**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  THE FISCAL YEAR ENDED DECEMBER 31, 2003.**                                                                                                                                                    |
|       |                                                                                                                                                                                                 |
| **o**      | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                              |
|       |                                                                                                                                                                                                 |
|       | **FOR  THE TRANSITION PERIOD FROM               TO             .** |

 

**Commission file number: 000-30575**

 

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**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, indefinitive proxy or information statements incorporated by reference inPart III of this Form 10-K or any amendment to thisForm 10-K.  ý

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined by Rule 12b-2of the Act). Yes ý   No o

The aggregate market value of the voting common stock held bynon-affiliates of the registrant on June 27, 2003 was approximately$1,364,588,525.

 

The number of shares outstanding of the registrant’scommon stock as of March 5, 2004 was 47,752,748.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Information with respect to items 10 to 13 ofPart III of this Form 10-K may be found in the definitive proxystatement to be delivered to stockholders in connection with the 2004 AnnualMeeting of Stockholders. Such information is incorporated herein by reference.

 

 

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**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 FUTURE ECONOMICCONDITIONS IN GENERAL AND STATEMENTS ABOUT OUR FUTURE:*

 

•                                          *STRATEGY AND BUSINESSPROSPECTS;*

 

•                                          *ENGINEERING AND DESIGNACTIVITIES, DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS AND TECHNOLOGIES, ANDTHE SIZE AND GROWTH OF THE POTENTIAL MARKETS FOR THESE PRODUCTS ANDTECHNOLOGIES IN THE FUTURE;*

 

•                                          *DEVELOPMENT OF NEW OEM,DISTRIBUTOR, RESELLER, AND SUPPLIER RELATIONSHIPS;*

 

•                                          *SALES, EARNINGS, INCOME,EXPENSES, OPERATING RESULTS, TAX RATES, OPERATING AND GROSS PROFIT AND PROFITMARGINS, INVENTORY LEVELS AND VALUATIONS, RECEIVABLES, RESERVES, LIQUIDITY,INVESTMENT INCOME, EMPLOYEE STOCK OPTION EXERCISES, CAPITAL RESOURCE NEEDS,CUSTOMERS, AND  COMPETITION;*

 

•                                             *ABILITY TO OBTAIN AND PROTECTOUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS;*

 

•                                             *EXPANSION OF INTERNATIONALSALES;*

 

•                                          *ACQUISITIONS AND TRANSACTIONCOSTS AND ADJUSTMENTS; AND*

 

•                                          *IMPLEMENTATION OF A NEW ERPSYSTEM.*

 

*ALL OF THESE FORWARD-LOOKING STATEMENTS ARE BASED ONINFORMATION AVAILABLE TO US ON THE DATE OF THIS ANNUAL REPORT. OUR ACTUAL RESULTSCOULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS ANNUAL REPORT. THEFORWARD-LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT, AND OTHER WRITTENAND ORAL FORWARD-LOOKING STATEMENTS MADE BY US FROM TIME TO TIME, 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.”*

 

**Overview**

 

We (meaning Avocent and its wholly-owned subsidiaries)design, manufacture, license, and sell analog and digital KVM (keyboard, video,and mouse) switching systems, serial connectivity devices, extension, andwireless extension products and technologies for the computer industry. Ourswitching and connectivity solutions provide IT managers with access andcontrol of multiple 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 extension,wireless extension, and remote access products and technologies, help themmanage multiple servers and serially controlled devices from a single local orremote console consisting of a keyboard, video monitor, and mouse. Ourswitching solutions provide multiple users with the ability to controlthousands of computers from any location, and eliminate the need for individualkeyboards, video monitors, and mice for the controlled computers. Eliminationof these peripheral devices can provide significant cost reductions includinglower initial investment, reduced utility costs, and space savings, as well asmore efficient technical support capabilities.

 

We provide plug and play switching systems for themany network administration, management, and storage problems faced bycorporate customers, data centers, and server farms. Our switching solutionsinclude products and technologies sold or licensed under the Avocent, Apex,Cybex, and Equinox brands, including our *AMX*TM,***AutoView*TM*, Cstation*TM,*DS Series*TM*, LongView*TM*,**OutLook®, SuperSerial*TM,*SwitchView®*,and *XP*®*4000 Series*products. Our switching systems and solutions help facilities managers andnetwork administrators access multiple servers from one or more centralized orremote consoles and consolidate hardware requirements.  Our systems provide a direct hardwiredconnection, an IP-address based connection, or both, between the switch and theattached servers to facilitate access to the servers, even when the network is down.In addition, our switching systems are able to work with multi-platform serverenvironments. Our switching solutions allow users to control IBM-compatible andMacintosh PCs,

 

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and Dell, Hewlett-Packard,IBM, Fujitsu-Siemens, Silicon Graphics, and Sun workstations. Our products andtechnologies are particularly useful in networking environments where multiplecomputers are dedicated as servers and in situations where multiple computersneed to be controlled from one location or from around the world to facilitatenetwork management.

 

Our Digital Desktop Division product line includes the*Cstation*TMproduct. Initial applications for the Cstation product include financialtrading floors where space is at a premium, industrial plant controlenvironments that benefit from remote computers due to harsh or unsecureenvironments, and government installations that require high security affordedthrough the remote location of the computer and hard disk. In addition, we alsooffer visual display products for high information-content digital displaysolutions.

 

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

 

Our digital KVM products allow users to controlservers from remote locations using an Internet or network connection withoutthe necessity of remote access hardware or software on the computers or serversbeing accessed. When used in conjunction with our switching products, ourremote access products permit users to control multiple attached computersremotely.

 

In 2003, we introduced LongView® Wireless, a KVM extender thatcan be used to wirelessly connect monitors (VGA, SVGA, and XGA), keyboards,mice, and audio devices to a computer up to 100 feet away.

 

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 sales andcustomer support staff, advertisements in trade publications, and participationin major industry trade shows. A substantial portion of our sales are to alimited number of major server OEMs that purchase our switching systems ona private-label or branded basis. We supply server console switching systems,products, and technologies to Dell Computer Corporation, Fujitsu-SiemensCorporation, Hewlett-Packard Company, and IBM Corporation under variousprivate-label, branded, and licensing arrangements. Our end-user branded salescustomers in the United States for 2003 included Aetna, AIG, Brocade, Citicorp,Disney, Exxon, Ford, General Motors, Georgia-Pacific, JP Morgan Chase, Intel,Microsoft, Novell, Prudential, and Wendy’s. Our international branded salescustomers included Bangkok Bank (Thailand), Beijing Telecom (China),CargoLifter (Germany), DaimlerChrysler (Germany), Guangzhou MobileCommunication (China), Hamburg Mannheimer (Germany), Hitachi (Japan), Hostworks(Australia), Integra (France), MetroRED (Brazil), Nokia (Finland), NTT (Japan),Overseas Bank (Singapore), TATA Consulting (India), Union Pay Bank (China), andWipro Technologies (India).

 

Our corporate Internet address is *www.avocent.com*.  At this website, we make available free of charge our annualreport on Form 10-K, our annual proxy statement, our quarterly reports on Form10-Q, any current reports on Form 8-K, and any amendments to these reports, assoon as reasonably practicable after we electronically file them with, orfurnish them to, the Securities and Exchange Commission.  The information found on our website is notpart of this Form 10-K.  In addition toour website, the SEC maintains an Internet site at *www.sec.gov* that contains reports, proxy and informationstatements, and other information regarding us and other issuers that fileelectronically with the SEC.

 

Apex, AMWorks, AMX, Avocent, AutoView, Cstation,Cybex, DS1800, DSR, DS Series, Equinox, KVM over IP, LongView, OutLook,SuperSerial, SwitchView, and XP4000 are trademarks or registered trademarksowned 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 network based architecture of interconnectedcomputers. The typical data center installation consists of a local areanetwork, or LAN, with a large number of computers operating as servers dedicated to performing specificfunctions for the many client computers connected to the LAN and, in manycases, may include a wide-area network, or WAN.

 

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

 

Corporate LANs, WANs, ISPs, ASPs, server farms, anddata centers face significant network administration, environmental, and spacelimitations.  Facilities managers andnetwork administrators, who may supervise hundreds or thousands of servers andother networked devices, must identify and access relevant servers and devices,add or delete users, add, change, or upgrade applications, tune systems forbetter performance, and diagnose and correct network failures. These serversare generally designed to operate as stand-alone systems, each with its ownconsole, and facilities managers and network administrators must therefore dealwith a large number of consoles, whether centrally located or dispersedthroughout the organization, when performing administration and

 

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management tasks.

 

Information technology resources are 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 the diagnosis and the correctionof abnormal server or network behavior often require support personnel tophysically access each affected server through its own console, quick andefficient fault management can be difficult, especially when there are a largenumber of dispersed servers involved. In addition, when a network fails, theability of a facilities manager or network administrator to quickly andefficiently diagnose and correct the problem is often hampered by the inabilityto access the software tools that reside on the network and that are normallyused to manage network failures.

 

In addition to these administration and managementproblems, as organizations grow and their computing needs increase, the numberof servers, consoles, peripherals, and cables grows. Without efficient storageand configuration, networked 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 servicingservers and network installations.  Ourprincipal products and technologies are:

 

•                                          Our *DS Series*TMof products digitizes keyboard, video, and mouse information and compresses andtransports the information in packets over traditional network connectionsusing only a fraction of the bandwidth required by other products andoptimizing performance for busy data centers. Our *DS1800*TM switchingsolution is a digital console connection that allows facilities managers andnetwork administrators access to servers utilizing standard networkinginfrastructure and our KVM OVER IPTM technology. Our *DSR*TM switches combine analog and digital connections in oneswitch and have an easy-to-use Windows interface.  Our *DS Series*products**provide access and control of servers aswell as serial devices in the network operations center or from any location inthe world using TCP/IP connectivity. Our *DS Series* products useour *DSView*TMsoftware, our key *KVM over IP*TMserver management tool, to help data center administrators manage their serversand other data center equipment. *DSView*uses industry standard TCP/IPconnections and DES encryption to transmit KVM signals and provides IT administratorswith a consolidated view of all connected data center devices and“point-and-click” access and control over these devices.

 

•                                          Our *OutLook®*switches are designed for small-to-medium network configurations and provideease-of-use, reliability, and enhanced server density.  Our *OutLook* switches allow one, two, or fourusers to access heterogeneous server populations that use different platforms,such as Intel, Macintosh, IBM RS 6000, and Sun Sparc, and different operatingsystems, such as Windows, Unix, NetWare, and Linux, and allow informationtechnology professionals to organize, access, maintain, and control banks ofservers from a single console or multiple consoles.  Multiple *OutLook* switches can be integrated toprovide centralized control of up to 256 servers.  *OutLook* switches offer extensive functionality, includingprogrammable naming, scanning, security, and system broadcast features. Withour proprietary *OSCAR*® interface, *OutLook* switches allow users to select andmanage servers using an intuitive, information-rich on-screen menu.

 

**•****                                         **Our *AutoView*TMswitch family offers users a variety of analog and digital switchingsolutions.  Our *AutoView*TM2000 is an analog switch that features end-to-end CAT 5connectivity, while our new *Autoview*TM1000R and *AutoView*TM 2000R combinein a single switch an analog port for local access and an Ethernet port forextended and remote IP-based digital access using our digital KVM over IPserver management tool.  With end-to-endCAT 5 connectivity, convenient on-screen management, and flexible access, the *AutoView*1000R and2000R provide local andremote users with access to servers from any location in the world that has aninternet or dial-up connection.  Forcontrol of multi-platform servers, our *AVWorks*TMadministration software is bundled with each switch.  These new switches compliment our existing *AutoView*TM *200*four and eight port matrix switches, which are designed to allow two usersaccess to up to 64 servers and support Sun, USB, and PC based servers.  Our *AutoView*TM**family offers computer selection throughan optional on-screen menu system and adds hot-pluggable operations to the *AutoBoot*TM technology, which allows supportpersonnel to automatically boot all connected servers after a power failure orother problem without operator intervention.

 

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•                                          Our *AMX*TM switches are the latest in our familyof analog switching solutions.  Our *AMX*switches address the continued marketopportunity for analog switches and provide simpler access and easiermanageability of servers in multi-rack, multi-platform environments.  Our *AMX*switchesincrease the number of users with simultaneous access and offer efficientscalability with an architecture that makes it easy to add and supportadditional servers. Our advanced *AMWorks*TMsoftware isalso included with our *AMX*switchesfor central administration.

 

•                                          Our *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 *LongView*®products extend a keyboard, monitor, mouse, speakers, microphone, and serialport up to 500 feet away from the computer or KVM switch with one Category 5UTP cable.   Our *LongView Wireless*is a KVMextender, which can wirelessly connect monitors (VGA, SVGA, and XGA),keyboards, mice, and audio devices to a computer up to 100 feet away.   Our *LongView Wireless* product, based on the802.11a standard and Advanced Encryption Standard (AES), connects directly totarget devices, and serves as the radio interface link so the computer cantransmit secure audio and high-resolution video data through walls — allwithout cables.

 

•                                          Our DigitalDesktop Division provides a single source for extension solutions acrossmultiple markets - from trading floors and financial institutions tomanufacturing floors, secure government facilities, and more. Combining thepower of *Cstation*’s award-winningdigital extension technology with our *Trading Floor Solutions* creates a powerfulcombination of tools for any distributed computing environment that can benefitfrom centralized PC assets*.*

 

•                                          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.

 

•                                          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 thesmall office or home office market. Our *SwitchView**OSD* product is an eight portswitch designed for small and medium-sized businesses with an on-screendisplay. Our *SwitchViewMP*is afour port switch that provides connectivity to Intel-based, Sun, and USBmachines without the need for expensive adapters or converters.  Our *SwitchViewSC*is designed to provide secure access for up to four computers but 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 *SwitchView IP* adds economical remoteaccess capability to existing KVM switches and offers secure, browser-basedaccess, BIOS-level access to multiple servers anywhere, anytime.

 

•                                          Our CPSappliances deliver secure, serial over IP access to console ports of serversand serially managed devices such as power management systems, network hubs androuters.  CPS units and attached devicescan be centrally managed using our DS management software.

 

•                                          Our SPC powermanagement devices provide customers a method to securely monitor and managepower to their business-critical servers and many other data center networkdevices.  Combined with our CPSserial-based network appliance, the SPC power distribution unit deliversadvanced power management and security.

 

The products and technologies described above are allpart of our connectivity solutions, and we have no other class of products thataccounts for 10% or more of our net sales.

 

**EmbeddedApplications, Solutions, and Systems**

 

In addition to our“appliance” products, we continue to develop our embedded applications,solutions, and systems for our OEM and other strategic customers.  Our embedded solutions team, which wasenhanced with the acquisition of Soronti, Inc. in November 2003, hasincorporated our proprietary KVM switching technologies and our DVC videocompression algorithms into servers.  Wehave licensed these technologies to some of our customers, and we are presentlypursuing a number of additional opportunities.

 

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**Sales and Marketing**

 

We market and sell our products through our own salesforce and various distribution channels, including OEM and a variety of distributorand reseller arrangements. We market our products primarily through directcustomer 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 engineers and our customerservice representatives who provide technical support and advice to customers.As of December 31, 2003, we employed 259 people in sales, marketing, andcustomer support.

 

We currently sell or license various switchingproducts and technologies to Dell, Fujitsu-Siemens, Hewlett-Packard, and IBMpursuant to private-label, branded, and licensing arrangements. These OEMcustomers integrate and sell our products and technologies with or within theirown products, including network servers. We devote significant sales,engineering, operations, and customer service resources to our OEM accounts. Wehave significant experience in working with our OEM and other server manufacturers,and we plan to use that experience to enter into new relationships with othercomputer manufacturers in the United States, Europe, and Asia. We believe thatthe architecture, quality, and reliability of our products and technologies,together with our commitment to customer service, are attractive to servermanufacturers.

 

We have relationships with a variety of distributorsand resellers, including Tech Data, Ingram Micro, NTT, Blue Ridge, Getronics,Techland, Datumstruct, QDS, Shanghai Aera, Denali, Digital First, APWPresident, and Daxten, value added resellers, or VARs, and systems integrators,for the distribution and sale of Avocent, Apex, Cybex, and Equinox brandedproducts in the United States, Europe, Asia, and elsewhere. We devote resourcesto educating our distributors and resellers about the benefits of our productsand training them in the proper installation and support of our products. Wewill continue to devote additional resources to increase these branded sales,and we will pursue additional relationships with distributors and resellers,both domestically and internationally, who have the technical capability andmarket presence to assist end-user customers in developing network spacemanagement, access, and control solutions to meet their particular needs. Ourfuture success will depend in part on our ability to attract, train, andmotivate 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 40% ofnet sales in 2003, 40% of net sales in 2002, and 38% of net sales in 2001, andwere made primarily through OEMs, distributors, and resellers located inEurope, Canada, Asia, and other foreign countries. We are expanding ourinternational sales efforts within Europe, Asia, and the Pacific Rim throughthe utilization of our sales offices in Beijing, Guangzhou, and Shanghai,China; London, England; Paris, France; Rotterdam, Holland; 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 switching solutions and products to OEMs forintegration with their product offerings. Sales to OEM customers represented46% of net sales in each of 2003, 2002, and 2001. While we have contracts withcertain of our existing OEM customers, none of them is obligated to purchaseproducts from us except pursuant to binding purchase orders. Consequently, anyOEM customer could cease doing business with us at any time. The loss of, ormaterial decline in orders from, certain of our current OEM customers wouldhave a material adverse effect on our business, financial condition, results ofoperations, or cash flow.

 

In addition to our OEM customers, our principalcustomers include a diversified group of dealers, major distributors, anddirect end users who purchase our branded products (54% of net sales in each of2003, 2002, and 2001). 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 Hewlett-Packard represented approximately 23%of net sales in 2003.  Sales to Dell andTech Data represented approximately 14% and 12%, respectively, of net sales in2003.  Sales to Hewlett-Packardrepresented approximately 25% of net sales in 2002 (including sales to Compaqbefore and after its merger with Hewlett-Packard in 2002).  Sales to Dell and Tech Data representedapproximately 11% each of our net sales in 2002. Sales to Compaq represented23% of net sales in 2001. No other customer accounted for more than 10% of netsales in 2003, 2002, or 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. In the past, revenue in ourfourth quarter of each year has typically been higher than revenue in priorquarters for the year.  In addition, wetypically see a sequential decline in revenue from the fourth quarter of a yearto the first quarter of the following year. While it is difficult to predict revenue in any quarter, we expect thatthis pattern will continue in the future.

 

**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.

 

**Development of New Products and Technologies**

 

We believe that the timely development of enhancementsto our existing products and technologies and of new products and technologiesis essential to building our competitive position. The market for our productshas experienced rapid technological advances, frequent new productintroductions and enhancements, and significant price competition. Theintroduction of products incorporating superior or alternative technologies(such as switching software), the creation or adoption of new technologies, theemergence of new industry standards, or changes in the market’s pricingstructure could render our existing products and technologies and the productsand technologies we have under development obsolete or unmarketable. Ourproducts generally combine components, such as printed circuit boards,semiconductors, memory, connectors, cable assemblies, power supplies andenclosures, that are manufactured by other companies and are generallyavailable to our competitors and potential competitors. Our future success willdepend in large part upon continued innovative application of commerciallyavailable components, together with continued enhancements to our proprietarysoftware, firmware and other technologies, to the expansion and enhancement ofour existing products and the development and introduction of new technologiesand products that address changing customer needs on a cost-effective andtimely basis. By emphasizing customer-driven research and development, wehave been able to develop innovative, practical, and marketable products thathave had immediate application and acceptance. Our failure to respond timely totechnological changes or customer requirements could have a material adverseeffect on our business, financial condition, results of operations, or cashflow.

 

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 and technologies that have immediate applications intheir markets. By maintaining contact with customers throughout theinstallation and technical support process, we are able to identify and testpotential design modifications and improvements as well as new applications andextensions for existing products and technologies. We expect this process willenable us to develop new product categories and applications based on existingtechnology developed to meet specific customer needs. Many of our products andtechnologies are designed to accommodate future modifications and additionalfeatures, which we believe facilitates the development and integration offuture modifications and features if we see a market need.

 

Our engineering and product development expenses wereapproximately $29.8 million in 2003 (excluding $3.9 million in expensedin-process research and development expenses related to our acquisition ofSoronti), $26.5 million in 2002 (excluding $6.0 million in expensed in-processresearch and development expenses related to our acquisition of 2C Computing),and $22.5 million in 2001 (excluding $4.6 million in expensed in-processresearch and development expenses related to the acquisition of Equinox) . Asof December 31, 2003, we employed 202 people in our engineeringdepartment. In addition, we use independent contractors from time to time. Asof December 31, 2003, we were working with approximately 12 independentcontractors on various development projects.

 

To meet the challenges of the rapidly changing technologyin the computer industry, we expect to make substantial investments in productdevelopment in the future. There can be no assurance that these new or enhancedversions or any other of our product development efforts will lead tocommercially viable products or technologies, will be completed on a timelybasis, or will include the features required to achieve market acceptance.

 

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A key component ofour engineering and product development strategy is the acquisition of newtechnologies and companies.  We acquiredEquinox Systems Inc. in early 2001, 2C Computing, Inc. in the thirdquarter of 2002, Soronti, Inc. in the fourth quarter of 2003, and Crystal LinkTechnologies Inc. early in the first quarter of 2004.  We intend to continue to evaluate opportunities to acquiretechnologies and companies, and it is likely that we will complete additionalacquisitions in the future.  There canbe no assurance that these acquisitions will result in the timely developmentof commercially viable products or technologies that achieve market acceptance

 

**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 toautomated testing, equipment burn-in procedures, comprehensive quality audits,functional testing, and regulatory screening to assure quality and reliability.As of December 31, 2003, we employed 160 people in our manufacturing andlogistics department.

 

We currently rely on several third partymanufacturers, including Likom Computer Products, MC Assembly, and Three-FiveSystems, Inc., for subassembly of our products. These outsourcing arrangements,and any future outsourcing arrangements, involve numerous risks, includingreduced control over product quality, delivery schedules, manufacturing yields,and costs. In addition, while these third-party manufacturers have arrangementsfor warranty obligations, we remain primarily responsible to our customers forwarranty obligations. We attempt to diversify our outsourced manufacturingoperations and believe we have an adequate supply of alternativesubcontractors.  We plan to add anothersignificant third party manufacturer in Eastern Europe in 2004.

 

We generally purchase industry-standard parts andcomponents, including power supplies, semiconductors, memory, cable assemblies,line filters, enclosures, and printed circuit boards for the assembly of ourproducts from multiple vendors and suppliers through a worldwide sourcingprogram. Custom molded cables and certain turnkey products procured fromoutside sources have significant delivery times (10 to 12 weeks), and failureto obtain adequate supplies could adversely affect our product deliveries. Webuy components under purchase orders and generally do not have long-termagreements with our suppliers. Circuit boards assemblies are currently obtainedfrom a number of sources, including Likom Computer Products, MC Assembly, andThree-Five Systems. We believe that there are adequate alternative sources forour product components. Any termination of, or significant disruption in, thebusiness or affairs of our suppliers or our third-party manufacturers or in ourrelationship with them may prevent us from filling customer orders in a timelymanner since we 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 contract manufacturersand suppliers. There can be no assurance, however, that delays in component andproduct deliveries will not occur in the future, and the inability to obtainsufficient components or to develop alternative sources if and as required inthe future, could result in delays or reductions in product shipments, which,in turn, could have a material adverse effect on our business, financialcondition, results of operations, or cash flow. Some of the components for ourproducts are available from a single supplier or a limited number of suppliers.We attempt to maintain quality relationships and close contact with each of oursuppliers.

 

**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 companies such as Raritan Computer, RoseElectronics, Minicom Advanced Systems, Agilent, Aten International, CompuCableMfg. Group, Belkin, Linksys, and Digital V6, some of which may have substantiallygreater financial, marketing, and technical resources than we have. We alsocompete with other companies (such as Microsoft) that offer alternativetechnologies or products (such as software) that compete with our switchingsystems.  In addition, certain of ourOEM customers, such as Dell, Hewlett-Packard, IBM, and Microsoft, offertechnologies and products that are competitive with our products, and we expectthese technologies and products to remain competitive in the features theyoffer.  Our products and technologiesare also in competition with the products and technologies offered by hardwaremanufacturers and network management companies such as Intel and Cisco.

 

In the market for our products, we compete primarilyon the basis of technological capabilities, 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, technologies and features at competitive price and performance levelsthat address the evolving needs of our customers. We continually experienceprice

 

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competition and expectthat pricing pressures could increase in the future.

 

**Proprietary Technology**

 

Our future success is dependent in part upon ourability to protect our intellectual property and our proprietary rights in ourproducts and technologies. We seek to protect our intellectual property rightsby invoking the benefits of the patent, trademark, copyright, trade secret, andunfair competition laws of the United States, which provide only limitedprotection. We have been issued 46 U.S. patents and have 19 U.S. patentapplications pending. We have various corresponding patent applications pendingunder the provisions of the Patent Cooperation Treaty, which permits the filingof corresponding foreign patent applications in numerous foreign countrieswithin a limited time period. We also have other foreign patent applicationspending. There can be no assurance that any additional patents will be issuedfrom any of our pending applications, that any patents will be issued in anyadditional countries where our products or technologies can be sold orlicensed, or that any claims allowed in our patents or in any pending patentapplications will be of sufficient scope or strength for, or provide anymeaningful protection or any commercial advantage to, us. Moreover, our competitorsmay challenge the validity of, or be able to design around, these patents orany other patents that may be issued to us. The laws of certain foreigncountries in which our products are or may be developed, manufactured, or soldmay not protect our products or intellectual property rights to the same extentas do the laws of the United States and thus increase the likelihood of piracyof our products and technologies.

