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

 

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

**(Mark One)**

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

 

**FOR THEFISCAL YEAR ENDED DECEMBER 31, 2002.**

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

 

**FOR THETRANSITION PERIODFROM               TO               .**

 

**Commission file number: 000-30575**

 

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**AVOCENT CORPORATION**

(Exact name ofregistrant as specified in its charter)

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

 

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

 

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

 

                Indicate by check mark whether the registrant is anaccelerated filer (as defined by Rule 12b-2 of the Act). Yes ý   No o

The aggregate market value of the voting common stock held bynon-affiliates of the registrant on June 30, 2002 was approximately$700,731,234.

 

The number of shares outstanding of the registrant’scommon stock as of March 18, 2003 was 45,646,311.

 

**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 2003 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,CAPITAL RESOURCE NEEDS, CUSTOMERS, AND COMPETITION;*

 

•               *ABILITYTO OBTAIN AND PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS;*

 

•               *EXPANSIONOF INTERNATIONAL SALES;*

 

•              *ACQUISITION AND TRANSACTION COSTSAND ADJUSTMENTS; AND*

 

•              *IMPLEMENTATION OF A NEW ERPSYSTEM AND THE ACHIEVEMENT OF ISO 9000:2000 ACCREDITATION.*

 

*ALL OF THESE FORWARD-LOOKING STATEMENTS ARE BASED ONINFORMATION AVAILABLE TO US ON THE DATE OF THIS ANNUAL REPORT. OUR ACTUALRESULTS COULD 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**

 

Avocent began operations in July 2000, by thecombination of the businesses of Apex Inc. (now known as Avocent RedmondCorp.) and Cybex Computer Products Corporation (now known as Avocent HuntsvilleCorp.). As a result of this merger transaction, both Avocent Redmond Corp. andAvocent Huntsville Corp. are now wholly-owned subsidiaries of Avocent.

 

We (meaning Avocent and its wholly-owned subsidiaries,Avocent Redmond Corp., Avocent Huntsville Corp., AvocentInternational Ltd., and Avocent Sunrise Corp. (formerly known as EquinoxSystems Inc.)) design, manufacture, and sell analog and digital KVM(keyboard, video, and mouse) switching systems, serial connectivity devices,extension and remote access products, technologies, software, and display products for the computer industry.Our switching 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 extensionand remote access products, technologies, and software, help them managemultiple servers and serially controlled devices from a single local or remoteconsole consisting of a keyboard, video monitor, and mouse. Our switchingsolutions provide multiple users with the ability to control thousands ofcomputers from any location, and eliminate the need for individual keyboards,video monitors, and mice for the controlled computers. Elimination of theseperipheral devices can provide significant cost reductions including lowerinitial investment, reduced utility costs, and space savings, as well as moreefficient 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, technologies, and software sold or 

 

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licensed under the Avocent, Apex, Cybex, Equinox, and 2C brands,including our *AMX*TM,***AutoView*TM*, Cstation*TM,*DS Series*TM*,**OutLook®, SuperSerial*TM,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 isdown. In addition, our switching systems are able to work with multi-platformserver environments. Our switching solutions allow users to controlIBM-compatible and Macintosh PCs, and Compaq, 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 offers the 2C productline, which includes the *Cstation*TM product. Initialapplications for the Cstation product include financial trading floors wherespace is at a premium, industrial plant control environments that benefit fromremote computers due to harsh or unsecure environments, and governmentinstallations that require high security afforded through the remote locationof the computer and hard disk. In addition, we also offer visual displayproducts for high information-content digital display solutions. Our SMARTGLASTMtechnology offers users working in real time or mission critical environmentssimultaneous access to large amounts of information. This technology permitsthe consolidation of information from multiple sources to be displayed onsingle or multiple flat panel displays, forming a tiled display solution, andhas been adopted by many stock exchanges and trading companies.

 

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

 

Our remote access 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.

