currencytranslation gains and losses. While we attempt to hedge our foreign currencyexposure, we cannot predict the effect of exchange rate fluctuations uponfuture quarterly and annual operating results, and we may experience currencylosses in the future.

 

 

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**We may acquire technologies or companies in the future thatcould cause disruption of business or exposure to other risks.**

 

Effective January 3, 2001, we acquired EquinoxSystems Inc., and in the future, we may acquire technologies or companiesor make investments in complementary companies, products, or technologies.These acquisitions entail many risks, any of which could materially harm ourbusiness. These risks include:

 

•                                          Difficultyassimilating the acquired company’s personnel and operations;

 

•                                          Diversion ofmanagement’s attention;

 

•                                          Loss of keypersonnel;

 

•                                          Dilution ofexisting stockholders as a result of issuing equity securities;

 

•                                          Assumption ofliabilities of the acquired company; and

 

•                                          Incurringsubstantial expenses as a result of the transaction.

 

Any failure to manage these integration challengescould materially harm our business, financial condition, and results ofoperations.

 

**Provisions in our charter documents and in Delaware law maydiscourage potential acquisition bids for us and may prevent changes inmanagement that stockholders may favor.**

 

Provisions in our charter documents could discouragepotential acquisition proposals and could delay or prevent a change in controltransaction that stockholders may favor. These provisions could have the effectof discouraging others from making tender offers for shares, and as a result,these provisions may prevent the market price of our common stock fromreflecting the effects of actual or rumored takeover attempts and may preventstockholders from reselling their shares at or above the price at which theypurchased their shares. These provisions may also prevent changes in managementthat stockholders may favor. Our charter documents do not permit stockholdersto act by written consent, limit the ability of stockholders to call astockholders meeting, and provide for a classified board of directors, whichmeans stockholders can only elect, or remove, a limited number of directors inany given year. Furthermore, the board of directors has the authority to issueup to five million shares of preferred stock in one or more series. The boardof directors can fix the price, rights, preferences, privileges andrestrictions of such preferred stock without any further vote or action by ourstockholders. The issuance of shares of preferred stock may delay or prevent achange in control transaction without further action by our stockholders.

 

In addition, Delaware law may inhibit potentialacquisition bids for us. Delaware law prevents certain Delaware corporations,including Avocent, from engaging, under certain circumstances, in a businesscombination with any interested stockholder for three years following the datethat such stockholder became an interested stockholder.

 

**Our stock will likely be subject to substantial price andvolume fluctuations which may prevent stockholders from reselling their sharesat or above the price at which they purchased their shares.**

 

Fluctuations in the price and trading volume of ourcommon stock may prevent stockholders from reselling their shares above theprice at which they purchased their shares. Stock prices and trading volumesfor many technology companies fluctuate widely for a number of reasons,including some reasons which may be unrelated to their businesses or results ofoperations. This market volatility, as well as general domestic orinternational economic, market and political conditions, could materiallyadversely affect the market price of our common stock without regard tooperating performance. In addition, if our operating results were to be belowthe expectations of public market analysts and investors, the market price ofour common stock would likely decrease significantly.

 

**Item 2. Properties.**

 

Our headquarters, occupying 126,000 square feet andcontaining administrative, sales, marketing, research and development,engineering, manufacturing, and distribution facilities, are located inHuntsville, Alabama, on an 18-acre tract of land owned by us in CummingsResearch Park.

 

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Our Redmond, Washington facility, which consists ofapproximately 117,000 square feet in an industrial office building, containsadministrative, sales, marketing, research and development, engineering,manufacturing, and distribution operations. We lease this space, and thecurrent base rent under the lease is approximately $100,000 per month, plustaxes, insurance and maintenance. The 117,000 square foot leased premises hasapproximately 35,000 more square feet than we currently need, and in 2000, weagreed with the subtenant to an early termination of the subleased space.

 

Avocent International Ltd. is located in a 60,500square foot leased facility located in the Shannon Free Trade Zone in Shannon,Ireland. The Shannon facility houses administrative, sales, marketing, researchand development, engineering, manufacturing, and distribution operations. Thelease with the Shannon Development Authority is for twenty-five years with fivefive-year break points, and provides for annual rent of approximately $320,000.

 

Our Steinhagen, Germany facility consists ofapproximately 9,900 square feet, contains sales and administrative personnel,and is located on leased property. The lease, which provides for annual rent ofapproximately $75,000, can be terminated in August 2002.

 

We also lease approximately 5,000 square feet in anoffice building in Austin, Texas.  Thisoffice contains sales, marketing, and administrative personnel to support ourOEM operations.  The sixty-two monthlease terminates in 2006, and our annual rent is approximately $92,000.

 

As a result of our acquisition of EquinoxSystems Inc. in early 2001, we own a 45,000 square foot building on 6.5acres of land in Sunrise, Florida. Our Sunrise facility containsadministrative, sales, marketing, research and development, engineering,manufacturing, and distribution operations.

 

We also lease approximately 8,600 square feet for$210,000 per year in Chelmsford, Massachusetts. This facility houses marketingfunctions and the engineering team responsible for visual display technologyand products.

 

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

 

**Item 3. Legal Proceedings.**

 

In February 1998, we filed patent infringementlawsuits against certain companies, which were dismissed without prejudice bythe agreement of the parties in early 1999 to allow certain patent issuesraised in the litigation to be initially determined by the PTO Board of Appealsand Interpretations. We also filed a complaint for patent infringement inUnited States District Court for the Western District of Washington at Seattleagainst CCC on June 1, 1998 seeking injunctive relief, damages, attorneys’fees, and costs. The complaint in the CCC lawsuit was filed but was neverformally served on CCC, and we subsequently voluntarily dismissed the CCClawsuit in Seattle without prejudice.

 

The issues raised in the Patent and Trademark Officewere subsequently resolved in our favor, and in May 2001, Apex (ourwholly-owned subsidiary) filed a complaint for patent infringement in theUnited States District Court for the Southern District of New York againstRaritan Computer Inc. The Raritan complaint sought injunctive relief, damages,attorneys’ fees and costs under three Apex patents.  After a seven day bench trial in New York in January of 2002, U.S. District Judge Milton Pollack foundthat there was no infringement of three Apex patents by Raritan and orderedthat judgment be entered in favor of Raritan. We are in the process of appealing the judgment.

 

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

 

None.

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**PART II**

 

**Item 5. Market For Registrant’s Common Equity and RelatedStockholder Matters.**

 

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

 

Our common stock is quoted on The Nasdaq NationalMarket System under the symbol “AVCT.” The following table shows the high andlow sales prices of our common stock for the period since the combination ofthe businesses of Apex and Cybex, July 1, 2000, to December 31, 2001,as reported by the Nasdaq National Market System.

 
|                             |   | **High** |   | **Low** |   |
|----------------------------------|--------|----------|--------|---------|--------|
| Quarter ended December 31, 2001  |   | $        | 27.26  |    | $      | 12.55 |   |
| Quarter ended September 28, 2001 |   | $        | 27.00  |    | $      | 12.00 |   |
| Quarter ended June 29, 2001      |   | $        | 28.10  |    | $      | 16.50 |   |
| Quarter ended March 30, 2001     |   | $        | 40.13  |    | $      | 18.00 |   |
| Quarter ended December 31, 2000  |   | $        | 71.88  |    | $      | 18.75 |   |
| Quarter ended September 29, 2000 |   | $        | 58.25  |    | $      | 39.75 |   |

 

The merger transaction combining Apex and Cybex wasaccounted for as a purchase of Cybex by Apex. Accordingly, the table belowshows the high and low sales prices, as reported by The Nasdaq National MarketSystem, for Apex for the period January 1, 1999 to June 30, 2000,taking into account the effect of the 1.0905 exchange ratio for shareholders ofApex as a result of the merger transaction between Apex and Cybex.

 
|                            |   | **High** |   | **Low** |   |
|---------------------------------|--------|----------|--------|---------|--------|
| Quarter ended June 30, 2000     |   | $        | 44.48  |    | $      | 22.24 |   |
| Quarter ended March 31, 2000    |   | $        | 47.34  |    | $      | 27.05 |   |
| Quarter ended December 31, 1999 |   | $        | 31.18  |    | $      | 13.30 |   |
| Quarter ended October 1, 1999   |   | $        | 32.44  |    | $      | 10.89 |   |
| Quarter ended July 2, 1999      |   | $        | 20.06  |    | $      | 11.23 |   |
| Quarter ended April 2, 1999     |   | $        | 24.53  |    | $      | 10.09 |   |

 

As of March 15, 2002, there were 240 holders of recordof our common stock. All prices above reflect a three-for-two stock spliteffective March 4, 1999.

 

**Dividend Policy**

 

We did not declare or pay any cash dividends in 2001,2000, or 1999, and for the foreseeable future, we expect to retain earnings tofinance the expansion and development of our business. The payment of dividendsis within the discretion of our Board of Directors and will depend on ourearnings, capital requirements and operating and financial condition, amongother factors. In addition, our line of credit facility prohibits the paymentof dividends if any loans are outstanding under such facility.

 

**Item 6. Selected Financial Data.**

(Amounts in thousands,except per share data.)

 
|                                                      |   | **2001** |     | **2000** |   | **1999** |   | **1998** |    | **1997** |   |
|-----------------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|----------|---------|----------|--------|
| Net sales                                                 |   | $        | 255,911  |     | $      | 222,372  |   | $        | 107,288 |     | $      | 75,640 |   | $ | 55,390 |   |
| Income (loss) before extraordinary item                   |   | $        | (320,466 | )        | $      | (130,556 | )      | $        | 21,243  |     | $      | 15,710 |   | $ | 10,468 |   |
| Basic per share income (loss) before extraordinary item   |   | $        | (7.22    | )        | $      | (3.92    | )      | $        | 0.94    |     | $      | 0.71 |   | $ | 0.54 |   |
| Diluted per share income (loss) before extraordinary item |   | $        | (7.22    | )        | $      | (3.92    | )      | $        | 0.90    |     | $      | 0.69 |   | $ | 0.50 |   |
| Total assets                                              |   | $        | 547,198  |     | $      | 815,246  |   | $        | 104,314 |     | $      | 73,375 |   | $ | 55,271 |   |
| Long-term obligations and preferred stock                 |   | —   |     | —   |   | —   |   | —   |    | —   |   |
| Cash dividends declared per share                         |   | —   |     | —   |   | —   |   | —   |    | —   |   |

 

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

 

THE INFORMATION IN THIS ITEM7—”MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS” CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITATION,STATEMENTS RELATING TO OUR REVENUES, EXPENSES, MARGINS, LIQUIDITY, CAPITAL NEEDS,MERGER ACCOUNTING, ACQUISITION AND TRANSACTION COSTS AND ADJUSTMENTS INCLUDING,AMONG OTHER THINGS, WRITE OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT COSTS ANDAMORTIZATION OF INTANGIBLE ASSETS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECTTO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFERMATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS. FACTORSTHAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSEDISCUSSED UNDER THE CAPTION “FACTORS THAT MAY AFFECT FUTURE RESULTS.”

 

**Formation ofAvocent**

 

On July 1, 2000, Apex andCybex entered into a merger transaction resulting in a new company, AvocentCorporation (formerly known as Aegean Sea Inc.). Prior to the effectivedate of the merger, Avocent did not conduct any activities. Avocent is on acalendar year basis with December 31 as its year-end.

 

The merger was accounted for asa purchase of Cybex by Apex in accordance with Accounting Principles BoardOpinion No. 16, with the purchase price allocated to the assets andliabilities of Cybex based upon their fair values on the date of thetransaction. The excess of the purchase price over the fair value of the assetsand liabilities has been allocated to the identifiable intangible assets andgoodwill. The purchase price allocation was as follows: $109 million oftangible assets, $90 million of identifiable intangible assets,$34 million of deferred tax liability on intangible assets acquired,$523 million of goodwill, and $94 million of in-process research anddevelopment.  The amortization periodsare 3 to 7 years for identifiable intangibles and 5 years forgoodwill.

 

In November 2000, Avocentand Equinox entered into a definitive agreement under which Equinoxagreed to merge with a wholly-owned subsidiary of Avocent Corporation. Equinox received final approval of the mergerfrom its shareholders on January 2, 2001. The merger was effective as ofJanuary 3, 2001.

 

The acquisition was recordedunder the purchase method of accounting, and the purchase price was allocatedbased on the fair value of the assets acquired and liabilities assumed. Inaccordance with generally accepted accounting principles, costs allocated toresearch and development assets with alternative future uses were capitalizedand the remaining amounts of purchased in-process research and development wereexpensed upon the closing of the transaction. The purchase price allocation wasas follows: $39 million of tangible assets, $12 million ofidentifiable intangible assets, $6 million of deferred tax liability onintangible assets acquired, $21 million of goodwill, and $5 millionof in-process research and development. The amortization periods are 3 to7 years for identifiable intangibles and 5 years for goodwill.

 

Avocent’s consolidated statementsof operations, stockholders’ equity, and cash flows for the year ended December31, 1999 include only the historical results of Apex. Avocent’s consolidatedstatement of operations, stockholders’ equity, and cash flows for the yearended 2000 include the twelve month results of Apex for the periodJanuary 1, 2000 through December 31, 2000 and the six month resultsof Cybex for the post-merger period July 1, 2000 through December 31,2000.  Avocent’s consolidatedstatements of operations, stockholders’ equity and cash flows for the yearended December 31, 2001 include the results of Apex, Cybex, and Equinox.  Avocent’s consolidated balance sheet as ofDecember 31, 2000 includes the consolidated financial position of Apex andCybex. Avocent’s consolidated balance sheet as of December 31, 2001 includesthe consolidated financial position of Apex, Cybex, and Equinox.  Certainreclassifications have been made to the prior year financial statements toconform to the current year presentation.

 

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**Apex, Cybex,and Equinox History**

 

Apex operated as a division ofApex Computer Company through January 1993, providing computer maintenanceservices to Microsoft and selling integrated server cabinets and, to a limitedextent, stand-alone switching systems, primarily to Microsoft. InFebruary 1993, the assets of that division were spun off as a dividend tothe sole shareholder of Apex Computer Company, who contributed those assets asApex’s initial capital. Throughout 1993, Apex derived revenue primarily fromthe provision of computer maintenance services to Microsoft. In May 1994,Apex began selling stand-alone switching systems to Compaq for integration intoserver cabinets. In June 1994, Apex discontinued its computer maintenanceservice business and decided to concentrate on sales of stand-alone switchingproducts.

 

Cybex engaged in the developmentof software and performed engineering consulting from 1981 to 1984 to financeits research and development efforts for computer-related products. In 1986,Cybex shipped its first computer-related hardware product. In 1987, Cybexshipped its first product that allowed the computer to be extended distancesfrom the keyboard, monitor, and mouse. Subsequently in 1989, Cybex shipped itsfirst stand–alone switching system. Through the effective date of themerger, Cybex derived primarily all of its revenues from switching, extension,and remote access products.

 

Equinox engaged inthe development of software and hardware products that provide communicationsport management and remote control capabilities. The products were marketed toend-users under the Equinox brand name through a worldwide, two-tierdistribution channel and network of value added resellers. Equinox also createdcustomized versions of its products for original equipment manufactures thatsell and support the products under their own brand names.

 

**Overview**

 

We design, manufacture, and sellanalog and digital console switching systems, serial connectivity devices, andextension and remote access products for the computer industry. Data centermanagers and network administrators have increasingly complex and growingserver populations, and our analog, digital, and serial switching solutions, aswell as our extension and remote access products, help them manage multipleservers and serially controlled devices from a single local or remote consoleconsisting of a keyboard, video monitor, and mouse.  Specifically, our products can provide significant costreductions including lower initial investment, reduced utility costs, and spacesavings, as well as more efficient technical support capabilities.

 

We provide “plug and play”switching systems for many network administration, management, and storageproblems faced by corporate customers, data centers, and server farms. Ourswitching solutions include products sold under the Avocent, Apex, Cybex, andEquinox brands, including our *AutoViewTM, DS SeriesTM, OutLook®,* and *XP®4000 Series* products. Our switchingproducts help facilities managers and network administrators access multipleservers and serially controlled devices from one or more centralized or remoteconsoles, consolidate hardware requirements, and provide direct hardwiredconnections between the switch and the attached servers to facilitate access tothose servers, even when the network is down. Our Equinox brandedproducts add high-performance, reliable, and affordable server-based productsfor serial and dial access applications. The Equinox *SuperSerial* product line provides serialcommunications for security, commercial point-of-sale, process control,industrial automation, data collection, remote access, fax servers, Internetaccess, and custom applications.

 

A substantial portion of our revenue is derived fromsales to a limited number of original equipment server manufacturers, or OEMs,who purchase our switching systems on a private-label or branded basis forintegration and sale with the their own products, sales through our resellerand distributor network, and sales to a limited amount of direct customers. For2001, sales to our OEM customers were 46% of net sales, sales to our resellerand distributor network were 49% of net sales, and sales to our directcustomers were 5% of net sales. We do not have contracts with many of thesecustomers, and in general, they are obligated to purchase products from us onlypursuant to binding purchase orders. The proposed merger between Compaq and Hewlett-Packard will result in a furtherconcentration of sales in our OEM customers, and the loss of, or materialdecline in orders from, our OEM customers would have a material adverse effecton our business, financial condition, results of operation, and cash flow.  We sell products to dealers, end-users andOEMs in the United States, Canada, Europe and Asia as well as in other foreignmarkets.  Sales within the United Statesaccounted for approximately 62% of 2001 sales, while sales outside the UnitedStates accounted for 38% of 2001 sales.

 

With recent industry-wideinitiatives to reduce all channel inventories and to shorten lead times, trendswith our major customers are, generally, to reduce the number of weeks offorward–committed firm orders. This trend is currently affecting ourbusiness with certain OEMs and other server manufacturers, and we believethat it will make our sales more difficult to predict and inventory levels moredifficult to manage.

 

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Weare currently experiencing increased price competition in the market for all ofour products, and we expect that pricing pressures will continue to increase inthe future.  In addition, generaleconomic conditions are not as favorable as they were in prior years, and ourrevenue growth rate has slowed. Depending on future general economic conditions and other factors, ourrevenue could decline in the future.

 

**CriticalAccounting Policies**

 

Managementbelieves the following critical accounting policies, among others, affect themore significant judgments and estimates used in the preparation of itsconsolidated financial statements:

 

•                                          Wereview customer contracts to determine if all of the requirements for revenuerecognition have been met prior to recording revenues from salestransactions.  We generally record salesrevenue upon shipment of our products, net of any discounts, since we generallydo not have significant post delivery obligations, the product price is fixedand determinable, collection of the resulting receivable is probable, andproduct returns are reasonably estimable. We generally ship products upon receipt of a purchase order from acustomer.  Shipping terms are evaluated,and revenue on products shipped FOB destination is recorded when the customertakes possession of the goods.

 

•                                          Wemaintain allowances for doubtful accounts for estimated losses resulting fromthe inability of our customers to make required payments.  If the financial condition of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required.

 

•                                          Weprovide for the estimated cost of product warranties at the time revenue isrecognized.  While we engage inextensive product quality programs and processes, including actively monitoringand evaluating the quality of our component suppliers, 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 be required.

 

•                                          Wewrite down our inventory for estimated obsolescence or unmarketable inventoryequal to the estimated market value based upon assumptions about future demandand market conditions.  If actual futuredemand or market conditions are less favorable than those projected bymanagement, additional inventory write-downs may be required.

 

•                                          Wehold minority interests in companies having operations or technology in areaswithin or adjacent to our strategic focus, some of which are in publicly tradedcompanies with share prices that are volatile and some of which are innon-publicly traded companies with values that are difficult to determine.  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.

 

**•**                                          We estimate allowances for sales returns based on our experiences fromhistorical customer returns.  If actualfuture customer returns are less favorable than those projected by management,additional sales return expenses may be required.