 

We believe that certain products of certaincompetitors infringe one or more of our U.S. patents. In May 2001, we filed acomplaint 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, attorneys’ fees and costs underthree of our patents.  After a seven daybench trial in New York in January 2002, U.S. District Judge Milton Pollack found that there was no infringementof our patents by Raritan and ordered that judgment be entered in favor ofRaritan.  We appealed that judgment, andin April 2003, the United States Court of Appeals for the FederalCircuit issued its ruling on our appeal in this patent litigation.  The Court of Appeals ruled in our favor byvacating the non-infringement decision of the District Court for the SouthernDistrict of New York and remanding the case for further proceedings consistentwith the Court of Appeals’ opinion.  In September 2003, Raritan petitioned theUnited States Supreme Court for a Writ of Certiorari to review the Court ofAppeals decision, and we filed our opposition to the petition in November2003.  Raritan’s petition was denied bythe Supreme Court in December 2003, and the case in now back before the UnitedStates District Court for the Southern District of New York.

 

In October 2003, we filed acomplaint for patent infringement in the United States District Court for theNorthern District of Alabama against ClearCube Technology, Inc.  The ClearCube complaint seeks injunctive relief,damages, attorneys’ fees, and costs under three Avocent patents.  ClearCube has filed counterclaims allegingnon-infringement, unenforceability, invalidity, and misuse of the Avocentpatents.

 

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 noassurance that the steps we take to protect our intellectual property rightswill be adequate to prevent misappropriation of our technologies or that we canuse our intellectual property rights to successfully prevent competitors fromcommercializing technologies that are substantially equivalent or superior toour products and technologies. Additionally, current or future competitorscould develop their own proprietary technologies or obtain patents that mayprevent us from developing or selling our products and technologies.

 

**Employees**

 

As of December 31, 2003, we had 537 full-timeemployees working in the United States. Of our domestic full-time employees,174 were in marketing, sales, and customer support, 174 were in engineering,research, and development, 119 were in manufacturing and logistical operations,and 70 were in administration. As of December 31, 2003, we had 182full-time employees working at our facilities outside of the United States. Ofour international full-time employees, 85 were in marketing, sales, andcustomer support, 28 were in engineering, research, and development, 41 were inmanufacturing and logistical operations, and 28 were in administration. Ouremployees are not covered by any collective bargaining agreements relating totheir employment by us. We believe that we have good relations with ouremployees.

 

**Backlog**

 

Backlog consists of purchase orders with deliverydates scheduled within the next six months. None of our customers is obligatedto purchase products from us except pursuant to binding purchase orders.Because of the timing of orders and the possibility of customer changes todelivery schedules, our backlog as of any particular date is not representativeof actual 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 actual salesfor any succeeding period.

 

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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:*

 

**Our business is dependent upon a limited number ofcustomers that are not obligated to 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 each of 2003, 2002, and 2001.  In 2003, sales to Hewlett-Packardrepresented approximately 23% of our net sales, and sales to Dell representapproximately 14% of our net sales. Sales to Hewlett-Packard represented approximately 25% of our net salesin 2002 (including sales to Compaq before and after its merger withHewlett-Packard in 2002).  Sales to Dellrepresented approximately 11% of net sales in 2002.  Sales to Compaq represented approximately 23% of net sales in2001.

 

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

 

•                                          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, pricing pressures and significantvariability 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 wouldmaterially 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. Similarly, at any time wemay be holding a significant amount of OEM-branded products in inventory.  In addition, OEM customers have longerpayment cycles that increase the likelihood of aged or problem accountsreceivable.  The merger between Compaqand Hewlett-Packard in 2002 increased these risks.  The loss of, or material decline in orders from, any of thesecustomers could have a material adverse effect on our business, financialcondition, and results of operations.

 

**Due to the maturity of our businessand uncertain global economic and political conditions, our revenue may declineor our costs may increase.**

 

As our business matures,it is possible that our revenue will not grow at the pace that it grew in2003.  Our future growth rates depend inpart on our ability to expand sales of our existing products and technologiesand to develop and market new products and technologies.  With uncertain global economic and politicalconditions, we may not have sufficient resources to cover the significant costsinvolved in such an expansion.  If ourrevenue does not increase at or above the rate that equity research analystsexpect, the trading price of our common stock may decline.

 

Our revenue may also suffer as aresult of general economic and political conditions and instability both in theUnited States and in the rest of the world. Prior to 2003, there was a rapid and severe downturn in the U.S. marketand global economy, and whether that trend has reversed is uncertain.  In addition, there is substantialuncertainty due to recent terrorist activity, such as the terrorist attacks inthe United States on September 11, 2001, and the recent and current militaryactivity in Afghanistan, Iraq, and the Middle East.  Additional terrorist acts or acts of war could cause damage ordisruption to us or to our suppliers and our customers.  Fears of global recession, war, and acts ofterrorism could dampen consumer confidence and cause our customers to slow orcease spending for our products and technologies.  In addition, our ability to manage our supply and deliverylogistics could be severely hampered by significant disruptions of domestic andinternational shipments caused by heightened security concerns around theglobe.  This global economic andpolitical instability could cause our revenue to decline or our costs toincrease and have a material adverse effect on our business.

 

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

 

We have in the past experienced substantialfluctuations in operating results, on a quarterly and an annual basis, and weexpect these fluctuations will continue in the future. Our operating resultswill be affected by a number of factors, including, but not limited to:

 

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

 

•                                          The timing ofshipments;

 

•                                          The timing ofnew product introductions, new technologies, and enhancements by us and by ourcompetitors;

 

•                                          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, new technologies, and retaining current OEM and other largecustomers; and

 

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

 

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 otherquarters.  In the past, revenue in our fourth quarter of each year has typicallybeen higher than revenue in prior quarters for the year.  In addition, we typically see a sequentialdecline in revenue from the fourth quarter of a year to the first quarter ofthe following year.  While it isdifficult to predict revenue in any quarter, we expect that this pattern willcontinue in the future.

 

Because our business and operating results depend to asignificant extent on the general conditions in the server market, any adversechange in the server market due to adverse economic conditions, decliningcapital spending levels, or other factors could have a material adverse effecton our business, financial condition, and results of operations. In addition,we continue to see industry-wide initiatives by OEMs and by distributors andresellers to reduce their inventories and to shorten their lead times, therebyreducing early commitments to firm orders by our major OEM and our distributorand reseller customers.

 

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

 

**A substantial portion of our businessconsists of sales to OEM customers, which vary significantly from quarter toquarter. A substantial drop 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. We use multiplewarehouses for many of our OEM customers to fulfill their orders under ajust-in-time inventory management system, which requires us to maintainsufficient inventory levels of our products at each of these warehouses tosatisfy our OEMs anticipated customer demand, and we generally recognizerevenue only when these OEM customers take possession of our products. We arerequired to plan production, order components, and undertake our manufacturingactivities prior to the time that these orders become firm or the products areaccepted. In addition, our OEM customers have requested, and are likely tocontinue to request from time to time, that we delay shipment dates or cancelorders for branded products that are subject to firm orders. Accordingly, oursales to OEMs for future quarters are increasingly difficult to predict.The inability to accurately predict the timing and volume of orders for our OEMcustomers during any given quarter could adversely affect operating results forthat quarter and, potentially, for future quarters. 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.

 

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**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 continued industry-wide initiatives by distributors and resellers toreduce their inventories and to shorten their lead times, our major distributorand reseller customers are reducing early commitments to firm orders.Furthermore, many purchasers typically require prompt delivery of products.This results in a limited backlog of orders for these products and requires usto maintain sufficient inventory levels to satisfy anticipated customer demand.The inability to accurately forecast the timing and volume of orders forbranded products during any given quarter could adversely affect operatingresults for such quarter and, potentially, for future periods. If weunderestimate sales, we will not be able to fill orders on a timely basis. Thiscould cause customer dissatisfaction and loss of future business. If weoverestimate sales, we will experience increased costs from inventory storage,waste, and obsolescence.

 

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

 

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

 

•                                          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 and technologies will have lower grossmargins than sales of other products;

 

•                                          Rawmaterials, freight, and labor costs;

 

•                                          New product introductionsby us and by our competitors; and

 

•                                          The level ofoutsourcing of our manufacturing and assembly services.

 

We expect our gross margins to vary and may decline inthe future primarily due to increased competition and the introduction of newproducts and technologies that may affect product prices.

 

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

 

We typically offer a 30-day unconditional money-backguarantee on our products. We also offer warranties for parts and service onall our products, ranging from one to three years (and, in the case of some ofour Equinox branded products, five years). Although our historical returnexperience has not been significant, our returns may increase in the future. Anincrease in returns would have an adverse effect on our sales and couldnegatively affect our financial results.

 

**Intense competition from new andexisting competitors could impair our ability to grow our business and sell ourproducts.**

 

The markets for our products and technologies arehighly fragmented and intensely competitive. Increased competition from bothhardware and software products could result in price reductions and loss ofsales, 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 and technologiesand product and technological features at competitive prices and performancelevels that address the evolving needs of our customers. We are continue toexperience price competition and increased customer sensitivity to productprices, and pricing pressures may increase in the future. Because of thiscompetition, we may not be successful in gaining additional OEM or servermanufacturer customers.

 

We compete for sales of switching systems andextension products with companies such as Raritan Computer, Rose Electronics,Minicom Advanced Systems, Agilent, Aten International, CompuCable Mfg. Group,Belkin, Linksys, and Digital V6. We also face competition from softwareproviders, who are able to offer software solutions at a much lower cost oreven bundled for free, and from server manufacturers (including our OEMcustomers), who are able to offer their competitive technology or products atthe time of the server sale. These software and hardware solutions address manyof the problems our switching systems, extension products, and remote accessproducts are designed 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 and technologies than we do. In addition, current andpotential competitors have established or may establish cooperativerelationships among themselves or

 

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with third parties thatenhance the ability of their products to address the needs of our prospectivecustomers. We may not be able to compete successfully against current andfuture competitors and competitive pressure may materially harm our business.

 

Certain of our customers, such as Dell,Hewlett-Packard, IBM, and Microsoft, presently offer competitive hardwareand/or software products, technologies, and solutions that address many of theproblems our products and technologies address. These customers could decide tomanufacture their own switching or remote access products, enhance their owninternally-developed switching solutions or technologies, or offerproducts or technologies supplied by competitors. Companies with hardwaremanufacturing experience or network management products, many of which aresubstantially larger than we are and have significantly more financialresources, also offer products or technologies that compete with us.Established companies with hardware manufacturing or network managementexperience (such as Intel or Cisco) could also offer new products, newtechnologies, or new solutions that compete with our products and technologies.

 

**Our failure to respond to rapid technological change or tointroduce successful new products and technologies may result in lost sales andrevenue which would impair our operating results.**

 

Sales of switching, extension, and remote accessproducts and technologies are characterized by rapid technological advances,frequent new product introductions and enhancements, and significant pricecompetition. If we do not keep pace with these changes, we will lose customers,and our business will be adversely affected. The introduction of products ortechnologies incorporating superior alternatives such as switching software,the emergence of new industry standards, or changes in pricing structure couldrender existing products and technologies and those under development obsoleteor unmarketable. New technologies offered by us or our competitors could competewith our existing products at a lower price which would reduce our revenue.

 

Our products combine components, such as printedcircuit boards, connectors, semiconductors, memory, cable assemblies, powersupplies and enclosures, that are manufactured by other companies and aregenerally available to competitors and potential competitors. Our futuresuccess will depend in large part upon continued innovative application of suchcommercially available components, together with continued enhancements to ourproprietary software, firmware and other technologies, to the expansion andenhancement of existing products and technologies and the development andintroduction of new products and technologies 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 the development or introduction of new products ortechnologies.

 

Due to our significant reliance on OEM relationships,our development efforts may often be focused on developing new products,technologies, or enhancements for OEM customers. As a result, our OEMrelationships may negatively affect our ability to develop new and enhancedproducts and technologies for our non-OEM customers. Moreover, these newproducts, technologies, or enhancements for OEM customers may not be availableto, or readily marketable to, other customers without significant modificationand delay. The termination or significant disruption of our relationship withcertain OEMs or other customers for whom we devote significant productdevelopment resources is likely to result in lost opportunities with respect tothe development of products, technologies, or enhancements for our othercustomers.

 

**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, semiconductors, memory, cableassemblies, line filters, enclosures, and printed circuit boards, all of whichare purchased from outside vendors. We generally buy components under purchaseorders and generally do not have long-term agreements with our suppliers. Also,we generally do not maintain large inventories of components. Any terminationof, or significant disruption of, our relationships with the suppliers of ourproduct components may prevent us from filling customer orders in a timelymanner which could result in customer dissatisfaction and lost sales.

 

We have occasionally experienced, and we may in thefuture experience, delays in delivery of components. Although alternatesuppliers are available for most of the components and services needed toproduce our products, the number of suppliers of some components is limited,and qualifying a replacement supplier and receiving components from alternatesuppliers 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

 

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some of our products.These outsourcing arrangements and any future outsourcing arrangements involvenumerous risks, including reduced control over product quality, deliveryschedules, manufacturing yields, and costs. Moreover, although arrangements with such manufacturers may containprovisions for warranty obligations on the part of such manufacturers, we areprimarily responsible to our customers for warranty obligations.

 

**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 ourdistributor and reseller relationships. We will be required to investsignificant additional resources in order to expand these relationships, andthe cost of this investment may exceed the margins generated from thisinvestment.

 

**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 competitors’ products. These distributors andresellers may give higher priority to the sale of our competitors’ products. Areduction in sales efforts by our resellers could lead to a reduction in oursales and could materially adversely affect our business, financial condition,and results 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, and our future success is highly dependentupon the personal efforts of our management and technical personnel. The lossof services of any one of them could have a material adverse effect on ourbusiness, financial condition, and results of operations. Many of our keymanagement and technical personnel were awarded stock options with exerciseprices that are above the current trading price of our common stock and thereforecurrently have little value. We may need to grant new options or other forms ofcompensation to these employees in the future in order to provide new incentiveand thus retain them. Our success will also be dependent in part upon ourability to attract, retain, and motivate highly skilled employees. Competitionfor employees with the skills required, particularly engineering and othertechnical personnel, is intense, and there can be no assurance that we will beable to attract and retain highly skilled employees in sufficient numbers tosustain our current business or to support future growth.  We may need to offer additional compensationor incentives to attract and retain these and other employees.

 

**Difficulties encountered during changing economic conditionscould adversely affect our results of operations.**

 

For the last several years, we have experienced rapidrevenue and customer growth and expansion in the number of employees, productofferings, customers, operating locations, and suppliers. This growth hasplaced significant strain on our managerial, operational, and financialresources and resulted in new and increased responsibilities for managementpersonnel. There can be no assurance that our management, personnel, systems,procedures, and controls are, or will be, adequate to support our existing andfuture operations or that we will continue to grow.

 

Our ability to effectively manage during changingeconomic conditions 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 technologies, securenew customers, and effectively serve the evolving needs of present and futurecustomers. We may not be successful in strengthening these capabilities.Without adequate management, engineering, product development, marketing,sales, and customer service capabilities, our ability to effectively manageduring changing economic conditions, expand and enhance our product lines,further penetrate existing markets, and develop new markets will besignificantly limited. If we are unable to effectively manage during changingeconomic conditions, our business, financial condition, and results ofoperations could be materially adversely affected.

 

**Implementation of our new ERP system could adverselyaffect our operations.**

 

In 2003, we undertook the implementation of a new enterprise resource planning system for our United States facilities.  In 2004, we plan to implement the new ERP system in our international locations.  The system is intended to provide us with more

 

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detailed information on a more timely basis so that we may improve our management of inventory, customer relationships, and operating expenses.  We believe that the successful implementation of this system worldwide is important to our operations and for continued growth.  The continued integration and conversion of information from our current systems to this new system, however, will significantly affect many aspects of our business, including our accounting, operations, purchasing, sales, marketing, and administrative functions. Accordingly, there is a great deal of risk involved in the integration and conversion process.  If we were to experience difficulties or delays in the implementation of this new system, there could be an adverse effect on our ability to provide products to our customers on a timely basis, which would likely harm our operating results and relationships with our customers.  Additionally, any integration difficulties or delays could delay the processing of our accounting and financial results. There can be no assurance that we would be able to correct any such difficulties or problems on a timely basis, and if not they could materially and adversely affect our business and operating results. Finally, there can be no assurance that, once successfully implemented worldwide, the new system will provide the intended benefits or that it will be adequate to support our operational needs.

 

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

 

Our future success is dependent in part upon ourability to protect proprietary rights in our products. We seek to protect ourintellectual property rights by invoking the benefits of the patent, trademark,copyright, trade secret, and unfair competition laws of the United States.These laws, however, afford only limited protection. There can be no assurancethat the steps we have taken to protect our intellectual property rights, orthat the steps we take in the future, will be adequate to preventmisappropriation of our intellectual property or technologies or that ourcompetitors will not independently develop proprietary or other technologiesthat are substantially equivalent or superior to our products or technologies.

 

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 of thosepending 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 develop their own intellectual property ortechnologies, obtain their own patents, or challenge the validity of, or beable to design around, our patents. The laws of certain foreign countries inwhich our products are or may be developed, manufactured, or sold may notprotect our products or intellectual property rights to the same extent as dothe laws of the United States and thus increase the likelihood of piracy of ourtechnologies and products.

 

In May 2001, we filed a complaint for patentinfringement in the United States District Court for the Southern District ofNew York against Raritan Computer Inc. The Raritan complaint sought injunctiverelief, damages, attorney’s fees and costs under three of our patents. After aseven-day bench trial in New York in January 2002, U.S. District Judge MiltonPollack found that there was no infringement of our patents by Raritan andordered that judgment be entered in favor of Raritan.   We appealedthat judgment, and in April 2003, the United States Court of Appeals forthe Federal Circuit issued its ruling on our appeal in this patentlitigation.  The Court of Appeals ruledin our favor by vacating the non-infringement decision of the District Courtfor the Southern District of New York and remanding the case for furtherproceedings consistent with the Court of Appeals’ opinion.  InSeptember 2003, Raritan petitioned the United States Supreme Court for a Writof Certiorari to review the Court of Appeals decision, and we filed ouropposition to the petition in November 2003. Raritan’s petition was denied by the Supreme Court in December 2003, andthe case in now back before the United States District Court for the SouthernDistrict of New York.

 

In October 2003, we filed acomplaint for patent infringement in the United States District Court for theNorthern District of Alabama against ClearCube Technology, Inc.  The ClearCube complaint seeks injunctive relief,damages, attorneys’ fees, and costs under three Avocent patents.  ClearCube has filed counterclaims allegingnon-infringement, unenforceability, invalidity, and misuse of the Avocentpatents.

 

We may initiate claims or litigation against otherthird parties for infringement of proprietary rights or to establish thevalidity of proprietary rights. Similarly, our competitors may initiate claimsor litigation against us alleging infringement of their proprietary rights orimproper use of their intellectual property. Existing litigation, and any other litigation relating to intellectualproperty to which we become a party, is subject to numerous risks anduncertainties, including the risk of counterclaims or other litigation againstus, and we may not be successful in any such litigation. Litigation isexpensive, and the existing litigation or any other litigation by or against uscould result in significant additional expense and divert the efforts oftechnical and management personnel, whether or not such litigation results in afavorable determination. In the event of an adverse result in any suchlitigation, we could be required to pay substantial damages, suspend or ceasethe manufacture, use, and sale of any infringing products, expend significantresources to develop non-infringing technology, discontinue the use of certainprocesses, or obtain licenses to the infringing technology. There can be noassurance that we would be successful in such development or that such licenseswould be available on reasonable terms, or at all, and any such development orlicense could require us to expend substantial time and other resources. In theevent that any third party makes a successful claim against us, or ourcustomers, and a license is not made available on commercially reasonableterms, our business, financial condition, and results of operations could beadversely affected.

 

The network server, electronics, and relatedindustries are characterized by vigorous pursuit and protection of intellectual

 

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property rights orpositions, which has resulted in significant and often protracted and expensivelitigation. We have in the past been, and we may from time to time in thefuture be, a party in proceedings alleging infringement of intellectual propertyrights owned by third parties. If necessary or desirable, we may seek licensesunder such intellectual property rights. However, licenses may not be offeredon terms acceptable to us, or at all. The failure to obtain a license from athird party for technology used by us could cause us to incur substantialliabilities and to suspend or cease the manufacture of products requiring suchtechnology. Additionally, current or future competitors could obtain patentsthat may prevent us from developing or selling 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 our business, financial condition, andresults of operations.

 

**If we are unable to successfully develop 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 or expanding the international distribution network orin marketing and selling products in foreign markets. If the revenues generatedby our international sales are not adequate to recover the expense ofestablishing, expanding, and maintaining an international distribution network,our business, financial condition, and results of operations could bematerially adversely affected. If international sales become a more significantcomponent of net sales, our business could become more vulnerable to the risksinherent in doing business on an international level, including:

 

•                                          Difficultiesin managing foreign 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 marketing expenses and our R&D resources as we localize our productofferings to meet local user requirements such as language translations andhardware 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. In particular, the introduction of the euro has led many ofour European customers to request or insist that our sales to them bedenominated in euros instead of U.S. dollars. Fluctuations in the value offoreign currencies relative to the U.S. dollar have caused, and are expected toincreasingly cause, currency translation gains and losses. While we attempt tohedge our foreign currency exposure, we cannot predict the effect of exchangerate fluctuations upon future quarterly and annual operating results, and wemay experience currency losses in the future.

 

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**We haveacquired, and expect to continue to acquire, technologies and companies thatcould disrupt our business or expose us to other risks.**

 

A key component of our engineering and productdevelopment strategy is the acquisition of technologies and companies.  We acquired Equinox Systems Inc. inearly 2001, 2C Computing, Inc. in the third quarter of 2002, Soronti, Inc. inthe fourth quarter of 2003, and Crystal Link Technologies Inc. early in thefirst quarter of 2004.  We intend tocontinue to execute our strategy through the acquisition of technologies orcompanies or through investments in complementary companies, products, ortechnologies, and it is likely we will complete such acquisitions orinvestments in the future.  Theseacquisitions and investments involve many risks, including the following:

 

•                                          Difficultyassimilating the acquired company’s personnel, technologies, products, andoperations;

 

•                                          Diversionof management’s attention;

 

•                                          Difficultyin entering into new markets or geographical areas in which we have no orlimited direct experience and where our competitors may have stronger marketpositions;

 

•                                          Lossof key personnel;

 

•                                          Difficultyin completing projects associated with acquired in-process research anddevelopment;

 

•                                          Incurringamortization expense related to certain intangible assets and recordinggoodwill and non-amortizable assets that will be subject to impairment testingand possible impairment charges;

 

•                                          Dilutionof existing stockholders as a result of issuing equity securities, includingthe assumption of any stock options issued by the acquired company;

 

•                                          Overpaymentfor any acquisition or investment;

 

•                                          Assumptionof liabilities of the acquired company, including any potential intellectualproperty infringement claims; and

 

•                                          Incurringsubstantial write-offs, restructuring charges, and transactional expenses.

 

**Our failure to manage these risks and challenges couldmaterially harm our business, financial condition, and results ofoperations.  Further, if we do notsuccessfully address these challenges in a timely manner, we may not fullyrealize all of the anticipated benefits or synergies on which the value of atransaction was based.  Futuretransactions could cause our financial results to differ from expectations ofmarket analysts or investors for any given quarter.**

 

**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

 

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the price at which theypurchased their shares. Stock prices and trading volumes for many technologycompanies fluctuate widely for a number of reasons, including some reasonswhich may be unrelated to their businesses or results of operations. Thismarket volatility, as well as general domestic or international economic,market and political conditions, could materially adversely affect the marketprice of our common stock without regard to operating performance. In addition,if our operating results were to be below the expectations of public marketanalysts and investors, the market price of our common stock would likelydecrease significantly.

 

**Item 2. Properties.**

 

Our headquarters, occupying approximately 181,000square feet and containing administrative, sales, marketing, research anddevelopment, engineering, manufacturing, and distribution facilities, arelocated in Huntsville, Alabama, on an 18-acre tract of land owned by us inCummings Research Park.

 

Our Redmond, Washington facility, which consists ofapproximately 82,000 square feet in an industrial office building, containsadministrative, sales, marketing, research and development, engineering,manufacturing, and distribution operations. In 2002, we renegotiated the leasefor this space for occupancy through March 2009, and the current base rentunder the amended lease is approximately $816,000 per year, plus taxes,insurance, and maintenance of approximately $192,000 per year.

 

In June 2003 AvocentInternational Ltd. completedthe purchase of a new facility of approximately 129,000 square feet in Shannon,Ireland for approximately $6.4 million to replace our former leased space inShannon.

 

Our Steinhagen, Germany facility consists ofapproximately 9,900 square feet, contains engineering, sales and administrativepersonnel, and is located on leased property. The lease, which provides forannual rent of approximately $128,000, can be terminated or renewed in February2006.

 

We lease approximately 5,100 square feet in an officebuilding in Austin, Texas.  This officecontains sales, marketing, and administrative personnel to support our OEMoperations.  The sixty-two month leaseterminates in 2006, and our annual base 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 contains sales,marketing, research and development, and engineering personnel.

 

We lease approximately 8,600 square feet for $224,000per year in Chelmsford, Massachusetts. This facility houses sales andengineering personnel.

 

We lease approximately 5,300 square feet for $42,000per year in Draper, Utah. This facility houses sales, marketing, andengineering personnel.

 

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

 

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

 

**Item 3. Legal Proceedings.**

 

In May 2001, we filed a complaint for patentinfringement in the United States District Court for the Southern District ofNew York against Raritan Computer Inc. The Raritan complaint sought injunctiverelief, damages, attorneys’ fees and costs under three of our patents.  After a seven day bench trial in New York inJanuary 2002, U.S.District Judge Milton Pollack found that there was no infringement of ourpatents by Raritan and ordered that judgment be entered in favor ofRaritan.  We appealed that judgment, andin April 2003, the United States Court of Appeals for the FederalCircuit issued its ruling on our appeal in this patent litigation.  The Court of Appeals ruled in our favor byvacating the non-infringement decision of the District Court for the SouthernDistrict of New York and remanding the case for further proceedings consistentwith the Court of Appeals’ opinion.  In September 2003, Raritan petitioned theUnited States Supreme Court for a Writ of Certiorari to review the Court ofAppeals decision, and we filed our opposition to the petition in November2003.  Raritan’s petition was denied bythe Supreme Court in December, 2003, and the case in now back before the UnitedStates District Court for the Southern District of New York.