 

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 2002 included Aetna, AIG, Brocade, Citicorp,Disney, Exxon, Ford, General Motors, Georgia-Pacific, Intel, Microsoft, Novell,Prudential, and Wendy’s. Our international branded sales customers includedBeijing Telecom (China), CargoLifter (Germany), DaimlerChrysler (Germany),Guangzhou Mobile Communication (China), Hamburg Mannheimer (Germany), Hitachi(Japan), Integra (France), MetroRED (Brazil), Nokia (Finland), NTT (Japan), andOverseas Bank (Singapore).

 

Our corporate Internet address is *www.avocent.com*.  At this website, we make available free of charge our annualreport on Form 10-K, our quarterly reports on Form 10-Q, any current reports onForm 8-K, and any amendments to these reports, as soon as reasonablypracticable after we electronically file them with, or furnish them to, theSecurities and Exchange Commission.  Theinformation found on our website is not part of this Form 10-K.  In addition to our website, the SECmaintains an Internet site at *www.sec.gov*that contains reports, proxy and information statements, and other informationregarding us and other issuers that file electronically with the SEC.

 

Apex, AMWorks, AMX, Avocent, AutoView, Cstation,Cybex, DS1800, DSR, DS Series, Equinox, KVM over IP, OutLook, SuperSerial, andXP4000 are trademarks or registered trademarks owned by us. This annual reportalso 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 ofinterconnected computers. The typical data center installation consists of alocal area network, 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.

 

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Corporate LANs, WANs, ISPs, ASPs, server farms, anddata centers all face significant network administration, environmental, andspace limitations.  Facilities managersand network administrators, who may supervise hundreds or thousands of serversand other networked devices, must identify and access relevant servers anddevices, add or delete users, add, change, or upgrade applications, tunesystems for better performance, and diagnose and correct network failures.These servers are generally designed to operate as stand-alone systems, eachwith its own console, and facilities managers and network administrators musttherefore deal with a large number of consoles, whether centrally located ordispersed throughout the organization, when performing administration andmanagement tasks.

 

Information technology resources are more critical toorganizations. Accordingly, constant availability is crucial to the operationof many businesses. The time that a corporation, ISP, ASP, data center, serverfarm, or network is down or degraded can cause significant inconvenience, lossof productivity, and financial loss. Because the diagnosis and the correctionof abnormal network behavior often require support personnel to physicallyaccess each affected server through its own console, quick and efficient faultmanagement can be difficult, especially when there are a large number ofdispersed servers involved. In addition, when a network fails, the ability of afacilities manager or network administrator to quickly and efficiently diagnoseand correct the problem is often hampered by the inability to access thesoftware tools that reside on the network and that are normally used to managenetwork failures.

 

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

 

**Products**

 

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

 

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

 

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

 

•**             **Our *AutoView*TMswitch family offers users a variety of analog and digital switchingsolutions.  Our new *AutoView*TM 2000 is an analog switch thatfeatures end-to-end CAT 5 connectivity, while our new *Autoview*TM 1000R and *AutoView*TM 2000R combine in a single switchan analog port for local access and an Ethernet port for extended and remoteIP-based digital access.  Withend-to-end CAT 5 connectivity, convenient on-screen management, and flexibleaccess, the *AutoView* 1000R/2000Rprovide local and remote users with access to servers from any location in theworld.  For control of multi-platformservers, *AVWorks*TM administrationsoftware is bundled with each switch. These new switches compliment our existing *AutoView*TM 200 four and eight port matrix switches, which aredesigned to allow two users access to up to 64 servers and support Sun, USB,and PC based servers.  Our *AutoView*TM family offers computer selectionthrough an optional on-screen menu system and adds hot-pluggable operations tothe *AutoBoot*TM technology, whichallows support personnel to automatically boot all connected servers after apower failure or other problem without operator intervention.

 

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•              Our*AMX*TM switches are the latest inour family of analog switching solutions. Our *AMX*switches addressthe continued growth opportunity for analog switches and provide simpler accessand easier manageability of servers in multi-rack, multi-platformenvironments.  Our *AMX*switches increase the number of userswith simultaneous access and offer efficient scalability with an architecturethat makes it easy to add and support additional servers. Our advanced*AMWorks*TM software 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.