** **

**•**                                          We review intangible assets and long-lived assets for impairment underthe guidance prescribed by SFAS No. 121 if indicators of impairment are presentand the undiscounted cash flows estimated to be generated by those assets areless than the carrying values of the assets. We performed a cash flow analysis as of December 31, 2001, to determineif the remaining balance of goodwill resulting from the merger transactionbetween Apex and Cybex and the acquisition of Equinox had been impaired.  The study was performed in accordance withSFAS No. 121, and as a result of this study, we recorded a $195.4 millionreduction during 2001 in the carrying value of goodwill created by the mergertransaction between Apex and Cybex.  Thewrite-off of the goodwill was based on an analysis of projected cash flows,which were no longer deemed adequate to support the value of goodwillassociated with the merger.  EffectiveJanuary 1, 2002, we adopted SFAS No. 142. Our initial test for goodwill impairment as of January 1, 2002determined that no adjustment for impairment was required.  If economic conditions deteriorate andindicators of impairment become present, an adjustment to the carrying value ofgoodwill may be required.

 

 

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**Results ofOperations**

 

The following table sets forth,for the periods indicated, selected statement of operations data expressed as apercentage of net sales:

 

 
|                                                                     |   | **Years Ended December 31,** |   |
|--------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                     |   | **2001**                     |   | **2000** |   | **1999** |   |
| Net sales                                                                |   | 100.0                        | %      | 100.0 | % | 100.0 | % |
| Cost of sales                                                            |   | 58.6                         |   | 50.6 |   | 53.5 |   |
| Gross profit                                                             |   | 41.4                         |   | 49.4 |   | 46.5 |   |
| Operating expenses:                                                      |   |                         |   |   |   |   |   |
| Research and development expenses                                        |   | 8.8                          |   | 5.8 |   | 6.1 |   |
| In-process research and development expense and other  acquisition costs |   | 1.8                          |   | 46.8 |   | — |   |
| Selling, general and administrative expenses                             |   | 29.2                         |   | 23.5 |   | 13.1 |   |
| Amortization of intangible assets                                        |   | 51.9                         |   | 28.0 |   | — |   |
| Impairment write-down of intangible assets                               |   | 76.4                         |   | — |   | — |   |
| Total operating expenses                                                 |   | 168.1                        |   | 104.1 |   | 19.2 |   |
| Income (loss) from operations                                            |   | (126.7                       | )      | (54.7 | ) | 27.3 |   |
| Other income, net                                                        |   | 0.3                          |   | 2.5 |   | 2.8 |   |
| Income (loss) before provision for (benefit from)  income taxes          |   | (126.4                       | )      | (52.2 | ) | 30.1 |   |
| Provision for (benefit from) income taxes                                |   | (1.2                         | )      | 6.5 |   | 10.3 |   |
| Net income (loss)                                                        |   | (125.2                       | )%     | (58.7 | )% | 19.8 | % |

 

*Years EndedDecember 31, 2001 and 2000*

 

*Net sales.*  Our net sales consist of salesof console switching systems, digital connectivity solutions, serialconnectivity devices, and extension and remote access solutions. Net sales increased 15% to $255.9 millionfor 2001 from $222.4 million for 2000. This increase was due to the timingof the merger of Apex and Cybex and acquisition of Equinox. Only six months ofrevenue from the Cybex products was recorded in 2000, while 12 months ofrevenue from the Cybex products and the Equinox products was recorded in 2001.  Equinox products contributed over$19 million of net sales in 2001. In addition, this increase in salesresulted from increased demand from our OEM customers and increased salesthrough our resellers and distributors. On a percentage basis, OEM sales for2001 increased 14% over 2000, and resellers and distributor sales for 2001increased 26% over 2000. OEM sales were 46% of sales for 2001 and 46% in 2000as well.  Reseller and distributor saleswere 49% of sales for 2001, compared to 45% of sales for 2000, and direct saleswere 5% of sales for 2001 and 9% of sales for 2000.  Sales within the United States were 62% of sales in both 2001 and2000, while sales to the rest of the world accounted for 38% of sales in both2001 and 2000.

 

*Gross profit.*  Gross profit is affected by avariety of factors, including: the ratio of sales among our distributionchannels, resellers and distributors, OEMs, and direct sales, as OEM salestypically have lower gross margins than our reseller and distributor sales anddirect sales; varying absorption of fixed costs as sales levels fluctuate;product mix, raw materials, and labor costs; new product introductions by usand by our competitors; and the level of our outsourcing of manufacturing andassembly services.  Gross margins were significantly affected by$13 million of write-downs for excess and obsolete inventories during2001.  These write-downs were made toreduce inventory valuations to bring them in-line with current replacementvalues and to the level necessary to support current sales demand.  Another charge of over $1 million was takenat one of our locations due to physical count shortages during the fourthquarter of 2001. An increase in deferred compensation charges to approximately $2.3 million in 2001 from $1.2 millionin 2000 also affected our margins.  Thisdeferred compensation amortization related to stock options for manufacturingemployees was recognized as a result of the merger of Apex and Cybex thatoccurred in mid 2000 and the acquisition of Equinox in January 2001.  Due to the timing of the merger andacquisition, only six months of deferred compensation expense from the mergerwas recognized in 2000, while 12 months of deferred compensation from themerger and the acquisition was recognized in 2001. This deferred compensationexpense will decline in 2002.  Grossprofit decreased to 41.4% for 2001 from 49.4% for 2000, due primarily to thefactors discussed above.

 

*Research and development expenses.*  Researchand development expenses include compensation for engineers, support personnel,and materials costs and are expensed as they are incurred. Research anddevelopment expenses were $22.5 million, or 8.8% of net sales, in 2001,compared to $12.9 million, or 5.8% of net sales, in 2000. The increase inresearch and development expenses in absolute dollars and as a percentage ofsales was due primarily to the addition of Cybex expenses as a result of themerger of Apex and Cybex on July 1, 2000 and the addition of Equinoxexpenses as the result of the acquisition on January 3, 2001. The additionalcosts attributable to Cybex and Equinox include over $4 million indeferred compensation amortization in 2001 as compared to $2 million ofdeferred compensation amortization in 2000. Deferred compensation amortization,related to stock options for research and development employees, was recognizedas a result of the merger of Apex and Cybex that occurred in mid 2000 and theacquisition of Equinox in January 2001. Due to the timing of the merger and acquisition, only six months ofdeferred compensation expense from the merger was recognized in 2000, while 12months of deferred compensation from the merger and the acquisition wasrecognized in 2001.  This deferredcompensation expense will decline in 2002 We believe that the timely

 

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development of innovative new products and enhancements to existingproducts is essential to maintaining our competitive position, and we expectresearch and development expenditures to continue to increase in absolutedollars in 2002 compared to 2001.

 

*In-process research and development expense and otheracquisition costs.*  Acquisition related expenses in 2001 iscomprised solely of the one-time write-offof $4.6 million of in-process research and development expense.  Merger related expenses of $104 millionin 2000 include the one-time write-off of $94 million of in-processresearch and development expense and an additional $10 million ofnon-recurring charges comprised mainly of fees to professional advisors.

 

*Selling, general and administrative expenses.*  Selling,general and administrative expenses include certain merger and acquisitionrelated expenses, personnel costs for administration, finance, human resources,sales and marketing and general management, as well as rent, utilities, legaland accounting expenses, advertising, promotional material, trade show expensesand related travel costs. The increase in selling, general and administrativeexpenses in absolute dollars and as a percentage of sales was due primarily tothe addition of Cybex expenses as a result of the merger transaction betweenApex and Cybex on July 1, 2000 and the addition of Equinox expenses as theresult of the acquisition of Equinox on January 3, 2001. Selling, general andadministrative expenses were $74.8 million, or 29.2% of net sales for 2001compared to $52.1 million, or 23.5% of net sales for 2000. Approximately$13.2 million of selling, general and administrative expenses in 2001related to the amortization of deferred compensation for stock options as aresult of the merger transaction between Apex and Cybex and the acquisition ofEquinox, and the amortization of deferred compensation for stock options as aresult of the two transactions will decline in 2002.  Approximately $15.3 million of selling, general andadministrative expenses in 2000 related to the amortization of deferredcompensation for stock options as a result of the merger transaction between Apexand Cybex, including approximately $9.8 million related to the discretionaryacceleration of stock options by the Apex Board of Directors in connection withthe merger.  Additionally, 2001 selling,general and administrative expenses include $1.3 million of severancecosts related to headcount reductions in the U.S. and Europe. Also, bad debtexpense increased  approximately $2.6million in 2001 when compared to 2000 as we increased reserves to addresscollectability issues in light of the general economic decline.  In the second half of 2001 selling, generaland administrative expenses declined in absolute dollars and as a percentage ofsales due to cost control measures that included headcount reductions and areduction in advertising and promotion programs.  We expect selling, generaland administrative expenditures as a percentage of net sales to remain at orbelow the level of expense for 2001 in the coming year.

 

*Amortizationand write-down of intangible assets.*  Amortization and write-down of intangibleassets is comprised of the amortization of the identifiable intangible assetsand goodwill created as a result of the merger transaction between Apex andCybex and the acquisition of Equinox and a write-down of goodwill recorded asthe result of a cash flow analysis performed under the applicable provisions ofSFAS No. 121 during 2001. Amortization of identifiable intangible assets andgoodwill was $132.8 million or 52.0% of net sales for 2001 compared to$62.4 million or 28.0% of net sales for 2000.  We performed a  cash flowanalysis to determine if the remaining balance of goodwill created at themerger of Apex and Cybex and the acquisition of Equinox had been impaired.  The study was performed in accordance withSFAS No. 121*“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto be Disposed Of.” *As aresult of this study, we recorded a $195.4 million reduction in the carryingvalue of goodwill created only the merger of Apex and Cybex.  The write-off of the goodwill was based onan analysis of projected cash flows, which were no longer considered adequateto support the value of goodwill associated with the merger.  Additionally, we adopted SFAS No. 142, *Goodwill andOther Intangible Assets,*on January 1, 2002.  On that date, under the provisions of SFASNo. 142, goodwill ceased to be amortized. The amortization of goodwill was approximately $111,000 during 2001.

 

*Other income, net.*  Other income was $735,000 in2001, down from $5.7 million for 2000. The decrease related primarily to acharge of $4.9 million recorded in for an “other-than-temporary” decline in themarket value of our portfolio. Excluding the $4.9 million charge, other income remained flat in 2001 ascompared to 2000.  Although we had morecash and marketable securities in 2001 than in 2000, interest income hasdeclined due to lower interest rates.

 

*Provision for (benefit from) income taxes.*  Thebenefit from income taxes was approximately $2.9 million for 2001,compared to a provision for income taxes of $14.6 million in 2000.Excluding merger related adjustments to federal taxes, the effective tax ratefor 2001 was approximately 29.0%, compared to 32.2% for 2000, primarily due toshifting of international sales to our Shannon, Ireland facility. Our Shannonfacility operates under a 10% tax rate.

 

*Net loss.*  Our net loss for 2001 was$320.5 million compared to $130.6 million for 2000, as a result ofthe above factors, including the reduction in the carrying value of goodwill,the amortization of identifiable intangible assets and goodwill, deferredcompensation expense, and inventory write-downs.  The net loss as a percentage of sales for 2001 was 125.2%,compared to 58.7% for 2000.

 

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*Years EndedDecember 31, 2000 and 1999*

 

*Net sales.*  Our net sales consist of salesof switching systems, extension and remote access products, and displayproducts. Net sales increased 107% to $222.4 million for 2000 from$107.3 million for 1999. This increase was due primarily to the impact ofthe merger of Apex and Cybex on July 1, 2000. Cybex contributed$90.8 million of net sales in 2000. Other factors related to the increasein sales were increased demand from our OEM customers and increased salesthrough our resellers and distributors. On a percentage basis, OEM sales for2000 increased 32% over 1999, and resellers and distributor sales for 2000increased 402% over 1999. OEM sales were 46% of sales for 2000, compared to 72%of sales for 1999, reseller and distributor sales were 45% of sales for 2000,compared to 19% of sales for 1999, and direct sales were 9% of sales for 2000and 9% of sales for 1999. The shift in customer mix is a reflection of theaddition of Cybex customers. For the period July 1 to December 31,2000, almost 80% of Cybex’s revenues were derived from sales to resellers anddistributors.

 

*Gross profit.*  Gross profit is affected by avariety of factors, including: the ratio of sales among our distributionchannels, resellers and distributors, OEMs, and direct sales, as OEM salestypically have lower gross margins than our reseller and distributor sales anddirect sales; varying absorption of fixed costs as sales levels fluctuate;product mix, raw materials, and labor costs; new product introductions by usand by our competitors; and the level of our outsourcing of manufacturing andassembly services. Additionally, the addition of Cybex customers as a result ofthe merger had a direct impact on gross profit. Cybex’s gross profitpercentages have historically been higher than Apex’s primarily due to thecomposition of the Cybex customer base. Historically, Cybex sales were largelysales to resellers which typically have higher gross margins than sales toOEMs.  Slightly offsetting the benefit of the Cybex customer compositionwere charges totaling approximately $1.2 million in deferred compensationamortization related to stock options for manufacturing employees recognized asa result of the merger. Gross profit increased to 49.4% for 2000 from 46.5% for1999, due primarily to the higher percentage of reseller and distributor salesin 2000 compared to 1999.

 

*Research and development expenses.*  Researchand development expenses include compensation for engineers, support personnel,and materials costs and are expensed as they are incurred. Research anddevelopment expenses were $12.9 million, or 5.8% of net sales, in 2000,compared to $6.5 million, or 6.1% of net sales, in 1999. The largeincrease in the amount spent on research and development can be attributed tothe impact of the merger effective July 1, 2000. The additional costs ofthe Cybex research and development team includes approximately $2 millionin deferred compensation amortization related to stock options for certainengineering employees recognized as a result of the merger.

 

*In-process research and development expense and otheracquisition costs.*  Merger related expenses of $104 millionin 2000 include the one-time write-off of $94 million of in-processresearch and development expense and an additional $10 million of one-timecharges comprised mainly of fees to professional advisors.

 

*Selling, general and administrative expenses.*  Selling,general and administrative expenses include some merger related expenses,personnel costs for administration, finance, human resources, sales andmarketing and general management, as well as rent, utilities and legal andaccounting expenses, advertising, promotional material, trade show expenses andrelated travel costs. Selling, general and administrative expenses were$52.1 million, or 23.5% of net sales for 2000 compared to$14.1 million, or 13.1% of net sales for 1999. Approximately$15.3 million of selling, general and administrative expenses in 2000related to the amortization of deferred compensation for stock options as aresult of the merger transaction between Apex and Cybex. Excluding the merger–relatedamortization of deferred compensation in 2000, selling, general andadministrative expenses were 16.6% of net sales. The increase in selling,general and administrative expenses in absolute dollars and as a percentage ofsales was due primarily to growth in our business and to the addition of Cybexexpenses as a result of the merger transaction between Apex and Cybex onJuly 1, 2000. Historically, Cybex’s selling, general and administrativeexpenses as a percentage of sales were larger than Apex’s due to the higherlevels of staffing and advertising and promotion expenses required to supportits reseller and distributor customers.

 

*Amortization of intangible assets.* Amortization of intangible assets is comprised entirely of theamortization of the amounts allocated to the identifiable intangible assets andgoodwill that were in excess of the purchase price over the fair value of theCybex assets and liabilities acquired by Apex in the merger transaction. The amortizationperiods are 3 to 7 years for intangibles and 5 years for goodwill.Amortization of identifiable intangible assets and goodwill from the date ofthe merger on July 1, 2000 was $62.4 million or 28.0% of net salesfor 2000.

 

*Other income, net.*  Other income was$5.7 million for 2000, up from $3.1 million for 1999. The increaserelated primarily to interest income from increased cash and investmentsprovided by the addition of the Cybex cash and cash equivalents and investmentsas a result of the merger effective July 1, 2000, as well as cash providedfrom 2000 operations.

 

*Provision for income taxes.*  Theprovision for income taxes was approximately $14.6 million for 2000,compared to

 

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$11.1 million in 1999. Excluding merger related adjustments tofederal taxes, the effective tax rate for 2000 was approximately 32.5%,compared to 34.3% for 1999, primarily due to shifting of international sales toour Shannon, Ireland facility. Our Shannon facility operates under a 10% taxrate.

 

*Net income (loss).*  Our net loss for 2000 was$130.6 million compared to net income of $21.2 million for 1999, as aresult of the above factors, including in-process research and developmentexpense and other acquisition costs, the amortization of identifiable assetsand goodwill, and deferred compensation expense. The net loss as a percentageof sales for 2000 was 58.7%, compared to the net income as a percentage ofsales for 1999 of 19.8%.

 

**Liquidity andCapital Resources**

 

As of December 31, 2001 our principalsources of liquidity consisted of approximately $172 million in cash, cashequivalents, and investments. In addition, we have an unsecured bank line ofcredit  with a borrowing capacity of$2.0 million with an interest rate of LIBOR plus 2.25% (approximately4.12% at December 31, 2001). There were no amounts outstanding under theline of credit at December 31, 2001, and all $2.0 million wasavailable. In early January 2001, we arranged two $25 million creditlines with two separate financial institutions at interest rates of LIBOR plus1.75% to temporarily finance our acquisition of Equinox pending maturity ofcertain short-term investments. Approximately $45 million was drawn againstthese lines in January 2001 and was repaid before the end of the first quarterof 2001. On the closing of the Equinox transaction, we acquired approximately$24.3 million in cash and short-term investments held by Equinox.  There were no other borrowings during 2001.

 

Our operating activities generated cash ofapproximately $72.6 million for 2001, $19.1 million for 2000, and$8.3 million for 1999. For 2001, after adjusting the net loss for mergerand acquisition related items and the goodwill valuation adjustment, the large increasein cash flow from operations compared to 2000 is attributable to significantfluctuations in accounts receivables, other receivables, inventory, and incometaxes payable. The significant decline in accounts receivable was the result ofthe timing of sales, increased collection efforts, and increased reserves forallowance for doubtful accounts to ensure accounts receivable are carried attheir realizable value.

 

Inventory levels declined significantly fromDecember 31, 2000 to December 31, 2001. Inventory levels increased early in 2001 due to the purchase oflong-lead items and transfer of completed subassemblies from a vendor for ourDS1800 product. During the fourth quarter of 2000, we sold a large amount ofour DS1800 components to a subcontractor to produce DS1800 subassemblies.   The value of these components was carriedas other receivables at December 31, 2000 and the value was transferred back toinventory from other receivables upon the receipt of the subassemblies.  The large inventory increase during early2001 was offset later in 2001 by a charge of over $13 million, before taxbenefit, for excess and obsolete inventories recorded during 2001. Anothercharge of over $1 million was taken at one of our locations due to physicalcount shortages during the fourth quarter of 2001. These charges reducedinventories to replacement value and to levels necessary to support salesdemand.

 

Other receivables consist primarily of amounts duefrom certain subcontractors, net of estimated uncollectable accounts, for componentssold to the subcontractors.  Otherreceivables decreased significantly from 2000 to 2001, due primarily to thetiming of a large shipment of components to a subcontractor at the end of 2000,discussed above.  Additionally, incometaxes payable increased significantly from 2000 to 2001.  The increase in income taxes payable can beattributed largely to the decline in the income tax benefit from the exerciseof stock options from 2000 to 2001.  Theamount of income tax benefit we record as the result of the exercise of stockoptions is directly impacted by the gain an employee receives from the optionexercise.  These gains were reducedsignificantly due to the decline in our stock price in 2001 versus 2000.

 

Future minimum rental paymentsunder non-cancelable operating lease for 2002 total approximately $2.0million.  We believe that existing cashbalances, cash generated from operations and the funds available under ourcredit facilities will be sufficient to fund our operations through 2002.