 

In October 2003, we filed acomplaint for patent infringement in the United States District Court for theNorthern District of Alabama against ClearCube Technology, Inc.  The ClearCube complaint seeks injunctive relief,damages, attorneys’ fees, and costs under three Avocent patents.  ClearCube has filed counterclaims allegingnon-infringement, unenforceability, invalidity, and misuse of the Avocentpatents.

 

**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 each quarterly period within the lasttwo fiscal years as reported by the Nasdaq National Market System.

 
|                               |   | **High** |   | **Low** |   |
|------------------------------------|--------|----------|--------|---------|--------|
| Quarter ended December 31, 2003    |   | $        | 39.53  |    | $      | 29.50 |   |
| Quarter ended September 26, 2003   |   | $        | 33.38  |    | $      | 24.11 |   |
| Quarter ended June 27, 2003        |   | $        | 33.85  |    | $      | 22.33 |   |
| Quarter ended March  28, 2003 |   | $        | 29.80  |    | $      | 21.68 |   |
| Quarter ended December 31, 2002    |   | $        | 25.45  |    | $      | 11.86 |   |
| Quarter ended September 27, 2002   |   | $        | 18.45  |    | $      | 12.39 |   |
| Quarter ended June 28, 2002        |   | $        | 28.07  |    | $      | 13.45 |   |
| Quarter ended March 29, 2002       |   | $        | 27.71  |    | $      | 20.55 |   |

 

As of March 5, 2004, there were 254 holders of recordof our common stock.

 

**Dividend Policy**

 

We have not declared or paid any cash dividends in thepast and, for the foreseeable future, we expect to retain earnings to financethe expansion and development of our business. The payment of dividends iswithin the discretion of our Board of Directors and will depend on our earnings,capital requirements and operating and financial condition, among otherfactors.

 

**Equity Compensation Plan Information**

 

Please see Item 12of this Annual Report on form 10-K for disclosures relating to our equitycompensation plans.  Such information isincorporated by reference from our 2004 proxy statement.

 

**Recent Sales of Unregistered Securities**

 

On November 17,2003, we issued an aggregate of 30,744 shares of our common stock to theshareholders of Soronti, Inc. in connection with our acquisition ofSoronti.  This sale of securities wasexempt from registrations under the Securities Act of 1933, as amended,pursuant to Section 4(2) , on the basis that the transaction did not involve apublic offering.  The resale of theseshares will be the subject of a registration statement on Form S-3 that weintend to file with the Securities and Exchange Commission during the secondfiscal quarter of 2004.

 

**Item 6. Selected Financial Data.**

(Amounts in thousands,except per share data and amounts in the note “*” below.)

 
|                            |   | **2003** |    | **2002** |   | **2001** |   | **2000** |     | **1999** |   |
|---------------------------------|--------|----------|---------|----------|--------|----------|--------|----------|----------|----------|--------|
| Net sales                       |   | $        | 304,238 |     | $      | 260,600  |   | $        | 255,911  |     | $      | 222,372 |   | $ | 107,288 |   |
| Net income (loss) *             |   | $        | 38,547  |     | $      | 10,738   |   | $        | (320,466 | )        | $      | (130,556 | ) | $ | 21,243 |   |
| Basic per share income (loss)   |   | $        | 0.83    |     | $      | 0.24     |   | $        | (7.22    | )        | $      | (3.92 | ) | $ | 0.94 |   |
| Diluted per share income (loss) |   | $        | 0.81    |     | $      | 0.24     |   | $        | (7.22    | )        | $      | (3.92 | ) | $ | 0.90 |   |
| Total assets                    |   | $        | 660,763 |     | $      | 568,607  |   | $        | 547,198  |     | $      | 815,246 |   | $ | 104,314 |   |

 

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* For the periods presented, we recognized charges foracquired in-process research and development expenses for the following mergersand acquisitions: $94.0 million for Apex Inc. and Cybex Computer Products Corp.in 2000, $4.6 million for Equinox Systems Inc. in 2001, $6.0 million for 2CComputing, Inc. in 2002 and $3.9 million for Soronti, Inc. in 2003 (*see note 3to the financial statements*). Additionally, we recorded an impairment charge of $195.4 million in 2001as a reduction in the remaining carrying value of goodwill arising from themerger of Apex and Cybex (*see note 8 to the financial statements*).  EffectiveJanuary 1, 2002, we adopted SFAS No. 142 and ceased amortizing goodwill createdfrom mergers and acquisitions. However, prior to the adoption of FASB 142, werecorded $52.8 million of goodwill amortization during the year ended December31, 2000 and $111.0 million during the year ended December 31, 2001.

 

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**Item 7.****        Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

THE INFORMATION IN THIS ITEM 7—”MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTSRELATING TO OUR REVENUES, EXPENSES, MARGINS, LIQUIDITY, CAPITAL NEEDS, INVESTMENTS,ACQUISITON ACCOUNTING, ACQUISITION AND TRANSACTION COSTS AND ADJUSTMENTSINCLUDING, AMONG OTHER THINGS, WRITE OFF OF IN-PROCESS RESEARCH AND DEVELOPMENTCOSTS AND AMORTIZATION OF INTANGIBLE ASSETS. THESE FORWARD-LOOKING STATEMENTSARE 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 Corporation was formed as a result of mergerin July 2000 between Apex Inc. and Cybex Computer Products Corporation, whichwas accounted for as an acquisition of Cybex by Apex.  Our acquisitions include Equinox Systems Inc. in January 2001, 2CComputing, Inc. in August 2002, Soronti, Inc. in November 2003, and CrystalLink Technologies in January 2004.

 

We design, manufacture, sell, and license analog anddigital KVM (keyboard, video and mouse) switching systems, serial connectivitydevices, extension, wireless extension, and remote access products, andtechnologies for the computer industry. 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 and technologies, help them manage multiple serversand 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 manynetwork administration, management, and storage problems faced by corporatecustomers, data centers, and server farms. Our switching solutions includeproducts and technologies sold or licensed under the Avocent, Apex, Cybex, Equinoxbrands, including our *AMX*TM, *AutoViewTM, DS SeriesTM, SwitchView®,OutLook®,LongViewTM,*and*XP®4000 Series* products.Our switching systems and solutions help facilities managers and networkadministrators access multiple servers and serially controlled devices from oneor more centralized or remote consoles, consolidate hardware requirements, andprovide direct hardwired connections between the switch and the attachedservers to facilitate access to those servers, even when the network is down.Our Equinox branded products add high-performance, reliable, and affordableserver-based products for serial and dial-up access applications.  The Equinox *SuperSerialTM* product lineprovides serial communications for security, commercial point-of-sale, processcontrol, industrial automation, data collection, remote access, fax servers,Internet access, and custom applications. Our Digital Desktops product lineincludes the *CstationTM* product. Initial applications for Cstation include financial trading floors wherespace is at a premium, industrial plant control environments that benefit fromremote computers due to harsh or unsecured environments, and governmentinstallations that require high security afforded through the remote locationof the computer and hard disk.

 

We introduced several additions to our product lines during 2003.  Our product introductions included the *SwitchView®IP*, which is a hardware solution that allows remote access to beadded to current analog KVM switching solutions, the  *SwitchView® USB,* which is directed at the homeoffice and small business user providing the ability to use a single keyboard,monitor, and mouse to access up to four computers and multiple USB devises, andthe *LongView*TM*Wireless,*which allows for wireless control of monitors, keyboards, mice, andaudio devices on a computer up to 100 feet away.

 

A substantial portion of our revenue is derived fromsales to a limited number of OEMs who purchase our switching systems on aprivate-label or branded basis for integration and sale with the their ownproducts, sales through our reseller and distributor network, and sales to alimited number of direct customers. Sales to our OEM customers accounted for46% of sales in each of 2003, 2002, and 2001. Sales to our branded customers accounted for 54% of sales in each of2003, 2002, and 2001. We do not have contracts with many of our OEM and brandedcustomers, and in general, they are obligated to purchase products from us onlypursuant to binding purchase orders. The loss of, or material decline in orders from, our OEM customers wouldhave a material adverse effect on our business, financial condition, results ofoperations, and cash flows.  Our topfive customers include both OEM and branded customers, and accounted for 64% ofsales in 2003, 65% of sales in 2002, and 55% of sales in 2001.

 

We sell products to dealers, end-users, and OEMs inthe United States, Canada, Europe, and Asia as well as in other foreignmarkets.  Sales within the United Statesaccounted for approximately 60% of 2003 sales, 60% of 2002 sales, and 62% of2001 sales.  Sales outside of the UnitedStates accounted for 40% of 2003 sales, 40% of 2002 sales, and 38% of 2001sales.  Sales to customers in the UnitedKingdom, including the European distribution facility for one of our OEMcustomers, accounted for 10% of 2003 sales, 15% of 2002 sales, and 15% of 2001sales.  No other country accounted formore than 10% of 2003, 2002, or 2001 sales.

 

With continued industry-wide initiatives to reduce allchannel inventories and to shorten lead times, trends with our major

 

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customers are, generally,to reduce the number of weeks of forward-committed firm orders. This trendcontinues to affect our business with certain distributors, OEMs and otherserver manufacturers, and we believe that it will continue to make our futuresales more difficult to predict and inventory levels more difficult to manage.

 

We continue to experiencesignificant price competition in the market for all of our products, and weexpect that pricing pressures will continue in the future.  In addition, general economic conditions arenot as predictable as they were in prior years and we expect our revenue growthrate to fluctuate in relation to economic conditions and IT related spendingtrends.  Depending on future generaleconomic conditions and other factors, our revenue could decline in the future.

 

We implemented a newenterprise resource planning system in the fourth quarter of 2003 at our UnitedStates locations, and we plan to implement the system at our internationallocations during 2004. We have capitalized the development and implementationcosts of the new system to date and have begun depreciating the costs for thesystem used in the United States.  As ofDecember 31, 2003, $9.9 million had been capitalized for this new system and$6.9 million had been placed in service for locations in the United States. Weexpect the new system to provide many benefits, including more detailedinformation to improve the ways we manage inventory, customer relationships,and operating expenses on a timelier basis.

 

We received ISO9001:2000 registration for our global business processes during the firstquarter of 2003.  We believe ISOregistration will become a requirement for doing business with several of ourOEM customers.

 

Our stockholdersapproved the adoption of the Avocent Corporation 2003 Stock Option Plan at theannual meeting of stockholders held in June 2003.  Under the 2003 Stock Option Plan, 2.0 million shares of ourcommon stock are reserved for issuance and we have issued approximately 496,000options under this plan through December 31, 2003.  We filed a registration statement on Form S-8 to register theshares authorized for issuance under this plan during the fourth quarter of2003.  Additionally, our Board of Directorsapproved the adoption of the Avocent Corporation 2003 Inducement Award Plan inthe fourth quarter of 2003.  Under theInducement Award Plan, 500,000 shares of our common stock are reserved forissuance to new employees. We have issued approximately 142,000 options underthis plan through December 31, 2003.

 

Many of our executiveofficers and directors are vested in significant amounts of options to purchaseshares of our common stock and continue to vest in additional shares on aregular basis.  These officers anddirectors have informed us that they have sold, and may sell additional, sharesof our common stock to provide liquidity and diversify their portfolios.

 

**Results of Operations**

 

Our consolidated statements of operations,stockholders’ equity, and cash flows reflect the results of acquired companiesfrom the respective dates of acquisition. Certain reclassifications have been made to the prior year financialstatements to conform to the current year presentation.

 

The following table sets forth, for the periodsindicated, selected statement of operations data expressed as a percentage ofnet sales:

 

 
|                                                                              |   | **Years  Ended December 31,** |   |
|-----------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                              |   | **2003**                      |   | **2002** |   | **2001** |   |
| Net  sales                                                                        |   | 100.0                         | %      | 100.0 | % | 100.0 | % |
| Cost  of sales                                                                    |   | 43.5                          |   | 49.5 |   | 58.6 |   |
| Gross  profit                                                                     |   | 56.5                          |   | 50.5 |   | 41.4 |   |
| Operating  expenses:                                                              |   |                          |   |   |   |   |   |
| Research  and development expenses                                                |   | 9.8                           |   | 10.2 |   | 8.8 |   |
| Acquired  in-process research and development expense and other acquisition costs |   | 1.3                           |   | 2.3 |   | 1.8 |   |
| Selling,  general and administrative expenses                                     |   | 23.1                          |   | 25.7 |   | 29.2 |   |
| Amortization  of intangible assets                                                |   | 7.2                           |   | 8.5 |   | 51.9 |   |
| Impairment  write-down of intangible assets                                       |   | —                        |   | — |   | 76.4 |   |
| Total  operating expenses                                                         |   | 41.4                          |   | 46.7 |   | 168.1 |   |
| Income  (loss) from operations                                                    |   | 15.1                          |   | 3.8 |   | (126.7 | ) |
| Net  investment income                                                            |   | 1.6                           |   | 2.2 |   | 2.5 |   |
| Net  realized investment gains (losses)                                           |   | 0.9                           |   | (0.1 | ) | (2.1 | ) |
| Other  expense, net                                                               |   | (0.1                          | )      | (0.1 | ) | (0.1 | ) |
| Income  (loss) before provision for (benefit from) income taxes                   |   | 17.5                          |   | 5.8 |   | (126.4 | ) |
| Provision  for (benefit from) income taxes                                        |   | 4.8                           |   | 1.7 |   | (1.2 | ) |
| Net  income (loss)                                                                |   | 12.7                          | %      | 4.1 | % | (125.2 | )% |

 

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*Years Ended December 31, 2003and 2002*

 

*Netsales.*  Our net salesconsist of sales of keyboard, video, and mouse console switching systems,digital connectivity solutions, serial connectivity devices, wireless extensionproducts, and extension and remote access solutions. Net sales increased 17% to$304.2 million for 2003 from $260.6 million for 2002. This increasein sales resulted from increased demand from our OEM and branded customersacross all geographic regions.  OEM salesfor 2003 increased 17% over 2002, and branded sales for 2003 increased 17% over2002. OEM sales were 46% of sales for both 2003 and 2002, while branded salesaccounted for 54% of sales for both 2003 and 2002.  Continued strong demand for our digital product line contributedto our sales growth. The primary contributor to the growth of our digitalproduct revenue was the introduction of the OEM versions of our digital productline in mid 2002.  Sales of our digitalsolutions accounted for $114.8 million or 37.7% of sales in 2003 compared with$64.1 million or 24.6% of sales for 2002. Our analog line of products also contributed to our sales growth withcontributions from our OEM line of analog products and our high-end analogsolution, the AMXTM.

 

Sales were strong in the United States and internationally.  Sales within the United States were 60% ofsales in both 2003 and 2002, while international sales accounted for 40% ofsales in both 2003 and 2002.  Sales inthe U.S. increased 17% from $155.6 million in 2002 to $182.1 million in 2003,while international sales increased 16% from $105.0 million in 2002 to $122.1million in 2003.  This increase in salesin the U.S. can be attributed to the stabilization of spending in thetechnology sector of the economy, the strengthening of our branded sales, andthe strong sales of our digital and analog OEM solutions.  The strength in our international sales wasmost evident in the European and the Asia Pacific regions, where both brandedand OEM sales were strong. We believe the overall strength in these regions isthe result of our increased investments in international sales and marketingprograms over the past two years.

 

We believe that our revenue will continue to grow and we anticipaterevenue growth of approximately 13% to 17% in 2004. To achieve these results,we expect our digital product sales to continue to increase as a percentage ofsales in 2004, and we expect contributions from new products planned in ourAMX, midrange, and SwitchView product families as well as from our embeddedsolutions.  We anticipate that these newproduct offerings will drive increased revenues in both our OEM and brandedbusiness.   Other factors supporting ourprojected sales growth are positive trends in our international business andreported increases in spending for information technology in the U.S.  Key assumptions underlying our expectationof sales growth is that the IT spending climate will continue to improve andthat there will be no material change in our competitive environment.  Our business is seasonal, and we expectrevenue to be flat to down 7% from the fourth quarter of 2003 to the firstquarter of 2004.

 

*Grossprofit.*  Gross profitmay be affected by a variety of factors, including: the ratio of sales amongour distribution channels, as OEM sales have lower gross margins than ourbranded sales; absorption of fixed costs as sales levels fluctuate; productmix, raw materials, and labor costs; new product introductions by us and by ourcompetitors; and the level of our outsourcing of manufacturing and assemblyservices.  Gross margins improvedsignificantly to 56.5% in 2003 from 50.5% in 2002.  Gross margin in 2003 benefited from higher sales of our digitalsolutions, which typically have a higher margin than our analog products, andaccounted for almost 38 % of sales in 2003 compared to 25% of sales in2002.  Gross margins also benefited fromchanging contract manufacturers to achieve lower costs for a significantportion of our business. Our margins also benefited from a full year of salesof our AMX product, which has a higher gross margin than our other analogproducts and only began shipping in the third quarter of 2002.  These factors were offset in part by pricereductions granted to certain OEM customers and larger discounts given tocertain new international resellers as we continue to expand the regions wherewe sell our products.  Margins werepositively affected by our efforts both to lower product costs through productredesigns that eliminated costly components and to reduce costs in our supplychain.

 

We expect gross margins to average between 55% and 57% in 2004, whileremaining flat in the first quarter of 2004 as compared to the fourth quarterof 2003.  Overall, we believe that weare not likely to be able to maintain such high margins in the long term as weexpect competitive and customer pressures may result in lower gross marginsthan we experienced in the last half of 2003. We expect continued costreductions from engineering redesigns and price reductions from our contractmanufacturers to help offset the adverse impact from competitive and customerpressures in the coming year.

 

*Researchand development expenses.* Research and development expenses include compensation for engineers,support personnel, outside contracted services and materials costs, and areexpensed as they are incurred. Research and development expenses were$29.8 million, or 9.8% of net sales in 2003, compared to$26.5 million, or 10.2% of net sales in 2002. The increase in the amountspent on research and development can be attributed to an increase in thenumber of engineers, and an increase in materials, certification, and testingof products currently in development. The increase in headcount was the resultof hiring software engineers to support the software embedded within ourexpanding suite of digital offerings and the addition of engineers through ouracquisitions.   In addition, wecontinued to enhance our existing engineering test labs and establish new labsin order to improve completion time for developing and testing newproducts.  We believe that the timelydevelopment of innovative products and enhancements to existing products isessential to maintaining our competitive position.  For 2004, we expect research and development expense to stabilizeas a percentage of sales and be in the 9.0% to 9.5% range.  For the first quarter of 2004, we expectresearch and development expense to increase slightly from the fourth quarterof 2003 due to a full quarter of costs from the Soronti and Crystal Linkacquisitions.

 

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*Acquiredin-process research and development expense and other acquisition costs.*  Acquisition related expenses in 2003 arecomprised solely of the write-off of $3.9 million of in-process researchand development expense related to the acquisition of Soronti.  Acquisition related expenses in 2002 werecomprised solely of the write-off of $6.0 million of in-process researchand development expense related to the acquisition of 2C.  We expect to expense $3.0 to $5.0 million ofin-process research and development expense related to the acquisition ofCrystal Link Technologies in the first quarter of 2004.

 

*Selling,general and administrative expenses.*  Selling, general and administrative expensesinclude personnel costs for administration, finance, information systems, humanresources, sales and marketing and general management, as well as some mergerand acquisition related expenses, rent, utilities, legal and accountingexpenses, bad debts, advertising, promotional material, trade show expenses andrelated travel costs. Selling, general and administrative expenses were$70.4 million, or 23.1% of net sales for 2003 compared to$66.9 million, or 25.7% of net sales for 2002.  The increase in selling, general and administrative expenses wasdue primarily to increased labor costs as a result of additions to headcountand higher advertising costs.  Ouradditions to headcount were the result of hiring sales staff in Europe, Asia,and certain regions of the U.S. to strengthen our sales force in key regions,and the hiring of additional information technology staff to support ourenterprise resource planning information system project and the acquisition ofSoronti.  The increased advertisingexpense was the result of advertising expenses related to the rollout of newproducts. The first quarter of 2002 was affected by $2.7 million in legal feesrelated to patent litigation, as well as $2.0 million of compensation expenserecorded as the result of a cashless option exercise.  However, selling, general and administrative expenses in 2002benefited from a $1.4 million recapture of a receivable previously reserved in2001, related to a contract manufacturer that had filed for bankruptcy.  We received a favorable ruling by thebankruptcy judge, which allowed the offset of receivables and payables betweenthe contract manufacturer and certain customers, including Avocent.  We expect selling, general andadministrative expenses as a percentage of sales to be flat for the firstquarter of 2004 and down slightly for the 2004 year, but we expect theseexpenses to grow slightly in dollars. Looking ahead, we expect legal and accounting costs related to corporategovernance initiatives (including the Sarbanes-Oxley Act of 2002 and otherregulatory changes) and the continued protection of our intellectual propertyrights to increase.  Additionally, weexpect increased costs related to additional sales staffing, product rolloutprograms, depreciation of capitalized ERP costs, increased trade show activity,increased advertising activity, and increased travel costs related to theseefforts.

 

*Amortizationof intangible assets.* Amortization of $21.8 million in 2003 is comprised of the amortizationof the identifiable intangible assets created as a result of the mergertransaction between Apex and Cybex, the acquisitions of Equinox and 2C and asmall amount for Soronti, acquired in mid November 2003.  Amortization of $22.2 million in 2002includes the amortization of the identifiable intangible assets created as aresult of the merger transaction between Apex and Cybex and the acquisitions ofEquinox and 2C.

 

*Netinvestment income**.** *Net******investment incomedecreased from $5.6 million in 2002 to $4.8 million in 2003.  Although we had more cash and investmentsduring 2003 than in 2002, our interest income declined due to lower interestrates.

 

*Netrealized investment gains (losses). *Netrealized investment gains (losses) increased from a loss of $305,000 in 2002 toa gain of over $2.6 million in 2003 almost entirely as a result of the gain onthe disposition of a previously written down equity investment recognized inthe third quarter of 2003.

 

*Otherincome (expense), net.* Net other expense increased from $178,000 in 2002, to $288,000 in 2003.This increase was due primarily to larger foreign exchange losses in the firsthalf of 2003 as compared to 2002.  Thelarger foreign exchange losses in the first half of 2003 were offset somewhatby exchange gains in the second half of 2003.

 

*Provisionfor (benefit from) income taxes.*  The provision for income taxes was $14.5 million in 2003 comparedto $4.5 million in 2002. The effective tax rate for 2003 was 27.3% in 2003compared to an effective tax rate of 29.5% in 2002.  Our effective tax rate is affected by many factors, including thecomposition of pretax profit among our locations.  In recent years, we have increased our international shipmentsfrom our Shannon, Ireland facility, which operates under a 10% tax rate.

 

*Netincome.*  Net incomefor 2003 was $38.5 million compared to $10.7 million for 2002, as aresult of the above factors, including the increase in our revenues, anincrease in our margins, and an increase in realized investment gains,partially offset by an increase in selling, general and administrative expensesand research and development expenses. The difference in amounts charged foracquired research and development expense upon the acquisitions of 2C in 2002and Soronti in 2003 also positively affected net income in 2003.  Net income as a percentage of sales for 2003was 12.7%, compared to 4.1% for 2002.

 

*Years Ended December 31, 2002and 2001*

 

*Netsales*. Net sales increased 2% to $260.6 million for 2002from $255.9 million for 2001. This increase in sales resulted fromincreased demand from our OEM customers and increased sales from our brandedcustomers. On a percentage basis, OEM sales for 2002 increased 3% over 2001,and branded sales for 2002 increased 1% over 2001. OEM sales were 46% of salesfor both 2002 and 2001.  Branded saleswere 54% of sales for both 2002 and 2001. The 2C acquisition did not contribute material sales in 2002.  Customer acceptance of our digital productsalso contributed to our moderate sales growth. Although sales of our analog switching solutions declined

 

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in 2002 from 2001,the increase in sales of our digital solutions more than offset the decline inanalog product sales.  Sales of ourdigital solutions accounted for $64.1 million or 24.6% of sales in 2002compared with $21.7 million or 8.5% of sales for 2001.

 

Sales within the United States were 60% of sales in 2002 and 62% ofsales in 2001, while international sales accounted for 40% of sales in 2002 and38% of sales in 2001.  Sales in the U.S.declined from $159.8 million in 2001 to $155.6 million in 2002, whileinternational sales increased from $96.1 million in 2001 to $105.0 million in2002.  The decline in sales in the U.S.was due to the general weakness in the technology sector of the economy.  The relative strength in our internationalsales was most evident in the European and the Asia Pacific regions. We believeour strength in these regions is evidence that we are beginning to realize thebenefits of our increased investments in international sales and marketingprograms over the last several years.

 

*Grossprofit.*  Gross profitis affected by a variety of factors, including: the ratio of sales among ourdistribution channels, as OEM sales have lower gross margins than our resellerand distributor sales and direct sales; absorption of fixed costs as saleslevels fluctuate; product mix, raw materials, and labor costs; new productintroductions by us and by our competitors; and the level of our outsourcing ofmanufacturing and assembly services. Gross margins improved significantly to 50.5% in 2002 from 41.4% in2001.  Gross margin in 2002 benefitedfrom higher sales of our digital solutions, which have a higher margin than ouranalog products, and accounted for over 23% of sales in 2002 compared to only8% of sales in 2001.  Also, AMX, our newanalog matrix switch, began shipping in the third quarter of 2002 and has ahigher gross margin than our other analog products.  Additionally, gross margins were significantly affected by $13million of write-downs for excess and obsolete inventories during 2001.  These write-downs were taken to reduceinventory valuations to bring them in line with current replacement values and tothe level necessary to support then 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. Margins in the latter half of 2001 were also affected unfavorablyby a DS1800 list price reduction.