 

•              OurDigital Desktop Division provides a single source for extension solutionsacross multiple 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 apowerful combination of tools for any distributed computing environment thatcan benefit from centralizing their PC assets*.*Our *SMARTGLAS*® technology offers users workingin real time or mission critical environments simultaneous access to largeamounts of information. This technology permits the consolidation ofinformation from multiple sources to be displayed on a single or multiple flatpanel display, forming a tiled display solution. Our *SMARTGLAS*products includean 18-inch desktop flat panel display and our *SMARTGLAS* multi-tilesolution that increases the amount of viewable information, the flexibility andformat of the information on the desktop and the consequent value of theinformation to the user.

 

•              OurEquinox branded products add high-performance, reliable, and affordableserver-based products 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.

 

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

 

**Sales and Marketing**

 

We market and sell our products through our own salesforce and various distribution channels, including OEM and a variety ofdistributor and reseller arrangements. We market our products primarily throughdirect customer sales calls, advertisements in trade publications, online sponsorships,participation in major industry trade shows, promotions with distributors andresellers, direct marketing, telemarketing, publicity programs, and through ourwebsite. We also devote a substantial portion of our marketing efforts todeveloping, monitoring, and enhancing our relationships with our network ofOEMs, independent dealers, distributors, resellers, and end users. Our salespersonnel are supported by our engineers and our customer servicerepresentatives who provide technical support and advice to customers. As ofDecember 31, 2002, we employed 234 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 servermanufacturers, and we plan to use that experience to enter into newrelationships with other computer manufacturers in the United States, Europe,and Asia. We believe that the architecture, quality, and reliability of ourproducts and technologies, together with our commitment to customer service,are attractive to server manufacturers.

 

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 (Dakota), value added 

 

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resellers, or VARs, and systems integrators, for the distribution andsale of Avocent, Apex, Cybex, Equinox, and 2C branded products in the UnitedStates, Europe, Asia, and elsewhere. We devote resources to educating ourdistributors and resellers about the benefits of our products and training themin the proper installation and support of our products. We will continue todevote additional resources to increase these branded sales, and we will pursueadditional relationships with distributors and resellers, both domestically andinternationally, who have the technical capability and market presence toassist end-user customers in developing network space management, access, andcontrol solutions to meet their particular needs. Our future success willdepend in part on our ability to attract, train, and motivate additionaldistributors 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 %of net sales in 2002, 38% of net sales in 2001, and 38% of net sales in 2000,and are made primarily through OEMs, distributors, and resellers located inEurope, Canada, Asia, and other foreign countries. We are expanding our internationalsales within Europe, Asia, and the Pacific Rim through the utilization of oursales offices in Guangzhou and Shanghai, China; London, England; Paris, France;Rotterdam, Holland; Seoul, Korea; Shannon, Ireland; Steinhagen, Germany; Tokyo,Japan; Hong Kong; and Singapore.

 

**Customers**

 

To date, a substantial portion of our net sales havebeen generated from sales of switching solutions and products to OEMs forintegration with their product offerings. Sales to OEM customers represented46% of net sales in each of 2002, 2001, and 2000. 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 recent mergerbetween Compaq Computer Corporation and Hewlett-Packard Company resulted in afurther concentration of sales in our OEM customers.  The loss of, or material decline in orders from, certain of ourcurrent OEM customers would have a material adverse effect on our business,financial condition, results of operations, or cash flow.

 

In addition to our OEM customers, our principalcustomers include a diversified group of dealers and major distributors (51% ofnet sales in 2002, 49% of net sales in 2001, and 45% of net sales in 2000) anddirect purchasers (3% of net sales in 2002, 5% of net sales in 2001, and 9% ofnet sales in 2000). 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 (including sales to Compaqbefore and after its merger with Hewlett-Packard in 2002) representedapproximately 25%, of net sales in 2002. Sales to Dell and Tech Data represented approximately 11% each of ournet sales in 2002. Sales to Compaq represented 23% of net sales in 2001and 32%of net sales in 2000. No other customer accounted for more than 10% of netsales in 2002.