 

**CertainTransactions**

 

*CyComL.L.C.*

 

In 2000, CybexComputer Products Corporation, our wholly-owned subsidiary, acquired a 40%interest in CyCom L.L.C., a joint venture created to focus on computertechnology and research for products in the desktop computer and serverindustry.  The other 60% of CyCom isowned by 2C Computing, a significant shareholder of which is a former Cybexdirector.  Upon the formation of CyCom,Cybex contributed a license for certain of its intellectual property, and 2Ccontributed management services and capital funding.  Under the terms of the membership agreement, 2C is responsiblefor all continued technology development efforts.  The net profits of CyCom are to be split 60% to 2C and 40% toCybex after 2C recoups its accumulated losses from the development andmarketing of CyCom products.  Thecarrying value of our investment in the joint venture is zero because Cybex'scontribution to the joint venture consisted of previously expensed research anddevelopment costs related to the technology. We have no obligation to provide funding or other financial support toCyCom in future periods.  As of December31, 2001, we believe that 2C had incurred cumulative unaudited losses, and wedo not anticipate that the joint venture will be profitable in 2002.

 

*EmployeeLoan*

 

In 2001, inconnection with the opening of our office in Austin, Texas, C. David Perry, ourVice President of OEM Sales, moved his principal residence from Redmond,Washintgon, to Austin.  In connectionwith the purchase of a new residence by Mr. Perry in the Austin area andpending the sale of his Redmond residence, Apex Solutions Texas L.P., awholly-owned indirect affiliate of Apex, loaned Mr. Perry and his wife $760,000under the terms of a Promissory Note dated October 31, 2001.  The loan was interest free and was payableon the earlier of the first anniversary of the promissory note or the sale ofthe Redmond residence.  The promissorynote was also conditioned on the future performance by his Mr. Perry ofsubstantial services to Apex and its affiliates.  The promissory note was secured by a Deed of Trust from Mr. Perryand his wife on the Redmond residence. The promissory note was repaid in full by Mr. Perry in January, 2002.

 

**Investments**

 

Our investments consist of corporate bonds, commercialpaper, mortgage backed securities guaranteed by U.S. government agencies,  and common stock. Debt securities that wehave the positive intent and ability to hold to maturity are classified asheld-to-maturity securities and are reported at amortized cost. Debt and equitysecurities not classified as either held-to-maturity securities or tradingsecurities and that have readily determinable fair values are classified asavailable-for-sale securities and are reported at fair value, with unrealizedgains and losses excluded from earnings and reported as a separate component ofstockholders’ equity. We periodically review our investment portfolio

 

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for investmentsconsidered to have sustained an other-than-temporary decline in value.   Accordingly, we recorded a $4.9 millionbefore tax benefit charge related to an other-than-temporary decline in fairvalue of certain equity investments in our investment portfolio during the yearended December 31, 2001.

 

**Results ofOperations, As If Apex and Cybex Operations Were Combined for All PeriodsPresented**

 

The following “as if” combinedfinancial information is unaudited, presented for illustrative purposes only,and is not necessarily indicative of the operating results that would haveoccurred if the transaction had been consummated prior to the years presentedbelow. Additionally, all merger and acquisition related expenses, merger andacquisition related deferred compensation charges, the write-off of in-processresearch and development expenses, intangible amortization, the goodwillvaluation write-down, severance charges, inventory write-downs for excess andobsolescence and investment write-down for other-than-temporary decline arepresented as certain items below the calculation of income. Financialinformation for Equinox is included only subsequent to the acquisition onJanuary 3, 2001.   The following tablesets forth, for the periods indicated, selected statement of operations dataexpressed in millions:

 

# **Combined Financial Information**

 
|                                         |   | **Years Ended December 31,** |   |
|----------------------------------------------|--------|-----------------------------------|--------|
|                                         |   | **2001**                          |   | **2000** |   | **1999** |   |
| Net sales                                    |   | $                                 | 255.9  |   | $ | 294.0 |   | $ | 216.7 |   |
| Cost of sales                                |   | 135.8                             |   | 144.2 |   | 108.1 |   |
| Gross profit                                 |   | 120.1                             |   | 149.8 |   | 108.6 |   |
| Operating expenses:                          |   |                              |   |   |   |   |   |
| Research and development expenses            |   | 18.2                              |   | 14.8 |   | 13.0 |   |
| Selling, general and administrative expenses |   | 58.9                              |   | 53.6 |   | 39.0 |   |
| Total operating expenses                     |   | 77.1                              |   | 68.4 |   | 52.0 |   |
| Income from operations before certain items  |   | 43.0                              |   | 81.4 |   | 56.6 |   |
| Other income, net                            |   | 5.6                               |   | 6.0 |   | 4.7 |   |
| Income before income taxes and certain items |   | 48.6                              |   | 87.4 |   | 61.3 |   |
| Provision for income taxes                   |   | 14.1                              |   | 28.2 |   | 20.9 |   |
| Income excluding certain items               |   | 34.5                              |   | 59.2 |   | 40.4 |   |
| Certain items, (*detailed below*)            |   | (355.0                            | )      | (177.9 | ) | (2.7 | ) |
| Net income (loss) — on a combined basis |   | $                                 | (320.5 | ) | $ | (118.7 | ) | $ | 37.7 |   |

 

*Years EndedDecember 31, 2001 and 2000-On an “as if” Combined Basis*

 

*Net sales.* Our net sales consist of sales of console switching systems,digital connectivity solutions, serial connectivity devices, and extension andremote access solutions. Net salesdecreased 13% to $255.9 million for 2001 from $294.0 million for2000. The overall decrease in sales resulted from the general weakness in thetechnology sector of the economy. Specifically, this decrease in net sales was the result of decreaseddemand from our resellers and distributors and decreased direct sales.  The decrease in direct sales and thedecrease in reseller and distributor sales were partially offset by an increasein sales to our OEM customers. Sales through our reseller and distributorchannel decreased 21% from $158.3 million in 2000 to $125.5 million in 2001.Direct sales decreased 51% from $28.2 million in 2000 to $13.9 million in 2001.OEM sales increased 8% from $107.5 million in 2000 to $116.5 million in 2001.Reseller and distributor sales were 49% of sales for 2001, compared to 54% ofsales for 2000, OEM sales, on the other hand, were 46% of sales for 2001,compared to 37% of sales for 2000, and direct sales were 5% of sales for 2001,compared to 9% of sales for 2000.  Thedecline in sales was more pronounced for sales within the United States ascompared to sales to the rest-of-world. Sales within the United Statesdecreased 14% from $186.8 million in 2000 to $159.8 million in 2001.Rest-of-world sales decreased 10% from $107.2 million in 2000 to $96.1 millionin 2001.  Sales within the United Stateswere 62% of sales for 2001, compared to 64% of sales for 2000, and rest-of-world sales were 38% of sales for 2001, compared to 36% of sales for 2000.

 

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*Gross profit.*  Gross profit is affected by avariety of factors, including: the ratio of sales among our distributionchannels, resellers and distributors, OEMs, and direct sales, as OEM salestypically have lower gross margins than our reseller and distributor sales anddirect sales; varying absorption of fixed costs as sales levels fluctuate;product mix, raw materials and labor costs; new product introductions by us andby our competitors; and the level of our outsourcing of manufacturing andassembly services. Gross profit decreased to 46.9% for 2001 from 50.9% for2000, due primarily to lower absorption of overhead due to reduced sales.Additionally, we recorded a $3 million inventory charge in the fourth quarterat one of our facilities.  The chargeconsisted of $1 million due to physical count shortages.  The remaining $2 million was primarily anincrease to the excess and obsolete reserve as we identified additional items similarto the second quarter charge included with certain items detailed below.

 

*Research and development expenses.*  Researchand development expenses include compensation for engineers, support personnel,and materials costs and are expensed as they are incurred. Research anddevelopment expenses were $18.2 million, or 7.1% of net sales in 2001,compared to $14.8 million, or 5.0% of net sales 2000. The increase inresearch and development can be attributed to the additional staff and projectcosts added as the result of the acquisition of Equinox on January 3, 2001.

 

*Selling, general and administrative expenses.*  Selling,general and administrative expenses include personnel costs for administration,finance, human resources, sales and marketing and general management, as wellas rent, utilities and legal and accounting expenses, advertising, promotionalmaterial, trade show expenses and related travel costs. Selling, general andadministrative expenses were $58.9 million, or 23.0% of net sales for 2001,compared to $53.6 million, or 18.2% of net sales for 2000. The increase inselling, general and administrative expenses in absolute dollars and as apercentage of sales was due primarily to the additional staff andadministrative costs added as the result of the acquisition of Equinox onJanuary 3, 2001.  In the second half of2001, selling, general and administrative expenses declined in absolutedollars and as a percentage of sales due to cost control measures, whichincluded headcount reductions and a reduction in advertising and promotionalprograms.

 

*Other income, net.*  Interest income was$5.6 million for 2001, down from $6.0 million for 2000. Although wehad more cash and marketable securities in 2001 than in 2000, interest incomedeclined due to lower interest rates.

 

*Provision for income taxes.*  Theprovision for income taxes was approximately $14.1 million for 2001,compared to $28.2 million in 2000. The effective tax rate for 2000 wasapproximately 29.0%, compared to 32.3% for 2000. The improvement in theeffective tax rate is due primarily to shifting international OEM shipments toour Shannon, Ireland facility from our U.S. operations. Our Shannon facilityoperates under a 10% tax rate.

 

*Income excluding certain items.*  Incomeexcluding certain items declined to $34.5 million for 2001 from$59.2 million for 2000, as a result of the above factors. As a percentageof net sales, income decreased to 13.5% for 2001 from 20.1% for 2000.

 

*Certain items.*  Certain items include theamortization of intangible assets, the write-off of in-process research anddevelopment expenses related to mergers and acquisitions, deferred compensationexpense related to stock options, additional charges comprised mainly of feesto professional advisors, goodwill impairment write-down, severance charges,inventory write-downs for excess and obsolescence and investment write-down forother than temporary decline. The merger and acquisition charges in 2001 are asfollows: amortization of intangibles was $125.2 million; write-off ofin-process research in development associated with the Equinox acquisition was$4.6 million; and deferred compensation expense, net of tax, was$17.3 million.  Additionally,during 2001 we recorded a $195.4 million charge for impairment in the carryingvalue of goodwill.  Other charges takenduring 2001, net of tax, are as follows: a charge for excess and obsoleteinventory of $8.4 million; severance charges for headcount reductions were $1.0million; and a write-off for other-than-temporary decline in investments was$3.1 million.  The expenses in 2000related to the merger of Apex and Cybex are as follows: amortization ofintangibles was $61.9 million; write-off of in-process research indevelopment associated with the merger of Apex and Cybex was $94.0 million;deferred compensation expense, net of tax, was $10.9 million; andprofessional fees paid to advisors totaled $11.1 million.

 

*Net loss on an “as if” combined basis.*  Net lossdeclined to $320.5 million for 2001 from $118.7 million for 2000, as a resultof the above factors, including the reduction in the carrying value ofgoodwill, the amortization of identifiable intangible assets and goodwill,deferred compensation expense, and inventory write-downs.  The net loss as a percentage of sales for2001 was 125.2%, compared to 40.4% for 2000.

 

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*Years Ended December 31, 2000 and 1999—On an “as if”Combined Basis*

 

*Net sales.*  Our net sales consist of salesof switching systems, extension and remote access products, and displayproducts. Net sales increased 36% to $294.0 million for 2000 from$216.7 million for 1999. This increase in net sales was the result ofincreased demand from our resellers and distributors and increased sales to ourOEM customers. On a percentage basis, reseller and distributor sales for 2000increased 41% over 1999 and OEM sales for 2000 increased 30% over 1999.Reseller and distributor sales were 54% of sales for 2000, compared to 52% ofsales for 1999, OEM sales were 37% of sales for 2000, compared to 38% of salesfor 1999, and direct sales were 9% of sales for 2000, compared to 10% of salesfor 1999.

 

*Gross profit.*  Gross profit is affected by avariety of factors, including: the ratio of sales among our distributionchannels, resellers and distributors, OEMs, and direct sales, as OEM salestypically have lower gross margins than our reseller and distributor sales anddirect sales; varying absorption of fixed costs as sales levels fluctuate;product mix, raw materials and labor costs; new product introductions by us andby our competitors; and the level of our outsourcing of manufacturing andassembly services. Gross profit increased to 50.9% for 2000 from 50.1% for1999, due primarily to the higher percentage of reseller and distributor salesin 2000 compared to 1999.

 

*Research and development expenses.*  Researchand development expenses include compensation for engineers, support personnel,and materials costs and are expensed as they are incurred. Research anddevelopment expenses were $14.8 million, or 5.0% of net sales in 2000,compared to $13.0 million, or 6.0% of net sales 1999. The dollar increaseon research and development includes increased compensation expense associatedwith increased staffing levels, which was slightly offset by decreased projectspending in Redmond related to the timing of product development, as there wassignificant project spending related to new products introduced by Redmond in1999.

 

*Selling, general and administrative expenses.*  Selling,general and administrative expenses include personnel costs for administration,finance, human resources, sales and marketing and general management, as wellas rent, utilities and legal and accounting expenses, advertising, promotionalmaterial, trade show expenses and related travel costs. Selling, general andadministrative expenses were $53.6 million, or 18.2% of net sales for2000, compared to $39.0 million, or 18.0% of net sales for 1999. Theincrease in selling, general and administrative expenses in absolute dollarsand as a percentage of sales was due primarily to growth in our business,increased advertising and promotional expenses and increased compensationexpense associated with increased staffing levels.

 

*Other income, net.*  Interest income was$6.0 million for 2000, up from $4.7 million for 1999. The increaserelated primarily to interest income from increased cash and investmentsprovided from 2000 operations.

 

*Provision for income taxes.*  Theprovision for income taxes was approximately $28.2 million for 2000,compared to $20.9 million in 1999. The effective tax rate for 2000 wasapproximately 32.3%, compared to 34.1% for 1999. The improvement in theeffective tax rate is due primarily to shifting our foreign shipments to ourShannon, Ireland facility from our U.S. operations. Our Shannon facilityoperates under a 10% tax rate.

 

*Income excluding certain items.*  Incomeexcluding certain items improved to $59.2 million for 2000 from$40.4 million for 1999, as a result of the above factors. As a percentage ofnet sales, income increased to 20.1% for 2000 from 18.7% for 1999.

 

*Certain items.*  Certain items include theamortization of intangible assets, the write-off of in-process research anddevelopment expenses related to mergers and acquisitions, deferred compensationexpense related to stock options and additional charges comprised mainly offees to professional advisors. The expenses in 2000 related to the merger ofApex and Cybex as follows: amortization of intangibles was $61.9 million;write-off of in-process research in development was $94.0 million;deferred compensation expense, net of tax, was $10.9 million; andprofessional fees paid to advisors totaled $11.1 million. The expenses in1999 of $2.7 million are net of taxes and relate to the acquisition of FoxNetwork Solutions Corporation and PixelVision Technology, Inc. The amountsfor 1999 are almost entirely related to the write-off of in-process researchand development expenses.

 

*Net income (loss) on a combined basis.*  Net lossfor 2000 was $118.7 million compared to net income of $37.7 million for1999, as a result of the above factors, including in-process research anddevelopment expense and other acquisition costs, the amortization ofidentifiable assets and goodwill, and deferred compensation expense.  The net loss as a percentage of sales for2000 was 40.4%, compared to net income as a percentage of sales for 1999 of17.4%.

 

32

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**Recently Issued Accounting Standards**

 

**InJune 2001, the Financial Accounting Standards Board issued SFASNo. 141, *Business Combinations,*which has an effective date of June30, 2001 for all business combinations initiated after this date.  This statement supersedes APB Opinion No.16, *BusinessCombinations,* and FASB Statement No. 38, *Accounting for PreacquisitionContingencies of Purchased Enterprises*.  This statement requires all business combinations within thescope of the Statement to be accounted for using the purchase method ofaccounting.  For business combinationscompleted prior to June 30, 2001, the statement requires companies to recognizeintangible assets apart from goodwill and expand the disclosures about assetsacquired and liabilities assumed.  Theimpact of SFAS No. 141 was not material to the Company’s December 31, 2001financial statements.**

** **

**InJune 2001, the Financial Accounting Standards Board issued SFASNo. 142, *Goodwill and Other Intangible Assets,*which has an effectivedate starting with fiscal years beginning after December 15, 2001.  This statement supersedes APB Opinion No.17, *IntangibleAssets*.  This statementaddresses the initial accounting for intangible assets that are acquiredindividually or with a group of other assets. This statement also addresses the accounting for goodwill and otherintangible assets after they have been initially recognized in the financialstatements.  Goodwill will cease to beamortized upon the implementation of the statement and companies will testgoodwill at least annually for impairment. We**adopted SFAS No. 142 effectiveJanuary 1, 2002 and accordingly, performed a test for possible goodwillimpairment  as of January 1, 2002. Thetest concluded that no adjustment was required upon adoption.  Additionally, under the provisions of SFASNo. 142, we will cease to amortize goodwill. Amortization of goodwill wasapproximately $111,000 during 2001.

 

In August 2001,the Financial Accounting Standards Board issued SFAS No. 143, *Accountingfor Asset Retirement Obligations (“ARO”)*, which has an effectivedate for financial statements for fiscal years beginning after June 15,2002.  This statement addresses thediversity in practice for recognizing asset retirement obligations and requiresthat obligations associated with the retirement of a tangible long-lived assetbe recorded as a liability when those obligations are incurred, with the amountof the liability initially measured at fair value.  Upon initially recognizing a liability for an ARO, an entity mustcapitalize the cost by recognizing an increase in the carrying amount of therelated long-lived asset.  Over time,the liability is accreted to its present value each period, and the capitalizedcost is depreciated over the useful life of the related asset.  Upon settlement of the liability, an entityeither settles the obligation for its recorded amount or incurs a gain or lossupon settlement.  The impact of SFAS No.143 on the financial statements is not expected to be material.

 

In October 2001, the Financial Accounting Standards Board issued SFASNo. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, which has aneffective date for financial statements for fiscal years beginning afterDecember 15, 2001.  This statement,which supersedes SFAS No. 121, *Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to be Disposed Of*, requires thatlong-lived assets that are to be disposed of by sale be measured at the lowerof book value or fair value less cost to sell. Additionally, this statement expands the scope of discontinued operationsto include all components of an entity with operations that (1) can bedistinguished from the rest of the entity and (2) will be eliminated from theongoing operations of the entity in a disposal transaction.  The impact of SFAS No. 144 on the financialstatements is not expected to be material.

 

**Item 7A.Quantitative and Qualitative Disclosures about Market Risks.**

 

Our primary market risk is thepotential loss arising from changes in interest rates, which could have anadverse impact on the fair value of our investment securities. Our investmentpolicy is to manage our investment portfolio to preserve principal andliquidity while maximizing the return on the investment portfolio through theinvestment of available funds. We diversify the investment portfolio byinvesting in a variety of highly–rated investment–grade securitiesand through the use of different investment managers. Our investment securitiesportfolio is primarily invested in securities with maturities (or interest rateresets) of two years or less with at least an investment grade rating tominimize interest rate and credit risk as well as to provide for an immediatesource of funds. Market risk is estimated as the potential change in fair valuein the investment portfolio resulting from a hypothetical 10 percentchange in interest rates, and was not material at December 31, 2001. Wegenerally hold investment securities until maturity and carry the securities atamortized cost, which approximates fair value.

 

We are also exposed to equity price risks on ourinvestments in publicly traded equity securities. These investments aregenerally in companies having operations or technology in areas within ourstrategic focus. We do not attempt to reduce or eliminate our market exposureon these securities. As of December 31, 2001, the fair value of ouravailable–for–sale equity investments was $851,000. A 20 percentadverse change in equity prices would result in a decrease of approximately

 

33

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$170,000 in the fair value of our available–for–sale equitysecurities as of December 31, 2001.

 

We also face foreign currency exchange rate riskto the extent that the value of certain foreign currencies relative to the U.S.dollar affects our financial results. Our international operations transact aportion of our business in currencies other than the U.S. dollar, and changesin exchange rates may positively or negatively affect our revenues, grossmargins, operating expenses, and retained earnings since these transactions areexpressed in U.S. dollars. We engage in some hedging programs aimed at limitingthe impact of currency fluctuations. These hedging activities provide onlylimited protection against currency exchange risks, and there can be no assurancethat such an approach will be successful, especially if a significant andsudden decline occurs in the value of local currencies.