 

*Researchand development expenses.* Research and development expenses include compensation for engineers,support personnel, outside contracted services and materials costs, and areexpensed as they are incurred. Research and development expenses were $26.5 million,or 10.2% of net sales in 2002, compared to $22.5 million, or 8.8% of netsales in 2001. The increase in research and development expenses was due to anincrease in contracted services and other costs related to the new productroll-outs in the second half of 2002 and to the impact of the acquisition of 2Cin August 2002. We expect to continue to focus on new products, enhancements toour AMX and digital products families, as well as new solutions for bladeservers and traditional servers.  We believethat the timely development of innovative new products and enhancements toexisting products is essential to maintaining our competitive position.

 

*Acquiredin-process research and development expense and other acquisition costs.*  Acquisition related expenses in 2002 arecomprised solely of the one-time write-off of $6.0 million of in-processresearch and development expense related to the acquisition of 2C.  Acquisition related expenses in 2001 arecomprised solely of the one-time write-off of $4.6 million of in-processresearch and development expense related to the acquisition of Equinox.

 

*Selling,general and administrative expenses.*  Selling, general and administrative expensesinclude personnel costs for administration, finance, information systems, humanresources, sales and marketing and general management, as well as some mergerand acquisition related expenses, rent, utilities, legal and accountingexpenses, bad debts, advertising, promotional material, trade show expenses andrelated travel costs. Selling, general and administrative expenses were$66.9 million, or 25.7% of net sales for 2002 compared to$74.8 million, or 29.2% of net sales for 2001.  The decrease in selling, general and administrative expenses waslargely attributable to a reduction in amortization of deferred stock optioncompensation related expenses and a reduction in bad debt expense.  Approximately $8.5 million of selling,general and administrative expenses in 2002 related to the amortization ofdeferred compensation for stock options as a result of the merger transactionbetween Apex and Cybex,  the acquisitionof Equinox and the acquisition of 2C, while approximately $13.2 million ofselling, general and administrative expenses in 2001 related to theamortization of deferred compensation for stock options as a result of themerger transaction between Apex and Cybex and the acquisition of Equinox.  In addition, selling, general andadministrative expenses in 2002 benefited from a $1.4 million recapture of areceivable, previously reserved in 2001, related to a contract manufacturerthat had filed for bankruptcy.  Wereceived a favorable ruling by the bankruptcy judge, which allowed the offsetof receivables and payables between the contract manufacturer and certaincustomers, including Avocent. Partially offsetting the decline in selling,general and administrative expenses was $2.7 million in legal fees related tothe patent infringement lawsuit we brought against one of our competitorschallenging the use of on-screen technology in the competitor’s switches.  A court decision was reached in the firstquarter of 2002 that found no infringement of the three patents involved in thelawsuit.  Accordingly, we expensed alllegal fees incurred to date during the first quarter of 2002.  The judgment is currently on appeal, and weintend to continue to pursue the lawsuit. Additionally, 2001 selling, general and administrative expenses include$1.3 million of severance costs related to headcount reductions in the U.S. andEurope.

 

*Impairmentwrite-down of intangible assets.*  The 2001 impairment write-down of intangible assets is comprisedsolely of a write-down of goodwill, created as a result of the mergertransaction between Apex and Cybex and the acquisition of Equinox, recorded asthe result of a cash flow analysis performed under the applicable provisions ofSFAS No. 121 during 2001. We performed a cash flow analysis to determine if theremaining balance of goodwill created at the merger of 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, in 2001, we recorded a $195.4 million reduction in the carryingvalue of goodwill created upon the merger of Apex and Cybex.  The write-off of the goodwill was based onan analysis

 

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of then projected cashflows, which were no longer considered adequate to support the value ofgoodwill associated with the merger.

 

*Amortizationof intangible assets.* Amortization of $22.2 million in 2002 is comprised of the amortizationof the identifiable intangible assets created as a result of the mergertransaction between Apex and Cybex, the acquisitions of Equinox and 2C, whileamortization of $132.9 million in 2001 includes the amortization of theidentifiable intangible assets created as a result of the merger transactionbetween Apex and Cybex, the acquisition of Equinox and the amortization ofgoodwill created as a result of these transactions.  The primary reason for the decline in amortization was thecessation of goodwill amortization in 2002. We adopted SFAS No. 142, *Goodwill and Other Intangible Assets,*on January1, 2002.  On that date, under theprovisions of SFAS No. 142, goodwill ceased to be amortized.  The amortization of goodwill wasapproximately $111.0 million during 2001.

 

*Netinvestment income**.** *Net******investment incomedecreased from $6.3 million in 2001 to $5.6 million in 2002.  Although we had more cash and marketablesecurities in 2002 than in 2001, interest income has declined due to lowerinterest rates**.**

 

*Netrealized investment gains (losses). *Thedecline in net realized investment losses from $5.3 million in 2001 to $305,000in 2002 relates mainly to a $4.9 million charge recorded in the fourth quarterof 2001 for an “other-than-temporary” decline in the market value of ourinvestment portfolio.

 

*Otherincome (expense), net.* Net other expense decreased from $303,000 in 2001, to $178,000 in 2002.The decline related primarily to a reduction in interest expense in 2002 as aresult of the interest incurred in the first quarter of 2001 related to $45.0million in short-term borrowings for the Equinox acquisition.

 

*Provisionfor (benefit from) income taxes.*  The provision for income taxes was $4.5 million in 2002 ascompared to a benefit from income taxes of approximately $2.9 million in2001. Excluding merger related adjustments to federal taxes, the effective taxrate for 2002 was approximately 25.5%, compared to 29.0% for 2001, primarilydue to increasing international sales from our Shannon, Ireland facility. OurShannon facility operates under a 10% tax rate.

 

*Netincome (loss).*  Netincome for 2002 was $10.7 million compared to a net loss of$320.5 million for 2001, as a result of the above factors, including thereduction in the carrying value of goodwill, the amortization of identifiableintangible assets and goodwill, deferred compensation expense, and inventorywrite-downs in 2001.  Net income as apercentage of sales for 2002 was 4.1%, compared to a net loss of 125.2% for2001.

 

**Liquidity and Capital Resources**

 

As of December 31, 2003 our principal sources of liquidityconsisted of approximately $306 million in cash, cash equivalents, andinvestments.  In previous years, we havehad a bank line of credit for borrowings but have determined that our cashposition and expected maturities of investments are and will continue to beadequate to cover our current and future liabilities and capital needs.  We have no outstanding debt.

 

Our operating activities generated cash of approximately$82.5 million for 2003, $71.1 million for 2002, and$72.6 million for 2001.  The cashflow from operations in 2003 was primarily the result of increased net incomeand our continued focus on managing our inventory, which were offset by anincrease in receivables as of December 31, 2003.  Inventories declined from $24.4 million at December 31, 2002 to$21.3 million at December 31, 2003.  Thedecline in inventory was the result of the continued efforts of our globaloperations group to increase turnover by consuming existing supplies whilemaintaining adequate inventory to meet customer demands.  A strong increase in sales throughout thelast quarter of 2003 also affected our inventory levels.  We continue to monitor our inventory levelsand expect to maintain inventory turns in the 6 to 8 range.  Receivables increased more than $8.7 millionat December 31, 2003 compared to December 31, 2002, primarily as a result ofthe increased sales volume in the fourth quarter of 2003 compared to the fourthquarter of 2002.  While our receivablesbalance increased year over year, we believe that the quality of ourreceivables was not affected as our DSO ratio remained relatively stable,increasing slightly from 46 at December 31, 2002 to 47 at December 31, 2003.

 

Other factors affecting our 2003 cash flow were an increase in accountspayable, an increase in accrued wages and commissions, and increased stockoption exercises in 2003 compared to 2002. We recorded a tax benefit from the exercise of stock options of over$10.2 million in 2003 compared to $1.2 million in 2002.  We experienced significant exercises ofstock options in 2003 as our stock achieved new 52-week highs at several pointsduring the year.

 

We implemented a newenterprise resource planning system in the fourth quarter of 2003 at our UnitedStates locations, and we plan to implement the system at our international locationsduring 2004. We have capitalized the costs of the new system to date and havebegun depreciating the costs for the portion of the system used in the UnitedStates.  As of December 31, 2003, $9.9million had been capitalized for this new system and $6.9 million had beenplaced in service for our locations in the United States. We expect the totalcost of the new system to be $11.0 to $12.2 million.

 

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During the second quarter of 2003, wepurchased a facility in Shannon, Ireland for approximately $6.4 million.  We have occupied the building since July2003.

 

In the ordinarycourse of our business, we may at any point in time have a significant amountof contractual commitments not yet recognized in our financial statements.These commitments relate primarily to our need to schedule the purchase ofinventories in advance of the related forecasted sales to customers. We havelonger lead times for the products we purchase from suppliers based in Asia thanthose for our U.S. based and European suppliers. Our actual contractualcommitments are typically limited to products needed for one to three months offorecasted sales. The liabilities for these inventory purchases along with therelated inventory assets are typically recognized upon our receipt of theproducts. We also have at any point in time a variety of short term contractualcommitments for services such as advertising, marketing, accounting, legal, andresearch and development activities. The liabilities for these services and therelated expenses are typically recognized upon our receipt of the relatedservices.  As of December 31, 2003, noneof our expected purchase commitments required payment beyond 2004.

 

The followingtable sets forth the annual payments we are required to make under contractualcash obligations and other commercial commitments for operating leases and forpurchases of inventory and services, in thousands, at December 31, 2003.

 
|       |   | **Operating  Leases** |   | **Purchase  Commitments** |   |
|------------|--------|-----------------------|--------|---------------------------|--------|
|       |   |                  |   |                      |   |
| 2004       |   | $                     | 1,745  |                      | $      | 25,033 |   |
| 2005       |   | 1,375                 |   | —                    |   |
| 2006       |   | 878                   |   | —                    |   |
| 2007       |   | 734                   |   | —                    |   |
| 2008       |   | 685                   |   | —                    |   |
| Thereafter |   | 167                   |   | —                    |   |
|       |   |                  |   |                      |   |
| Total      |   | $                     | 5,584  |                      | $      | 25,033 |   |

 

We intend to use a portion of our cash and investments for strategicacquisitions of technologies and companies that will enhance and complement ourexisting technologies and help increase our sales.

 

**CertainTransactions**

 

*Investmentin VIEO, Inc.*

 

In the second quarter of 2003, we made a $3.0 millionpreferred stock investment in VIEO, Inc. VIEO provides management products forAdaptive Application Infrastructure Management.  VIEO’s products combine application-aware networking hardwarewith intelligent infrastructure management software in a secure, purpose-builtappliance to measure, analyze and control application resources.  Headquartered in Austin, Texas, VIEO hasraised funding from a wide group of investors, including our investment.  We are accounting for our investment, whichrepresents less than 10% ownership in VIEO, on the cost method.

 

***Acquisitionof Soronti, Inc.***

** **

**On November 17, 2003, we acquired the outstandingpreferred and common shares of Soronti for approximately $7.0 million in cashand stock, plus the assumption of liabilities and payment of certainacquisition costs.  The results ofSoronti’s operations have been included in the consolidated financialstatements since that date.  Soronti,based in Draper, Utah, has developed server and system management products forthe control of IT resources.  Soronti’sproducts included a virtual presence PCI adaptor and a virtual presence standalone unit.**

 

We recorded theacquisition under the purchase method of accounting and allocated the purchaseprice based on the fair values of the assets acquired and liabilities assumed.In accordance with generally accepted accounting principles, purchased researchand development costs allocated to patent-pending technology were capitalizedand will be amortized over the respective estimated useful lives.  The remaining amounts of purchased researchand development were expensed upon the closing of the transaction.  The goodwill recorded as a result of theacquisition will not be amortized but will be included in our annual review ofgoodwill for impairment.

 

***Acquisitionof Crystal Link Technologies***

** **

On January 6,2004, we acquired Crystal Link Technologies for an initial payment of cash andstock of approximately $7.0 million, plus assumed liabilities of approximately$1.2 million and acquisition costs of approximately $175,000. The purchase agreementcalls for possible additional earn-out payments of up to $5.0 million based onfuture technical enhancements and sales goals. Crystal Link, based in Escondido, California, has developed wirelesstechnology for KVM switching and extension products, which is incorporated intoour LongView Wireless product.

 

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We will record theacquisition under the purchase method of accounting and will allocate thepurchase price based on the fair values of the assets acquired and liabilitiesassumed. In accordance with generally accepted accounting principles, purchasedresearch and development costs allocated to patent-pending technology will becapitalized and will be amortized over the respective estimated useful lives.  The remaining amounts of purchased researchand development expensed upon the closing of the transaction.  The goodwill recorded as a result of theacquisition will not be amortized but will be included in our annual review ofgoodwill for impairment.

 

**CriticalAccounting Policies**

 

We believe thefollowing critical accounting policies affect the more significant judgmentsand estimates used in the preparation of our consolidated 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.  We record revenue in accordancewith the applicable terms of each respective customer contract.  Accordingly, revenue on products shipped FOBdestination is recorded when the customer takes possession of the goods, andrevenue on products shipped FOB shipping point is recorded when the goods leaveour facilities.  Shipping and handlingfees are included in net sales, and the related costs are included in cost ofsales in the accompanying consolidated statements of operations.

 

We accrue for sales returns as a reduction of salesand cost of sales based on our experience from historical customer returns,which we believe provides a reasonable estimate of future returns.  Our sales agreements generally include aone-month unconditional return policy. We also allow additional rights of return to certain distributors, whichgenerally extend the return period to 90 days. If actual future customer returns are less favorable than thoseprojected by management, additional sales return costs may be incurred.  Our allowance for sales returns totaled $3.9million and $3.8 million at December 31, 2003 and 2002, respectively.  The reserve is included as a reduction inthe carrying value of accounts receivable in the accompanying consolidatedbalance sheets.

 

Prior to extending credit to a new customer, weperform a detailed credit review of the customer and establish credit limitsbased on the results of our credit review. We review collection experience periodically to determine if thecustomer’s payment terms and credit limits need to be revised.  We maintain allowances for doubtful accountsfor estimated losses resulting from the inability of our customers to makerequired payments.  If the financialcondition of our customers were to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances may be required.  If circumstances change with regard toindividual receivable balances that had previously been determined to beuncollectible (and for which a specific reserve had been established), areduction in our allowance for doubtful accounts may be required.  Our allowance for doubtful accounts was $2.0million and $2.6 million at December 31, 2003 and 2002, respectively.

 

We participate in cooperative advertising and marketdevelopment programs with certain distributors and OEMs. We use these programsto reimburse distributors and OEMs for certain forms of advertising, and ingeneral, allow distributors and OEMs credits up to a specified percentage ofnet purchases. Our costs associated with these programs are estimated andaccrued at the time of sale, and are included in sales and marketing expensesin the accompanying consolidated statements of operations.

 

•                                          Wecarry our inventory at the lower of cost or market, with cost being determinedusing the first-in, first-out method. We use standard costs for material, labor, and manufacturing overhead tovalue our inventory.  We review andrevise our standard costs on a quarterly basis.  Therefore, our inventory costs approximate actual costs at theend of each reporting period.  We write down our inventory forestimated obsolescence or unmarketable inventory to the estimated market valuebased upon assumptions about future demand and market conditions.  If actual future demand or market conditionsare less favorable than those projected by management, additional inventorywrite-downs may be required.  Ourreserve for excess and obsolete inventory was $4.0 million and $7.5 million atDecember 31, 2003 and 2002, respectively.

 

•                                          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 and contractmanufacturers, our warranty obligation is affected by product failure rates,failure rates of purchased components integrated into our products, materialusage, and other rework costs incurred in correcting a product failure.  Should actual product failure rates,material usage, or other rework costs differ from

 

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our estimates, revisions to our estimated warrantyliability may be required.  Our warrantyreserve was $2.7 million and $2.4 million at December 31, 2003 and 2002,respectively.

 

•                                          Wehold investments in various publicly traded equity and debt securities,including mortgaged-backed and other asset-backed securities.  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 recorded $4.9million of other-than-temporary impairment charges against investments in2001.   There were noother-than-temporary impairment charges recorded against investments in 2003 or2002.

 

We also invest in privately held entities andgenerally record our investments in these entities at cost or we use the equitymethod if we have the ability to exercise significant influence over theentity.  We review our investments inthese entities periodically to determine if circumstances (both financial andnon-financial) exist that indicate that we will not recover our initialinvestment.  We record impairmentcharges on investments having a carrying value that is greater than the valuethat we would reasonably expect to receive in an arm’s length sale of theinvestment.  We recorded $550,000 ofwrite-downs against such investments for the year ended December 31, 2002.  We did not record any such write-downsagainst these investments in 2003 or 2001.

 

**•**                                          Effective January 1, 2002, we adopted SFAS No. 142 and ceased amortizinggoodwill.  Our initial test for goodwillimpairment as of January 1, 2002 determined that no adjustment for impairmentwas required.  Additionally, our annualtests for goodwill impairment, performed in the fourth quarters of 2003 and2002, determined that no adjustment for impairment was required.  Our testing indicated that the implied fairvalue of our goodwill exceeded its carrying value; accordingly, in accordancewith SFAS 142, no further impairment analysis was required.  If economic conditions deteriorate andindicators of impairment become present, an adjustment to the carrying value ofgoodwill and other intangible assets may be required.

** **

**•****                                         **We review long-lived assets forimpairment under the guidance prescribed by SFAS No. 144, *Accounting for the Impairment orDisposal of Long-Lived Assets*. We recognize impairment losses onlong-lived assets used in operations when indicators of impairment are presentand the undiscounted cash flows estimated to be generated by those assets areless than the assets’ carrying values. An impairment loss would be recognizedin the amount by which the recorded value of the asset exceeds the fair valueof the asset, measured by the quoted market price of an asset or an estimatebased on the best information available in the circumstances.  There were no such losses recognized during2003, 2002, or 2001.

 

**•****                                         **We account for income taxes using theasset and liability method. We provide for income taxes currently payable and,in addition, provide deferred income taxes for temporary differences betweenthe tax bases of assets and liabilities and their reported amounts in thefinancial statements and for known contingencies. Temporary differences relateprincipally to the allowance for doubtful accounts, allowance for salesreturns, liability for warranty claims, unrealized gain (loss) on investments,acquired intangible assets, accumulated depreciation, loss on write-down ofinvestments, and inventory reserves. Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to berealized.  We have a valuation allowancerecorded against a deferred tax asset arising from a foreign subsidiary of $2.0million at December 31, 2003 and 2002.

 

**RecentlyIssued Accounting Standards**

 

In January 2003, the FASB issued FIN 46*, Consolidation of Variable Interest Entities*.In December 2003, the FASB issued FIN 46R (revised December 2003), whichreplaces FIN 46. FIN 46R clarifies the application of Accounting ResearchBulletin No. 51, *Consolidated FinancialStatements*, to certain entities in which equity investors do nothave the characteristics of a controlling financial interest or do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated support from other parties.  FIN 46R is requiredto be applied to entities that are considered special-purpose entities no laterthan as of the end of the first reporting period that ends after December 15,2003.  Since we do not have any special-purpose entities, the accompanyingconsolidated financial statements for 2003 were not affected by FIN 46R. FIN46R is required to be applied by March 31, 2004 to entities not considered tobe special-purpose entities. We do not anticipate a material impact from FIN46R on our financial position, results of operations, or cash flows.

 

In April 2003, the FASB issued SFAS 149, Amendment ofStatement 133 on Derivative Instruments and Hedging Activities, which amendsSFAS 133 for certain decisions made by the FASB Derivatives ImplementationGroup. In particular, SFAS 149 (1) clarifies under what circumstances acontract with an initial net investment meets the characteristic of a derivative,(2) clarifies when a derivative contains a financing component, (3) amends thedefinition of underlying to conform it to language used in FASB

 

27

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interpretation number (FIN) 45, and (4) amends certain other existingpronouncements. SFAS 149 is effective for contracts entered into or modifiedafter June 30, 2003, and for hedging relationships designated after June 30,2003. In addition, most provisions of SFAS 149 are to be applied prospectively.SFAS No. 149 does not currently impact our financial statements.

 

In May 2003, theFASB issued SFAS 150, Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity. SFAS 150 improves theaccounting for certain financial instruments that, under previous guidance,issuers could account for as equity. SFAS 150 requires that those instrumentsbe classified as liabilities in statements of financial position. SFAS 150 iseffective for interim periods beginning after June 15, 2003. In its October2003 meeting, the FASB Board decided to defer the effective date of certainprovisions of SFAS 150. SFAS No. 150 does not currently impact our financialstatements.

 

**Item 7A. Quantitative and QualitativeDisclosures about Market Risks.**

 

Our primary marketrisk is the potential loss arising from increases in interest rates, whichcould have an adverse impact on the fair value of our investment securities.Our investment policy is to manage our investment portfolio to preserveprincipal and liquidity while maximizing the return on our investment portfoliothrough the investment of available funds. We diversify our investmentportfolio by investing 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, calculated as the potential change in fair valuein our investment portfolio resulting from a hypothetical 10% change ininterest rates, was not material at December 31, 2003. We generally holdinvestment securities until maturity.

 

We also faceforeign currency exchange rate risk to the extent that the value of certainforeign currencies relative to the U.S. dollar affects our financialresults.  Our international operationstransact a portion of our business in currencies other than the U.S. dollar,predominantly the euro, and changes in exchange rates may positively ornegatively affect our revenues, gross margins, operating expenses, and retainedearnings since these transactions are reported by us in U.S. dollars.  We occasionally purchase foreign currencyforwards aimed at limiting the impact of currency fluctuations.  These instruments provide only limitedprotection against currency exchange risks, and there can be no assurance thatsuch an approach will be successful, especially if a significant and suddendecline occurs in the value of local currencies. There were no such instrumentsoutstanding as of December 31, 2003.

 

28

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**Item 8.Financial Statements.**

 

**Index to Consolidated Financial Statements**

 
| Report of Independent  Auditors                                                                                  |   |   |
|------------------------------------------------------------------------------------------------------------------|--------|--------|
| Consolidated Financial Statements:                                                                               |   |   |
| Consolidated Balance Sheets  as of December 31, 2003 and 2002                                               |   |   |
| Consolidated  Statements of Operations for the years ended December 31, 2003, 2002 and  2001                |   |   |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31,  2003, 2002 and 2001 |   |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2003, 2002 and  2001                |   |   |
| Notes to  Consolidated Financial Statements                                                                      |   |   |
| Schedule  II - Valuation and Qualifying Accounts                                                                 |   |   |

 

29

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### **Reportof Independent Auditors**

###  

To the Board of Directors and Stockholders

of Avocent Corporation

 

In our opinion, the consolidated financial statements listed in theaccompanying index present fairly, in all material respects, the financialposition of Avocent Corporation and its subsidiaries at December 31, 2003 and2002, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2003 in conformity with accountingprinciples generally accepted in the United States of America.  In addition, in our opinion, the financialstatement schedule listed in the accompanying index presents fairly, in allmaterial respects, the information set forth therein when read in conjunctionwith the related consolidated financial statements.  These financial statements and financial statement schedule arethe responsibility of the Company’s management; our responsibility is toexpress an opinion on these financial statements and financial statementschedule based on our audits.  Weconducted our audits of these statements in accordance with auditing standardsgenerally accepted in the United States of America, which require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

As explained in Notes 2 and 8 to the consolidated financial statements,the Company adopted SFAS No. 142, *Goodwilland Intangible Assets*, effective January 1, 2002.