 

**Seasonality**

 

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

 

**Customer Service**

 

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

 

**Product Development**

 

We believe that the continued, timely development ofnew products and technologies and enhancements to our existing 

 

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products and technologies are essential to building our competitiveposition. The market for our products has experienced rapid technologicaladvances, frequent new product introductions and enhancements, and significantprice competition. The introduction of products incorporating superior oralternative technologies (such as switching software), the creation or adoptionof new technologies, the emergence of new industry standards, or changes in themarket’s pricing structure could render our existing products and technologiesand the products and technologies we have under development obsolete orunmarketable. Our products generally combine components, such as printedcircuit boards, semiconductors, memory, connectors, cable assemblies, powersupplies and enclosures, that are manufactured by other companies and aregenerally available to our competitors and potential competitors. Our futuresuccess will depend in large part upon continued innovative application ofcommercially available components to the expansion and enhancement of ourexisting products and the development and introduction of new technologies andproducts that address changing customer needs on a cost-effective and timelybasis. By emphasizing customer-driven research and development, we havebeen able to develop innovative, practical, and marketable products that havehad 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 cash flow.

 

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

 

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

 

Our engineering and product development expenses wereapproximately $26.5million in 2002 (excluding $6.0 million in expensedin-process research and development expenses related to our acquisition of 2CComputing), $22.5 million in 2001 (excluding $4.6 million in expensedin-process research and development expenses related to the acquisition ofEquinox), and $12.9 million in 2000 (excluding $94 million inexpensed in-process research and development costs related to the Apex andCybex combination) . As of December 31, 2002, we employed 155 people inour engineering department. In addition, we use independent contractors fromtime to time. As of December 31, 2002, we were working with approximately12 independent contractors on various development projects.

 

To meet the challenges of the rapidly changingtechnology in the computer industry, we expect to make substantial investmentsin product development in the future. There can be no assurance that these newor enhanced versions or any other of our product development efforts will leadto commercially viable products or technologies, will be completed on a timelybasis, or will include the features required to 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, 2002, we employed 165 people in our manufacturingdepartment.

 

We currently rely on several third partymanufacturers, including Likom Computer Products, MC Assembly, UnicoTechnologies, and ETMA, for subassembly of our products. These outsourcingarrangements, and any future outsourcing arrangements, involve numerous risks,including reduced control over product quality, delivery schedules,manufacturing yields, and costs. In addition, while these third-partymanufacturers have arrangements for warranty obligations, we remain primarilyresponsible to our customers for warranty obligations. We attempt to diversifyour outsourced manufacturing operations and believe we have an adequate supplyof alternative subcontractors.

 

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 

 

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significant delivery times (10 to 12 weeks), and failure to obtainadequate supplies could adversely affect our product deliveries. We buycomponents under purchase orders and generally do not have long-term agreementswith our suppliers. Circuit boards assemblies are currently obtained from anumber of sources, including Likom Computer Products, MC Assembly, UnicoTechnologies, and ETMA. We believe that there are adequate alternative sourcesfor our product components. Any termination of, or significant disruption in,the business or affairs of our suppliers or our third-party manufacturers or inour relationship with them may prevent us from filling customer orders in atimely manner since we generally do not maintain large inventories of ourcomponents.

 

In the past, we have experienced delays in the receiptof certain components, which have resulted in delays in related productdeliveries. We attempt to manage these risks through developing alternativesources, committing internal resources to supply chain management, andmaintaining relationships and close personal contact with each of our contractmanufacturers and suppliers. There can be no assurance, however, that delays incomponent and product deliveries will not occur in the future, and theinability to obtain sufficient components or to develop alternative sources ifand as required in the future, could result in delays or reductions in productshipments, which, in turn, could have a material adverse effect on ourbusiness, financial condition, results of operations, or cash flow. Some of thecomponents for our products are available from a single supplier or a limitednumber of suppliers. We attempt to maintain quality relationships and closecontact with each of our suppliers.