 

34

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**Item 8. Financial Statements.**

 

**Index to Consolidated FinancialStatements**

 
| Report of Independent  Accountants                                                                               |   |   |
|------------------------------------------------------------------------------------------------------------------|--------|--------|
| Consolidated  Financial Statements:                                                                              |   |   |
| Consolidated Balance Sheets  as of December 31, 2001 and 2000                                               |   |   |
| Consolidated  Statements of Operations for the years ended December 31, 2001, 2000 and  1999                |   |   |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31,  2001, 2000 and 1999 |   |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2001, 2000 and  1999                |   |   |
| Notes to  Consolidated Financial Statements                                                                      |   |   |
| Schedule  II - Valuation and Qualifying Accounts                                                                 |   |   |

 

 

35

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### **Reportof Independent Accountants**

 

 

 

To the Board of Directors and Stockholders

of Avocent Corporation

 

 

In our opinion,the consolidated financial statements listed in the accompanying index presentfairly, in all material respects, the financial position of Avocent Corporationand its subsidiaries at December 31, 2001 and 2000, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2001 in conformity with accounting principles generally acceptedin 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 consolidatedfinancial statements.  These financialstatements and financial statement schedule are the responsibility of theCompany’s management; our responsibility is to express an opinion on thesefinancial statements and financial statement schedule based on our audits.  We conducted our audits of these statementsin accordance with auditing standards generally accepted in the United Statesof America, which require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

 

 

 

#### PricewaterhouseCoopersLLP

Birmingham,Alabama

February 15, 2002

 

36

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**Avocent Corporation**

**Consolidated Balance Sheets**

**December 31, 2001 and 2000**

**(In thousands, except per share data)**

 
|                                                                                                                                                            |   | **2001** |    | **2000** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| **ASSETS**                                                                                                                                                      |   |     |    |     |   |
| Current assets:                                                                                                                                                 |   |     |    |     |   |
| Cash and cash  equivalents                                                                                                                                      |   | $        | 80,506  |     | $      | 44,106 |   |
| Investments  maturing within one year                                                                                                                           |   | 84,270   |    | 77,372   |   |
| Accounts  receivable, less allowance for doubtful accounts of $4,052 and $2,682 at  December 31, 2001 and 2000, respectively                                    |   | 49,091   |    | 62,889   |   |
| Income taxes  receivable                                                                                                                                        |   | 2,330    |    | 4,487    |   |
| Other  receivables, net                                                                                                                                         |   | 2,115    |    | 10,800   |   |
| Inventories, net                                                                                                                                                |   | 27,155   |    | 34,458   |   |
| Other current  assets                                                                                                                                           |   | 2,134    |    | 3,029    |   |
| Deferred tax  assets                                                                                                                                            |   | 10,839   |    | 5,560    |   |
| Total current  assets                                                                                                                                           |   | 258,440  |    | 242,701  |   |
|                                                                                                                                                            |   |     |    |     |   |
| Investments                                                                                                                                                     |   | 7,718    |    | 3,891    |   |
| Property held  for lease, net                                                                                                                                   |   | 1,919    |    | 2,102    |   |
| Property and  equipment, net                                                                                                                                    |   | 21,343   |    | 16,062   |   |
| Intangible  assets, net                                                                                                                                         |   | 257,161  |    | 549,910  |   |
| Other assets                                                                                                                                                    |   | 617      |    | 580      |   |
| Total assets                                                                                                                                                    |   | $        | 547,198 |     | $      | 815,246 |   |
|                                                                                                                                                            |   |     |    |     |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                  |   |     |    |     |   |
|                                                                                                                                                            |   |     |    |     |   |
| Current  liabilities:                                                                                                                                           |   |     |    |     |   |
| Accounts payable                                                                                                                                                |   | $        | 8,579   |     | $      | 8,869 |   |
| Accrued wages  and commissions                                                                                                                                  |   | 4,727    |    | 3,965    |   |
| Accrued  liabilities                                                                                                                                            |   | 15,496   |    | 12,757   |   |
| Income taxes  payable                                                                                                                                           |   | 7,016    |    | 1,610    |   |
| Other  liabilities                                                                                                                                              |   | 719      |    | 123      |   |
| Total current  liabilities                                                                                                                                      |   | 36,537   |    | 27,324   |   |
|                                                                                                                                                            |   |     |    |     |   |
| Deferred tax  liability                                                                                                                                         |   | 24,053   |    | 27,742   |   |
| Total liabilities                                                                                                                                               |   | 60,590   |    | 55,066   |   |
|                                                                                                                                                            |   |     |    |     |   |
| Commitments and  contingencies *(Note 13)*                                                                                                                      |   |     |    |     |   |
|                                                                                                                                                            |   |     |    |     |   |
| Stockholders’  equity:                                                                                                                                     |   |     |    |     |   |
| Preferred stock,  par value $0.001 per share; 5,000 shares authorized; no shares issued and  outstanding                                                        |   | —   |    | —   |   |
| Common stock,  par value $0.001 per share; 200,000 shares authorized; 2001 - 44,650 shares  issued and outstanding; 2000 - 43,820 shares issued and outstanding |   | 45       |    | 44       |   |
| Additional  paid-in capital                                                                                                                                     |   | 926,746  |    | 898,410  |   |
| Accumulated  other comprehensive loss:                                                                                                                          |   |     |    |     |   |
| Unrealized gain (loss)  on investments, net of deferred taxes                                                                                                   |   | 78       |    | (2,848   | )      |
| Foreign currency  translation adjustment, net of deferred taxes                                                                                                 |   | (120     | )       | (33      | )      |
| Accumulated  deficit                                                                                                                                            |   | (423,177 | )       | (102,711 | )      |
| Deferred  compensation                                                                                                                                          |   | (16,964  | )       | (32,682  | )      |
| Total stockholders’  equity                                                                                                                                |   | 486,608  |    | 760,180  |   |
|                                                                                                                                                            |   |     |    |     |   |
| Total liabilities and  stockholders’ equity                                                                                                                |   | $        | 547,198 |     | $      | 815,246 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

37

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**Avocent Corporation**

**Consolidated Statements of Operations**

**For the Years Ended December 31,2001, 2000 and 1999**

**(In thousands, except per share data)**

 
|                                                                                |   | **2001** |     | **2000** |   | **1999** |   |
|-------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| Net sales                                                                           |   | $        | 255,911  |     | $      | 222,372  |   | $ | 107,288 |   |
|                                                                                |   |     |     |     |   |     |   |
| Cost of sales                                                                       |   | 149,925  |     | 112,598  |   | 57,374   |   |
|                                                                                |   |     |     |     |   |     |   |
| Gross profit                                                                        |   | 105,986  |     | 109,774  |   | 49,914   |   |
|                                                                                |   |     |     |     |   |     |   |
| Research and  development expenses                                                  |   | 22,520   |     | 12,881   |   | 6,544    |   |
| In-process  research and development expense and other acquisition costs *(Note 3)* |   | 4,570    |     | 104,092  |   | –   |   |
| Selling, general  and administrative expenses                                       |   | 74,800   |     | 52,109   |   | 14,074   |   |
| Amortization of  intangible assets                                                  |   | 132,879  |     | 62,394   |   | –   |   |
| Impairment  write-down of intangible assets *(Note 8)*                              |   | 195,365  |     | –   |   | –   |   |
|                                                                                |   |     |     |     |   |     |   |
| Total operating  expenses                                                           |   | 430,134  |     | 231,476  |   | 20,618   |   |
|                                                                                |   |     |     |     |   |     |   |
| Income (loss)  from operations                                                      |   | (324,148 | )        | (121,702 | )      | 29,296   |   |
|                                                                                |   |     |     |     |   |     |   |
| Other income,  net                                                                  |   | 735      |     | 5,699    |   | 3,053    |   |
|                                                                                |   |     |     |     |   |     |   |
| Income (loss)  before provision for (benefit from) income taxes                     |   | (323,413 | )        | (116,003 | )      | 32,349   |   |
|                                                                                |   |     |     |     |   |     |   |
| Provision for  (benefit from) income taxes                                          |   | (2,947   | )        | 14,553   |   | 11,106   |   |
|                                                                                |   |     |     |     |   |     |   |
| Net income  (loss)                                                                  |   | $        | (320,466 | )        | $      | (130,556 | )      | $ | 21,243 |   |
|                                                                                |   |     |     |     |   |     |   |
| Net income  (loss) per common share:                                                |   |     |     |     |   |     |   |
| Basic                                                                               |   | $        | (7.22    | )        | $      | (3.92    | )      | $ | 0.94 |   |
|                                                                                |   |     |     |     |   |     |   |
| Diluted                                                                             |   | $        | (7.22    | )        | $      | (3.92    | )      | $ | 0.90 |   |
|                                                                                |   |     |     |     |   |     |   |
| Weighted average  common shares outstanding:                                        |   |     |     |     |   |     |   |
| Basic                                                                               |   | 44,374   |     | 33,266   |   | 22,484   |   |
|                                                                                |   |     |     |     |   |     |   |
| Diluted                                                                             |   | 44,374   |     | 33,266   |   | 23,516   |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

38

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**Avocent Corporation**

**Consolidated Statements ofStockholders' Equity**

**For the Years Ended December 31,2001, 2000 and 1999**

**(In thousands)**

 
|                                                                                    |   |             |   |       |   | **Additional  Paid-In  Capital** |   | **Unrealized  Gain (Loss) on Investments** |   | **Foreign  Currency  Translation  Adjustment** |   | **Retained  Earnings  (Accumulated Deficit)** |   | **Deferred**

**Compensation** |   | **Total** |     |
|-----------------------------------------------------------------------------------------|--------|------------------|--------|------------|--------|----------------------------------|--------|--------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|--------------------------------|--------|-----------|----------|
|                                                                                    |   | **Common Stock** |   |       |   |                             |   |                                       |
|                                                                                    |   | **Shares**       |   | **Amount** |   |                             |   |                                       |   |                                           |
| Balance, December 31, 1998                                                              |   | 22,154           |   | $          | 62,901 |                             | $      | –                                     |   | $                                              | – |                                          | $      | –                         |   | $         | 6,602    |   | $ | (96 | ) | $ | 69,407 |   |
| Net income                                                                              |   | –           |   | –     |   | –                           |   | –                                     |   | –                                         |   | 21,243                                        |   | –                         |   | 21,243    |     |
| Issuance of common stock                                                                |   | 522              |   | 1,308      |   | –                           |   | –                                     |   | –                                         |   | –                                        |   | –                         |   | 1,308     |     |
| Income tax benefit from exercise of stock options                                       |   | –           |   | 2,374      |   | –                           |   | –                                     |   | –                                         |   | –                                        |   | –                         |   | 2,374     |     |
| Amortization of deferred compensation                                                   |   | –           |   | –     |   | –                           |   | –                                     |   | –                                         |   | –                                        |   | 61                             |   | 61        |     |
| Balance, December 31, 1999                                                              |   | 22,676           |   | 66,583     |   | –                           |   | –                                     |   | –                                         |   | 27,845                                        |   | (35                            | )      | 94,393    |     |
| Acquisition of Cybex                                                                    |   | 19,441           |   | (66,541    | )      | 862,012                          |   | –                                     |   | –                                         |   | –                                        |   | (41,165                        | )      | 754,306   |     |
| Net loss                                                                                |   | –           |   | –     |   | –                           |   | –                                     |   | –                                         |   | (130,556                                      | )      | –                         |   | (130,556  | )        |
| Acceleration of unvested stock option awards                                            |   | –           |   | –     |   | 9,821                            |   | –                                     |   | –                                         |   | –                                        |   | (9,821                         | )      | –    |     |
| Change in foreign currency translation adjustment, net of deferred  income taxes of $19 |   | –           |   | –     |   | –                           |   | –                                     |   | (33                                            | )      | –                                        |   | –                         |   | (33       | )   |
| Change in net unrealized losses on investments, net of deferred  income taxes of $1,637 |   | –           |   | –     |   | –                           |   | (2,848                                     | )      | –                                         |   | –                                        |   | –                         |   | (2,848    | )   |
| Issuance of common stock                                                                |   | 1,703            |   | 2          |   | 1,936                            |   | –                                     |   | –                                         |   | –                                        |   | –                         |   | 1,938     |     |
| Income tax benefit from exercise of stock options                                       |   | –           |   | –     |   | 24,641                           |   | –                                     |   | –                                         |   | –                                        |   | –                         |   | 24,641    |     |
| Amortization of stock-based compensation                                                |   | –           |   | –     |   | –                           |   | –                                     |   | –                                         |   | –                                        |   | 18,339                         |   | 18,339    |     |
| Balance, December 31, 2000                                                              |   | 43,820           |   | 44         |   | 898,410                          |   | (2,848                                     | )      | (33                                            | )      | (102,711                                      | )      | (32,682                        | )      | 760,180   |     |
| Acquisition of Equinox                                                                  |   | –           |   | –     |   | 13,331                           |   | –                                     |   | –                                         |   | –                                        |   | (2,752                         | )      | 10,579    |     |
| Net loss                                                                                |   | –           |   | –     |   | –                           |   | –                                     |   | –                                         |   | (320,466                                      | )      | –                         |   | (320,466  | )   |
| Change in foreign currency translation adjustment, net of deferred  income taxes of $51 |   | –           |   | –     |   | –                           |   | –                                     |   | (87                                            | )      | –                                        |   | –                         |   | (87       | )   |
| Change in net unrealized losses on investments, net of deferred income  taxes of $1,824 |   | –           |   | –     |   | –                           |   | 2,926                                      |   | –                                         |   | –                                        |   | –                         |   | 2,926     |     |
| Issuance of common stock                                                                |   | 830              |   | 1          |   | 10,078                           |   | –                                     |   | –                                         |   | –                                        |   | –                         |   | 10,079    |     |
| Income tax benefit from exercise of stock options                                       |   | –           |   | –     |   | 3,561                            |   | –                                     |   | –                                         |   | –                                        |   | –                         |   | 3,561     |     |
| Amortization of stock-based compensation                                                |   | –           |   | –     |   | 1,366                            |   | –                                     |   | –                                         |   | –                                        |   | 18,470                         |   | 19,836    |     |
|                                                                                    |   |             |   |       |   |                             |   |                                       |   |                                           |   |                                          |   |                           |   |      |     |
| Balance, December 31, 2001                                                              |   | 44,650           |   | $          | 45     |                             | $      | 926,746                                    |   | $                                              | 78     |                                          | $      | (120                           | )      | $         | (423,177 | ) | $ | (16,964 | ) | $ | 486,608 |   |
|                                                                                         |        |                  |        |            |        |                                  |        |                                            |        |                                                |        |                                               |        |                                |        |           |          |  |  |  |  |  |  |  |  |  |  |  |  |

 

Comprehensive lossin 2001 of $323,305 consists of $320,466 of net loss, $2,926 release ofunrealized loss on investments (net of deferred income taxes) and $87 offoreign currency translation adjustment (net of deferred income taxes).  The unrealized loss on investments is net of$272 of realized losses and a $4,899 write-down on investments that areincluded in other income in the accompanying consolidated statement ofoperations.

Comprehensive lossin 2000 of $133,437 consists of $130,556 of net loss, $2,848 of unrealized losson investments (net of deferred income taxes) and $33 of foreign currencytranslation adjustment (net of deferred income taxes).  The unrealized loss on investments is net of$433 of realized losses on investments that are included in other income in theaccompanying consolidated statement of operations.

 

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

 

39

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**Avocent Corporation**

**Consolidated Statements of Cash Flows**

**For the Years Ended December 31,2001, 2000 and 1999**

**(In thousands)**

 
|                                                                                     |   | **2001** |     | **2000** |   | **1999** |   |
|------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| Cash flows from  operating activities:                                                   |   |     |     |     |   |     |   |
| Net income  (loss)                                                                       |   | $        | (320,466 | )        | $      | (130,556 | )      | $ | 21,243 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities |   |     |     |     |   |     |   |
| Depreciation                                                                             |   | 4,709    |     | 2,223    |   | 626      |   |
| Amortization of  intangible assets                                                       |   | 132,879  |     | 62,394   |   | –   |   |
| Impairment  write-down of intangible assets                                              |   | 195,365  |     | –   |   | –   |   |
| Stock-based  compensation                                                                |   | 19,836   |     | 18,339   |   | 61       |   |
| Purchased  research and development expenses and other acquisition costs                 |   | 4,570    |     | 94,000   |   | –   |   |
| Other-than-temporary  decline in fair value of investments                               |   | 4,899    |     | –   |   | –   |   |
| Net loss on  sales of investments                                                        |   | 403      |     | 433      |   | –   |   |
| Deferred income  taxes                                                                   |   | (15,827  | )        | (6,409   | )      | (98      | )      |
| Income tax  benefit from exercise of stock options                                       |   | 3,561    |     | 24,641   |   | 2,374    |   |
| Changes in  operating assets and liabilities (net of effects of acquisitions):           |   |     |     |     |   |     |   |
| Accounts  receivable                                                                     |   | 17,964   |     | (8,163   | )      | (13,521  | )      |
| Income taxes  receivable                                                                 |   | 2,157    |     | (4,487   | )      | –   |   |
| Other  receivables                                                                       |   | 8,685    |     | (9,993   | )      | –   |   |
| Inventories, net                                                                         |   | 10,869   |     | (9,998   | )      | (7,750   | )      |
| Other current  assets                                                                    |   | (1,501   | )        | (2,042   | )      | (618     | )      |
| Accounts payable                                                                         |   | (2,256   | )        | (8,245   | )      | 2,280    |   |
| Accrued  liabilities, wages and commissions                                              |   | 819      |     | 4,425    |   | 844      |   |
| Income taxes  payable                                                                    |   | 5,406    |     | (7,453   | )      | 2,829    |   |
| Other current  liabilities                                                               |   | 558      |     | (28      | )      | –   |   |
|     Net cash provided by operating  activities                            |   | 72,630   |     | 19,081   |   | 8,270    |   |
| Cash flows from  investing activities:                                                   |   |     |     |     |   |     |   |
| Purchase of  Equinox, net of cash and investments acquired                               |   | (31,725  | )        | –   |   | –   |   |
| Cash acquired  from purchase of Cybex                                                    |   | –   |     | 34,878   |   | –   |   |
| Purchases of  property and equipment                                                     |   | (3,343   | )        | (1,812   | )      | (1,929   | )      |
| Purchases of  investments                                                                |   | (94,718  | )        | (97,015  | )      | (93,526  | )      |
| Proceeds from  maturities and sales of investments                                       |   | 83,564   |     | 71,283   |   | 67,078   |   |
|     Net cash provided by (used in) investing activities                   |   | (46,222  | )        | 7,334    |   | (28,377  | )      |
| Cash flows from  financing activities:                                                   |   |     |     |     |   |     |   |
| Proceeds from  issuance of short term debt                                               |   | 45,000   |     | –   |   | –   |   |
| Repayment of  short term debt                                                            |   | (45,000  | )        | –   |   | –   |   |
| Proceeds from issuance  of common stock                                                  |   | 10,079   |     | 1,938    |   | 1,308    |   |
|     Net cash provided by financing  activities                            |   | 10,079   |     | 1,938    |   | 1,308    |   |
|                                                                                     |   |     |     |     |   |     |   |
|     Effect of exchange rate changes on cash  and cash equivalents         |   | (87      | )        | (33      | )      | –   |   |
|                                                                                     |   |     |     |     |   |     |   |
|                                                                                     |   |     |     |     |   |     |   |
|     Net increase (decrease) in cash and cash  equivalents                 |   | 36,400   |     | 28,320   |   | (18,799  | )      |
| Cash and cash  equivalents, beginning of year                                            |   | 44,106   |     | 15,786   |   | 34,585   |   |
|                                                                                     |   |     |     |     |   |     |   |
| Cash and cash  equivalents, end of year                                                  |   | $        | 80,506   |     | $      | 44,106   |   | $ | 15,786 |   |
|                                                                                     |   |     |     |     |   |     |   |
| Supplemental  disclosures of cash flow information:                                      |   |     |     |     |   |     |   |
| Cash paid during  the year for interest                                                  |   | $        | 282      |     | $      | –   |   | $ | – |   |
|                                                                                     |   |     |     |     |   |     |   |
| Cash paid during  the year for income taxes                                              |   | $        | 4,248    |     | $      | 6,568    |   | $ | 6,100 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

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** **

**Avocent Corporation**

**Notes to Consolidated FinancialStatements******

**For the Years Ended December 31,2001, 2000 and 1999**

**(In Thousands, except per share data)**

 

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

 

Avocent Corporation (the Company or Avocent) designs, manufactures andsells analog and digital console switching systems, serial connectivity devicesand extension and remote access products for the computer industry.  The Company’s analog, digital and serialswitching solutions and the extension and remote access products help networkadministrators manage multiple servers and serially controlled devices from asingle keyboard, video monitor and mouse configuration from extended distancesor from remote locations, facilitating more efficient network management andadministration. The Company sells products to distributors, resellers,end-users and original equipment manufacturers in the United States andthroughout the rest of the world.