 

#### PricewaterhouseCoopersLLP

Birmingham, Alabama

March 11, 2004

 

30

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**AvocentCorporation**

**Consolidated Balance Sheets**

**December31, 2003 and 2002**

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

 
|                                                                                                                                                                      |   | **2003** |    | **2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| **ASSETS**                                                                                                                                                                |   |     |    |     |   |
| Current assets:                                                                                                                                                           |   |     |    |     |   |
| Cash and cash  equivalents                                                                                                                                                |   | $        | 76,492  |     | $      | 61,699 |   |
| Investments  maturing within one year                                                                                                                                     |   | 146,900  |    | 107,619  |   |
| Accounts  receivable, less allowance for doubtful accounts of $1,991 and $2,563 at  December 31, 2003 and 2002, respectively                                              |   | 45,011   |    | 36,313   |   |
| Income taxes  receivable                                                                                                                                                  |   | 415      |    | 609      |   |
| Other  receivables, net                                                                                                                                                   |   | 225      |    | 525      |   |
| Inventories, net                                                                                                                                                          |   | 21,324   |    | 24,422   |   |
| Other current  assets                                                                                                                                                     |   | 4,251    |    | 3,922    |   |
| Deferred tax  assets                                                                                                                                                      |   | 4,616    |    | 5,932    |   |
| Total current  assets                                                                                                                                                     |   | 299,234  |    | 241,041  |   |
|                                                                                                                                                                      |   |     |    |     |   |
| Investments                                                                                                                                                               |   | 82,884   |    | 44,849   |   |
| Property held  for lease, net                                                                                                                                             |   | 1,526    |    | 1,723    |   |
| Property and  equipment, net                                                                                                                                              |   | 38,473   |    | 24,313   |   |
| Goodwill                                                                                                                                                                  |   | 206,037  |    | 203,625  |   |
| Other intangible  assets, net                                                                                                                                             |   | 31,889   |    | 52,601   |   |
| Other assets                                                                                                                                                              |   | 720      |    | 455      |   |
| Total assets                                                                                                                                                              |   | $        | 660,763 |     | $      | 568,607 |   |
|                                                                                                                                                                      |   |     |    |     |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                            |   |     |    |     |   |
| Current  liabilities:                                                                                                                                                     |   |     |    |     |   |
| Accounts payable                                                                                                                                                          |   | $        | 10,034  |     | $      | 6,416 |   |
| Accrued wages  and commissions                                                                                                                                            |   | 9,120    |    | 7,743    |   |
| Accrued  liabilities                                                                                                                                                      |   | 15,769   |    | 13,007   |   |
| Income taxes  payable                                                                                                                                                     |   | 6,702    |    | 6,901    |   |
| Other current  liabilities                                                                                                                                                |   | 1,097    |    | 655      |   |
| Total current  liabilities                                                                                                                                                |   | 42,722   |    | 34,722   |   |
|                                                                                                                                                                      |   |     |    |     |   |
| Deferred tax  liabilities                                                                                                                                                 |   | 10,884   |    | 16,213   |   |
| Total liabilities                                                                                                                                                         |   | 53,606   |    | 50,935   |   |
|                                                                                                                                                                      |   |     |    |     |   |
| 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; 2003 – 47,350 shares  issued and outstanding; 2002 – 45,210 shares issued and outstanding |   | 47       |    | 45       |   |
| Additional  paid-in capital                                                                                                                                               |   | 982,218  |    | 936,288  |   |
| Unrealized gain on  investments, net of deferred taxes                                                                                                                    |   | 163      |    | 43       |   |
| Foreign currency  translation adjustment, net of deferred taxes                                                                                                           |   | 64       |    | (29      | )      |
| Accumulated  deficit                                                                                                                                                      |   | (373,892 | )       | (412,439 | )      |
| Deferred compensation                                                                                                                                                     |   | (1,443   | )       | (6,236   | )      |
| Total stockholders’  equity                                                                                                                                          |   | 607,157  |    | 517,672  |   |
|                                                                                                                                                                      |   |     |    |     |   |
| Total liabilities and  stockholders’ equity                                                                                                                          |   | $        | 660,763 |     | $      | 568,607 |   |

 

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

 

31

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**AvocentCorporation**

**ConsolidatedStatements of Operations**

**For theYears Ended December 31, 2003, 2002 and 2001**

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

 
|                                                                                         |   | **2003** |    | **2002** |   | **2001** |    |
|----------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|---------|
| Net sales                                                                                    |   | $        | 304,238 |     | $      | 260,600  |    | $ | 255,911 |   |
|                                                                                         |   |     |    |     |   |     |    |
| Cost of sales                                                                                |   | 132,412  |    | 128,873  |   | 149,925  |    |
|                                                                                         |   |     |    |     |   |     |    |
| Gross profit                                                                                 |   | 171,826  |    | 131,727  |   | 105,986  |    |
|                                                                                         |   |     |    |     |   |     |    |
| Research and  development expenses                                                           |   | 29,793   |    | 26,522   |   | 22,520   |    |
| Acquired  in-process research and development expense and other acquisition costs *(Note 3)* |   | 3,940    |    | 6,000    |   | 4,570    |    |
| Selling, general  and administrative expenses                                                |   | 70,398   |    | 66,891   |   | 74,800   |    |
| Amortization of  intangible assets                                                           |   | 21,805   |    | 22,189   |   | 132,879  |    |
| Impairment  write-down of intangible assets *(Note 8)*                                       |   | —   |    | —   |   | 195,365  |    |
|                                                                                         |   |     |    |     |   |     |    |
| Total operating  expenses                                                                    |   | 125,936  |    | 121,602  |   | 430,134  |    |
|                                                                                         |   |     |    |     |   |     |    |
| Income (loss)  from operations                                                               |   | 45,890   |    | 10,125   |   | (324,148 | )       |
|                                                                                         |   |     |    |     |   |     |    |
| Net investment  income                                                                       |   | 4,825    |    | 5,598    |   | 6,340    |    |
| Net realized  investment gains (losses)                                                      |   | 2,619    |    | (305     | )      | (5,302   | )       |
| Other expense,  net                                                                          |   | (288     | )       | (178     | )      | (303     | )  |
|                                                                                         |   |     |    |     |   |     |    |
| Income (loss)  before provision for (benefit from) income taxes                              |   | 53,046   |    | 15,240   |   | (323,413 | )       |
|                                                                                         |   |     |    |     |   |     |    |
| Provision for  (benefit from) income taxes                                                   |   | 14,499   |    | 4,502    |   | (2,947   | )  |
|                                                                                         |   |     |    |     |   |     |    |
| Net income  (loss)                                                                           |   | $        | 38,547  |     | $      | 10,738   |    | $ | (320,466 | )  |
|                                                                                         |   |     |    |     |   |     |    |
| Net income  (loss) per common share:                                                         |   |     |    |     |   |     |    |
| Basic                                                                                        |   | $        | 0.83    |     | $      | 0.24     |    | $ | (7.22 | )  |
|                                                                                         |   |     |    |     |   |     |    |
| Diluted                                                                                      |   | $        | 0.81    |     | $      | 0.24     |    | $ | (7.22 | )  |
|                                                                                         |   |     |    |     |   |     |    |
| Weighted average  common shares outstanding:                                                 |   |     |    |     |   |     |    |
| Basic                                                                                        |   | 46,194   |    | 44,977   |   | 44,374   |    |
|                                                                                         |   |     |    |     |   |     |    |
| Diluted                                                                                      |   | 47,693   |    | 45,549   |   | 44,374   |    |

 

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

 

32

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**AvocentCorporation**

**ConsolidatedStatements of Stockholders’ Equity**

**For theYears Ended December 31, 2003, 2002 and 2001**

**(Inthousands)**

** **

 
|                                                                                    |   |       |   |   |   | **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, 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 gains on investments, net of deferred income  taxes of $1,824  |   | —     |   | — |   | —                           |    | 2,926                                       |    | —                                         |   | —                                        |   | —                     |   | 2,926     |     |
| Issuances of common stock                                                               |   | 830        |   | 1      |   | 10,078                           |    | —                                      |    | —                                         |   | —                                        |   | —                     |   | 10,079    |     |
| Income tax benefit from exercise of stock options                                       |   | —     |   | — |   | 3,561                            |    | —                                      |    | —                                         |   | —                                        |   | —                     |   | 3,561     |     |
| 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   |     |
| Acquisition of 2C Computing, Inc.                                                       |   | —     |   | — |   | 1,965                            |    | —                                      |    | —                                         |   | —                                        |   | (115                       | )      | 1,850     |     |
| Net income                                                                              |   | —     |   | — |   | —                           |    | —                                      |    | —                                         |   | 10,738                                        |   | —                     |   | 10,738    |     |
| Change in foreign currency translation adjustment, net of deferred  income taxes of $53 |   | —     |   | — |   | —                           |    | —                                      |    | 91                                             |   | —                                        |   | —                     |   | 91        |     |
| Change in net unrealized gains on investments, net of deferred income  taxes of $23     |   | —     |   | — |   | —                           |    | (35                                         | )  | —                                         |   | —                                        |   | —                     |   | (35       | )   |
| Issuances of common stock                                                               |   | 560        |   | — |   | 4,918                            |    | —                                      |    | —                                         |   | —                                        |   | —                     |   | 4,918     |     |
| Income tax benefit from exercise of stock options                                       |   | —     |   | — |   | 1,150                            |    | —                                      |    | —                                         |   | —                                        |   | —                     |   | 1,150     |     |
| Stock-based compensation                                                                |   | —     |   | — |   | 1,509                            |    | —                                      |    | —                                         |   | —                                        |   | 10,843                     |   | 12,352    |     |
| Balance, December 31, 2002                                                              |   | 45,210     |   | 45     |   | 936,288                          |    | 43                                          |    | (29                                            | )      | (412,439                                      | )      | (6,236                     | )      | 517,672   |     |
| Acquisition of Soronti, Inc.                                                            |   | 31         |   | — |   | 1,152                            |    | —                                      |    | —                                         |   | —                                        |   | —                     |   | 1,152     |     |
| Net income                                                                              |   | —     |   | — |   | —                           |    | —                                      |    | —                                         |   | 38,547                                        |   | —                     |   | 38,547    |     |
| Change in foreign currency translation adjustment, net of deferred  income taxes of $56 |   | —     |   | — |   | —                           |    | —                                      |    | 93                                             |   | —                                        |   | —                     |   | 93        |     |
| Change in net unrealized gains on investments, net of deferred income  taxes of $65     |   | —     |   | — |   | —                           |    | 120                                         |    | —                                         |   | —                                        |   | —                     |   | 120       |     |
| Issuances of common stock                                                               |   | 2,109      |   | 2      |   | 34,618                           |    | —                                      |    | —                                         |   | —                                        |   | —                     |   | 34,620    |     |
| Income tax benefit from exercise of stock options                                       |   | —     |   | — |   | 10,239                           |    | —                                      |    | —                                         |   | —                                        |   | —                     |   | 10,239    |     |
| Stock-based compensation                                                                |   | —     |   | — |   | (79                              | )  | —                                      |    | —                                         |   | —                                        |   | 4,793                      |   | 4,714     |     |
| Balance, December 31, 2003                                                              |   | 47,350     |   | $      | 47     |                             | $       | 982,218                                     |    | $                                              | 163    |                                          | $      | 64                         |   | $         | (373,892 | ) | $ | (1,443 | ) | $ | 607,157 |   |
|                                                                                         |        |            |        |        |        |                                  |         |                                             |         |                                                |        |                                               |        |                            |        |           |          |  |  |  |  |  |  |  |  |  |

 

Comprehensiveincome in 2003 of $38,334 consists of $38,547 of net income, $120 of unrealizedgain on investments (net of deferred income taxes) and $93 of foreign currencytranslation adjustment (net of deferred income taxes).  The unrealized gain on investments is net of$1,702, net of $917 tax expense, of realized gains that are included in netrealized investment gains (losses) in the accompanying consolidated statementof operations.

Comprehensiveincome in 2002 of $10,682 consists of $10,738 of net income, $35 of unrealizedloss on investments (net of deferred income taxes) and $91 of foreign currencytranslation adjustment (net of deferred income taxes).  The unrealized loss on investments is net of$199, net of $106 tax benefit, of realized losses that are included in netrealized investment gains (losses) in the accompanying consolidated statementof operations.

Comprehensiveloss in 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$177, net of $95 tax benefit, of realized losses and a $4,899 write-down oninvestments that are included in net realized investment gains (losses) in theaccompanying consolidated statement of operations.

 

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

 

33

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**AvocentCorporation**

**ConsolidatedStatements of Cash Flows**

**For theYears Ended December 31, 2003, 2002 and 2001**

**(Inthousands)**

 
|                                                                                      |   | **2003** |    | **2002** |    | **2001** |    |
|-------------------------------------------------------------------------------------------|--------|----------|---------|----------|---------|----------|---------|
| Cash flows from operating activities:                                                     |   |     |    |     |    |     |    |
| Net income (loss)                                                                         |   | $        | 38,547  |     | $       | 10,738   |    | $ | (320,466 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by  operating activities: |   |     |    |     |    |     |    |
| Depreciation                                                                              |   | 4,859    |    | 4,361    |    | 4,709    |    |
| Amortization of intangible assets                                                         |   | 21,805   |    | 22,189   |    | 132,879  |    |
| Impairment write-down of intangible assets                                                |   | —   |    | —   |    | 195,365  |    |
| Stock-based compensation                                                                  |   | 4,714    |    | 12,352   |    | 19,836   |    |
| Acquired in-process research and development expenses and other  acquisition costs        |   | 3,940    |    | 6,000    |    | 4,570    |    |
| Other-than-temporary decline in fair value of investments                                 |   | —   |    | 550      |    | 4,899    |    |
| Amortization of premium on investments                                                    |   | 3,339    |    | 2,457    |    | —   |    |
| Net (gain) loss on sales of investments                                                   |   | (2,619   | )  | 305      |    | 403      |    |
| Deferred income taxes                                                                     |   | (4,283   | )       | (5,735   | )       | (15,827  | )       |
| Income tax benefit from exercise of stock options                                         |   | 10,239   |    | 1,150    |    | 3,561    |    |
| Changes in operating assets and liabilities (net of effects of  acquisitions):            |   |     |    |     |    |     |    |
| Accounts receivable, net                                                                  |   | (8,677   | )  | 12,811   |    | 17,964   |    |
| Income taxes receivable                                                                   |   | 194      |    | 1,721    |    | 2,157    |    |
| Other receivables, net                                                                    |   | 966      |    | 1,590    |    | 8,685    |    |
| Inventories, net                                                                          |   | 3,300    |    | 3,663    |    | 10,869   |    |
| Other assets                                                                              |   | (983     | )       | (220     | )       | (1,501   | )       |
| Accounts payable                                                                          |   | 3,430    |    | (3,062   | )       | (2,256   | )       |
| Accrued liabilities, wages and commissions                                                |   | 1,277    |    | 393      |    | 819      |    |
| Income taxes payable                                                                      |   | (199     | )  | (115     | )  | 5,406    |    |
| Other current liabilities                                                                 |   | 2,654    |    | (64      | )  | 558      |    |
| Net cash provided by operating activities                                                 |   | 82,503   |    | 71,084   |    | 72,630   |    |
| Cash flows from investing activities:                                                     |   |     |    |     |    |     |    |
| Purchase of Soronti, net of cash acquired                                                 |   | (5,520   | )       | —   |    | —   |    |
| Purchase of 2C, net of cash acquired                                                      |   | —   |    | (23,189  | )       | —   |    |
| Purchase of Equinox, net of cash acquired                                                 |   | —   |    | —   |    | (31,725  | )  |
| Purchases of property and equipment                                                       |   | (18,983  | )       | (7,064   | )       | (3,343   | )       |
| Purchases of available-for-sale investments                                               |   | (243,698 | )       | (74,192  | )       | (25,864  | )       |
| Purchases of held-to-maturity investments                                                 |   | —   |    | (91,911  | )       | (68,854  | )       |
| Proceeds from maturities and sales of available-for-sale investments                      |   | 115,376  |    | 89,510   |    | 13,490   |    |
| Proceeds from maturities of held-to-maturity investments                                  |   | 50,405   |    | 12,836   |    | 70,074   |    |
| Net cash used in investing activities                                                     |   | (102,420 | )       | (94,010  | )       | (46,222  | )  |
| Cash flows from financing activities:                                                     |   |     |    |     |    |     |    |
| Proceeds from issuance of short term debt                                                 |   | —   |    | —   |    | 45,000   |    |
| Repayment of short-term debt                                                              |   | —   |    | —   |    | (45,000  | )  |
| Repayment of short-term debt assumed at acquisitions                                      |   | (3       | )       | (890     | )       | —   |    |
| Proceeds from employee stock option exercises                                             |   | 32,811   |    | 3,675    |    | 9,291    |    |
| Proceeds from employee stock purchase plan                                                |   | 1,809    |    | 1,243    |    | 788      |    |
| Net cash provided by financing activities                                                 |   | 34,617   |    | 4,028    |    | 10,079   |    |
|                                                                                      |   |     |    |     |    |     |    |
| Effect of exchange rate  changes on cash and cash equivalents                             |   | 93       |    | 91       |    | (87      | )       |
|                                                                                      |   |     |    |     |    |     |    |
| Net increase (decrease) in cash and cash equivalents                                      |   | 14,793   |    | (18,807  | )  | 36,400   |    |
| Cash and cash equivalents, beginning of year                                              |   | 61,699   |    | 80,506   |    | 44,106   |    |
|                                                                                      |   |     |    |     |    |     |    |
| Cash and cash equivalents, end of year                                                    |   | $        | 76,492  |     | $       | 61,699   |    | $ | 80,506 |   |
| Supplemental disclosures of cash flow information:                                        |   |     |    |     |    |     |    |
| Cash paid during the year for interest                                                    |   | $        | —  |     | $       | 1        |    | $ | 282 |   |
|                                                                                      |   |     |    |     |    |     |    |
| Cash paid during the year for income taxes                                                |   | $        | 9,658   |     | $       | 7,845    |    | $ | 4,248 |   |

 

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

 

34

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**AvocentCorporation**

**Notes toConsolidated Financial Statements**

**For theYears Ended December 31, 2003, 2002 and 2001**

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

 

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

** **

Avocent Corporation (the Company or Avocent) designs,manufactures and sells analog and digital KVM (keyboard, video and mouse)switching systems, serial connectivity devices, extension and remote accessproducts, and technologies for the computer industry.  The Company’s analog, digital and serial switching solutions andthe extension and remote access products, and technologies help networkadministrators manage multiple servers and serially controlled devices from asingle keyboard, video monitor and mouse configuration from extended distancesor from remote locations, facilitating efficient network management andadministration. The Company sells products to distributors, resellers, originalequipment manufacturers and end-users in the United States and internationally.

 

The results of acquired companies are included in theconsolidated results from the respective dates of acquisition, includingEquinox Systems Inc. (“Equinox”), which was acquired on January 3, 2001, 2CComputing, Inc. (“2C”), which was acquired on August 20, 2002 and Soronti, Inc.(“Soronti”), which was acquired on November 17, 2003.

 

**2.**                                Summary of Significant Accounting Policies

 

The principal accounting policies of the Company areas 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.

 

**Cashand Cash Equivalents**- The Company considers all highly liquid instruments with an original maturityof three months or less when purchased to be cash equivalents, except thatcertain investments with original maturities of less than 90 days areclassified as short term investments when such investments are a part of ournon-operating investment portfolio.

 

**OtherReceivables -**Otherreceivables are primarily comprised of amounts due, net of estimateduncollectible accounts, from certain subcontract manufacturers of the Companyfor product components sold to those subcontractors.  The selling price generally approximates our cost of thecomponent inventory.  The componentsales are netted against our inventory costs with gains or losses included inthe determination of cost of sales in the accompanying consolidated statementsof operations.  As of December 31, 2003and 2002, there were no reserves for uncollectible accounts recorded againstreceivables from subcontractors.

 

**Inventories** - Raw materials, work in process andfinished goods inventories are recorded using the lower of standard cost, whichapproximates first-in first-out (FIFO), or market.  Standard costs are reviewed and revised on a quarterly basis.Therefore, inventory costs approximate actual costs at the end of eachreporting period.  The Company writes down inventory forestimated obsolescence or unmarketable inventory to the estimated market valuebased upon assumptions about future demand and market conditions.

 

**FinancialInstruments**- Thecarrying amounts 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 -**The Company’s investments consist primarily ofbank deposits, corporate bonds, commercial paper, asset-backed securities,municipal bonds, U.S. government agency securities, mortgage-backed securitiesguaranteed by U.S. government agencies, preferred stock 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, net ofdeferred income taxes. Unrealized losses are charged against earnings when adecline in fair value is determined to be other than temporary.  Certain investments with originalmaturities of less than 90 days are classified as short term investments whensuch are a part of our investment portfolio.  Realized gains and losses are accounted foron the specific identification method. Purchases and sales are recorded on a trade date basis.

 

35

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The Company also invests in privately-held companiesand generally records its investments in these entities at cost or using theequity method if the Company has the ability to exercise significant influenceover the entity.  The Company had $3,450of such investments as of December 31, 2003 and $450 of such investments as ofDecember 31, 2002.  These investmentsare included in total long-term investments in the accompanying consolidatedbalance sheets.  The Company reviews itsinvestments in these entities periodically to determine if circumstances (bothfinancial and non-financial) exist that indicate that the investment will notbe recovered.  Impairment charges arerecorded on investments having a basis that is greater than the value that theCompany would reasonably expect to receive in an arm’s length sale of theinvestment (*seenote 5*).

 

**PropertyHeld for Lease -**Propertyheld for lease is carried at cost, less accumulated depreciation, which iscomputed using the straight-line method over the estimated useful lives of theassets. Rental income from this property is recorded on a monthly basis inaccordance with the lease terms. Initial direct costs are deferred and matchedagainst rental income over the initial term of the lease *(see Note 6).*  Net rental income is reportedwithin net investment income.

 

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

 

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                  |   | 3 – 5 years  |   |

 

**Long-LivedAssets –**TheCompany reviews long-lived assets for impairment under the guidance prescribedby SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.The Company recognizes impairment losses on long-lived assets used inoperations when indicators of impairment are present and the undiscounted cashflows estimated to be generated by those assets are less than the assets’carrying values. An impairment loss would be recognized in the amount by whichthe recorded value of the asset exceeds the fair value of the asset, measuredby the quoted market price of an asset or an estimate based on the bestinformation available in the circumstances. There were no such losses recognized during 2003, 2002 or 2001.

 

**OtherIntangible Assets**- Intangible assets are amortized on a straight-line basis over the followingestimated useful lives:

 

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

 

**Goodwill -** The Company records goodwill when the cost of an acquired entityexceeds the net amounts assigned to assets acquired and liabilitiesassumed.  In accordance with SFAS No.142, *Goodwilland Other Intangible Assets*, the Company completed a transitionalimpairment test of all goodwill as of January 1, 2002.  The testconcluded that no adjustment was required upon adoption.  Additionally, the Company performed anannual impairment test of goodwill, as prescribed by this standard, in thefourth quarters of 2003 and 2002.  Thetests conducted during 2003 and 2002 concluded that there had been noimpairment of goodwill and that no adjustments were required. However, in 2001the Company recorded a $195,365 reduction in the remaining carrying value ofgoodwill arising from the merger of Apex and Cybex (*see note 8*).

** **

**Allowancefor Sales Returns -**The Company’s sales generally include a one-month unconditional returnpolicy.  The Company also allowsadditional rights of return to certain of its distributors, which generallyextend the return period to 90 days. The Company reserves for estimated salesreturns as a reduction of revenue and cost of sales at the time the productrevenue is recognized based on historical sales return experience, whichmanagement believes provides a reasonable estimate of future returns.  The allowance for sales returns totaledapproximately $3,909 and $3,769 at December 31, 2003 and 2002, respectively.The reserve is included as a reduction in the carrying value of accountsreceivable in the accompanying consolidated balance sheets.

 

36

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**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 Company also offers extendedwarranties to customers and recognizes the revenue associated with the extendedwarranties over the life of the warranty. The liability for warranty returns totaled approximately $2,652 and$2,435 at December 31, 2003 and 2002, respectively. These liabilities areincluded in accrued liabilities in the accompanying consolidated balancesheets.

 

**Stock-BasedCompensation -**TheCompany generally records compensation expense for all stock-based compensationplans using the intrinsic value method in which compensation expense, if any,is measured as the excess of the market price of the stock over the exerciseprice of the award on the measurement date. For unvested options of companiesacquired that existed as of their respective acquisition dates, the intrinsicvalue was computed as of the acquisition date and the pro rata portion relatedto future service was deferred (included in deferred compensation in theconsolidated balance sheets) and is being amortized over the remaining vestingperiod of the stock options. The fair value of these unvested options as of theconsummation date was computed and the amount in excess of the intrinsic valuewas included in the respective purchase consideration (*see**Note 3*).

 

The Company applies Accounting Principles BoardOpinion No. 25, *Accounting for Stock Issued to Employees*, and relatedInterpretations in accounting for its stock-based compensation plans. Hadcompensation cost for the Company’s stock-based compensation plans beendetermined based on the fair value at the grant dates for awards under thoseplans consistent with the method prescribed in SFAS No. 123, *Accountingfor Stock-Based Compensation*, the Company’s net income (loss) andearnings (loss) per share would have been reduced to the pro forma amountsindicated below:

 

 
|                                                                                                                                    |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net income  (loss) — as reported                                                                                                   |   | $        | 38,547 |     | $      | 10,738   |   | $ | (320,466 | ) |
| Add: Stock-based  employee compensation expense included in reported net income (loss), net of  related tax effects                     |   | 4,367    |   | 11,110   |   | 18,183   |   |
| Deduct: Total  stock based employee compensation expense determined under fair value method  for all awards, net of related tax effects |   | (29,001  | )      | (36,717  | )      | (46,131  | )      |
| Net income  (loss) — pro forma                                                                                                     |   | $        | 13,913 |     | $      | (14,869  | )      | $ | (348,414 | ) |
|                                                                                                                                    |   |     |   |     |   |     |   |   |   |   |
|                                                                                                                                    |   |     |   |     |   |     |   |   |   |   |
| Basic earnings  (loss) per share — as reported                                                                                     |   | $        | 0. 83  |     | $      | 0.24     |   | $ | (7.22 | ) |
| Basic loss per  share — pro forma                                                                                                  |   | $        | 0.30   |     | $      | (0.33    | )      | $ | (7.85 | ) |
| Diluted earnings  (loss) per share — as reported                                                                                   |   | $        | 0.81   |     | $      | 0.24     |   | $ | (7.22 | ) |
| Diluted loss per  share — pro forma                                                                                                |   | $        | 0.29   |     | $      | (0.33    | )      | $ | (7.85 | ) |

 

 

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:

 

 
|                     |   | **2003**         |   | **2002**         |   | **2001**         |   |   |
|--------------------------|--------|------------------|--------|------------------|--------|------------------|--------|--------|
| Dividend yield           |   | 0.0              | %      | 0.0              | %      | 0.0              | %      |
| Expected life  (years)   |   | 4.5              |   | 5                |   | 5                |   |
| Expected  volatility     |   | 60.0             | %      | 67.5             | %      | 89.9             | %      |
| Risk-free  interest rate |   | 2.38 — 3.03 | %      | 2.93 — 4.47 | %      | 4.09 — 4.79 | %      |

 

**Concentrationsof Customer Base and Credit Risk –**Three customers each exceeded 10% of the Company’ssales for 2003 and 2002, while only one customer exceeded 10% of sales for2001.** **The****three customers accountedfor 48% of net sales in 2003 and 47% of net sales for 2002.  The one customer accounted for 23% of netsales for 2001. Accounts receivable from these three customers representedapproximately 56% of trade receivables at December 31, 2003 and December 31,2002.  The Company’s top five customersaccounted for 64%, 65% and 55% of net sales for 2003, 2002 and 2001,respectively.

 

The Company places cash and investments in severalhigh-quality financial institutions and seeks to limit the credit exposure fromany one institution, 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 principally

 

37

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to the allowance for doubtful accounts, allowance forsales returns, liability for warranty claims, unrealized gain (loss) oninvestments, acquired in-process research and development expenses, acquiredintangible assets, foreign subsidiary intangibles, accumulated depreciation,loss on write-down of investments and inventory reserves. Valuation allowancesare established when necessary to reduce deferred tax assets to the amountexpected 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 with any transaction gains or losses reported inother income (expense). Adjustments from translating financial statements ofinternational subsidiaries are recorded as a separate component ofstockholders’ 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 income(expense) in the accompanying consolidated statements of operations. AtDecember 31, 2003 and December 31, 2002, the Company had no open forwardcontracts.