 

**Competition**

 

The market for our products is highly fragmented andcompetitive, and we expect competition to increase in the future. In the marketfor switching systems, we compete with companies such as Raritan Computer, RoseElectronics, CCC Group, Minicom Advanced Systems, Aten International,CompuCable Mfg. Group, Belkin, Linksys, and Digital V6, some of which may havesubstantially greater financial, marketing, and technical resources than wehave. We also compete with other companies (such as Microsoft) that offeralternative technologies or products (such as software) that compete with ourswitching systems.  In addition, all ofour OEM customers offer technologies and products that are competitive with ourproducts, and we expect these technologies and products to remain competitivein the features they offer.  Ourproducts and technologies are also in competition with the products and technologiesoffered by hardware manufacturers and network management companies such asIntel 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 and product features at competitive price and performance levels thataddress the evolving needs of our customers. We are currently experiencingincreased price competition and expect that pricing pressures will continue toincrease in the future.

 

**Proprietary Technology**

 

Our future success is dependent in part upon ourability to protect our 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 43 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, ourcompetitors may challenge the validity of, or be able to design around, thesepatents or any other patents that may be issued to us. The laws of certainforeign countries in which our products are or may be developed, manufactured,or sold may not protect our products or intellectual property rights to thesame extent as do the laws of the United States and thus increase thelikelihood of piracy of our products and technologies.

 

We believe that certain products of certaincompetitors infringe one or more of our U.S. patents. In May 2001, AvocentRedmond Corp. (our wholly-owned subsidiary formerly known as Apex Inc.) 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 Apex patents.  After a seven daybench trial in New York in January 2002, U.S. District Judge MiltonPollack found that there was no infringement of three Apex patents by Raritanand ordered that judgment be entered in favor of Raritan.  We have appealed the judgment, and oralarguments were held before the United States Court of Appeals for the FederalCircuit Court in Washington, D.C. in December 2002.

 

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 

 

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superior to our products and technologies. Additionally, current orfuture competitors could develop their own proprietary technologies or obtainpatents that may prevent us from developing or selling our products andtechnologies.

 

 

**Employees**

 

As of December 31, 2002, we had 484 full-timeemployees working in the United States. Of our domestic full-time employees,160 were in marketing, sales, and customer support, 132 were in engineering,research, and development, 126 were in manufacturing and operations, and 66were in administration. As of December 31, 2002, we had 163 full-timeemployees working at our facilities outside of the United States. Of ourinternational full-time employees, 74 were in marketing, sales, and customersupport, 23 were in engineering, research, and development, 39 were inmanufacturing and operations, and 27 were in administration. Our employees arenot covered by any collective bargaining agreements relating to theiremployment by us. We believe that we have good relations with our employees.

 

**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 actualsales for any succeeding period.

 

**Segment Reporting**

 

Subsequent to the merger transaction that createdAvocent, we reported segment information on a geographical basis in which wepresented sales and gross profit information for Redmond, Washington;Huntsville, Alabama; and Shannon, Ireland. Following the merger, the previously separate businesses of Apex andCybex were integrated.  In recentquarters, shipments to certain international OEM customers that hadhistorically originated from Redmond were shifted to Shannon.  As this occurred, the historical comparisonsby location became less meaningful. Additionally, we have gradually realigned operating and managementresponsibilities within Avocent to emphasize that we are “one company,operating around the world.” Consequently, we have evaluated the business in light of the segmentreporting requirements, and we have determined that we will report operationsas a single operating segment.  We will,however, disclose sales in the United States compared to sales in the rest ofthe world on a quarterly and annual basis.

 

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** **

**FACTORSTHAT MAY AFFECT FUTURE RESULTS**

** **

*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 2002, 2001, and 2000.  Sales to Hewlett-Packard (including sales toCompaq before and after its merger with Hewlett-Packard in 2002) representedapproximately 25% of net sales in 2002. Sales to Dell represented approximately 11% of net sales in 2002.  Sales to Compaq represented approximately23% of net sales in 2001 and 32% of net sales in 2000.