 

Avocent was formed from the merger of Apex, Inc (“Apex”) and CybexComputer Products Corporation (“Cybex”) on July 1, 2000, when both Apex andCybex merged with wholly owned subsidiaries of Avocent.  The merger has been accounted for as apurchase of Cybex by Apex.  Avocent’sconsolidated statements of operations, stockholders’ equity, and cash flows forthe year ended December 31, 1999, includes only the historical results of Apex.  Avocent’s consolidated statements ofoperations, stockholders’ equity, and cash flows for the year ended December31, 2000, include the 12-month results of Apex for the period January 1, 2000through December 31, 2000, and the six-month results of Cybex for thepost-merger period July 1, 2000 through December 31, 2000.  Avocent’s consolidated statements ofoperations, stockholders’ equity and cash flows for the year ended December 31,2001 includes the results of Apex, Cybex and Equinox Systems Inc. (“Equinox”),which was acquired by Avocent on January 3, 2001.  Avocent’s consolidated balance sheet as of December 31, 2000includes the consolidated financial position of Apex and Cybex. Avocent’sconsolidated balance sheet as of December 31, 2001 includes the consolidated financialposition of Apex, Cybex and Equinox.

 

**2.**                        Summary of Significant Accounting Policies

 

The principal accounting policies of the Company are as follows:

 

**Principlesof Consolidation**- The Company’s consolidated financial statements include the Company and itswholly owned subsidiaries. All significant intercompany accounts andtransactions have been eliminated in consolidation.

 

**Cash andCash Equivalents**- The Company considers all highly liquid instruments with an original maturityof three months or less when purchased to be cash equivalents.

 

**OtherReceivables -**Otherreceivables is primarily comprised of amounts due, net of estimateduncollectable accounts, from certain subcontract manufacturers of the Companyfor product components sold to subcontractors. Amounts due from component sales is included in the accompanyingconsolidated statements of operations as a reduction of cost of sales. As ofDecember 31, 2001, the Company’s other receivables included an allowance foruncollectable accounts of approximately $1,800.  Additionally, other receivables at December 31, 2001 included areceivable of $760 due from an executive employee that was collected subsequentto year-end.

 

41

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**Inventories** - Raw materials, work in process and finished goods arerecorded using the lower of standard cost, which approximates first-infirst-out (FIFO), or market.

 

**Financial Instruments** - The carryingamounts reported in the balance sheets for cash and cash equivalents,short-term investments, accounts receivable and accounts payable approximatefair value because of the immediate or short-term maturity of these financialinstruments.

 

**Investments -**TheCompany’s investments consist of corporate bonds, commercial paper, mortgagebacked securities guaranteed by U.S. government agencies and common stock.  Debt securities that the Company has thepositive intent and ability to hold to maturity are classified asheld-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.Unrealized losses are charged against earnings when a decline in fair value isdetermined to be other than temporary. Realized gains and losses are accounted for on the specificidentification method.  Purchases andsales are recorded on a trade date basis. The Company’s investments at December31, 2001 and 2000 have been classified as available-for-sale andheld-to-maturity *(see Note 5)*.

 

**Property Held for Lease -**Property held for lease is carried at cost, lessaccumulated depreciation, which is computed using the straight-line method overthe estimated useful lives of the assets. Rental income from this property isrecorded on a monthly basis in accordance with the lease terms. Initial directcosts are deferred and matched against rental income over the initial term ofthe lease *(see Note 6).*

 

**Property and Equipment** - Property and equipment are carried at cost, lessaccumulated depreciation, and include expenditures that substantially increasethe useful lives of existing assets. Maintenance and repairs are charged tocurrent operations as incurred. Upon sale, retirement, or other disposition ofthese assets, the cost and related accumulated depreciation are removed fromthe respective accounts, and any gain or loss on the disposition is included inearnings.

 

Depreciation expense is computed using thestraight-line method over the following estimated useful lives:

 
| **Description**                  |   | **Useful  Life**  |   |
|----------------------------------|--------|-------------------|--------|
| Land  improvements               |   | 30 years          |   |
| Buildings                        |   | 39 years          |   |
| Leasehold improvements           |   | 5 – 39 years |   |
| Computer  software and equipment |   | 3 – 5 years  |   |
| Other equipment                  |   | 5 – 7 years  |   |

 

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**Long-Lived Assets -**The Company recognizes 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. There were no such losses recognized during 2001,2000 or 1999.

 

**Intangible Assets** - Intangible assets are amortized on a straight-linebasis over the following estimated useful lives:

 
| **Description**      |   | **Useful  Life**  |   |
|----------------------|--------|-------------------|--------|
| Goodwill             |   | 5 years           |   |
| Developed technology |   | 3 – 5 years  |   |
| Other                |   | 3 – 10 years |   |

 

At each balance sheet date, or as changes incircumstances arise, the Company evaluates the recoverability of intangibleassets based upon utilization of related tangible assets and expectations offuture cash flows. Accordingly, the Company recorded an impairment charge of$195,365 to write-down goodwill created at the merger of Apex and Cybex *(see Note 8)*during 2001.  There were nosuch losses recognized during 2000 or 1999.

 

**Patent Defense Costs** -The Company capitalizes legal fees related to thedefense of existing patents.  Upon thesuccessful defense of patent infringement actions, the respective patentdefense costs are amortized over the remaining useful life of the relatedpatents.  If ultimately, an unfavorableruling is reached in a patent infringement action, the respective patentdefense costs are written off, and the remaining patents are reviewed forimpairment.

 

**Allowance for Sales Returns -** The Company’s sales generally include a one-monthunconditional return policy.  TheCompany also allows additional rights of return to certain of its distributors,which generally extend the return period to 90 days. The Company reserves forsales returns as a reduction of revenue and cost of sales at the time theproduct revenue is recognized based on historical sales return experience,which management believes provides a reasonable estimate of futurereturns.  The allowance for salesreturns totaled approximately $2,607 and $997 at December 31, 2001 and 2000,respectively. The reserve is included as a reduction in the carrying value ofaccounts receivable in the accompanying consolidated balance sheets.

 

**Liability for Warranty Returns** - The Company’s products generally include warrantiesof one to three years for product defects. The Company accrues for warrantyreturns at cost to repair or replace products. The liability for warrantyreturns totaled approximately $4,157 and $3,882 at December 31, 2001 and 2000,respectively. These liabilities are included in accrued liabilities in theaccompanying consolidated balance sheets.

 

**Stock-Based Compensation -**The Company generally records compensation expense forall stock-based compensation plans using the intrinsic value method in whichcompensation expense, if any, is measured as the excess of the market price ofthe stock over the exercise price of the award on the measurement date. Forunvested options of Cybex that existed as

 

43

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of the merger date and unvested options of Equinoxthat existed as of the acquisition date, the intrinsic value was computed as ofthe consummation date and the pro rata portion related to future service wasdeferred (included in deferred compensation in the consolidated balance sheets)and is being amortized over the remaining vesting period of the stock options.The fair value of these unvested options as of the consummation date wascomputed and the amount in excess of the intrinsic value was included in thepurchase consideration of Cybex and Equinox (*see**Note 3*).

 

**Concentrations of Customer Base and Credit Risk -**One of the Company’s OEM (originalequipment manufacturer) customers accounted for 23% of net sales for 2001, 32%of net sales for 2000 and 50% of net sales for 1999. Accounts receivable fromthis customer represented approximately 26% and 34% of trade receivables atDecember 31, 2001 and 2000, respectively.

 

The Company sells its products internationally tocustomers in several countries. Total international sales were approximately$96,112, $84,123 and $38,450 for 2001, 2000 and 1999, respectively.

 

The Company places cash and investments in severalhigh-quality financial institutions and limits the credit exposure from any oneinstitution, issuer or instrument.

 

**Income Taxes** - The Company accounts for income taxes using theasset and liability method. The Company provides for income taxes currentlypayable and, in addition, provides deferred income taxes for temporarydifferences between the tax bases of assets and liabilities and their reportedamounts in the financial statements. Temporary differences relate principallyto the allowance for doubtful accounts, liability for sales and warrantyreturns, unrealized loss on investments, acquired in-process research anddevelopment expenses, acquired intangible assets, foreign subsidiaryintangibles, accumulated depreciation, loss on write-down of investments andinventory reserves. Valuation allowances are established when necessary toreduce deferred tax assets to the amount expected to be realized.

 

**Foreign Currency** - The Company records transactions denominated inforeign currencies on a monthly basis using the average monthly exchange rate.Assets and liabilities denominated in foreign currencies are translated at thebalance sheet dates using the closing rates of exchange between those foreigncurrencies and the U.S. Dollar. Resulting translation adjustments are recordedas a separate component of stockholders’ equity.

 

The Company uses forward contracts to reduce itsforeign currency exposure related to the net cash flows from its European andAsian operations. The majority of these contracts are short-term contracts(three months or less) and are marked-to-market each quarter and included intrade payables, with the offsetting gain or loss included in other revenues inthe accompanying statements of operations. At December 31, 2001, the Companyhad no open forward contracts. At December 31, 2000, the Company had five openforward contracts, all maturing in the first quarter of 2001, to purchase$3,100 in foreign currency.  The fairvalue of the contracts at December 31, 2000 was approximately $3,100.

 

44

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**Revenue Recognition** - The Company generally records sales upon shipmentof the related product, net of any discounts, as the Company generally has nosignificant post delivery obligations, the product price is fixed anddeterminable, collection of the resulting receivable is probable, and productreturns are reasonably estimable. Product shipments occur upon receipt of apurchase order from a customer. Shipping terms are evaluated, and revenue onproducts shipped FOB destination is recorded when the customer takes possessionof the goods. The Company’s shipping and handling fees are included in netsales, and the related costs are included in cost of sales in the accompanyingconsolidated statements of operations. At December 31, 2001, certain shipmentsof approximately $1,100 did not meet the criteria for revenue recognition asdescribed above and were not recorded as revenue in 2001.

 

The Company participates in cooperative advertisingand market development programs with certain distributors. These programs areused by the Company to reimburse distributors for certain forms of advertising,and, in general, allow distributors credits up to a specified percentage of netpurchases. The Company’s costs associated with these programs are estimated andaccrued at the time of sale, and are included in marketing expenses in theaccompanying consolidated statements of operations.

 

**Government Grants -** The Company records government grants received inconnection with its Shannon, Ireland operations as reductions of thecorresponding expense in the consolidated statements of operations. Proceedsfrom rent reduction grants are recognized as reductions to rent expense as therelated rent expense is incurred. Proceeds from the employment grant, which arereceived in multiple installments, are amortized as reductions of compensationexpense over a 12 month period from the creation of the related jobs.

 

Grants recognized as a reduction of related expensestotaled approximately $17 and $142 for the years ended December 31, 2001, and2000, respectively. Accounts receivable of approximately $243 and $248 anddeferred revenue of approximately $49 and $97 related to the grants wereincluded in the accompanying consolidated balance sheets as of December 31,2001 and 2000, respectively. The maximum amount attainable under the Shannonagreements is $1,600, of which $1,369 has been received to date. The grants maybe repayable, in whole or in part, upon certain conditions contained in therespective grant agreements.

 

**Research and Development Expense** - Research and development costs areexpensed as incurred.  Research anddevelopment expense totaled $22,520, $12,881 and $6,544 for the years endedDecember 31, 2001, 2000, and 1999, respectively.

 

**Software Development Costs -**The costs of software development of the Company’sproducts incurred between achieving technological feasibility and theintegration into the Company’s products available for sale to customers havenot been material to date. Such costs, if material, would be capitalized.Additionally, costs related to development of internal use software, other thanthose incurred during the application development stage,

 

45

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are expensed as incurred. Costs incurred during theapplication development stage have not been material to date.

 

**Advertising Expense** - Advertising costs are expensed as incurred.Advertising expense totaled approximately $8,079, $5,205 and $921 for the yearsended December 31, 2001, 2000 and 1999, respectively.

** **

**Comprehensive Income (Loss) -** Comprehensive income (loss) includes all changes inequity (net assets) during a period from non-owner sources. Items included incomprehensive income include net income (loss), foreign currency translationadjustments, and unrealized gains and losses on available-for-sale securities.

 

**Use of Estimates -** The preparation of the Company’s consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the dates of the financialstatements and reported amounts of revenues and expenses during the reportingperiods. Actual results could differ from those estimates.

 

**Recently Issued Accounting Standards** - In June 2001, the FinancialAccounting Standards Board issued SFAS No. 141, *Business Combinations,*whichhas an effective date of June 30, 2001, for all business combinations initiatedafter this date.  This statementsupersedes APB Opinion No. 16, *Business Combinations,* and FASB StatementNo. 38, *Accountingfor Preacquisition Contingencies of Purchased Enterprises*.  This statement requires all businesscombinations within the scope of the Statement to be accounted for using thepurchase method of accounting.  Forbusiness combinations completed prior to June 30, 2001, the statement requirescompanies to recognize intangible assets apart from goodwill and expand thedisclosures about assets acquired and liabilities assumed.  The impact of SFAS No. 141 was not materialto the Company's December 31, 2001 financial statements.

** **

**46**

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** **

In June 2001, the Financial Accounting Standards Boardissued SFAS No. 142, *Goodwill and Other Intangible Assets,*whichhas an effective date starting with fiscal years beginning after December 15,2001.  This statement supersedes APBOpinion No. 17, *Intangible Assets*. This statement addresses the initial accounting for intangible assetsthat are acquired individually or with a group of other assets.  This statement also addresses the accountingfor goodwill and other intangible assets after they have been initiallyrecognized in the financial statements. Goodwill will cease to be amortized upon the implementation of thestatement, and companies will test goodwill at least annually forimpairment.   The Company adopted SFASNo. 142 effective January 1, 2002 and accordingly, performed a test forpossible goodwill impairment as of January 1, 2002. The test concluded that noadjustment was required upon adoption. Additionally, under the provisions of SFAS No. 142, goodwill will ceaseto be amortized in future periods. Amortization of goodwill was approximately $111,000 during 2001.

 

In August 2001, the Financial Accounting StandardsBoard issued SFAS No. 143, *Accounting for Asset Retirement Obligations (“ARO”)*,which has an effective date for financial statements for fiscal years beginningafter June 15, 2002.  This statementaddresses the diversity in practice for recognizing asset retirementobligations and requires that obligations associated with the retirement of atangible long-lived asset be recorded as a liability when those obligations areincurred, with the amount of the liability initially measured at fairvalue.  Upon initially recognizing aliability for an ARO, an entity must capitalize the cost by recognizing anincrease in the carrying amount of the related long-lived asset.  Over time, the liability is accreted to itspresent value each period, and the capitalized cost is depreciated over theuseful life of the related asset.  Uponsettlement of the liability, an entity either settles the obligation for itsrecorded amount or incurs a gain or loss upon settlement.  The impact of SFAS No. 143 on the financialstatements is not expected to be material.

 

In October 2001, theFinancial Accounting Standards Board issued SFAS No. 144, *Accounting for the Impairment orDisposal of Long-Lived Assets*, which has an effective date forfinancial statements for fiscal years beginning after December 15, 2001.  This statement, which supercedes SFAS No.121, *Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of*, requires that long-lived assets that are to be disposedof by sale be measured at the lower of book value or fair value less cost tosell.  Additionally, this statementexpands the scope of discontinued operations to include all components of anentity with operations that (1) can be distinguished from the rest of theentity and (2) will be eliminated from the ongoing operations of the entity ina disposal transaction.  The impact ofSFAS No. 144 on the financial statements is not expected to be material.

 

**Reclassifications** - Certain reclassifications have been made to the2000 and 1999 consolidated financial statements in order to conform to the 2001presentation. These reclassifications had no effect on previously reported netincome (loss), cash flows from operations or total stockholders’ equity.

 

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**3.            Merger and Acquisition**

** **

**Acquisition of Equinox**- On January 3, 2001, the Companyacquired Equinox Systems Inc. for cash equal to $9.75 for each outstandingshare of Equinox capital stock. Equinox, headquartered in Sunrise, Florida,makes products that provide communications port management and remote controlcapabilities. The products are distributed through a two-tier distributionchannel; a network of value-added resellers and original equipmentmanufacturers.

 

The acquisition was recordedunder the purchase method of accounting, and the purchase price was allocatedbased on the fair value of the assets acquired and liabilities assumed. Inaccordance with generally accepted accounting principles, costs allocated toresearch and development assets with alternative future uses were capitalized;and the remaining amounts of purchased in-process research and development wereexpensed upon the closing of the transaction. The excess of the fair value over the intrinsic value of the unvestedEquinox options and the fair value of the vested Equinox options at the date ofconsumation have been included in the purchase consideration.  A summary of the total purchaseconsideration is as follows:

** **
| Cash paid for outstanding shares           |   | $      | 55,607 |   |
|--------------------------------------------|--------|--------|--------|--------|
| Outstanding  options                       |   | 10,579 |   |
| Assumed  liabilities and acquisition costs |   | 4,456  |   |
|                                       |   |   |   |
| Total purchase consideration               |   | $      | 70,642 |   |

 

The purchase consideration wasallocated to the estimated fair values of the assets acquired and liabilitiesassumed, as follows:

 
|                                                  |   | **Purchase  Price  Allocation** |       | **Amortization  Life** |   |
|-------------------------------------------------------|--------|---------------------------------|------------|------------------------|--------|
|                                                  |   | ** **                      | ** ** |
|                                                  |   | ** **                      | ** ** |
| Tangible assets                                       |   | $                               | 38,981     |                   | — |   |
| In-process  research and development                  |   | 4,570                           |       | —                 |   |
| Patents and  trademarks                               |   | 1,680                           |       | 7 years                |   |
| Developed  technology                                 |   | 6,250                           |       | 5 years                |   |
| Assembled  workforce                                  |   | 1,800                           |       | 3 years                |   |
| Customer base  and certification                      |   | 2,500                           |       | 3 — 6 years       |   |
| Deferred tax  liability on intangible assets acquired |   | (5,962                          | )          | Various                |   |
| Goodwill                                              |   | 20,823                          |       | 5 years                |   |
|                                                  |   |                            |       |                   |   |
|                                                  |   | $                               | 70,642     |                   |   |   |

 

The acquisition was fundedthrough available cash and the issuance of short-term debt.  The Company borrowed a total of $45,000 atthe stated rate of 30-day LIBOR plus 1.75% (8.31% at January 31,2001).  All borrowings were repaidduring the quarter ended March 30, 2001. On the closing of the Equinox transaction, the Company acquired $24,295in cash and short–term investments held by Equinox.

 

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In-process research anddevelopment expense and other acquisition costs included in the accompanyingconsolidated statement of operations for the year ended December 31, 2001,include the write-off of the $4,570 of in-process research development upon theclosing of the transaction.