 

**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, 2003 and 2002, there were no shipments for which Avocentdeferred revenue as the result of not meeting the Company’s criteria forrevenue recognition.

 

**Research and Development Expense** - Research and development costs areexpensed as incurred. In-process research and development obtained throughacquisitions of other companies is expensed upon consummation of theacquisition.

 

**Software Development Costs -**The costs of software development for 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, are expensed asincurred.

 

The Company implemented a new enterprise resourceplanning system in the fourth quarter of 2003 at its United States locationsand plans to implement the system at its international locations during 2004.The Company has capitalized the costs of the new system to date and has begundepreciating the costs for the system used in the U.S.  As of December 31, 2003, $9,867 had beencapitalized for this new system and $6,877 had been placed in service for thelocations in the United States. As of December 31, 2002, $1,600 had beencapitalized for this new system.

 

**Advertising Expense****–** Advertising costs are expensed asincurred and are included as a component of selling, general and administrativeexpenses. Advertising expense totaled approximately $6,793, $6,983 and $8,079for the years ended December 31, 2003, 2002 and 2001, respectively.

 

The Company participates in cooperative advertisingand market development programs with certain distributors and OEMs. Theseprograms are used by the Company to reimburse distributors and OEMs for certainforms of advertising, and in general, allow distributors and OEMs credits up toa specified percentage of net purchases. The Company’s costs associated withthese programs are estimated and accrued at the time of sale, and are includedin sales and marketing expenses in the accompanying consolidated statements ofoperations.

 

**Netinvestment income****–**Netinvestment income includes income from interest, dividends, rental propertyheld for lease and accretion of bond discounts, net of related expenses.

 

**Netrealized investment gains (losses) –**Net realized investment gains (losses) include gains(losses) realized upon the sales of equity and cost basis investments andlosses realized on investments when a decline in fair value is determined bymanagement to be other than temporary.

 

**Other Income (Expense) –**Other income (expense) consists primarily of foreigncurrency exchange gains or losses and interest expense.

 

38

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**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.

 

**Earnings (Loss) Per Share –**Earnings (loss) per common share, and earnings (loss)per common share assuming dilution, are based on the weighted average number ofcommon and common equivalent, when dilutive, shares outstanding during the year(see *Note12*).

 

**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.

 

**Reclassifications**- Certain reclassifications have been made to the 2002and 2001 consolidated financial statements in order to conform to the 2003presentation. These reclassifications had no effect on previously reported netincome (loss), net cash provided by operating activities, net cash used ininvesting activities or total stockholders’ equity.

 

**RecentlyIssued Accounting Standards** - In January 2003, the FASBissued FIN 46*, Consolidation of VariableInterest Entities*. In December 2003, the FASB issued FIN 46R(revised December 2003), which replaces FIN 46. FIN 46R clarifies theapplication of Accounting Research Bulletin No. 51, *Consolidated Financial Statements*, to certain entities inwhich equity investors do not have the characteristics of a controllingfinancial interest or do not have sufficient equity at risk for the entity tofinance its activities without additional subordinated support from otherparties.  FIN 46R is required to be applied to entities that areconsidered special-purpose entities no later than as of the end of the firstreporting period that ends after December 15, 2003.  Since the Companydoes not have any special-purpose entities, the accompanying consolidatedfinancial statements for 2003 were not affected by FIN 46R. FIN 46R is requiredto be applied by March 31, 2004 to entities not considered to bespecial-purpose entities. The Company does not anticipate a material impactfrom FIN 46R on Avocent’s financial position, results of operations, or cashflows.

 

In April 2003, the FASB issued SFAS 149, *Amendment ofStatement 133 on Derivative Instruments and Hedging Activities*,which amends SFAS 133 for certain decisions made by the FASB DerivativesImplementation Group. In particular, SFAS 149 (1) clarifies under whatcircumstances a contract with an initial net investment meets thecharacteristic of a derivative, (2) clarifies when a derivative contains a financingcomponent, (3) amends the definition of underlying to conform it to languageused in FASB interpretation number (FIN) 45, and (4) amends certain otherexisting pronouncements. SFAS 149 is effective for contracts entered into ormodified after June 30, 2003, and for hedging relationships designated afterJune 30, 2003. In addition, most provisions of SFAS 149 are to be appliedprospectively. SFAS No. 149 does not currently impact the Company’s financialstatements.

 

In May 2003, the FASB issued SFAS 150, *Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity*. SFAS 150 improves the accounting for certain financialinstruments that, under previous guidance, issuers could account for as equity.SFAS 150 requires that those instruments be classified as liabilities instatements of financial position. SFAS 150 is effective for interim periodsbeginning after June 15, 2003. In its October 2003 meeting, the FASB Boarddecided to defer the effective date of certain provisions of SFAS 150. SFAS No.150 does not currently impact the Company’s financial statements.

 

**3.**                                      Acquisitions

** **

**Acquisition of Soronti -**On November 17, 2003, the Company acquired theoutstanding preferred and common shares of Soronti for approximately $7,000 incash and stock, plus the assumption of liabilities and payment of certainacquisition costs.  The results ofSoronti’s operations have been included in the consolidated financialstatements since that date.  Soronti,headquartered in Draper, Utah, has developed server and system managementproducts for the control of IT. Soronti’s products included a virtual presence PCI adaptor and a virtualpresence stand alone unit.

** **

The acquisition wasrecorded under the purchase method of accounting, and the purchase price wasallocated based on the fair value of the assets acquired and liabilitiesassumed. In accordance with generally accepted accounting principles, purchasedresearch and development costs allocated to patent-pending technology werecapitalized and will be amortized over the respective estimated usefullives.  The remaining amounts ofpurchased research and development were expensed upon the closing of thetransaction.  The goodwill recorded as aresult of the acquisition will not be amortized but will be included in theCompany’s annual review of goodwill for impairment.  A summary of the total purchase consideration is as follows:

 

39

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| Cash paid for outstanding shares                     |   | $      | 5,848  |   |
|------------------------------------------------------|--------|--------|--------|--------|
| Value of common  stock issued for outstanding shares |   | 1,152  |   |
| Acquisition  costs                                   |   | 207    |   |
|                                                 |   |   |   |
| Total purchase  consideration                        |   | $      | 7,207  |   |

 

The purchase consideration was allocated, on apreliminary basis, to the estimated fair values of the assets acquired andliabilities assumed, as follows:

 
|                                                  |   | **Purchase  Price  Allocation** |       | **Amortization  Period** |    |
|-------------------------------------------------------|--------|---------------------------------|------------|--------------------------|---------|
|                                                  |   | ** **                      | ** ** |
|                                                  |   | ** **                      | ** ** |
| Tangible assets                                       |   | $                               |  800  |                     | Various |   |
| In-process  research and development                  |   | 3,940                           |       | —                   |    |
| Developed  technology                                 |   | 500                             |       | 3 years                  |    |
| International  marketing rights                       |   | 668                             |       | 3 years                  |    |
| Goodwill                                              |   | 2,412                           |       | —                   |    |
| Deferred tax  liability on intangible assets acquired |   | (270                            | )          | 3 years                  |    |
| Assumed  liabilities                                  |   | (843                            | )          | —                   |    |
|                                                  |   |                            |       |                     |    |
|                                                  |   | $                               | 7,207      |                     |    |   |

 

The acquisition wasfunded through available cash and by the issuance of 31 shares of Avocent commonstock.  The common stock, valued atapproximately $1,152, was recorded as non-cash consideration for theacquisition of Soronti, Inc. On the closing of the Soronti transaction, theCompany acquired $535 in cash held by Soronti.

 

The fair value of all of the in-process research anddevelopment (“IPR&D”) received in the acquisition was determined using aform of the discounted cash flow method known as the multi-period excessearnings method.  These amounts weredeemed to be for particular research and development projects that have noalternative future uses and were therefore expensed rather than capitalized atthe time of purchase.

 

Soronti’s in-process research and developmentactivities consisted of the development of the Remote Office Branch Office(“ROBO”) product, an appliance with both KVM and serial ports that utilizes theSwitchView IP technology to provide the user access over IP, a mezzanine cardbased on the virtual presence technology that is a small form factor carddesigned for integration into existing analog KVM switches, embedded KVMredirection circuitry for remote server management, which essentiallyintegrates the technology from the mezzanine card into the server motherboard,and a PCI card which is an add-in card that provides remote management of aserver. The work remaining to be performed on these projects varied, but at thetime of the acquisition, the projects were considered to be in early conceptform, prototype form, or mid-design form. The ROBO project essentially competed with products currently sold byAvocent and the project has been abandoned at this time.  The results of our IPR&D valuation workyielded no value from the ROBO product. The other projects were still in process at the end of 2003.

 

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.  Revenue for the projects underdevelopment was projected through 2013, with 90% of Soronti’s forecastedrevenue in 2005 coming from projects currently in development.   Net income attributable to IPR&D wascalculated by applying Soronti’s projected gross, operating and net profitmargins to IPR&D revenue, while considering Avocent’s historical resultsand industry prospects.

 

Revenue growth related to the in-process research anddevelopment is embodied in products to be launched in late 2004. These productshave estimated economic lives ranging from approximately seven to ten years.The product life cycle is characterized by a gradual 3 to 4 year ramp upperiod, followed by a 2 to 3 year plateau, followed by a 2 to 3 year declineperiod. Operating margins are projected to be below overall Avocent margins inthe early years, but will improve for these products over their lives as theproducts mature, as costs are designed out of the products, and as salesvolumes increase. The discount rate used to value IPR&D was 25%.

 

**Acquisition of 2C -**On August 20, 2002, the Company acquired theoutstanding preferred and common shares of 2C for approximately $22.8 millionin cash, plus the assumption of liabilities and stock options.  The results of 2C’s operations have beenincluded in the consolidated financial statements since that date.  2C, headquartered in Huntsville, Alabama,has developed digital extension technology that splits the PCI bus of a PC andallows the PC motherboard, processor, hard drive, and other user devices to belocated at a distance from the user and connected using CAT 5 or fiber opticcable.

 

40

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The acquisition wasrecorded under the purchase method of accounting, and the purchase price wasallocated based on the fair value of the assets acquired and liabilitiesassumed. In accordance with generally accepted accounting principles, purchasedresearch and development costs allocated to patent-pending technology werecapitalized and will be amortized over the respective estimated usefullives.  The remaining amounts ofpurchased research and development were expensed upon the closing of thetransaction.  The goodwill recorded as aresult of the acquisition will not be amortized but will be included in theCompany’s annual review of goodwill for impairment.  A summary of the total purchase consideration is as follows:

 
| Cash paid for outstanding shares |   | $      | 22,781 |   |
|----------------------------------|--------|--------|--------|--------|
| Outstanding  options assumed     |   | 1,850  |   |
| Acquisition  costs               |   | 441    |   |
|                             |   |   |   |
| Total purchase  consideration    |   | $      | 25,072 |   |

 

The purchase consideration was allocated to theestimated fair values of the assets acquired and liabilities assumed, asfollows:

 

 
|                                                  |   | **Purchase  Price  Allocation** |       | **Amortization  Period**   |    |
|-------------------------------------------------------|--------|---------------------------------|------------|----------------------------|---------|
|                                                  |   | ** **                      | ** ** |
|                                                  |   | ** **                      | ** ** |
| Tangible assets                                       |   | $                               | 1,306      |                       | Various |   |
| In-process  research and development                  |   | 6,000                           |       | —                     |    |
| Patents                                               |   | 370                             |       | 5 years                    |    |
| Non-compete  agreements                               |   | 3,273                           |       | 3 years  (contract period_ |    |
| Trademarks                                            |   | 2,030                           |       | 5 years                    |    |
| Customer base                                         |   | 1,613                           |       | 3 years                    |    |
| Goodwill                                              |   | 15,136                          |       | —                     |    |
| Deferred tax liability  on intangible assets acquired |   | (2,733                          | )          | Various                    |    |
| Assumed  liabilities                                  |   | (1,923                          | )          | —                     |    |
|                                                  |   |                            |       |                       |    |
|                                                  |   | $                               | 25,072     |                       |    |   |

 

The acquisition wasfunded through available cash.  On theclosing of the 2C transaction, the Company acquired $32 in cash held by 2C.

 

**Acquisition of Equinox**- On January 3, 2001, the Company acquired Equinox for cash equal to $9.75for each outstanding share of Equinox capital stock. Equinox, headquartered inSunrise, Florida, makes products that provide communications port management andremote control capabilities. The products are distributed through a two-tierdistribution channel, a network of value-added resellers and OEMs.

 

The acquisition was recorded under the purchase methodof accounting, and the purchase price was allocated based on the fair value ofthe assets acquired and liabilities assumed. In accordance with generallyaccepted accounting principles, costs allocated to research and developmentassets with alternative future uses were capitalized; the remaining amounts ofpurchased in-process research and development were expensed upon the closing ofthe transaction.  The excess of the fairvalue over the intrinsic value of the unvested Equinox options and the fairvalue of the vested Equinox options at the date of consummation have beenincluded in the purchase consideration.

 

A summary of the total purchase consideration is asfollows:

 
| Cash paid for outstanding shares |   | $      | 55,607 |   |
|----------------------------------|--------|--------|--------|--------|
| Outstanding  options assumed     |   | 10,579 |   |
| Acquisition  costs               |   | 413    |   |
|                             |   |   |   |
| Total purchase  consideration    |   | $      | 66,599 |   |

 

41

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The purchase consideration was allocated to theestimated fair values of the assets acquired and liabilities assumed, asfollows:

 
|                                                  |   | **Purchase  Price  Allocation** |       | **Amortization  Period** |    |
|-------------------------------------------------------|--------|---------------------------------|------------|--------------------------|---------|
|                                                  |   | ** **                      | ** ** |
|                                                  |   | ** **                      | ** ** |
| Tangible assets                                       |   | $                               | 38,981     |                     | Various |   |
| 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         |    |
| Goodwill                                              |   | 21,165                          |       | —                   |    |
| Deferred tax  liability on intangible assets acquired |   | (5,962                          | )          | Various                  |    |
| Assumed  liabilities                                  |   | (4,385                          | )          | —                   |    |
|                                                  |   |                            |       |                     |    |
|                                                  |   | $                               | 66,599     |                     |    |   |

 

The acquisition was funded through available cash andthe issuance of short-term debt.  TheCompany borrowed a total of $45,000 at the stated rate of 30-day LIBOR plus1.75% (8.31% at January 31, 2001). All borrowings were repaid during the quarter ended March 30, 2001.  On the closing of the Equinox transaction,the Company acquired $24,295 in cash and short-term investments held byEquinox.

 

**Pro Forma Financial Information -**The following unaudited pro forma summarycombines the results of operations of Avocent, 2C, Equinox, and Soronti as ifthe acquisitions had occurred on January 1, 2001.  Certain adjustments have been made to reflect the impact of thepurchase transactions. These pro forma results have been prepared forcomparative purposes only and do not purport to be indicative of what wouldhave occurred had the acquisitions been made at the beginning of 2001, or ofresults which may occur in the future.

 
|                             |   | **Years Ended December 31,** |    |
|----------------------------------|--------|------------------------------|---------|
|                             |   | **2003**                     |    | **2002** |   | **2001** |   |
|                             |   |                         |    |   |   |   |   |
| Net sales                        |   | $                            | 305,235 |   | $ | 262,034 |   | $ | 255,970 |   |
| Net income  (loss)               |   | $                            | 39,962  |   | $ | 14,153 |   | $ | (319,856 | ) |
| Income (loss)  per diluted share |   | $                            | 0.84    |   | $ | 0.31 |   | $ | (7.21 | ) |

** **

**4.**                                      Inventories

** **

Inventories consist of the following at December 31,2003 and 2002:

 
|                  |   | **2003** |   | **2002** |   |
|-----------------------|--------|----------|--------|----------|--------|
| Raw materials,  net   |   | $        | 4,155  |     | $      | 7,560 |   |
| Work in process,  net |   | 659      |   | 851      |   |
| Finished goods,  net  |   | 16,510   |   | 16,011   |   |
|                  |   |     |   |     |   |
| Inventories, net      |   | $        | 21,324 |     | $      | 24,422 |   |

 

As of December 31, 2003 and2002, inventories above have been reduced by reserves for excess and obsoleteinventories of $4,020 and $7,502, respectively.

 

**5.**                                      Investments

** **

All investments in publicly traded securities atDecember 31, 2003, are classified as available-for-sale and carried at fairvalue.   During 2003, anyheld-to-maturity investments were allowed to mature, and all new purchases ofsecurities were accounted for as available-for-sale.  The Company includes certain investments with original maturitiesof less than 90 days as short term investments when such investments are a partof our non-operating investment portfolio. Investments at December 31, 2003, are as follows:

 

42

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|                                                               |   | **December  31, 2003**       |       |
|--------------------------------------------------------------------|--------|------------------------------|------------|
|                                                               |   | **Cost or  Amortized  Cost** |       | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Estimated  Fair  Value** |   |
|                                                               |   |                         | ** ** | ** ** | ** ** |
| **Current investments:**                                           |   |                         | ** ** | ** ** | ** ** |
|                                                               |   |                         |       |   |   |   |   |   |   |
| Corporate bonds                                                    |   | $                            | 40,944     |   | $ | 49 |   | $ | (30 | ) | $ | 40,963 |   |
| Municipal  bonds                                              |   |                         | 56,316     |   |   | 3 |   |   | (1 | ) |   | 56,318 |   |
| Asset-backed  securities                                           |   |                         | 292        |   |   | 7 |   |   | — |   |   | 299 |   |
| Mortgage-backed  securities guaranteed by U.S. government agencies |   |                         | 13,762     |   |   | 96 |   |   | (23 | ) |   | 13,835 |   |
| U.S. government  agency obligations                                |   |                         | 17,508     |   |   | 20 |   |   | (2 | ) |   | 17,526 |   |
| Time deposits                                                      |   | 17,959                       |       | — |   | — |   | 17,959 |   |
| Total                                                              |   | $                            | 146,781    |   | $ | 175 |   | $ | (56 | ) | $ | 146,900 |   |

 
|                                                               |   | **December  31, 2003**       |       |
|--------------------------------------------------------------------|--------|------------------------------|------------|
|                                                               |   | **Cost or  Amortized  Cost** |       | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Estimated  Fair  Value** |   |
|                                                               |   |                         | ** ** | ** ** | ** ** |
| **Non-current investments:**                                       |   |                         | ** ** | ** ** | ** ** |
|                                                               |   |                         |       |   |   |   |   |   |   |
| Corporate bonds                                                    |   | $                            | 30,538     |   | $ | 43 |   | $ | (69 | ) | $ | 30,512 |   |
| Municipal bonds                                                    |   |                         | 14,047     |   |   | 11 |   |   | (31 | ) |   | 14,027 |   |
| Mortgage-backed  securities guaranteed by U.S. government agencies |   |                         | 32,111     |   |   | 225 |   |   | (54 | ) |   | 32,282 |   |
| U.S agency  obligations                                            |   | 2,607                        |       | 6 |   | — |   | 2,613 |   |
| Private equity  investments                                        |   | 3,450                        |       | — |   | — |   | 3,450 |   |
|                                                               |   |                         |       |   |   |   |   |   |   |
| Totals                                                             |   | $                            | 82,753     |   | $ | 285 |   | $ | (154 | ) | $ | 82,884 |   |

 

At December 31, 2002, the amortized costs andestimated fair values of held-to-maturity investments (carried at amortizedcost) and available-for-sale securities (carried at fair value) are as follows:

 
|                                                               |   | **December  31, 2002**       |       |
|--------------------------------------------------------------------|--------|------------------------------|------------|
|                                                               |   | **Cost or  Amortized  Cost** |       | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Estimated  Fair  Value** |   |
|                                                               |   |                         | ** ** | ** ** | ** ** |
| **Current investments:**                                           |   |                         | ** ** | ** ** | ** ** |
| Held-to-maturity  investments:                                     |   |                         |       |   |   |   |   |   |   |
| Corporate bonds                                                    |   | $                            | 48,534     |   | $ | 179 |   | $ | (12 | ) | $ | 48,701 |   |
| Asset-backed  securities                                           |   | 1,010                        |       | 3 |   | — |   | 1,013 |   |
| U.S. government  agency obligations                                |   | 2,005                        |       | 5 |   | — |   | 2,010 |   |
|                                                               |   |                         |       |   |   |   |   |   |   |
| Total                                                              |   | $                            | 51,549     |   | $ | 187 |   | $ | (12 | ) | $ | 51,724 |   |
|                                                               |   |                         |       |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale  securities:                                    |   |                         |       |   |   |   |   |   |   |
| Corporate bonds                                                    |   | $                            | 33,863     |   | $ | 67 |   | $ | (84 | ) | $ | 33,846 |   |
| Mortgage-backed  securities guaranteed by U.S. government agencies |   |                         | 12,466     |   |   | 103 |   |   | — |   |   | 12,569 |   |
| Time deposits                                                      |   | 9,655                        |       | — |   | — |   | 9,655 |   |
|                                                               |   |                         |       |   |   |   |   |   |   |
| Total                                                              |   | $                            | 55,984     |   | $ | 170 |   | $ | (84 | ) | $ | 56,070 |   |

 

43

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|                                                               |   | **December  31, 2002**       |       |
|--------------------------------------------------------------------|--------|------------------------------|------------|
|                                                               |   | **Cost or  Amortized  Cost** |       | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Estimated  Fair  Value** |   |
|                                                               |   |                         | ** ** | ** ** | ** ** |
| **Non-current investments:**                                       |   |                         | ** ** | ** ** | ** ** |
| Held-to-maturity  investments:                                     |   |                         |       |   |   |   |   |   |   |
| Corporate bonds                                                    |   | $                            | 511        |   | $ | 11 |   | $ | — |   | $ | 522 |   |
| Asset-backed  securities                                           |   | 1,009                        |       | 7 |   | — |   | 1,016 |   |
| U.S. government  agency obligations                                |   | 1,004                        |       | 22 |   | — |   | 1,026 |   |
|                                                               |   |                         |       |   |   |   |   |   |   |
| Totals                                                             |   | $                            | 2,524      |   | $ | 40 |   | $ | — |   | $ | 2,564 |   |
|                                                               |   |                         |       |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale  securities:                                    |   |                         |       |   |   |   |   |   |   |
| Corporate bonds                                                    |   |                         | 10,195     |   |   | 12 |   |   | (4 | ) |   | 10,203 |   |
| Mortgage-backed  securities guaranteed by U.S. government agencies |   |                         | 29,022     |   |   | 307 |   |   | — |   |   | 29,329 |   |
| U.S agency  obligations                                            |   | 1,997                        |       | 13 |   | — |   | 2,010 |   |
| Equity  investments                                                |   | 1,131                        |       | — |   | (348 | )  | 783 |   |
|                                                               |   |                         |       |   |   |   |   |   |   |
| Totals                                                             |   | $                            | 42,345     |   | $ | 332 |   | $ | (352 | ) | $ | 42,325 |   |

 

Scheduled maturities of non-current investments,excluding equity securities which have no stated maturity,  are as follows:

 
|                        |   | **December  31, 2003** |   |
|-----------------------------|--------|------------------------|--------|
|                        |   | **Amortized  Cost**    |   | **Estimated  Fair  Value** |   |
| Due within two  years       |   | $                      | 42,693 |   | $ | 42,648 |   |
| Due two to three  years     |   |                   | 4,499  |   |   | 4,504 |   |
| Mortgage-backed  securities |   | 32,111                 |   | 32,282 |   |
|                        |   |                   |   |   |   |
| Totals                      |   | $                      | 79,303 |   | $ | 79,434 |   |

 

Investments in mortgage-backed securities are includedunder available-for-sale securities. The Company anticipates prepayments ofapproximately 25% per year in addition to scheduled maturities on suchsecurities.

 

As of December 31, 2003 substantially all of theCompany's investments that had unrealized losses were in a loss position forless than twelve months.  The unrealizedlosses include 55 individual securities and have been caused by slight upwardvariations in interest rates in the particular securities since the time theywere acquired. Most of these investments have been acquired within the past 12months and are of high credit quality or are guaranteed by an agency of the USgovernment. The Company anticipates that it will realize the full par valueupon maturity of these securities.

 

Gross realized gains on the sale of available-for-salesecurities were approximately $3,191 and gross realized losses wereapproximately $572 for the year ended December 31, 2003.  During the year ended December 31, 2003 theCompany included gross unrealized losses of $166 on its investments inmortgage-backed securities, and gross unrealized gains of $7 on its investmentsin other debt instruments as a separate component of stockholders’ equity.  We have evaluated our investments as ofDecember 31, 2003, and determined that none have sustained another-than-temporary decline, and no such charges have been recorded for2003.  Gross realized gains on the saleof available-for-sale securities were approximately $36 and gross realizedlosses were approximately $378 for the year ended December 31, 2002. During2002, the Company included gross unrealized losses of $213 on its equityinvestments and gross unrealized gains of $246 on its investments inmortgage-backed securities as a separate component of stockholders’equity.  Gross realized gains on thesale of available-for-sale securities were approximately $528 and grossrealized losses were approximately $800 for the year ended December 31, 2001.During 2001, the Company recognized gross losses of $4,899 on its equityinvestments due to declines in value that were determined by management to beother than temporary. During 2003, the Company realized gross gains of $3,173upon the sale an equity investment that had been previously written down.  There were no such gains or charges toinvestments in 2002.