 

Our OEM business is subject to risks, including:

 

•              Contracttermination or reduced or delayed orders;

 

•              Shortorder cycles and difficulty in predicting sales, because our OEM customers donot have long-term commitments to purchase from us;

 

•              Adoptionof competing products or technologies developed by third parties for the OEMsor by the OEMs’ internal development teams; and

 

•              Changesin corporate ownership, financial condition, business direction, or product mixby the 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 andsignificant reductions or delays in orders from our OEM customers, which may inthe future have a material adverse effect on our quarterly sales and operatingresults.

 

The loss of one or more large OEM customers couldmaterially harm our business. While we have contracts with some of our existingOEM customers, none of our OEM customers is obligated to purchase products fromus except pursuant to binding purchase orders. Consequently, any OEM customercould cease doing business with us at any time. Our dependence upon a fewOEMs also results in a significant concentration of credit risk, thus asubstantial portion of our trade receivables outstanding from time to time maybe concentrated among a limited number of customers. In addition, OEM customershave longer payment cycles that increase the likelihood of aged or problemaccounts receivable.  The merger betweenCompaq and Hewlett-Packard in 2002 increased these risks.  The loss of, or material decline in ordersfrom, any of these customers could have a material adverse effect on ourbusiness, financial condition, and results of operations.

 

**Due to thematurity of our business and deteriorating global economic and politicalconditions, our revenue may decline or our costs may increase.**

 

                As our businessmatures, it is highly unlikely that our revenue will grow at the rapid pacethat it grew prior to the merger of Apex and Cybex.  Our future growth rates depend in part on our ability to expandsales of our existing products and technologies and to develop and market newproducts and technologies.  Withdeteriorating global economic and political conditions, we may not have sufficientresources to cover the significant costs involved in such an expansion.  If our revenue does not increase at or abovethe rate that equity research analysts expect, the trading price of our commonstock may decline.

 

                Our revenue mayalso suffer as a result of general economic and political conditions andinstability both in the United States and in the rest of the world.  Over the past two years, there has been arapid and severe downturn in the U.S. market and global economy, and theduration and future severity of this trend are uncertain.  This uncertainty has significantly increaseddue to recent terrorist activity, such as the terrorist attacks in the UnitedStates on September 11, 2001, and the recent and current military activity inAfghanistan, 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:

 

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

 

•              Thetiming of shipments;

 

•              Thetiming of new product introductions and enhancements by us and by our competitors;

 

•              Changesin product or distribution channel mixes;

 

•              Changesin pricing policies or price reductions;

 

•              Competitionand price reductions by competitors;

 

•              Theavailability and cost of supplies and components;

 

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

 

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

 

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 third andfourth quarters will generally have higher net sales levels due to customerbudgeting and procurement cycles, which may depress net sales in otherquarters. Because our business and operating results depend to a significantextent on the general conditions in the server market, any adverse change inthe server market due to adverse economic conditions, declining capitalspending levels, or other factors could have a material adverse effect on ourbusiness, financial condition, and results of operations. Moreover, we arecurrently seeing indications that the rate of growth in capital spending forinformation technology equipment has continued to decline. In addition, wecontinue 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, that we delay shipment dates or cancel orders for brandedproducts that are subject to firm orders. Accordingly, our sales toOEMs for future quarters are increasingly difficult to predict. Theinability 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.

 

**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.**

 

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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 and timingof branded product orders received during the quarter. Because many customersof our branded products typically place orders shortly before their requestedshipment date, revenues from branded sales are difficult to forecast. Withrecent industry-wide initiatives by distributors and resellers to reduce theirinventories and to shorten their lead times, our major distributor and resellercustomers are reducing early commitments to firm orders. Furthermore, manypurchasers typically require prompt delivery of products. This results in alimited backlog of orders for these products and requires us to maintainsufficient inventory levels to satisfy anticipated customer demand. Theinability to accurately forecast the timing and volume of orders for brandedproducts during any given quarter could adversely affect operating results forsuch quarter and, potentially, for future periods. If we underestimate sales,we will not be able to fill orders on a timely basis. This could cause customerdissatisfaction and loss of future business. If we overestimate sales, we willexperience increased costs from inventory storage, waste, and obsolescence.