 

**In-Process Research and Development -**The fair value of substantially all ofthe in-process research and development received in the acquisition wasdetermined using the discounted cash flow method of the income approach. Thefair value of a small portion of in-process research and development wasestimated using the cost approach. Also, additional calculations were performed based on the understandingof the current perspective of the SEC concerning the determination of allocableamounts for purchased in-process research and development.

 

Equinox’s in-process research and developmentactivities consisted of a redesign of its ELS terminal server product linehardware, developing new Console Port Management technology, developing acompletely new line of Internet Attached Products and creating new softwaredrivers for use with certain products. The work to be performed in theseprojects varied, but at the time of the acquisition, the projects would bedescribed as 30 to 99 percent complete. All projects, except for the Internet Attached Products project, werecompleted and began shipping in 2001.

 

The new generations of products under development areprojected to sell through sales channels and to customers that aresubstantially the same as current and historical sales channels and customers.Pricing and margins will not differ significantly from historical pricing andmargins. All technology projections were developed within the context of anaverage revenue growth rate for Equinox of 26% annually over six years, basedon historical results and industry prospects.

 

Revenue growth related to the in-process technologyand development is embodied in products to be launched in fiscal years 2001 and2002. These products have estimated economic lives ranging from approximatelyfive to seven years. The product life cycle is characterized by an approximate2 to 3 year ramp up period, followed by a 1 to 2 year plateau, followed by a 1to 3 year decline period. Operating margins are projected to remain relativelyconstant for these products over their remaining lives, with aggregate marginsdeclining in later years due to shifts in product mix. The discount rate forthe in-process research and development was estimated to be 25%.

 

**Merger of Apex and Cybex** - On July 1, 2000, Apex and Cybex merged to formAvocent. According to the terms of the merger, each share of Apex common stockwas converted into 1.0905 shares of Avocent common stock, and each share ofCybex common stock was converted into one share of Avocent common stock. Foraccounting purposes, the merger was treated as a purchase of Cybex by Apex. Theexcess of the fair value over the intrinsic value of the unvested Cybex optionsand the fair value of the vested Cybex options at the date of consummation havebeen included in the purchase consideration. 

 

 

49

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A summary of the total purchaseconsideration is as follows:

 
| Common stock                               |   | $      | 723,788 |   |
|--------------------------------------------|--------|--------|---------|--------|
| Outstanding  options                       |   | 30,518 |    |   |
| Assumed  liabilities and acquisition costs |   | 27,953 |    |   |
|                                       |   |   |    |   |
| Total purchase  consideration              |   | $      | 782,259 |   |   |
|                                            |        |        |         |        |  |  |  |

 

The merger was recorded using the purchase method ofaccounting, and the purchase price was allocated to the estimated fair valuesof the assets acquired and liabilities assumed, as follows:

 
|                                                  |   | **Purchase  Price  Allocation** |       | **Amortization  Life** |   |
|-------------------------------------------------------|--------|---------------------------------|------------|------------------------|--------|
|                                                  |   | ** **                      | ** ** |
|                                                  |   | ** **                      | ** ** |
| Tangible assets                                       |   | $                               | 109,011    |                   | — |   |
| In-process  research and development                  |   | 94,000                          |       | —                 |   |
| Patents and  trademarks                               |   | 12,018                          |       | 5 – 7 years       |   |
| Developed  technology                                 |   | 59,490                          |       | 5 years                |   |
| Assembled  workforce                                  |   | 1,600                           |       | 3 years                |   |
| Reseller network                                      |   | 17,000                          |       | 3 years                |   |
| Deferred tax  liability on intangible assets acquired |   | (33,930                         | )          | Various                |   |
| Goodwill                                              |   | 523,070                         |       | 5 years                |   |
|                                                  |   |                            |       |                   |   |
|                                                  |   | $                               | 782,259    |                   |   |   |

 

In-process research and development expense and otheracquisition costs included in the accompanying consolidated statement ofoperations for the year ended December 31, 2000, include the write-off of the$94,000 of in-process research and development acquired and approximately$10,000 of transaction-related fees paid to external advisors.

 

**Pro Forma Financial Information -**The following unaudited pro forma summarycombines the results of operations of Apex and Cybex as if the merger had occurredon January 1, 2000 and includes the results of operations for Equinox as if theacquisition had occurred on January 1, 2000. Certain adjustments have been madeto reflect the impact of the purchase transactions. These pro forma resultshave been prepared for comparative purposes only and do not purport to beindicative of what would have occurred had the acquisitions been made at thebeginning of 2000, or of results which may occur in the future.

 
| ** **                 |   |                                                             |     |
|----------------------------|--------|------------------------------------------------------------------|----------|
|                       |   | **Twelve  Months Ended December 31, 2000 (Unaudited, Proforma)** |     |
| Net sales                  |   | $                                                                | 311,731  |   |
| Net loss                   |   | $                                                                | (197,734 | ) |
| Net loss per  common share |   | $                                                                | (4.61    | ) |

 

50

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**4.            Inventories**

 

Inventories consist of the following at December 31,2001 and 2000:

 
|                  |   | **2001** |   | **2000** |   |
|-----------------------|--------|----------|--------|----------|--------|
| Raw materials,  net   |   | $        | 13,034 |     | $      | 10,712 |   |
| Work in process,  net |   | 446      |   | 7,379    |   |
| Finished goods,  net  |   | 13,675   |   | 16,367   |   |
|                  |   |     |   |     |   |
| Inventories, net      |   | $        | 27,155 |     | $      | 34,458 |   |

 

**5.            Investments**

 

The amortized costs and estimated fair values ofheld-to-maturity investments (carried at amortized cost) and available-for-salesecurities (carried at fair value) are as follows:

 
|                                                               |   | **December  31, 2001**           |       |
|--------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                               |   | **Cost or**

**Amortized  Cost** |       | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Estimated  Fair  Value** |   |
|                                                               |   |                             | ** ** | ** ** | ** ** |
|                                                               |   |                             | ** ** | ** ** | ** ** |
| Held-to-maturity  investments:                                     |   |                             |       |   |   |   |   |   |   |
| Corporate bonds                                                    |   | $                                | 51,939     |   | $ | — |   | $ | — |   | $ | 51,939 |   |
| Mortgage backed  securities guaranteed by U.S. government agencies |   | 3,035                            |       | — |   | — |   | 3,035 |   |
|                                                               |   | $                                | 54,974     |   | $ | — |   | $ | — |   | $ | 54,974 |   |
|                                                               |   |                             |       |   |   |   |   |   |   |
| Available-for-sale  securities:                                    |   |                             |       |   |   |   |   |   |   |
| Mortgage backed  securities guaranteed by U.S. government agencies |   | $                                | 36,000     |   | $ | 176 |   | $ | (13 | ) | $ | 36,163 |   |
| Equity  securities                                                 |   | 851                              |       | — |   | — |   | 851 |   |
|                                                               |   |                             |       |   |   |   |   |   |   |
| Totals                                                             |   | $                                | 36,851     |   | $ | 176 |   | $ | (13 | ) | $ | 37,014 |   |
|                                                               |   |                             |       |   |   |   |   |   |   |
|                                                               |   |                             |       |   |   |   |   |   |   |
|                                                               |   | **December  31, 2000**           | ** ** |
|                                                               |   | **Cost or  Amortized  Cost**     |       | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** |   | **Estimated  Fair  Value** | ** ** |
|                                                               |   |                             | ** ** | ** ** | ** ** |
|                                                               |   |                             | ** ** | ** ** | ** ** |
| Held-to-maturity  investments:                                     |   |                             |       |   |   |   |   |   |   |
| Corporate bonds                                                    |   | $                                | 47,755     |   | $ | — |   | $ | — |   | $ | 47,755 |   |
|                                                               |   |                             |       |   |   |   |   |   |   |
| Available-for-sale  securities:                                    |   |                             |       |   |   |   |   |   |   |
| Mortgage backed  securities guaranteed by U.S. government agencies |   | $                                | 29,617     |   | $ | — |   | $ | — |   | $ | 29,617 |   |
| Equity  securities                                                 |   | 8,468                            |       | 98 |   | (4,675 | ) | 3,891 |   |
|                                                               |   |                             |       |   |   |   |   |   |   |
| Totals                                                             |   | $                                | 38,085     |   | $ | 98 |   | $ | (4,675 | ) | $ | 33,508 |   |

 

51

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Maturities of held-to-maturity investments were asfollows at December 31, 2001:

 
|                                    |   | **Amortized  Cost** |   | **Estimated  Fair  Value** |   |
|-----------------------------------------|--------|---------------------|--------|----------------------------|--------|
|                                    |   |                |   |
|                                    |   |                |   |
| Due within one  year                    |   | $                   | 47,804 |                       | $      | 47,804 |   |
| Due after one  year through three years |   | 7,170               |   | 7,170                      |   |
|                                    |   |                |   |                       |   |
| Totals                                  |   | $                   | 54,974 |                       | $      | 54,974 |   |

 

All debt instruments with fixed maturities at December31, 2000, were due in one year or less.

 

Gross realized gains on the sale of available-for-salesecurities were approximately $528 and gross realized losses were approximately$800 for the year ended December 31, 2001. During 2001, the Company recognizedgross losses of $4,899 on its equity investments due to impairments that weredetermined by management to be other than temporary. The remaining fair valueof these investments at December 31, 2001, was $851.  Gross realized gains on the sale of available-for-sale securitieswere approximately $754 and gross realized losses were approximately $1,187 forthe year ended December 31, 2000.  Theremaining fair value of these investments at December 31, 2000 was $3,891.

 

The Company has a 40% interest in CyCom L.L.C("CyCom"), a joint venture created to focus on computer technologyand research for products in the computer industry.  The other 60% of CyCom is owned by 2C Computing, a significantshareholder of which is a former Cybex director.  Upon the formation of CyCom, the Company contributed a licensefor certain of its intellectual property and 2C Computing contributedmanagement services and capital funding. Under the terms of the membership agreement, 2C Computing is responsiblefor all continued technology development efforts.  The net profits of CyCyom are to be split 60% to 2C Computing and40% to the Company after 2C Computing recoups its accumulated losses from thedevelopment and marketing of CyCom’s products. The carrying value of the Company’s investment in the joint venture iszero because the Company's contribution consisted of previously expensed researchand development costs related to the technology.  The Company has no obligation to provide funding or otherfinancial support to CyCom in future periods. As of December 31, 2001, 2C Computing had incurred cumulative unauditedlosses, and management does not anticipate that the joint venture will beprofitable in 2002.

 

**6.            Property Held for Lease**

 

The Company owns a building in Huntsville, Alabama andhas executed a five-year agreement to lease the building to an unrelated party.The lease agreement contains renewal options for up to two three-yearextensions, subject to certain conditions. The lease agreement also providesfor early termination at the option of the lessee after three or four years,subject to certain conditions, including termination fees. Rental incometotaled approximately $221 and $111 for the years ended December 31, 2001 and2000, respectively.

 

Property held for lease consists of the following atDecember 31, 2001 and 2000:

 
|                          |   | **2001** |   | **2000** |   |
|-------------------------------|--------|----------|--------|----------|--------|
| Building                      |   | $        | 2,306  |     | $      | 2,294 |   |
| Accumulated  depreciation     |   | (387     | )      | (192     | )      |
|                          |   |     |   |     |   |
| Property held  for lease, net |   | $        | 1,919  |     | $      | 2,102 |   |

 

Future minimum rental income on this non-cancelableoperating lease are approximately as follows:

 
| **Year  ending December 31:** |   |   |   |
|-------------------------------|--------|--------|--------|
| 2002                          |   | $      | 221    |   |
| 2003                          |   | 221    |   |
| 2004                          |   | 221    |   |
| 2005                          |   | 93     |   |
|                          |   |   |   |
|                          |   | $      | 756    |   |

 

52

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**7.            Property and Equipment**

 

Property and equipment consists of the following atDecember 31, 2001 and 2000:

* *
|                             |   | **2001** |   | **2000** |   |
|----------------------------------|--------|----------|--------|----------|--------|
| Land and land  improvements      |   | $        | 2,911  |     | $      | 1,799 |   |
| Buildings                        |   | 13,476   |   | 7,033    |   |
| Leasehold  improvements          |   | 1,378    |   | 1,297    |   |
| Computer  software and equipment |   | 9,103    |   | 6,069    |   |
| Other equipment                  |   | 9,419    |   | 7,632    |   |
| Construction in  progress        |   | 443      |   | 175      |   |
|                             |   |     |   |     |   |
|                             |   | 36,730   |   | 24,005   |   |
| Less accumulated  depreciation   |   | (15,387  | )      | (7,943   | )      |
|                             |   |     |   |     |   |
| Property and  equipment, net     |   | $        | 21,343 |     | $      | 16,062 |   |

** **

**8.            Intangible Assets**

 

Intangible assets consist of the following at December31, 2001 and 2000:

 
|                           |   | **2001** |    | **2000** |   |
|--------------------------------|--------|----------|---------|----------|--------|
| Goodwill                       |   | $        | 348,528 |     | $      | 523,128 |   |
| Developed  technology          |   | 65,740   |    | 59,490   |   |
| Other                          |   | 38,866   |    | 31,066   |   |
|                           |   |     |    |     |   |
|                           |   | 453,134  |    | 613,684  |   |
| Less accumulated  amortization |   | (195,973 | )       | (63,774  | )      |
|                           |   |     |    |     |   |
| Intangible  assets, net        |   | $        | 257,161 |     | $      | 549,910 |   |

 

During the fourth quarter of 2001, due to the deteriorated economic conditions and lower futuregrowth expectations relative to estimates made at the merger of Apex and Cybexand the acquisition of Equinox, the Company performed an analysis todetermine if the remaining balance ofgoodwill created at the merger and the acquisition had been impaired.  The analysis was performed in accordancewith SFAS No. 121*“Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to be Disposed Of.” *As a result, the Company recorded a $195,365 reduction in theremaining carrying value of goodwill arising from the merger of Apex andCybex.  The write-off of the goodwillwas based on an analysis of projected cash flows, which were no longer deemedadequate to support the value of goodwill associated with the merger.

 

53

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**9.            Short-Term Borrowings**

 

The Company has an unsecured bank line of credit thatprovides for borrowings of up to $2,000. Interest on outstanding advances ispayable monthly at LIBOR plus 2.25% (approximately 4.12% at December 31, 2001).The line of credit expires May 10, 2002. The Company had no amounts outstandingunder the line of credit at December 31, 2001 and 2000.

 

The acquisition of Equinox (*see Note 3*)was funded through available cash and the issuance of short-term debt.  The Company borrowed a total of $45,000 atthe stated rate of 30-day LIBOR plus 1.75% (8.31% at January 31,2001).  All borrowings were repaidduring the quarter ended March 30, 2001.

** **

**10.          Income Taxes**

 

The provision for (benefit from) income taxes for theyears ended December 31, 2001, 2000 and 1999, is comprised of the following:

 
|                                             |   | **2001** |   | **2000** |   | **1999** |   |
|--------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| U.S. operations:                                 |   |     |   |     |   |     |   |
| Current:                                         |   |     |   |     |   |     |   |
| Federal                                          |   | $        | 12,174 |     | $      | 17,144   |   | $ | 11,204 |   |
| State                                            |   | (309     | )      | 935      |   | —   |   |
|                                             |   |     |   |     |   |     |   |
|                                             |   | 11,865   |   | 18,079   |   | 11,204   |   |
| Deferred:                                        |   |     |   |     |   |     |   |
| Federal                                          |   | (14,517  | )      | (3,948   | )      | (98      | )      |
| State                                            |   | (821     | )      | (208     | )      | —   |   |
|                                             |   |     |   |     |   |     |   |
|                                             |   | (15,338  | )      | (4,156   | )      | (98      | )      |
|                                             |   |     |   |     |   |     |   |
| Total U.S.  operations tax provision (benefit)   |   | (3,473   | )      | 13,923   |   | 11,106   |   |
| Total foreign  operations tax provision          |   | 526      |   | 630      |   | —   |   |
|                                             |   |     |   |     |   |     |   |
| Total provision  for (benefit from) income taxes |   | $        | (2,947 | )        | $      | 14,553   |   | $ | 11,106 |   |

 

The provision for (benefit from) federal income taxesdiffers from the amount computed by applying the statutory rate of 35% to taxableincome as follows:

 

54

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|                                                        |   | **2001** |     | **2000** |   | **1999** |   |
|-------------------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| Computed  “expected” federal income tax provision |   |     |     |     |   |     |   |
| (benefit)                                                   |   | $        | (113,332 | )        | $      | (40,601  | )      | $ | 11,322 |   |
| Add (deduct):                                               |   |     |     |     |   |     |   |
| CIC foreign  sales corporation income                       |   | (305     | )        | (798     | )      | —   |   |
| State income tax  deduction                                 |   | (499     | )        | (140     | )      | —   |   |
| Tax effect  resulting from foreign activities               |   | (1,741   | )        | (1,472   | )      | (582     | )      |
| Purchased  research and development                         |   | 1,599    |     | 32,900   |   | —   |   |
| Goodwill  amortization and write-off of intangibles         |   | 106,830  |     | 18,257   |   | —   |   |
| Compensation  expense                                       |   | 5,599    |     | 2,190    |   | —   |   |
| Acquisition  expenses                                       |   | —   |     | 2,485    |   | —   |   |
| Other                                                       |   | (1,098   | )        | 1,732    |   | 366      |   |
|                                                        |   |     |     |     |   |     |   |
|                                                        |   | $        | (2,947   | )   | 14,553 |     | $      | 11,106 |   |
|                                                             |        |          |          |          |        |          |        |  |  |  |

 

The components of the net deferred income tax assetsand liabilities at December 31, 2001 and 2000, are as follows:

 
|                                                                        |   | **2001** |    | **2000** |   |
|-----------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Net current  deferred income tax asset:                                     |   |     |    |     |   |
| Allowance for  doubtful accounts                                            |   | $        | 1,919   |     | $      | 751 |   |
| Allowance for  sales returns and liability for warranty returns             |   | 1,932    |    | 1,385    |   |
| Inventory  reserves                                                         |   | 4,546    |    | 1,545    |   |
| Unrealized loss  on investments and foreign currency translation adjustment |   | (9       | )       | 1,656    |   |
| Loss on  write-down of investments                                          |   | 1,884    |    | —   |   |
| Other                                                                       |   | 567      |    | 223      |   |
|                                                                        |   |     |    |     |   |
|                                                                        |   | $        | 10,839  |     | $      | 5,560 |   |
|                                                                        |   |     |    |     |   |   |   |
| Net noncurrent  deferred income tax liability:                              |   |     |    |     |   |
| Accumulated  depreciation                                                   |   | $        | (1,627  | )        | $      | (706 | ) |
| Foreign  subsidiary intangibles and other                                   |   | 2,005    |    | 2,039    |   |
| Acquired  in-process research and development expenses                      |   | 1,322    |    | 1,452    |   |
| Acquired  intangible assets                                                 |   | (25,043  | )       | (29,639  | )      |
| Other                                                                       |   | 1,295    |    | 1,151    |   |
|                                                                        |   |     |    |     |   |
|                                                                        |   | (22,048  | )       | (25,703  | )      |
| Less valuation  allowance                                                   |   | (2,005   | )       | (2,039   | )      |
|                                                                        |   |     |    |     |   |
|                                                                        |   | $        | (24,053 | )        | $      | (27,742 | ) |

 

55

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The Company has a full valuation allowance recordedagainst a deferred tax asset arising from a foreign subsidiary. The Companyintends to fully reserve this asset until it is determined that it is morelikely than not that the asset can be realized through future taxable incomefrom its acquired foreign operations.

 

**11.          Stockholders’ Equity**

 

**Preferred Stock** - The Company has 5,000 shares of $0.001 par valuepreferred stock authorized and no shares issued and outstanding at December 31,2001 and 2000.