 

In the second quarter of2002, the Company made a $1,000 investment in Rymic Systems, Inc., aprivately-held company based in Huntsville, Alabama, that develops hardware andsoftware solutions for remote monitoring and control of vehicles and equipmentover the internet using standard desktop web browsers.  The Company purchased 400 shares of Rymic’scommon stock, giving Avocent approximately a 14% equity position in Rymic.  In addition, as part of the investment, theCompany received certain rights of co-sale regarding the shares of stock thatwere purchased and certain rights of first refusal regarding shares of Rymicstock held by its major shareholders. The Company also entered into a Strategic Partnership Agreement withRymic to share certain technologies and other expertise, and the Company becamean authorized reseller of Rymic’s line of rymicNETTM remote monitoring andcontrol products in the computer, server, and data center management markets.Subsequent to the initial investment, the Company received 200 additionalshares in Rymic in November of 2002 as a result of Rymic failing to meetcertain pre-defined operational targets. During 2002, the Company recordedequity-method losses and an impairment charge totaling $550 against its investmentin Rymic, which was included in research and

 

44

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development expenses in theaccompanying consolidated statements of operations.  The Company did not recognize any grossrealized losses on such investments in 2003 or 2001

 

Early in the first quarter of 2001 and prior to theCompany’s investment in Rymic, Doyle C. Weeks, one of the Company’s directorsand Executive Vice President for Group Operations and Business Development,purchased 10 shares of common stock of Rymic at the price of $2.50 pershare.  Mr. Weeks also received a giftof 5 shares of Rymic common stock from one of its major shareholders.  At approximately the same time, Gary R.Johnson, Avocent’s Senior Vice President of Global Sales and Marketing,purchased 10 shares of common stock at the price of $2.50 per share.  At the time of the Company’s investment, Mr.Weeks was one of 6 directors of Rymic, and in connection with his services as adirector and prior to Avocent’s investment, Mr. Weeks was awarded nonqualifiedstock options to purchase 5 shares of Rymic common stock at $2.50 per sharethat vested upon receipt.  Mr. Weeks didnot receive any fees from Rymic.  Mr.Weeks was on the board of directors of Rymic through January 2004, but will notreceive any additional director fees or stock options for as long as theCompany holds its equity position in Rymic.

 

In 2003 the Company entered into a research anddevelopment agreement with Rymic whereby the Company paid $332 to Rymic for thedevelopment of certain technologies. The costs associated with this agreement were expensed and included inresearch and development expenses in 2003.

 

In the second quarter of 2003 the Company made a$3,000 preferred stock investment in VIEO, Inc. VIEO provides managementproducts for Adaptive Application Infrastructure Management.  VIEO’s products combine application-awarenetworking hardware with intelligent infrastructure management software in asecure, purpose-built appliance to measure, analyze and control applicationresources.  Headquartered in Austin,Texas, VIEO has received funding from a wide group of investors, includingAvocent’s investment.  The Company’sinvestment, which represents less than 10% ownership in VIEO, is beingaccounted for on the cost method.

 

**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-year extensions,subject to certain conditions. The lease agreement also provides for earlytermination at the option of the lessee after three or four years, subject tocertain conditions, including termination fees. Rental income totaledapproximately $221 for each of the years ended December 31, 2003, 2002 and2001.

 

Property held for lease consists of the following atDecember 31, 2003 and 2002:

 
|                          |   | **2003** |   | **2002** |   |
|-------------------------------|--------|----------|--------|----------|--------|
| Building                      |   | $        | 2,306  |     | $      | 2,306 |   |
| Accumulated  depreciation     |   | (780     | )      | (583     | )      |
|                          |   |     |   |     |   |
| Property held  for lease, net |   | $        | 1,526  |     | $      | 1,723 |   |

 

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

 

| **Year ending  December 31:** |   |   |   |
|-------------------------------|--------|--------|--------|
| 2004                          |   | $      | 221    |   |
| 2005                          |   | 93     |   |
|                          |   |   |   |
|                          |   | $      | 314    |   |

 

45

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**7.**                                      Property and Equipment

** **

Property and equipment consists of the following atDecember 31, 2003 and 2002:

 

* *
|                             |   | **2003** |   | **2002** |   |
|----------------------------------|--------|----------|--------|----------|--------|
| Land and land  improvements      |   | $        | 4,947  |     | $      | 3,152 |   |
| Buildings                        |   | 21,530   |   | 16,873   |   |
| Leasehold  improvements          |   | 2,403    |   | 1,392    |   |
| Computer  software and equipment |   | 15,014   |   | 9,838    |   |
| Other equipment                  |   | 11,539   |   | 10,804   |   |
| Construction in  progress        |   | 3,331    |   | 2,002    |   |
|                             |   |     |   |     |   |
|                             |   | 58,764   |   | 44,061   |   |
| Less accumulated  depreciation   |   | (20,291  | )      | (19,748  | )      |
|                             |   |     |   |     |   |
| Property and  equipment, net     |   | $        | 38,473 |     | $      | 24,313 |   |

** **

Depreciation expense was $4,859, $4,361 and $4,709 forthe years ended December 31, 2003, 2002 and 2001, respectively.

 

The Company implemented a new enterprise resourceplanning system in the fourth quarter of 2003 at its United States locationsand plans to implement the system at its international locations during 2004.The Company has capitalized the costs of the new system to date and has begundepreciating the costs for the United States locations.    The Company has capitalized approximately$9,870 of related costs as of December 31, 2003 and expects the total cost ofimplementing the system to be in the range of $11,000 to $12,200.

 

**8.**                                      Goodwilland Other Intangible Assets

** **

**Acquiredother intangible assets subject to amortization, including the intangibleassets from the Soronti acquisition detailed in Note 3, are as follows:**

** **
|                             |   | **December  31, 2003**       |   | **December  31, 2002**        |   |
|----------------------------------|--------|------------------------------|--------|-------------------------------|--------|
|                             |   | **Gross  Carrying  Amounts** |   | **Accumulated  Amortization** |   | **Gross  Carrying  Amounts** |   | **Accumulated  Amortization** |   |
| Developed  technology            |   | $                            | 66,240 |                          | $      | 45,824 |   | $ | 65,740 |   | $ | 32,869 |   |
| Patents and  trademarks          |   | 17,657                       |   | 9,566                         |   | 17,350 |   | 5,663 |   |
| Customer base  and certification |   | 1,613                        |   | 717                           |   | 21,113 |   | 16,013 |   |
| Non-compete  agreements          |   | 3,273                        |   | 1,455                         |   | 3,273 |   | 364 |   |
| Other assets                     |   | 768                          |   | 100                           |   | 101 |   | 67 |   |
|                             |   | $                            | 89,551 |                          | $      | 57,662 |   | $ | 107,577 |   | $ | 54,976 |   |

** **

**During2003, the Company retired $19,500 of fully amortized other intangible assetsand the related accumulated amortization, which were recorded in 2000 at themerger of Apex Inc. and Cybex Computer Products Corporation to form Avocent andhad a three year estimated useful life. The retirement had no impact on reported earnings.**

** **

**Forthe years ended December 31, 2003, 2002 and 2001, amortization expense forother intangible assets was $21,805, $22,189 and $21,881, respectively.  The approximate future annual amortizationfor other intangible assets is as follows:**

** **

| **Years  ending  December 31:** |   |   |   |
|---------------------------------|--------|--------|--------|
| 2004                            |   | $      | 17,900 |   |
| 2005                            |   | 11,100 |   |
| 2006                            |   | 2,600  |   |
| 2007                            |   | 289    |   |
| Total                           |   | $      | 31,889 |   |

** **

**46**

----

** **

**Thefollowing tables present the impact of the new standards on income (loss) fromoperations, net income (loss) and income (loss) per share, as if they had beenin effect for the year ended December 31, 2001.**

** **

** **
|                               |   | **For the  Year Ended December 31,** |   |
|------------------------------------|--------|--------------------------------------|--------|
|                               |   | **2003  As Reported**                |   | **2002  As Reported** |   | **2001  As Reported** |   | **2001  Pro- Forma** |   |
| Income (loss)  from operations     |   | $                                    | 45,890 |   | $ | 10,125 |   | $ | (324,148 | ) | $ | (213,150 | ) |
| Net income  (loss)                 |   | $                                    | 38,547 |   | $ | 10,738 |   | $ | (320,466 | ) | $ | (209,468 | ) |
| Basic earnings  (loss) per share   |   | $                                    | 0.83   |   | $ | 0.24 |   | $ | (7.22 | ) | $ | (4.72 | ) |
| Diluted earnings  (loss) per share |   | $                                    | 0.81   |   | $ | 0.24 |   | $ | (7.22 | ) | $ | (4.72 | ) |

** **

**Inaccordance with SFAS No. 142, the Company completed a transitional impairmenttest of all goodwill and intangible assets as of January 1, 2002.**  The testconcluded that no adjustment was required upon adoption.  Additionally, the Company performed anannual impairment test of goodwill in the fourth quarter of 2003 and 2002, asprescribed by this standard.  The testin the fourth quarter of both years concluded that there had been no impairmentof goodwill and that no adjustments were required.

** **

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, at that time, were nolonger deemed adequate to support the value of goodwill recorded at the datesof the merger and acquisition.  Additionally,in 2001, prior to the adoption of SFAS No. 142, we recorded goodwillamortization in the amount of $110,998. Following the adoption of SFAS No. 142,we no longer recorded goodwill amortization.

 

**9.**                                      Product Warranties

** **

The activity within the liability for warranty returnsin 2003 and 2002 is as follows:

 

|                                                      |   | **2003** |   | **2002** |   |
|-----------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                      |   |     |   |     |   |
| Balance,  beginning of year                               |   | $        | 2,435  |     | $      | 4,157 |   |
|                                                      |   |     |   |     |   |
| Accruals for  product warranties issued during the period |   | 597      |   | 398      |   |
| Settlements made  during the period                       |   | (380     | )      | (2,132   | )      |
| Warranty  liability assumed upon the acquisition of 2C    |   | —   |   | 12       |   |
|                                                      |   |     |   |     |   |
| Balance, end of  year                                     |   | $        | 2,652  |     | $      | 2,435 |   |

 

Deferred revenue related to the Company’s extendedwarranty program was $1,046 at December 31, 2003 and $618 at December 31,2002.  The Company recorded earnedrevenue from the amortization of deferred revenue related to extendedwarranties of $282 for the year ended December 31, 2003 and $90 for the yearended December 31, 2002.  In addition,the Company recorded new extended warranties of $710 during 2003 and $590during 2002.

 

47

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**10.**                              Income Taxes

 

The provision for(benefit from) income taxes for the years ended December 31, 2003, 2002 and2001 is comprised of the following:

 
|                                             |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| U.S.  operations:                                |   |     |   |     |   |     |   |
| Current:                                         |   |     |   |     |   |     |   |
| Federal                                          |   | $        | 13,356 |     | $      | 8,262    |   | $ | 12,174 |   |
| State                                            |   | 1,198    |   | (1,468   | )      | (309     | )      |
|                                             |   |     |   |     |   |     |   |
|                                             |   | 14,554   |   | 6,794    |   | 11,865   |   |
| Deferred:                                        |   |     |   |     |   |     |   |
| Federal                                          |   | (3,676   | )      | (4,615   | )      | (14,517  | )      |
| State                                            |   | (540     | )      | (677     | )      | (821     | )      |
|                                             |   |     |   |     |   |     |   |
|                                             |   | (4,216   | )      | (5,292   | )      | (15,338  | )      |
|                                             |   |     |   |     |   |     |   |
| Total  U.S. operations tax provision (benefit)   |   | 10,338   |   | 1,502    |   | (3,473   | )      |
| Total  foreign operations tax provision          |   | 4,161    |   | 3,000    |   | 526      |   |
|                                             |   |     |   |     |   |     |   |
| Total  provision for (benefit from) income taxes |   | $        | 14,499 |     | $      | 4,502    |   | $ | (2,947 | ) |

 

The provision for (benefit from) federal income taxes differs from theamount computed by applying the statutory rate of 35% to taxable income asfollows:

 
|                                                               |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                               |   |     |   |     |   |     |   |
| Expected  federal income tax provision (benefit)                   |   | $        | 18,566 |     | $      | 5,334    |   | $ | (113,195 | ) |
| Add  (deduct):                                                     |   |     |   |     |   |     |   |
| Extraterritorial  income exclusion benefit                         |   | (63      | )      | (29      | )      | (305     | )      |
| State  income tax deduction                                        |   | (642     | )      | (1,041   | )      | (499     | )      |
| Tax  effect resulting from foreign operations taxed at lower rates |   | (6,782   | )      | (6,154   | )      | (1,741   | )      |
| Acquired  in-process research and development                      |   | 1,379    |   | 2,100    |   | 1,599    |   |
| Goodwill  amortization and write-off of intangibles                |   | —   |   | —   |   | 106,830  |   |
| Compensation  expense                                              |   | 1,488    |   | 3,897    |   | 5,599    |   |
| Other                                                              |   | 553      |   | 395      |   | (1,235   | )      |
|                                                               |   |     |   |     |   |     |   |
|                                                               |   | $        | 14,499 |     | 4,502  |     | $      | (2,947 | )  |
|                                                                    |        |          |        |          |        |          |        |  |  |  |

 

The components of the netdeferred income tax assets and liabilities at December 31, 2003 and 2002, areas follows:

 
|                                                            |   | **2003** |    | **2002** |   |
|-----------------------------------------------------------------|--------|----------|---------|----------|--------|
| Net  current deferred income tax assets:                        |   |     |    |     |   |
| Allowance  for doubtful accounts                                |   | $        | 517     |     | $      | 661 |   |
| Allowance  for sales returns and liability for warranty returns |   | 1,657    |    | 1,928    |   |
| Inventory  reserves                                             |   | 1,531    |    | 2,511    |   |
| Other                                                           |   | 911      |    | 832      |   |
|                                                            |   |     |    |     |   |
|                                                            |   | $        | 4,616   |     | $      | 5,932 |   |
|                                                            |   |     |    |     |   |
| Net  noncurrent deferred income tax liabilities:                |   |     |    |     |   |
| Accumulated  depreciation                                       |   | $        | (2,305  | )        | $      | (1,682 | ) |
| Foreign  subsidiary intangibles                                 |   | 2,039    |    | 2,039    |   |
| Acquired  developed technology                                  |   | 1,128    |    | 1,236    |   |
| Acquired  intangible assets                                     |   | (11,988  | )       | (19,867  | )      |
| Loss  on investments                                            |   | 521      |    | 1,753    |   |
| Acquired  NOL carryforwards                                     |   | 426      |    | —   |   |
| Other                                                           |   | 1,760    |    | 2,347    |   |
|                                                            |   |     |    |     |   |
|                                                            |   | (8,419   | )       | (14,174  | )      |
| Less  valuation allowance                                       |   | (2,465   | )       | (2,039   | )      |
|                                                            |   |     |    |     |   |
|                                                            |   | $        | (10,884 | )        | $      | (16,213 | ) |

 

48

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The Company has a fullvaluation allowance recorded against a deferred tax asset arising from aforeign subsidiary. The Company intends to fully reserve this asset until it isdetermined that it is more likely than not that the asset can be realizedthrough future taxable income from its acquired foreign operations.

 

**11.**                              Stockholders’ Equity

 

**Preferred Stock** - The Company has 5,000 shares of $0.001par value preferred stock authorized and no shares issued and outstanding atDecember 31, 2003 and 2002.

 

**Common Stock** - The Company has 200,000 shares of$0.001 par value common stock authorized. There were 47,350 and 45,210 shares issued and outstanding at December31, 2003 and 2002, respectively.

 

**12.**                              Earnings (Loss) Per Share

 

A summary of thecalculation of basic and diluted earnings (loss) per share (EPS) for the yearsended December 31, 2003, 2002 and 2001, is as follows:

 
|                                      |   | **Income  (loss)  (Numerator)** |     | **Shares  (Denominator)** |   | **Earnings  (Loss)  Per-Share** |   |
|-------------------------------------------|--------|---------------------------------|----------|---------------------------|--------|---------------------------------|--------|
|                                      |   |                            |     |                      |
|                                      |   |                            |     | ** **                |
| **For  the Year Ended December 31, 2003** |   |                            |     |                      |   |                            |   |
| **Basic  EPS**                            |   |                            |     |                      |   |                            |   |
| Net  income                               |   | $                               | 38,547   |                      | 46,194 |                            | $      | 0.83 |   |
| **Effect  of Dilutive Securities**        |   |                            |     |                      |   |                            |   |
| Stock  options                            |   |                            |     | 1,499                     |   |                            |   |
| **Diluted  EPS**                          |   |                            |     |                      |   |                            |   |
| Net  income and assumed conversions       |   | $                               | 38,547   |                      | 47,693 |                            | $      | 0.81 |   |
|                                      |   |                            |     |                      |   |                            |   |
| **For  the Year Ended December 31, 2002** |   |                            |     |                      |   |                            |   |
| **Basic  EPS**                            |   |                            |     |                      |   |                            |   |
| Net  income                               |   | $                               | 10,738   |                      | 44,977 |                            | $      | 0.24 |   |
| **Effect  of Dilutive Securities**        |   |                            |     |                      |   |                            |   |
| Stock  options                            |   |                            |     | 572                       |   |                            |   |
| **Diluted  EPS**                          |   |                            |     |                      |   |                            |   |
| Net  income and assumed conversions       |   | $                               | 10,738   |                      | 45,549 |                            | $      | 0.24 |   |
|                                      |   |                            |     |                      |   |                            |   |
| **For  the Year Ended December 31, 2001** |   |                            |     |                      |   |                            |   |
| **Basic  EPS**                            |   |                            |     |                      |   |                            |   |
| Net  loss                                 |   | $                               | (320,466 | )                         | 44,374 |                            | $      | (7.22 | ) |
| **Effect  of Dilutive Securities**        |   |                            |     |                      |   |                            |   |
| Stock  options                            |   |                            |     | —                    |   |                            |   |
| **Diluted  EPS**                          |   |                            |     |                      |   |                            |   |
| Net  loss and assumed conversions         |   | $                               | (320,466 | )                         | 44,374 |                            | $      | (7.22 | ) |

 

At December 31, 2003,2002 and 2001, options to purchase 1,941, 5,470 and 7,188 shares of commonstock, respectively, were outstanding but were not included in the computationof diluted earnings (loss) per share because inclusion of such options wouldhave been anti-dilutive.

** **

**13.**                              Commitments and Contingencies

 

The Company leasesbuildings and certain equipment under various operating leases. Rent expenseunder these leases totaled approximately $2,559, $2,882 and $2,871 for theyears ended December 31, 2003, 2002 and 2001, respectively.  Future minimum rental payments undernon-cancelable operating leases are approximately as follows:

 

49

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| **Year ending  December 31:** |   |   |   |
|-------------------------------|--------|--------|--------|
| 2004                          |   | $      | 1,745  |   |
| 2005                          |   | 1,375  |   |
| 2006                          |   | 878    |   |
| 2007                          |   | 734    |   |
| 2008                          |   | 685    |   |
| Thereafter                    |   | 167    |   |
|                          |   |   |   |
|                          |   | $      | 5,584  |   |

 

In theordinary course of our business, the company may at any point in time have asignificant amount of contractual commitments not yet recognized in ourfinancial statements.  These commitmentstotaled $25,033 as of December 31, 2003 and are all due within 2004. Thesecommitments relate primarily to Avocent’s need to schedule the purchase ofinventories in advance of the related forecasted sales to customers. TheCompany also has at any point in time a variety of short term contractualcommitments for services such as advertising, marketing, accounting, legal, andresearch and development activities. The liabilities for these services and therelated expenses are typically recognized upon the receipt of the relatedservices.

 

TheCompany has been involved from time to time in litigation in the normal courseof business. Management is not aware of any pending or threatened litigationmatters that will have a material adverse effect on the Company’s business,operations, financial condition or cash flows (*see Note 18*).

 

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

 

The Company has stockoption plans covering substantially all of its employees and directors. Avocentassumed the stock option plans and the related underlying options of Apex andCybex at the merger effective July 1, 2000, of Equinox at the acquisitioneffective January 3, 2001 and of 2C at the acquisition effective August 20,2002. No additional options have been or will be granted under thesepre-existing plans.

 

Apex had adopted theEmployee Stock Option Plan (the Apex Plan), which provided for nonqualified andincentive stock options for officers,directors and employees. At the time of the merger there were options topurchase 2,775 shares (after conversion to Avocent options at 1.0905 peroutstanding option) of common stock outstanding under the Apex Plan. Options underthe Apex Plan will generally expire 10 years from the date of grant, or 5 yearsin the case of an optionee owning more than 10% of the voting power of allclasses of stock. Purchase prices for common stock subject to options issuedunder the Apex Plan generally approximate the fair market value of the relatedshares at the date of grant. Generally, options vest over four years.

 

Cybexhad adopted three plans, including the 1995 Employee Stock Option Plan (thePlan), the 1995 Outside Directors Option Plan (the 1995 Plan), and the 1998Employee Stock Incentive Plan (the 1998 Plan). The 1995 Employee Stock OptionPlan provided fornonqualified and incentive stock options forofficers and employees. At the time of the 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.

 

The1995 Outside Directors Plan provided for nonqualified options for outside directors. At the time of the merger there were options topurchase 37 shares of common stock outstanding under the 1995 Plan. Optionsunder the 1995 Plan will generally expire 5 years from the date of grant.Purchase prices for common stock subject to options issued under the 1995 Plangenerally approximate the fair market value of the related shares at the dateof grant. Options vest and become exercisable immediately upon issuance.

 

The1998 Employee Stock Incentive Plan provided for nonqualified and incentive stock optionsfor officers and employees. At the time ofthe merger there were options to purchase 1,171 shares of common stockoutstanding under the 1998 Plan. Options under the 1998 Plan will generallyexpire 10 years from the date of grant. Purchase prices for common stocksubject to options issued under the 1998 Plan generally approximate the fairmarket value of the related shares at the date of grant. Generally, optionsvest over two to five years.

 

Equinoxhad adopted an option plan (the Equinox Plan) that provided for nonqualified stock options for officers, directors and employees.  At the time of the acquisition there wereoptions to purchase 675 shares (after conversion to Avocent options at 0.4575per outstanding option) of common stock outstanding under the EquinoxPlan.  Options under this plan generallyexpire 10 years from the date of grant. Purchase prices for common stocksubject to options issued under the Equinox Plan generally approximate the fairmarket value of the related shares at the date of grant. Generally, optionsvest quarterly over four years.

 

50

----

 

2Chad adopted an option plan (the 2C Plan) that provided for nonqualified stock options for officers, directors and employees.  At the time of the merger there were optionsto purchase 152 shares (after conversion to Avocent options at 0.3553 peroutstanding option) of common stock outstanding under the 2C Plan.  Options under this plan generally expire 10years from the date of grant. Purchase prices for common stock subject tooptions issued under the 2C Plan generally approximate the fair market value ofthe related shares at the date of grant. Generally, options vest annually overtwo years.

 

Avocent has adopted fouradditional stock option plans, the 2000 Stock Option Plan (the 2000 Plan), the2000 Transition Nonstatutory Stock Option Plan (the Transition Plan), theAvocent Corporation 2003 Stock Option Plan (the 2003 Plan), and the AvocentCorporation 2003 Inducement Plan (the Inducement Plan). The 2000 Stock OptionPlan, which provides for nonqualified and incentive stock options for officers, directors and employees, reserved atotal of 6,000 shares of common stock for issuance pursuant to the 2000 Plan.Options under the 2000 Plan will generally expire 10 years from the date ofgrant. Purchase prices for common stock subject to options issued under the2000 Plan generally approximate the fair market value of the related shares atthe date of grant. Generally, options vest over two to four years.

 

The 2000 TransitionNonstatutory Stock Option Plan, which provides for non-qualified and incentivestock options for employees, reserved atotal of 450 shares of common stock for issuance pursuant to the TransitionPlan. Options under the Transition Plan will generally expire 10 years from thedate of grant. Purchase prices for common stock subject to options issued underthe Transition Plan generally approximate the fair market value of the relatedshares at the date of grant. Generally, options vest over four years.

 

The2003 Plan, whichprovides for nonqualified and incentive stock options for officers, directors and employees, reserved a total of 2,000 sharesof common stock for issuance pursuant to the 2003 Plan.  The Inducement Plan, which provides fornonqualified and incentive stock options for new employees, reserved a total of500 shares of common stock for issuance pursuant to the Inducement Plan.  Options under the 2003 Plan and theInducement Plan will generally expire 10 years from the date of grant. Purchaseprices for common stock subject to options issued under the 2003 Plan and theInducement Plan generally approximate the fair market value of the relatedshares at the date of grant. Generally, options vest over two to four years.

 

Pertinent informationregarding the Company’s plans is as follows:

 
|                                         |   | **Number of  Options** |   | **Range of  Exercise  Prices** |   | **Weighted  Average  Exercise  Price** |   |
|----------------------------------------------|--------|------------------------|--------|--------------------------------|--------|----------------------------------------|--------|
| Options  outstanding, December 31, 2000      |   | 5,834                  |   | $ 0.11 – $70.94           |   | $                                      | 27.52  |   |
| Options  assumed upon acquisition of Equinox |   | 675                    |   | $ 3.28 – $21.32           |   | $                                      | 14.65  |   |
| Options  granted                             |   | 1,672                  |   | $ 14.25 – $37.44          |   | $                                      | 22.29  |   |
| Options  forfeited and cancelled             |   | (205                   | )      | $ 5.50 – $69.63           |   | $                                      | 26.18  |   |
| Options  exercised                           |   | (793                   | )      | $ 0.11 – $30.38           |   | $                                      | 11.70  |   |
|                                         |   |                   |   |                           |   |                                   |   |
| Options  outstanding, December 31, 2001      |   | 7,183                  |   | $ 0.11 – $70.94           |   | $                                      | 26.88  |   |
| Options  assumed upon acquisition of 2C      |   | 152                    |   | $ 14.08                        |   | $                                      | 14.08  |   |
| Options  granted                             |   | 2,022                  |   | $ 12.86 – $27.30          |   | $                                      | 20.90  |   |
| Options  forfeited and cancelled             |   | (606                   | )      | $ 5.50 – $58.38           |   | $                                      | 36.40  |   |
| Options  exercised                           |   | (808                   | )      | $ 0.11 – $22.85           |   | $                                      | 12.85  |   |
|                                         |   |                   |   |                           |   |                                   |   |
| Options  outstanding, December 31, 2002      |   | 7,943                  |   | $ 0.11 – $70.94           |   | $                                      | 25.82  |   |
| Options  granted                             |   | 1,645                  |   | $ 21.79 – $38.20          |   | $                                      | 27.65  |   |
| Options  forfeited and cancelled             |   | (201                   | )      | $ 0.11 – $68.56           |   | $                                      | 25.26  |   |
| Options  exercised                           |   | (1,978                 | )      | $ 0.11 – $30.38           |   | $                                      | 16.59  |   |
|                                         |   |                   |   |                           |   |                                   |   |
| Options  outstanding, December 31, 2003      |   | 7,409                  |   | $ 0.11 – $70.94           |   | $                                      | 28.70  |   |

 

Included in the stockoptions outstanding at December 31, 2001, were 290 shares for which vesting wasaccelerated as the result of employment agreements for certain employees thatterminated during 2001.  These optionswould have been forfeited had the vesting not been accelerated.  As a result, the Company recordedcompensation expense in 2001 of approximately $2,600 based on the excess of theintrinsic value at the acceleration date over the intrinsic value at the grantdate.  There were no options withaccelerated vesting outstanding as of December 31, 2003 or 2002. However, inthe first quarter of 2002, the Company allowed shares issued upon the exerciseof certain stock options by a former executive of the Company to be traded aspayment for the cost of the options and related taxes.  Under applicable accounting rules, thiscashless exercise required variable plan accounting for these options.  As a result, the Company recordedapproximately $2,000 of compensation expense in the first quarter of 2002.