 

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

 

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

 

•              Theratio of OEM sales to branded sales, since OEM sales typically have lower grossmargins than branded sales;

 

•              Productmix, because sales of some of our products will have lower gross margins thansales of other products;

 

•              Rawmaterials, freight, and labor costs;

 

•              Newproduct introductions by us and by our competitors; and

 

•              Thelevel of outsourcing of our manufacturing and assembly services.

 

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

 

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

 

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 of sales,which would materially harm our business. Our business is becoming increasinglysensitive to new product introductions, price changes, and marketing efforts bycompetitors. Accordingly, our future success will be highly dependent upontimely completion and introduction of new products and technologies and productand technological features at competitive prices and performance levels thataddress the evolving needs of our customers. We are currently experiencingincreased price competition and increased customer sensitivity to productprices, and pricing pressures on us will continue to increase in the future.Because of this competition, we may not be successful in gaining additional OEMor server manufacturer customers.

 

We compete for sales of switching systems andextension products with companies such as Raritan, Rose Electronics, CCC Group,Minicom Advanced Systems, Aten International, CompuCable Mfg. Group, Belkin,Linksys, and Digital V6. We also face competition from software providers, whoare able to offer software solutions at a much lower cost or even bundled forfree, and from server manufacturers (including our OEM customers), who are ableto offer their competitive technology or products at the time of the serversale. These software and hardware solutions address many of the problems ourswitching systems, extension products, and remote access products are designedto 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 with third parties that enhance the abilityof their products to address the needs of our prospective customers. We may notbe able to compete successfully against current and future competitors andcompetitive pressure may materially harm our business.

 

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Certain of our customers, such as Hewlett-Packard,IBM, and Microsoft, presently offer competitive hardware and/or softwareproducts, technologies, and solutions that address many of the problems ourproducts address. These customers could decide to manufacture their ownswitching or remote access products, enhance their own internally-developedswitching solutions or technologies, or offer products supplied by competitors.Companies with hardware manufacturing experience or network managementproducts, many of which are substantially larger than we are and havesignificantly more financial resources, also offer products or technologiesthat compete with us. Established companies with hardware manufacturing ornetwork management experience (such as Intel or Cisco) could also offer newproducts, new technologies, or new solutions that compete with our products andtechnologies.

 

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

 

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

 

Our products combine components, such as printedcircuit boards, connectors, 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 to the expansion and enhancement of existingproducts and the development and introduction of new products that addresschanging customer needs on a cost-effective and timely basis. If we fail torespond on a timely basis to technological developments, changes in industrystandards, customer requirements, or software innovations, we will losecustomers, and our business will be greatly harmed. Similar results could occurif we experience significant delays in new product development or introduction.

 

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

 

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

 

The principal components of our products areelectronic components, power supplies, 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 some ofour products. These outsourcing arrangements and any future outsourcingarrangements involve numerous risks, including reduced control over productquality, delivery schedules, manufacturing yields, and costs.  Moreover, although arrangements with suchmanufacturers may contain provisions for warranty obligations on the part ofsuch manufacturers, we are primarily responsible to our customers for warrantyobligations.

 

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

 

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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 competitor’s products. These distributors andresellers may give higher priority to the sale of other products. A reductionin sales efforts by our resellers could lead to a reduction in our sales andcould materially adversely affect our business, financial condition, andresults of operations.