 

**Common Stock** - The Company has 200,000 shares of $0.001 par valuecommon stock authorized.  There were44,650 and 43,820 shares issued and outstanding at December 31, 2001 and 2000,respectively.  Upon the merger of Apexand Cybex to form Avocent on July 1, 2000, each share of Apex common stock wasexchanged for 1.0905 shares of Avocent common stock.  All capital stock and stock option information included in theseconsolidated financial statements and related notes have given retroactiveeffect for this exchange rate.

 

56

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**12.          Earnings Per Share**

 

A summary of the calculation of basic and dilutedearnings per share (EPS) for the years ended December 31, 2001, 2000 and 1999,is as follows:

 
|                                                                 |   | **Income  (loss)  (Numerator)** |     | **Shares  (Denominator)** |   | **Per-Share  Amount** |   |
|----------------------------------------------------------------------|--------|---------------------------------|----------|---------------------------|--------|-----------------------|--------|
|                                                                 |   |                            |     |                      |
|                                                                 |   |                            |     | ** **                |
| **For the Year Ended December 31,  2001**                            |   |                            |     |                      |   |                  |   |
| **Basic EPS**                                                        |   |                            |     |                      |   |                  |   |
| Net loss  available to common stockholders                           |   | $                               | (320,466 | )                         | 44,374 |                  | $      | (7.22 | ) |
| **Effect of Dilutive Securities**                                    |   |                            |     |                      |   |                  |   |
| Stock options                                                        |   |                            |     | —                    |   |                  |   |
| **Diluted EPS**                                                      |   |                            |     |                      |   |                  |   |
| Net loss  available to common stockholders and assumed conversions   |   | $                               | (320,466 | )                         | 44,374 |                  | $      | (7.22 | ) |
|                                                                 |   |                            |     |                      |   |                  |   |
| **For the Year Ended December 31,  2000**                            |   |                            |     |                      |   |                  |   |
| **Basic EPS**                                                        |   |                            |     |                      |   |                  |   |
| Net loss  available to common stockholders                           |   | $                               | (130,556 | )                         | 33,266 |                  | $      | (3.92 | ) |
| **Effect of Dilutive Securities**                                    |   |                            |     |                      |   |                  |   |
| Stock options                                                        |   |                            |     | —                    |   |                  |   |
| **Diluted EPS**                                                      |   |                            |     |                      |   |                  |   |
| Net loss  available to common stockholders and assumed conversions   |   | $                               | (130,556 | )                         | 33,266 |                  | $      | (3.92 | ) |
|                                                                 |   |                            |     |                      |   |                  |   |
| **For the Year Ended December 31,  1999**                            |   |                            |     |                      |   |                  |   |
| **Basic EPS**                                                        |   |                            |     |                      |   |                  |   |
| Net income  available to common stockholders                         |   | $                               | 21,243   |                      | 22,484 |                  | $      | 0.94 |   |
| **Effect of Dilutive Securities**                                    |   |                            |     |                      |   |                  |   |
| Stock options                                                        |   |                            |     | 1,032                     |   |                  |   |
| **Diluted EPS**                                                      |   |                            |     |                      |   |                  |   |
| Net income  available to common stockholders and assumed conversions |   | $                               | 21,243   |                      | 23,516 |                  | $      | 0.90 |   |

 

There were no options outstanding at December 31,1999, with exercise prices that were greater than the average market price ofthe common shares in each respective year. At December 31, 2000, options topurchase 5,825 shares of common stock and at December 31, 2001, options topurchase 7,188 shares of common stock were outstanding but were not included inthe computation of diluted net loss per share because inclusion of such optionswould have been anti-dilutive.

 

57

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**13.          Commitments and Contingencies**

 

The Company leases buildings and certain equipmentunder various operating leases. Rent expense under these leases totaledapproximately $2,871, $1,503 and $772 for the years ended December 31, 2001,2000 and 1999, respectively.  Futureminimum rental payments under non-cancelable operating leases are approximatelyas follows:

 
| **Year  ending December 31:** |   |   |   |
|-------------------------------|--------|--------|--------|
| 2002                          |   | $      | 2,007  |   |
| 2003                          |   | 1,947  |   |
| 2004                          |   | 943    |   |
| 2005                          |   | 688    |   |
| 2006                          |   | 491    |   |
| Thereafter                    |   | 335    |   |
|                          |   |   |   |
|                          |   | $      | 6,411  |   |

 

The Company has been involved from time totime in litigation in the normal course of business. Management is not aware ofany pending or threatened litigation matters that will have a material adverseeffect on the Company’s business, operations, financial condition or cash flows(*see Note18*).

 

**14.          Stock Option and Stock Purchase Plans**

 

The Company has stock option plans coveringsubstantially all of its employees and directors. Avocent assumed the stockoption plans and the related underlying options of Apex and Cybex at the mergereffective July 1, 2000, and of Equinox at the acquisition effective January 3,2001. No additional options have been or will be granted under thesepre-existing plans. Options outstanding under the Apex plan were converted toAvocent options at 1.0905 per outstanding option. Options outstanding under theCybex plans were converted on a one-for-one basis. Options outstanding underthe Equinox plan were converted to Avocent options at 0.4575 per outstandingoption.

 

Apex had adopted the Employee Stock Option Plan (theApex Plan), which provided for nonqualified and incentive stock options for officers, directors and employees. At thetime of the merger there were options to purchase 2,775 shares (afterconversion to Avocent options at 1.0905 per outstanding option) of common stockoutstanding under the Apex Plan. Options under the Apex Plan will generallyexpire 10 years from the date of grant, or 5 years in the case of an optioneeowning more than 10% of the voting power of all classes of stock. Purchaseprices for common stock subject to options issued under the Apex Plan generallyapproximate the fair market value of the related shares at the date of grant.Generally, options vest over four years.

 

Cybex had adopted three plans,including the 1995 Employee Stock Option Plan (the Plan), the 1995 OutsideDirectors Option Plan (the 1995 Plan), and the 1998 Employee Stock IncentivePlan (the 1998 Plan). The 1995 Employee Stock Option Plan provided for nonqualified and incentivestock options for officers and employees.At the time of the

 

58

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merger there were options topurchase 1,167 shares of common stock outstanding under the Plan. Options underthe Plan will generally expire 10 years from the date of grant. Purchase pricesfor common stock subject to options issued under the Plan generally approximatethe fair market value of the related shares at the date of grant. Generally,options vest over five years.

 

The 1995 Outside Directors Plan provided for nonqualified options foroutside. At the time of the merger therewere options to purchase 37 shares of common stock outstanding under the 1995Plan. Options under the 1995 Plan will generally expire 5 years from the dateof grant. Purchase prices for common stock subject to options issued under the1995 Plan generally approximate the fair market value of the related shares atthe date of grant. Options vest and become exercisable immediately uponissuance.

 

The 1998 Employee StockIncentive Planprovided for nonqualified and incentive stock options for officers and employees. At the time of the merger there wereoptions to purchase 1,171 shares of common stock outstanding under the 1998Plan. Options under the 1998 Plan will generally expire 10 years from the dateof grant. Purchase prices for common stock subject to options issued under the1998 Plan generally approximate the fair market value of the related shares atthe date of grant. Generally, options vest over two to five years.

 

Equinox had adopted an optionplan (the Equinox Plan)that provided for nonqualified stock options forofficers, directors and employees.  Atthe time of the merger there were options to purchase 675 shares (afterconversion to Avocent options at 0.4575 per outstanding option) of common stockoutstanding under the Equinox Plan. Options under this plan generally expire 10 years from the date ofgrant. Purchase prices for common stock subject to options issued under theEquinox Plan generally approximate the fair market value of the related sharesat the date of grant. Generally, options vest quarterly over four years.

 

Avocent has adopted two additional stock option plans,the 2000 Stock Option Plan (the 2000 Plan) and the 2000 Transition NonstatutoryStock Option Plan (the Transition Plan). The 2000 Stock Option Plan, whichprovides for nonqualified and incentive stock options for officers, directors and employees, reserved a total of 6,000 sharesof common stock for issuance pursuant to the 2000 Plan. Options under the 2000Plan will generally expire 10 years from the date of grant. Purchase prices forcommon stock subject to options issued under the 2000 Plan generallyapproximate the fair market value of the related shares at the date of grant.Generally, options vest over two to four years.

 

The 2000 Transition Nonstatutory Stock Option Plan,which provides for non-qualified and incentive stock options for employees, reserved a total of 450 shares ofcommon stock for issuance pursuant to the Transition Plan. Options under theTransition Plan will generally expire 10 years from the date of grant. Purchaseprices for common stock subject to options issued under the Transition Plangenerally approximate the fair market value of the related shares at the dateof grant. Generally, options vest over four years.

 

59

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Pertinent information regarding the Company’s plans isas follows:

 
|                                    |   | **Number of  Options** |       | **Range of  Exercise  Prices** |   | **Weighted  Average  Exercise  Price** |   |
|-----------------------------------------|--------|------------------------|------------|--------------------------------|--------|----------------------------------------|--------|
|                                    |   |                   |       |                           |
|                                    |   |                   | ** ** | ** **                     |
|                                    |   |                   | ** ** | ** **                     |
| Options  outstanding, December 31, 1998 |   | 3,523                  |       | $ 0.11 – $17.65           |   | $                                      | 10.07  |   |
| Options granted                         |   | 737                    |       | $ 10.60 – $22.01          |   | $                                      | 10.91  |   |
| Options  cancelled                      |   | (159                   | )          | $ 0.11 – $17.65           |   | $                                      | 9.80   |   |
| Options  exercised                      |   | (501                   | )          | $ 0.11 – $13.70           |   | $                                      | 2.12   |   |
|                                    |   |                   |       |                           |   |                                   |   |
| Options  outstanding, December 31, 1999 |   | 3,600                  |       | $ 0.11 – $22.01           |   | $                                      | 11.35  |   |
| Options assumed  due to acquisition     |   | 2,375                  |       | $ 3.78 – $37.45           |   | $                                      | 13.82  |   |
| Options granted                         |   | 2,247                  |       | $ 24.00 – $70.94          |   | $                                      | 49.59  |   |
| Options  cancelled                      |   | (356                   | )          | $ 5.50 – $58.50           |   | $                                      | 13.37  |   |
| Options  exercised                      |   | (2,032                 | )          | $ 0.11 – $27.17           |   | $                                      | 9.88   |   |
|                                    |   |                   |       |                           |   |                                   |   |
| Options  outstanding, December 31, 2000 |   | 5,834                  |       | $ 0.11 – $70.94           |   | $                                      | 27.52  |   |
| Options assumed  due to acquisition     |   | 675                    |       | $ 3.28 – $21.32           |   | $                                      | 14.65  |   |
| Options granted                         |   | 1,672                  |       | $ 14.25 – $37.44          |   | $                                      | 22.29  |   |
| Options  cancelled                      |   | (200                   | )          | $ 5.50 – $69.63           |   | $                                      | 26.18  |   |
| Options  exercised                      |   | (793                   | )          | $ 0.11 – $30.38           |   | $                                      | 11.70  |   |
|                                    |   |                   |       |                           |   |                                   |   |
| Options  outstanding, December 31, 2001 |   | 7,188                  |       | $ 0.11 – $70.94           |   | $                                      | 26.88  |   |

 

Included in the stock options outstanding at December31, 2001, were 290 shares for which vesting was accelerated as the result ofemployment agreements for certain employees that terminated during 2001.  These options would have been forfeited hadthe vesting not been accelerated.  As aresult, the Company recorded compensation expense in 2001 of approximately$2,600 based on the excess of the intrinsic value at the acceleration date overthe intrinsic value at the grant date.

 

Included in the stock options exercised during 2000were 354 shares which were exercised following the merger of Apex and Cybex forwhich vesting was accelerated at the discretion of the Board of Directors inconnection with the merger. These options would have been forfeited had thevesting not been accelerated. As a result, the Company recorded compensationexpense in 2000 of approximately $9,800 based on the excess of the intrinsicvalue at the acceleration date over the intrinsic value at the grant date.

 

60

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The following table summarizes information about stockoptions outstanding at December 31, 2001:

 
|                          |   | **Options  Outstanding** |   | **Options  Exercisable**                          |   |
|-------------------------------|--------|--------------------------|--------|---------------------------------------------------|--------|
| **Range of  Exercise Prices** |   | **Number  Outstanding**  |   | **Weighted  Average  Remaining Contractual Life** |   | **Weighted  Average  Exercise Price** |   | **Number  Exercisable** |   | **Weighted  Average Exercise Price** |   |
| $ 0.11 - $9.48                |   | 871                      |   | 5.86                                              |   | $ | 7.86 |   | 493 |   | $ | 7.34 |   |
| $ 10.05 - $19.68              |   | 2,059                    |   | 6.91                                              |   | $ | 13.46 |   | 1,447 |   | $ | 13.51 |   |
| $ 20.00 - $29.38              |   | 2,162                    |   | 8.96                                              |   | $ | 23.35 |   | 430 |   | $ | 24.80 |   |
| $ 30.21 - $44.25              |   | 99                       |   | 8.09                                              |   | $ | 33.17 |   | 25 |   | $ | 32.48 |   |
| $ 46.19 - $70.94              |   | 1,997                    |   | 8.72                                              |   | $ | 52.51 |   | 812 |   | $ | 52.49 |   |
|                          |   |                     |   |                                              |   |   |   |   |   |   |   |
|                          |   | 7,188                    |   |                                              |   |   |   | 3,207 |   |   |   |

 

The options above were issued with exercise pricesthat approximate fair value at the date of grant. At December 31, 2001, 2,838shares are available for grant under the Company’s stock option plans.

 

The Company applies Accounting Principles BoardOpinion No. 25, *Accounting for Stock Issued to Employees*, and relatedInterpretations in accounting for its stock plans. Accordingly, no compensationcost has been recognized related to stock options. Had compensation cost forthe Company’s stock-based compensation plans been determined based on the fairvalue at the grant dates for awards under those plans consistent with themethod prescribed in SFAS No. 123, *Accounting for Stock-Based Compensation*,the Company’s net income (loss) and earnings (loss) per share would have beenreduced to the pro forma amounts indicated below:

 
|                                                  |   | **2001** |     | **2000** |   | **1999** |   |
|-------------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| Net income  (loss) — as reported                 |   | $        | (320,466 | )        | $      | (130,556 | )      | $ | 21,243 |   |
| Net income  (loss) — pro forma                   |   | $        | (348,414 | )        | $      | (143,942 | )      | $ | 16,366 |   |
| Diluted earnings  (loss) per share — as reported |   | $        | (7.22    | )        | $      | (3.92    | )      | $ | 0.90 |   |
| Diluted earnings  (loss) per share — pro forma   |   | $        | (7.85    | )        | $      | (4.33    | )      | $ | 0.70 |   |

 

The pro forma amounts reflected above are notrepresentative of the effects on reported net income in future years because,in general, the options granted typically do not vest for several years andadditional awards are made each year. The fair value of each option grant isestimated on the grant date using the Black-Scholes option-pricing model usingthe following weighted-average assumptions:

 

61

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|                     |   | **2001**         |   | **2000**         |   | **1999** |   |
|--------------------------|--------|------------------|--------|------------------|--------|----------|--------|
| Dividend yield           |   | 0.0              | %      | 0.0              | %      | 0.0      | %      |
| Expected life  (years)   |   | 5                |   | 5                |   | 5        |   |
| Expected  volatility     |   | 89.9             | %      | 87.3             | %      | 87.0     | %      |
| Risk-free  interest rate |   | 4.09 — 4.79 | %      | 5.70 — 6.47 | %      | 5.51     | %      |

 

On December 9, 1996, the Company adopted an employeestock purchase plan (the ESPP), through which qualified employees couldparticipate in common stock ownership. The ESPP qualifies as a non-compensatoryplan under Section 423 of the Internal Revenue Code.  The price of shares purchased under the ESPP was the lower of 85%of the fair market value of the shares on the first day of each quarterlyoffering period, or 85% of the fair market value of the shares on the last dayof the quarterly offering period. The ESPP administrator administers andinterprets all rules and regulations applicable to the ESPP. Pursuant to theESPP, 7 shares were issued at a weighted average price of $25.62 per share forthe year ended December 31, 2000. The ESPP was canceled July 1, 2000, theeffective date of the merger between Apex and Cybex.

 

On December 6, 2000, the stockholders approved anemployee stock purchase plan for all Avocent employees (the AESPP), throughwhich qualified employees may participate in common stock ownership. The AESPPqualifies as a non-compensatory plan under Section 423 of the Internal RevenueCode. The Company has reserved 1,500 shares of common stock for issuance underthe AESPP. The price of stock purchased under the AESPP is generally 85% of thelower of the fair market value of the common stock (i) at the beginning of the offeringperiod or (ii) at the end of the purchase period. In the event the fair marketvalue at the end of a purchase period is less than the fair market value at thebeginning of the offering period, the participants will be withdrawn from thecurrent offering period following exercise and automatically re-enrolled in anew offering period. The new offering period will use the lower fair marketvalue as of the first date of the new offering period to determine the purchaseprice for future purchase periods. The AESPP administrator administers andinterprets all rules and regulations applicable to the AESPP.  Pursuant to the AESPP, 37 shares were issuedat a weighted average price of $21.63 per share for the year ended December 31,2001.  There were no shares issued underthe AESPP as of December 31, 2000.

 

62

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**15.          Retirement Plan**

 

After the acquisition of Equinox, the Company had two401(k) savings plans and a profit-sharing plan covering substantially all employees.Effective April 1, 2001, the Company’s two 401(k) plans merged into one plan(the Avocent Plan) covering substantially all U.S. employees. Under the AvocentPlan, the employer will match 50% of an employee’s contributions up to 6% ofthe employee’s compensation. The Company may also elect to make discretionarycontributions as determined by its Board of Directors. No discretionarycontributions were made during the year ended December 31, 2001 under theAvocent Plan. The Company’s expense for matching contributions under all planstotaled approximately $710, $449 and $162 for the years ended December 31,2001, 2000 and 1999, respectively.

 

**16.          Segment Reporting**

 

Subsequent to the merger of Apex and Cybex on July 1,2000, the Company reported segment information on a geographical basis in whichthe Company presented sales and gross profit information for Redmond,Washington; Huntsville, Alabama; and Shannon, Ireland.