 

51

----

 

The following tablesummarizes information about stock options outstanding at December 31, 2003:

 
|                         |   | **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               |   | 368                      |   | 4.11                                               |   | $ | 8.63 |   | 368 |   | $ | 8.63 |   |
| $ 10.05 - $20.00             |   | 1,001                    |   | 5.90                                               |   | $ | 14.21 |   | 726 |   | $ | 13.65 |   |
| $ 20.10 - $29.38             |   | 4,133                    |   | 8.17                                               |   | $ | 24.01 |   | 1,738 |   | $ | 23.41 |   |
| $ 30.21 - $44.25             |   | 239                      |   | 8.93                                               |   | $ | 35.39 |   | 47 |   | $ | 32.41 |   |
| $ 46.19 - $70.94             |   | 1,668                    |   | 6.72                                               |   | $ | 52.50 |   | 1,438 |   | $ | 52.51 |   |
|                         |   |                     |   |                                               |   |   |   |   |   |   |   |
|                         |   | 7,409                    |   |                                               |   |   |   | 4,317 |   |   |   |

 

The options above wereissued with exercise prices that approximated fair value at the date of grant.At December 31, 2003, 2,239 shares are available for grant under the Company’sstock option plans.

 

On December 6, 2000, thestockholders approved an employee stock purchase plan for all Avocent employees(the AESPP), through which qualified employees may participate in common stockownership. The AESPP qualifies as a non-compensatory plan under Section 423 ofthe Internal Revenue Code. The Company has reserved 1,500 shares of commonstock for issuance under the AESPP. The price of stock purchased under theAESPP is generally 85% of the lower of the fair market value of the commonstock (i) at the beginning of the offering period or (ii) at the end of thepurchase period. In the event the fair market value at the end of a purchaseperiod is less than the fair market value at the beginning of the offeringperiod, the participants will be withdrawn from the current offering periodfollowing exercise and automatically re-enrolled in a new offering period. Thenew offering period will use the lower fair market value as of the first dateof the new offering period to determine the purchase price for future purchaseperiods. The AESPP administrator administers and interprets all rules andregulations applicable to the AESPP. Pursuant to the AESPP, 131 shares were issued at a weighted averageprice of $13.84 per share for the year ended December 31, 2003, 78 shares wereissued at a weighted average price of $16.01 per share for the year endedDecember 31, 2002 and 37 shares were issued at a weighted average price of$21.63 per share for the year ended December 31, 2001.

 

**15.**                              Retirement Plans

 

The Company sponsors a401(k) savings plan covering substantially all U.S. employees and aprofit-sharing plan covering substantially all international employees.  Under the 401(k) savings plan, the Companymakes discretionary contributions to match 50% of an employee’s contributionsup to 6% of the employee’s compensation. The Company may also elect to makeadditional discretionary contributions as determined by its Board of Directors.No discretionary contributions were made during the years ended December 31,2003, 2002 or 2001 under the 401(k) savings plan. The Company’s expense forcontributions under these plans totaled approximately $1,072, $907 and $710 forthe years ended December 31, 2003, 2002 and 2001, respectively.

 

**16.**                              Segment Reporting

 

The Company hasevaluated, and will periodically re-evaluate, its business in light of thesegment reporting requirements prescribed by SFAS No. 131, *Disclosures about Segments of anEnterprise and Related Information.* Avocent has determined that it should report its operations as a singleoperating segment.  However, the Companysupplementally reports sales by geographic region, as well as by customertype.  Following is a presentation ofsales by geographic region for the years ended December 31, 2003, 2002 and2001:

 
|           |   | **2003** |    | **2002** |   | **2001** |   |
|----------------|--------|----------|---------|----------|--------|----------|--------|
| Net  sales:    |   |     |    |     |   |     |   |
| United  States |   | $        | 182,153 |     | $      | 155,589  |   | $ | 159,799 |   |
| International  |   | 122,085  |    | 105,011  |   | 96,112   |   |
|           |   |     |    |     |   |     |   |
|           |   | $        | 304,238 |     | $      | 260,600  |   | $ | 255,911 |   |

 

52

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Following is apresentation of sales by customer type for the years ended December 31, 2003,2002 and 2001:

 
|        |   | **2003** |    | **2002** |   | **2001** |   |
|-------------|--------|----------|---------|----------|--------|----------|--------|
| Net  sales: |   |     |    |     |   |     |   |
| Branded     |   | $        | 164,684 |     | $      | 140,888  |   | $ | 139,457 |   |
| OEM         |   | 139,554  |    | 119,712  |   | 116,454  |   |
|        |   |     |    |     |   |     |   |
|        |   | $        | 304,238 |     | $      | 260,600  |   | $ | 255,911 |   |

** **

**Morethan 90% of the Company’s revenue was derived from its KVM products during eachof 2003, 2002 and 2001.**

** **

**TheCompany sells its products internationally to customers in severalcountries.  Sales to customers in theUnited Kingdom, including sales to the European distribution center of an OEMcustomer, accounted for $30,334, $38,559 and $37,551 in 2003, 2002 and 2001respectively.  No other countryaccounted for more than 10% of sales in 2003, 2002 or 2001.**

** **

**Asof December 31, 2003, long-lived assets totaled $277,925, which includes$267,048 held in the U.S. and $10,877 held outside of the U.S.  As of December 31, 2002, long-lived assetstotaled $282,262, which includes $280,513 held in the U.S. and $1,749 heldoutside of the U.S.**

** **

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

 

The following tablepresents unaudited quarterly operating results for each of the Company’s lasteight fiscal quarters. This information has been prepared by the Company on abasis consistent with the Company’s audited financial statements and includesall adjustments, consisting only of normal recurring adjustments, that theCompany considers necessary for a fair presentation of the data.

 
|                       |   | **Three  Months Ended** |        |
|----------------------------|--------|-------------------------|-------------|
|                       |   | **March 28,  2003**     |        | **June 27,  2003** | ** ** | **September  26,  2003** | ** ** | **December  31,  2003** | ** ** |
|                       |   |                    | ** **  | ** ** | ** ** |
| Net  sales                 |   | $                       | 71,162      |   | $ | 70,612 |   | $ | 76,482 |   | $ | 85,982 |   |
| Gross  profit              |   | $                       | 39,597      |   | $ | 40,685 |   | $ | 43,573 |   | $ | 47,971 |   |
| Income  from operations    |   | $                       |  9,970 |   |   | $ | 8,751 |   | $ | 14,893 |   | $ | 12,276 |   |
| Net  income                |   | $                       | 8,167       |   | $ | 7,345 |   | $ | 13,476 |   | $ | 9,559 |   |
| Net  income per share (1): |   |                    |        |   |   |   |   |   |   |
| Basic                      |   | $                       | 0.18        |   | $ | 0.16 |   | $ | 0.29 |   | $ | 0.20 |   |
| Diluted                    |   | $                       | 0.17        |   | $ | 0.16 |   | $ | 0.28 |   | $ | 0.20 |   |
|                            |        |                         |             |  |  |  |  |  |  |  |  |  |  |  |

 
|                              |   | **Three  Months Ended** |       |
|-----------------------------------|--------|-------------------------|------------|
|                              |   | **March 29,  2002**     |       | **June 28,  2002** | ** ** | **September  27,  2002** | ** ** | **December  31,  2002** | ** ** |
|                              |   |                    | ** ** | ** ** | ** ** |
| Net  sales                        |   | $                       | 62,103     |   | $ | 63,018 |   | $ | 64,490 |   | $ | 70,988 |   |
| Gross  profit                     |   | $                       | 30,263     |   | $ | 31,616 |   | $ | 33,238 |   | $ | 36,610 |   |
| Income  (loss) from operations    |   | $                       | (1,394     |   | ) | $ | 3,879 |   | $ | 326 |   | $ | 7,314 |   |
| Net  income (loss)                |   | $                       | 303        |   | $ | 3,567 |   | $ | (325 | ) | $ | 7,193 |   |
| Net  income (loss) per share (1): |   |                    |       |   |   |   |   |   |   |
| Basic                             |   | $                       | 0.01       |   | $ | 0.08 |   | $ | (0.01 | ) | $ | 0.16 |   |
| Diluted                           |   | $                       | 0.01       |   | $ | 0.08 |   | $ | (0.01 | ) | $ | 0.16 |   |
|                                   |        |                         |            |  |  |  |  |  |  |  |  |  |  |  |

 

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  (1)  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 value ofthe Company’s Common stock during the year and the effect these variations hadon the shares outstanding calculation.

 

**18.**                              **Patent Litigation**

 

In May 2001, the Companyfiled a complaint for patent infringement in the United States District Courtfor the Southern District of New York against Raritan Computer Inc. The Raritancomplaint sought injunctive relief, damages, attorneys’ fees and costs underthree patents.  After a seven day benchtrial in New York in January of 2002, U.S. District Judge Milton Pollack found that there was no infringementof these patents by Raritan and ordered that judgment be entered in favor ofRaritan.

 

In April 2003, the UnitedStates Court of Appeals for the Federal Circuit issued its ruling on theCompany’s appeal in this patent litigation. The Court of Appeals ruled in the Company’s favor by vacating thenon-infringement decision of the District Court for the Southern District ofNew York and remanding the case for further proceedings consistent with the

 

53

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Court of Appeals’opinion.

 

InSeptember 2003, Raritan petitioned the United States Supreme Court for a Writ of Certiorari to review the Court ofAppeals decision.  The Supreme Courtdeclined to review Raritan’s petition in December 2003, and the case is nowback before the United States District Court for the Southern District of NewYork.

 

InOctober 2003, the Company filed a complaint for patent infringement in theUnited States District Court for the Northern District of Alabama againstClearCube Technology, Inc.  TheClearCube complaint seeks injunctive relief, damages, attorneys’ fees, andcosts under three Avocent patents. ClearCube has filed counterclaims alleging non-infringement,unenforceability, invalidity, and misuse of the Avocent patents.

 

**19.**                              **Subsequent Event**

 

OnJanuary 6, 2004, the Company acquired Crystal Link Technologies (CrystalLink) for an initial payment of cash and stock of approximately  $7,000, plus assumed liabilities ofapproximately $1,200 and acquisition costs of approximately $175. The purchaseagreement calls for additional potential earn-out payments of up to $5,000based on future technical enhancements and achievement of certain salesgoals.  Crystal Link, headquartered inEscondido, California, has developed wireless technology for KVM switching andextension products, which is incorporated into the Company’s LongView Wirelessproduct.

 

The acquisition will be recordedunder the purchase method of accounting in the first quarter of 2004, and thepurchase price will be allocated based on the fair value of the assets acquiredand liabilities assumed. In accordance with generally accepted accountingprinciples, purchased research and development costs allocated topatent-pending technology will be capitalized and will be amortized over therespective estimated useful lives.  Theremaining amounts of purchased research and development will be expensed as ofthe closing of the transaction.  Thegoodwill recorded as a result of the acquisition will not be amortized but willbe included in the Company’s annual review of goodwill for impairment.  Asummary of the total purchase consideration is as follows:

 

Asummary of the total purchase consideration, excluding the potential earn-outconsiderations of $5,000, is as follows:

** **
| Cash paid for outstanding shares                     |   | $      | 3,500  |   |
|------------------------------------------------------|--------|--------|--------|--------|
| Value  of common stock issued for outstanding shares |   | 3,500  |   |
| Acquisition  costs                                   |   | 175    |   |
|                                                 |   |   |   |
| Total  purchase consideration                        |   | $      | 7,175  |   |

 

The acquisition was fundedthrough available cash and by the issuance of 107 shares of Avocent commonstock.  The preliminary purchaseallocation is expected to be complete in the Company’s first quarter of 2004.

 

54

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

 

None.

 

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

 

(a) *Evaluation of disclosure controls and procedures.*    Based on their evaluation as of December31, 2003, our Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures (as defined in Rules13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) areeffective to ensure that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms.

 

(b) *Changes in internal controls*.    There were no significant changes in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of their evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses. We arein the process of implementing a new ERP system, which we expect, when fullyimplemented, will enhance our internal controls over financial reportingthrough the automation and standardization of certain controls and processesand will support our anticipated future growth.

 

**PART III**

 

Information with respect to Items 10 through 14 ofthis Part III may be found in the definitive proxy statement to bedelivered to stockholders in connection with the 2004 Annual Meeting ofStockholders. Such information is incorporated herein by reference.

 

55

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**PART IV**

 

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

 

**(a) Financial Statement Schedule**

 

**Schedule of Valuation and Qualifying Accounts**

*For the years ended December 31, 2003, 2002 and 2001 (inthousands)*

 
|                                  |   | **Beginning  Balance** |   | **Assumed on  Acquisitions(1)** |   | **Charged to  Income** |   | **Deductions  from   Reserves** |    | **Ending  Balance** |   |
|---------------------------------------|--------|------------------------|--------|---------------------------------|--------|------------------------|--------|---------------------------------|---------|---------------------|--------|
|                                  |   |                   |   |                            |   |                   |   |                            |    |                |   |   |
| Year ended December 31, 2001:    |   |                   |   |                            |   |                   |   |                            |    |                |   |   |
| Allowance for  doubtful accounts      |   | $                      | 2,682  |                            | 143    |                   | 1,849  |                            | (622    | )                   | $      | 4,052 |   |
| Allowance for  other receivables      |   | $                      | — |                            | — |                   | 1,772  |                            | —  |                | $      | 1,772 |   |
| 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 |   |
|                                  |   |                   |   |                            |   |                   |   |                            |    |                |   |   |   |
| Year ended December 31, 2002:    |   |                   |   |                            |   |                   |   |                            |    |                |   |   |
| Allowance for  doubtful accounts      |   | $                      | 4,052  |                            | 2      |                   | (119   | )                               | (1,372  | )                   | $      | 2,563 |   |
| Allowance for other  receivables      |   | $                      | 1,772  |                            | — |                   | (1,772 | )                               | —  |                | $      | — |   |
| Allowance for  inventory obsolescence |   | $                      | 15,279 |                            | 37     |                   | 5,118  |                            | (12,932 | )                   | $      | 7,502 |   |
| Allowance for  sales returns          |   | $                      | 2,607  |                            | — |                   | 3,145  |                            | (1,983  | )                   | $      | 3,769 |   |
| Liability for  warranty returns       |   | $                      | 4,157  |                            | 12     |                   | 398    |                            | (2,132  | )                   | $      | 2,435 |   |
| Valuation  allowance for income taxes |   | $                      | 2,005  |                            | — |                   | 34     |                            | —  |                | $      | 2,039 |   |
|                                  |   |                   |   |                            |   |                   |   |                            |    |                |   |   |   |
| Year ended December 31, 2003:    |   |                   |   |                            |   |                   |   |                            |    |                |   |   |
| Allowance for  doubtful accounts      |   | $                      | 2,563  |                            | — |                   | (386   | )                               | (186    | )                   | $      | 1,991 |   |
| Allowance for  inventory obsolescence |   | $                      | 7,502  |                            | — |                   | 1,967  |                            | (5,449  | )                   | $      | 4,020 |   |
| Allowance for  sales returns          |   | $                      | 3,769  |                            | — |                   | 5,461  |                            | (5,321  | )                   | $      | 3,909 |   |
| Liability for  warranty returns       |   | $                      | 2,435  |                            | — |                   | 597    |                            | (380    | )                   | $      | 2,652 |   |
| Valuation  allowance for income taxes |   | $                      | 2,039  |                            | 426    |                   | — |                            | —  |                | $      | 2,465 |   |

 

----

(1)                                 Theseare the balances assumed from the acquisition of Equinox in 2001, from theacquisition of 2C in 2002 and from the acquisition of Soronti in 2003.

 

56

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**(b)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 and Restated Bylaws of Avocent Corporation                                                                                                                              |   |                          |   |   |   |   |   |   |   | ý |   |
| 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 |   |   |   |
| 10.11               |   | 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 |   |   |   |
| 10.11.1             |   | 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 |   |   |   |
| 10.12               |   | Purchase Agreement dated September 19, 1994  between Apex Inc. and Compaq Computer Corporation, as amended(2)                                                         |   | SB-2                          |   | Apex |   | 12/12/96 |   | Ex. 10.6 |   |   |   |
| 10.12.1             |   | 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 |   |   |   |

 

57

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| 10.13 |   | Amended and Restated Employment and Noncompetition  Agreement dated October 10, 2003, among Avocent Huntsville Corp., the  Company, and John R. Cooper         |   |   |   |   |   |   |   |        |   | ý |   |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|-------------|--------|--------|--------|
| 10.14 |   | Amended and Restated Employment and Noncompetition  Agreement dated October 10, 2003, among Avocent Huntsville Corp., the  Company, and William A. Dambrackas  |   |   |   |   |   |   |   |        |   | ý |   |
| 10.15 |   | Amended and Restated Employment and Noncompetition  Agreement dated October 10, 2003, among Avocent Huntsville Corp., the  Company, and R. Byron Driver   |   |   |   |   |   |   |   |        |   | ý |   |
| 10.16 |   | Amended and Restated Employment and Noncompetition  Agreement dated October 10, 2003, among Avocent Huntsville Corp., the  Company, and Gary R. Johnson        |   |   |   |   |   |   |   |        |   | ý |   |
| 10.17 |   | Amended and Restated Employment and Noncompetition  Agreement dated October 10, 2003, among Avocent International Ltd., the  Company, and Kieran MacSweeney    |   |   |   |   |   |   |   |        |   | ý |   |
| 10.18 |   | Employment and Noncompetition Agreement dated  January 5, 2004, among Avocent California Corp., Avocent Huntsville Corp.,  the Company, and Rick Moore         |   |   |   |   |   |   |   |        |   | ý |   |
| 10.19 |   | Amended and Restated Employment and Noncompetition  Agreement dated October 10, 2003, among Avocent Texas, L.P., the Company, and  C. David Perry    |   |   |   |   |   |   |   |        |   | ý |   |
| 10.20 |   | Amended and Restated Employment and Noncompetition  Agreement dated October 10, 2003, among Avocent Huntsville Corp., the  Company, and Douglas E. Pritchett   |   |   |   |   |   |   |   |        |   | ý |   |
| 10.21 |   | Amended and Restated Employment and Noncompetition  Agreement dated October 10, 2003, among Avocent Redmond Corp., the Company,  and Samuel F. Saracino        |   |   |   |   |   |   |   |        |   | ý |   |
| 10.22 |   | Amended and Restated Employment and Noncompetition  Agreement dated October 10, 2003, among Avocent Huntsville Corp., the  Company, and Christopher Thomas     |   |   |   |   |   |   |   |        |   | ý |   |
| 10.23 |   | Amended and Restated Employment and Noncompetition  Agreement dated October 10, 2003, among Avocent Huntsville Corp., the  Company, and Doyle C. Weeks         |   |   |   |   |   |   |   |        |   | ý |   |
| 10.24 |   | Amended and Restated Amendment Agreement among the  Company, Avocent Employment Services Company, Cybex Computer Products  Corporation and Stephen F. Thornton |   | 10-Q   |   | AVCT   |   | 8/9/02 |   | Ex. 10.30.1 |   |   |   |

 

58

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| 10.25 |   | Form of Avocent Corporation Indemnification  Agreement for Officers and Directors                                                                                                         |   | 10-Q       |   | AVCT   |   | 9/29/00 |   | Ex. 10.11   |   |   |   |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------|--------|--------|---------|--------|-------------|--------|--------|--------|
| 10.26 |   | Avocent Corporation 2000 Transition Nonstatutory  Stock Option Plan                                                                                                                       |   | 10-Q       |   | AVCT   |   | 9/29/00 |   | Ex. 10.12   |   |   |   |
| 10.27 |   | Avocent Corporation 2000 Stock Option Plan                                                                                                                                                |   | Sched. 14A |   | AVCT   |   | 11/3/00 |   | App. A      |   |   |   |
| 10.26 |   | Avocent Corporation 2000 Employee Stock Purchase  Plan                                                                                                                                    |   | Sched. 14A |   | AVCT   |   | 11/3/00 |   | App. B      |   |   |   |
| 10.29 |   | Avocent Corporation 2003 Employee Stock Option Plan                                                                                                                                       |   | Sched.14A  |   | AVCT   |   | 4/25/03 |   | Annex B     |   |   |   |
| 10.30 |   | Avocent Corporation 2003 Inducement Plan                                                                                                                                                  |   |       |   |   |   |    |   |        |   | ý |   |
| 10.31 |   | Form of Amendment to Option Agreement for Directors  regarding Change of Control of the Company                                                                                           |   |       |   |   |   |    |   |        |   | ý |   |
| 10.32 |   | Fourth Amendment to the Net Lease Agreement dated  October 17, 2002, by and between Avocent’s subsidiary, Apex Inc.,  and Willows Redmond, L.L.C.                               |   | 10-Q       |   | AVCT   |   | 9/27/02 |   | Ex. 10.37.1 |   |   |   |
| 21.1  |   | Subsidiaries of Avocent Corporation                                                                                                                                                       |   |       |   |   |   |    |   |        |   | ý |   |
| 23.1  |   | Consent of PricewaterhouseCoopers LLP, Independent  Accountants                                                                                                                           |   |       |   |   |   |    |   |        |   | ý |   |
| 24.1  |   | Power of Attorney(3)                                                                                                                                                                      |   |       |   |   |   |    |   |        |   | ý |   |
| 31.1  |   | Sarbanes-Oxley Act of 2002  Section 302(a) Certification of the Chief Executive Officer.                                                                                                  |   |       |   |   |   |    |   |        |   | ý |   |
| 31.2  |   | Sarbanes-Oxley Act of 2002  Section 302(a) Certification of the Chief Financial Officer                                                                                                   |   |       |   |   |   |    |   |        |   | ý |   |
| 32.1  |   | Certification of the Chief  Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |   |       |   |   |   |    |   |        |   | ý |   |

 

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

 

                                               AVCT = AvocentCorporation; AGI = Aegean Sea Inc. (now known as AvocentCorporation); Apex = Apex Inc. (now Avocent Redmond Corp.); andCybex = Cybex Computer Products Corporation (now Avocent HuntsvilleCorp.)

 

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

 

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

 

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

 

On October 16, 2003, we furnished a Report on Form 8-K with the SEC regarding the publicdissemination of a press release announcing the financial results forour third quarter and nine months ended September 26, 2003.

 

On November 4, 2003, we filed a Report on Form 8-K with the SEC regarding the publicdissemination of a press release announcing a Plan and Agreement ofMerger whereby Avocent would acquire Soronti, Inc.

 

On November 17, 2003, we filed a Report on Form 8-K with the SEC regarding the publicdissemination of a press release announcing a definitive agreementwhereby Avocent would acquire Crystal Link Technologies.

 

On November 19, 2003, we filed a Report on Form 8-K with the SEC regarding the publicdissemination of a press release announcing that Avocent had completedthe acquisition of Soronti, Inc.

 

59

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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 12, 2004 |

** **

**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, Chief Executive Officer, Chairman of the  Board of Directors                        |   | March 12, 2004 |
| 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 Officer)                                                                  |   | March 12, 2004 |
|                       |   |                                                                                           |   |           |
| /s/ Edward H.  Blankenship |   | Vice President of Accounting and  Chief Accounting Officer                                |   | March 12, 2004 |
| Edward H. Blankenship      |   | (Principal Accounting Officer)                                                                 |   |           |
|                       |   |                                                                                           |   |           |
| /s/ Harold D. Copperman    |   | Director                                                                                       |   | March 12, 2004 |
| Harold D. Copperman        |   |                                                                                           |   |           |
|                       |   |                                                                                           |   |           |
| /s/ Francis A. Dramis, Jr. |   | Director                                                                                       |   | March 12, 2004 |
| Francis A. Dramis, Jr.     |   |                                                                                           |   |           |
|                       |   |                                                                                           |   |           |
| /s/ Edwin L. Harper        |   | Director                                                                                       |   | March 12, 2004 |
| Edwin L. Harper            |   |                                                                                           |   |           |
|                       |   |                                                                                           |   |           |
| /s/ William H. McAleer     |   | Director                                                                                       |   | March 12, 2004 |
| William H. McAleer         |   |                                                                                           |   |           |
|                       |   |                                                                                           |   |           |
| /s/ Stephen F. Thornton    |   | Director                                                                                       |   | March 12, 2004 |
| Stephen F. Thornton        |   |                                                                                           |   |           |

 

60

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| /s/ David P. Vieau |   | Director |   | March 12, 2004 |
|--------------------|--------|----------|--------|----------------|
| David P. Vieau     |   |     |   |           |
|               |   |     |   |           |
| /s/ Doyle C. Weeks |   | Director |   | March 12, 2004 |
| Doyle C. Weeks     |   |     |   |           |

 

61

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