 

Following the merger, the previously separatebusinesses of Apex and Cybex began to be integrated.  In recent quarters, shipments to certain international OEMcustomers that had historically originated from Redmond were shifted toShannon.  As this occurred, thehistorical comparisons by location became less meaningful.  Additionally, the Company has graduallyrealigned operating and management responsibilities within the Company toemphasize that Avocent is “one company, operating around the world.”  Consequently, the Company has evaluated itsbusiness in light of the segment reporting requirements prescribed by SFAS No.131, *Disclosures about Segments of anEnterprise and Related Information*, and has determined that Avocentwill report its operations as a single operating segment.  The Company will, however, report sales bygeographic region on a quarterly and annual basis.  Following is a presentation of sales by geographic region for theyears ended December 31, 2001, 2000 and 1999:

 
|              |   | **2001** |    | **2000** |   | **1999** |   |
|-------------------|--------|----------|---------|----------|--------|----------|--------|
| Net sales:        |   |     |    |     |   |     |   |
| United States     |   | $        | 159,799 |     | $      | 138,249  |   | $ | 68,838 |   |
| Rest of the World |   | 96,112   |    | 84,123   |   | 38,450   |   |
|              |   |     |    |     |   |     |   |
|              |   | $        | 255,911 |     | $      | 222,372  |   | $ | 107,288 |   |

 

**Asof December 31, 2001, long- lived assets totaled $280,423, which includes$278,118 held in the U.S. and $2,305 held outside of the U.S.  As of December 31, 2000, long- lived assetstotaled $568,074, which included $563,948 held in the U.S. and $4,126 heldoutside the U.S.**

** **

**63**

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** **

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

 

The following table presents unaudited quarterlyoperating results for each of the Company’s last eight fiscal quarters. Thisinformation has been prepared by the Company on a basis consistent with theCompany’s audited financial statements and includes all adjustments, consistingonly of normal recurring adjustments, that the Company considers necessary fora fair presentation of the data.

 
|                               |   | **Three  Months Ended** |       |
|------------------------------------|--------|-------------------------|------------|
|                               |   | **March 30,  2001**     |       | **June 29,  2001** | ** ** | **September  28,  2001** | ** ** | **December  31,**

**2001** | ** ** |
|                               |   |                    | ** ** | ** ** | ** ** |
| Net sales                          |   | $                       | 73,174     |   | $ | 65,079 |   | $ | 55,095 |   | $ | 62,563 |   |
| Gross profit                       |   | $                       | 35,834     |   | $ | 19,071 |   | $ | 24,946 |   | $ | 26,135 |   |
| Income (loss)  from operations (1) |   | $                       | (27,130    |   | ) | $ | (40,961 | ) | $ | (31,881 | ) | $ | (224,176 | ) |
| Net income  (loss) (1)             |   | $                       | (28,123    | ) | $ | (36,855 | ) | $ | (29,259 | ) | $ | (226,229 | ) |
| Net income  (loss) per share (2):  |   |                    |       |   |   |   |   |   |   |
| Basic                              |   | $                       | (0.64      | ) | $ | (0.83 | ) | $ | (0.66 | ) | $ | (5.07 | ) |
| Diluted                            |   | $                       | (0.64      | ) | $ | (0.83 | ) | $ | (0.66 | ) | $ | (5.07 | ) |
|                                    |        |                         |            |  |  |  |  |  |  |  |  |  |  |  |

 
|                              |   | **Three  Months Ended** |       |
|-----------------------------------|--------|-------------------------|------------|
|                              |   | **March 31,  2000**     |       | **June 30,  2000** | ** ** | **September  29,  2000** | ** ** | **December  31,  2000** | ** ** |
|                              |   |                    | ** ** | ** ** | ** ** |
| Net sales                         |   | $                       | 28,244     |   | $ | 36,447 |   | $ | 77,154 |   | $ | 80,527 |   |
| Gross profit                      |   | $                       | 13,653     |   | $ | 16,799 |   | $ | 38,673 |   | $ | 40,649 |   |
| Income (loss)  from operations    |   | $                       | 8,145      |   | $ | 10,348 |   | $ | (127,202 | ) | $ | (12,993 | ) |
| Net income  (loss)                |   | $                       | 6,001      |   | $ | 7,540 |   | $ | (124,355 | ) | $ | (19,742 | ) |
| Net income  (loss) per share (2): |   |                    |       |   |   |   |   |   |   |
| Basic                             |   | $                       | 0.26       |   | $ | 0.33 |   | $ | (2.89 | ) | $ | (0.45 | ) |
| Diluted                           |   | $                       | 0.25       |   | $ | 0.31 |   | $ | (2.89 | ) | $ | (0.45 | ) |
|                                   |        |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

----

 

(1)  Income (loss) from operations and net income(loss) for the three months ended December 31, 2001 includes a $195,365reduction in the carrying value of goodwill.

 

(2)  The net income (loss) per share for eachquarter within a fiscal year does not equal the total net income (loss) pershare for the particular fiscal year due to variations in the estimated valueof the Company’s Common stock during the year and the effect these variationshad on the shares outstanding calculation. Additionally, for 2000, the weighted average shares outstandingcalculation for the fiscal year includes the shares issued to effect the mergerfrom the date of the merger through year-end.

 

64

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**18.          PatentDispute**

 

The Company filed acomplaint for infringement of U.S. Patent Number 5,721,842 (the Patent) inUnited States District Court for the Western District of Washington at Seattleagainst CCC on June 1, 1998. The complaint alleges that the productsmanufactured and sold by the defendant embody the inventions claimed in thePatent, and sought injunctive relief, damages, attorney’s fees and costs. Thecomplaint in the CCC lawsuit was never formally served on CCC, andsubsequently, Apex voluntarily dismissed the CCC lawsuit in Seattle withoutprejudice. The issues raised in the Patent and Trademark Office weresubsequently resolved in the Company’s favor, and in May 2001, Apex (theCompany’s wholly-owned subsidiary) filed a complaint for patent infringement inthe United States District Court for the Southern District of New York againstRaritan Computer Inc. The Raritan complaint sought injunctive relief, damages,attorneys’ fees and costs under three Apex patents.  After a seven day bench trial in New York in January of 2002,U.S. District Judge Milton Pollack found that there was no infringement ofthree Apex patents by Raritan and ordered that judgment be entered in favor ofRaritan.  The Company is in the processof appealing the judgment. The Company has capitalized $1.8 million of patentdefense costs which are included with intangible assets in the Company’sconsolidated balance sheet as of December 31, 2001.  Should the Company not be successful with the appeal, the patentdefense costs will be written off and the remaining patents will be reviewedfor impairment.

 

 

65

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**Item9.  Changes in and Disagreements WithAccountants on Accounting and Financial Disclosure.**

 

None.

 

**PART III**

 

Information withrespect to this Part III may be found in the definitive proxy statement tobe delivered to stockholders in connection with the 2002 Annual Meeting ofStockholders. Such information is incorporated herein by reference.

 

**PART IV**

 

**Item14.****                                                 Exhibits,Financial Statement Schedules, and Reports on Form 8-K.**

**(a)(1) Financial Statements**

 

**Avocent Corporation**

** **
| Report of Independent  Accountants                                                                               |
|------------------------------------------------------------------------------------------------------------------|
| Consolidated Balance  Sheets as of December 31, 2001 and 2000                                               |
| Consolidated Statements  of Operations for the years ended December 31, 2001, 2000 and 1999                 |
| Consolidated Statements  of Stockholders’ Equity for the years ended December 31, 2001, 2000 and  1999 |
| Consolidated Statements  of Cash Flows for the years ended December 31, 2001, 2000 and 1999                 |
| Notes to Consolidated  Financial Statements                                                                      |
|                                                                                                             |

 

**(a)(2) Financial Statement Schedules**

 

**Schedule of Valuation and QualifyingAccounts**

*For the years ended December 31,2001 and 2000 (in thousands)*

 

 
|                                 |   | **Beginning  Balance** |   | **Assumed on  the Acquisitions(1)** |   | **Charged to  Income(2)** |   | **Deductions  from Reserves(2)** |   | **Ending  Balance** |   |
|--------------------------------------|--------|------------------------|--------|-------------------------------------|--------|---------------------------|--------|----------------------------------|--------|---------------------|--------|
| Year ended December 31, 2000:   |   |                   |   |                                |   |                      |   |                             |   |                |   |
| Allowance for doubtful accounts      |   | $                      | 535    |                                | 2,170  |                      | — |                             | (23    | )                   | $      | 2,682 |   |
| Allowance for inventory obsolescence |   | $                      | 341    |                                | 2,466  |                      | 693    |                             | — |                | $      | 3,500 |   |
| Allowance for sales returns          |   | $                      | 354    |                                | — |                      | 643    |                             | — |                | $      | 997 |   |
| Liability for warranty returns       |   | $                      | 545    |                                | 3,537  |                      | — |                             | (200   | )                   | $      | 3,882 |   |
| Valuation allowance for income taxes |   | $                      | — |                                | 2,039  |                      | — |                             | — |                | $      | 2,039 |   |
|                                 |   |                   |   |                                |   |                      |   |                             |   |                |   |   |
| Year ended December 31, 2001:   |   |                   |   |                                |   |                      |   |                             |   |                |   |   |
| Allowance for doubtful accounts      |   | $                      | 2,682  |                                | 143    |                      | 1,849  |                             | (622   | )                   | $      | 4,052 |   |
| Allowance for inventory obsolescence |   | $                      | 3,500  |                                | 2,789  |                      | 15,781 |                             | (6,791 | )                   | $      | 15,279 |   |
| Allowance for sales returns          |   | $                      | 997    |                                | 472    |                      | 2,630  |                             | (1,492 | )                   | $      | 2,607 |   |
| Liability for warranty returns       |   | $                      | 3,882  |                                | 260    |                      | 2,040  |                             | (2,025 | )                   | $      | 4,157 |   |
| Valuation allowance for income taxes |   | $                      | 2,039  |                                | — |                      | — |                             | (34    | )                   | $      | 2,005 |   |

 

----

(1)                                  Theseare the balances assumed from the acquisition of Cybex Computer ProductsCorporation during 2000 and from the acquisition of Equinox Systems Inc. in2001.

 

(2)                                  Additionsand deductions to valuation and qualifying accounts were netted forpresentation purposes due to being insignificant to the December 31, 2000financial statements.

 

Note: No schedule wasprepared for 1999 as the balances and activity were immaterial for this period.

 

66

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 **(a)(3) Exhibits**

 
|                |   |                                                                                                                                                                            |   | **Incorporated by Reference** |   |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
| **Exhibit  Number** |   | **Exhibit Description**                                                                                                                                                         |   | **Form**                      |   | **Entity(1)** |   | **Date** |   | **Number** |   | **Included** |   |
| 2.1                 |   | Agreement and Plan of  Reorganization dated March 8, 2000, by and among Apex Inc., Cybex  Computer Products Corporation, and the Company (f/k/a Aegean Sea Inc.) |   | S-4                           |   | AGI |   | 3/31/00 |   | Ex. 2.1 |   |   |   |
| 2.2                 |   | Plan and Agreement of  Merger dated November 3, 2000, by and among Blue Marlin Acquisition  Corporation, Equinox Systems Inc., and the Company                        |   | 8-K                           |   | AVCT |   | 11/20/00 |   | Ex. 2.1 |   |   |   |
| 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 Bylaws of  Avocent Corporation                                                                                                                                          |   | 10-K                          |   | AVCT |   | 3/27/01 |   | Ex 3.2 |   |   |   |
| 10.2                |   | Apex Inc. 1995 Employee  Stock Plan                                                                                                                                             |   | SB-2                          |   | Apex |   | 12/12/96 |   | Ex. 10.9 |   |   |   |
| 10.2.1              |   | Form of Nonstatutory  Stock Option Letter Agreement related to Apex Inc. 1995 Employee Stock Plan                                                                               |   | SB-2                          |   | Apex |   | 12/12/96 |   | Ex. 10.10 |   |   |   |
| 10.3                |   | Cybex Computer Products  Corporation 1995 Employee Stock Option Plan                                                                                                            |   | S-1                           |   | Cybex |   | 7/26/95 |   | Ex. 10.3 |   |   |   |
| 10.4                |   | Cybex Computer Products  Corporation 1995 Outside Directors Stock Option Plan                                                                                                   |   | S-1                           |   | Cybex |   | 7/26/95 |   | Ex. 10.4 |   |   |   |
| 10.5                |   | Cybex Computer Products  Corporation 1998 Employee Stock Incentive Plan                                                                                                         |   | 10-K                          |   | Cybex |   | 6/26/98 |   | Ex. 10.7 |   |   |   |
| 10.6                |   | Apex Inc. Employee  Stock Purchase Plan                                                                                                                                         |   | SB-2                          |   | Apex |   | 12/12/96 |   | Ex. 10.11 |   |   |   |
| 10.7                |   | Equinox Systems Inc.  1992 Non-Qualified Stock Option Plan                                                                                                                      |   | S-8                           |   | AVCT |   | 1/23/01 |   | Ex. 4.6 |   |   |   |
| 10.8                |   | Equinox Systems Inc.  1993 Stock Option Plan                                                                                                                                    |   | S-8                           |   | AVCT |   | 1/23/01 |   | Ex. 4.7 |   |   |   |
| 10.9                |   | Equinox Systems Inc.  Directors Stock Option Plan                                                                                                                               |   | S-8                           |   | AVCT |   | 1/23/01 |   | Ex. 4.8 |   |   |   |
| 10.10               |   | Equinox Systems Inc.  2000 Directors Stock Option Plan                                                                                                                          |   | S-8                           |   | AVCT |   | 1/23/01 |   | Ex. 4.9 |   |   |   |
| 10.17               |   | Employment and  Non-competition Agreement dated March 7, 2000 by and between  Apex Inc. and C. David Perry                                                            |   | S-4/A                         |   | AVCT |   | 5/30/00 |   | Ex. 10.17 |   |   |   |
| 10.19               |   | Amendment Agreement  dated March 7, 2000 by and between Apex Inc. and Kevin J. Hafer                                                                                  |   | 10-K                          |   | Apex |   | 5/30/00 |   | Ex. 10.3.3 |   |   |   |
| 10.19.1             |   | First Amendment to  Amendment Agreement dated December 1, 2000 between Apex Inc and Kevin J.  Hafer                                                                        |   | 10-K                          |   | AVCT |   | 3/27/01 |   | Ex 10.19.1 |   |   |   |
| 10.20               |   | Purchase Agreement  dated September 19, 1994 between Apex Inc. and Compaq Computer  Corporation, as amended                                                           |   | SB-2                          |   | Apex |   | 12/12/96 |   | Ex. 10.6 |   |   |   |
| 10.21               |   | Amendment to Purchase  Agreement effective as of August 6, 1998 between Apex Inc. and  Compaq Computer Corporation(2)                                                 |   | 10-Q                          |   | Apex |   | 11/9/98 |   | Ex. 10.6.2 |   |   |   |
| 10.22               |   | Amended and Restated  Employment and Noncompetition Agreement among Avocent Employment Services  Company, the Company, and R. Byron Driver                                      |   | 10-Q                          |   | AVCT |   | 9/29/00 |   | Ex. 10.1 |   |   |   |
| 10.23               |   | Amended and Restated  Employment and Noncompetition Agreement among Apex, Inc., the Company,  and Barry L. Harmon                                                          |   | 10-Q                          |   | AVCT |   | 9/29/00 |   | Ex. 10.2 |   |   |   |
| 10.23.1             |   | Separation and General  Release Agreement among the Company, Apex Inc., and Barry L. Harmon                                                                                     |   | 10-Q                          |   | AVCT |   | 11/13/01 |   | Ex 10.23.1 |   |   |   |
| 10.24               |   | Amended and Restated  Employment and Noncompetition Agreement among Avocent Employment Services  Company, the Company, and Gary R. Johnson                                      |   | 10-Q                          |   | AVCT |   | 9/29/00 |   | Ex. 10.3 |   |   |   |
| 10.25               |   | Amended and Restated  Employment and Noncompetition Agreement among Avocent  International Ltd., the Company, and Kieran MacSweeney                                        |   | 10-Q                          |   | AVCT |   | 9/29/00 |   | Ex. 10.4 |   |   |   |
| 10.27               |   | Amended and Restated  Employment and Noncompetition Agreement among Avocent Employment Services  Company, the Company, and Douglas E. Pritchett                                 |   | 10-Q                          |   | AVCT |   | 9/29/00 |   | Ex. 10.6 |   |   |   |
| 10.28               |   | Amended and Restated  Employment and Noncompetition Agreement among Apex, Inc., the Company,  and Samuel F. Saracino                                                       |   | 10-Q                          |   | AVCT |   | 9/29/00 |   | Ex. 10.7 |   |   |   |
| 10.29               |   | Amended and Restated  Employment and Noncompetition Agreement among Avocent Employment Services  Company, the Company, and Christopher L. Thomas                                |   | 10-Q                          |   | AVCT |   | 9/29/00 |   | Ex. 10.8 |   |   |   |
| 10.30               |   | Amended and Restated  Employment and Noncompetition Agreement among Avocent Employment Services  Company, the Company, and Stephen F. Thornton                                  |   | 10-Q                          |   | AVCT |   | 9/29/00 |   | Ex. 10.9 |   |   |   |
| 10.31               |   | Amended and Restated  Employment and Noncompetition Agreement among Avocent Employment Services  Company, the Company, and Doyle C. Weeks                                       |   | 10-Q                          |   | AVCT |   | 9/29/00 |   | Ex. 10.10 |   |   |   |
| 10.32               |   | Form of Avocent  Corporation Indemnification Agreement for Officers and Directors                                                                                               |   | 10-Q                          |   | AVCT |   | 9/29/00 |   | Ex. 10.11 |   |   |   |
| 10.33               |   | Avocent Corporation  2000 Transition Nonstatutory Stock Option Plan                                                                                                             |   | 10-Q                          |   | AVCT |   | 9/29/00 |   | Ex. 10.12 |   |   |   |
| 10.34               |   | Avocent Corporation  2000 Stock Option Plan                                                                                                                                     |   | Sched. 14A                    |   | AVCT |   | 11/3/00 |   | App. A |   |   |   |
| 10.35               |   | Avocent Corporation  2000 Employee Stock Purchase Plan                                                                                                                          |   | Sched. 14A                    |   | AVCT |   | 11/3/00 |   | App. B |   |   |   |
| 10.36               |   | Employment and  Noncompetation Agreement among Cybex Computer Products Corporation, the  Company, and John R. Cooper                                                            |   |                          |   |   |   |   |   |   |   | X |   |
| 21.1                |   | Subsidiaries of Avocent  Corporation                                                                                                                                            |   |                          |   |   |   |   |   |   |   | X |   |
| 23.1                |   | Consent of  PricewaterhouseCoopers LLP, Independent Accountants                                                                                                                 |   |                          |   |   |   |   |   |   |   | X |   |
| 24.1                |   | Power of Attorney(3)                                                                                                                                                            |   |                          |   |   |   |   |   |   |   | X |   |

 

----

 

(1)                                  Thefollowing abbreviations are used to identify corporate entities:

 

                AVCT = Avocent Corporation

 

                AGI = Aegean Sea Inc. (now known asAvocent Corporation)

 

                Apex = Apex Inc.

 

                Cybex = Cybex Computer Products Corporation

 

(2)                                  Confidentialtreatment has previously been requested for portions of these documents.

 

(3)                                  Setforth on page 68 and incorporated herein by reference.

 

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

 

                None

 

 **(c) Exhibits**

 

                See Item 14(a)(3), above.

 

67

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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/ John R. Cooper |
|   |                | John R. Cooper

*President  and Chief Executive Officer*

Date: March  29, 2002 |

 

**POWER OF ATTORNEY**

 

KNOW ALL PERSONS BY THESE PRESENTS:

 

                That theundersigned officers and directors of Avocent Corporation do hereby constituteand appoint Douglas E. Pritchett, 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 regulations orrequirements of the Securities Exchange Act of 1934, as amended, and any rulesor regulations 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 WITNESSWHEREOF, each of the undersigned has executed this Power of Attorney as of thedate indicated opposite his name.

 

                In accordance withthe Exchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 
| **Signature**             |   | **Title**                                                                                      |   | **Date**       |
|---------------------------|--------|------------------------------------------------------------------------------------------------|--------|----------------|
|                      |   |                                                                                           |   |           |
| /s/ John R. Cooper        |   | President  and  Chief Executive Officer and Director                                      |   | March 29, 2002 |
| John R. Cooper            |   | (Principal  Executive Officer)                                                                 |   |           |
|                      |   |                                                                                           |   |           |
| /s/ Douglas E.  Pritchett |   | Senior Vice President of Finance, Chief Financial  Officer, Treasurer, and Assistant Secretary |   |           |
| Douglas E. Pritchett      |   | (Principal  Financial and Accounting Officer)                                                  |   | March 29, 2002 |
|                      |   |                                                                                           |   |           |
| /s/ Stephen F. Thornton   |   | Chairman of the  Board and Director                                                            |   | March 29, 2002 |
| Stephen F. Thornton       |   |                                                                                           |   |           |

 

68

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| /s/ Barry L. Harmon    | Director | March 29, 2002 |
|------------------------|----------|----------------|
| Barry L. Harmon        |     |           |
|                   |     |           |
| /s/ Edwin L. Harper    | Director | March 29, 2002 |
| Edwin L. Harper        |     |           |
|                   |     |           |
| /s/ William H. McAleer | Director | March 29, 2002 |
| William H. McAleer     |     |           |
|                   |     |           |
| /s/ David P. Vieau     | Director | March 29, 2002 |
| David P. Vieau         |     |           |
|                   |     |           |
| /s/ Doyle C. Weeks     | Director | March 29, 2002 |
| Doyle C. Weeks         |     |           |

 

69

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