 

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

 

We are greatly dependent on the ability to retain keymanagement and technical personnel, 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 substantially above the current trading price of our commonstock and therefore currently have little value. We may need to grant newoptions or other forms of compensation to these employees in the future inorder to provide new incentive and thus retain them. Our success will also bedependent in part upon our ability to attract, retain, and motivate highlyskilled employees. Competition for employees with the skills required,particularly engineering and other technical personnel, is intense, and therecan be no assurance that we will be able to attract and retain highly skilledemployees in sufficient numbers to sustain our current business or to supportfuture growth.  We may need to offeradditional compensation or incentives to attract and retain these and otheremployees.

 

**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, and suppliers. This growth has placed significant strainon our managerial, operational, and financial resources and resulted in new andincreased responsibilities for management personnel. There can be no assurancethat our management, personnel, systems, procedures, and controls are, or willbe, adequate to support our existing and future operations or that we willcontinue 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 plan to commence the implementation of a new enterprise resource planning system.  We expect that this new system will be operational in 2004.  The system is intended to provide us with more 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 is important to our operations and for continued growth.  The integration and conversion of information from our current system 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 

 

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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, 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 facerisks of 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 ofthose pending applications or that any patents will be issued in any additionalcountries where our products can be sold. Also, claims allowed in our patentsor in any pending patent applications may not be of sufficient scope or strengthfor, or provide meaningful protection or any commercial advantage to us. Also,competitors may develop their own intellectual property or technologies, obtaintheir own patents, or challenge the validity of, or be able to design around,our patents. The laws of certain foreign countries in which our products are ormay be developed, manufactured, or sold may not protect our products orintellectual property rights to the same extent as do the laws of the UnitedStates and thus increase the likelihood of piracy of our technologies andproducts.

 

In May 2001, Avocent Redmond Corp. filed a complaintfor patent infringement in the United States District Court for the SouthernDistrict of New York against Raritan Computer Inc. The Raritan complaint soughtinjunctive relief, damages, attorney’s fees and costs under three Apex patents.After a seven day bench trial in New York in January 2002, U.S. District JudgeMilton Pollack found that there was no infringement of three Apex patents byRaritan and ordered that judgment be entered in favor of Raritan. We haveappealed the judgment, and oral arguments were held before the UnitedStates Court of Appeals for the Federal Circuit Court in Washington, D.C. inDecember 2002.

 

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 (in 2002 we expensed $2.7 millionin legal fees related to the Raritan patent infringement lawsuit), and the existinglitigation or any other litigation by or against us could result in significantadditional expense and divert the efforts of technical and managementpersonnel, whether or not such litigation results in a favorable determination.In the event of an adverse result in any such litigation, we could be requiredto pay substantial damages, suspend or cease the manufacture, use, and sale ofany infringing products, expend significant resources to develop non-infringingtechnology, discontinue the use of certain processes, or obtain licenses to theinfringing technology. There can be no assurance that we would be successful insuch development or that such licenses would be available on reasonable terms,or at all, and any such development or license could require us to expendsubstantial time and other resources. In the event that any third party makes asuccessful claim against us, or our customers, and a license is not madeavailable on commercially reasonable terms, our business, financial condition,and results of operations could be adversely affected.

 

The network server, electronics, and relatedindustries are characterized by vigorous pursuit and protection of intellectualproperty rights or positions, which has resulted in significant and oftenprotracted and expensive litigation. We have in the past been, and we may fromtime to time in the future be, a party in proceedings alleging infringement ofintellectual property rights owned by third parties. If necessary or desirable,we may seek licenses under such intellectual property rights. However, licensesmay not be offered on terms acceptable to us, or at all. The failure to obtaina license from a third party for technology used by us could cause us to incursubstantial liabilities and to suspend or cease the manufacture of productsrequiring such technology. Additionally, current or future competitors couldobtain patents that 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 customer serviceresources. Any failure to maintain adequate customer service could causecustomer dissatisfaction, result in reduced sales of products and, accordingly,materially adversely affect business, financial condition, and 

 

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results 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;

 

•              Theeffects of seasonal customer demand;

 

•              Changesin regulatory requirements;

 

•              Difficultiesin meeting the requirements of different international product regulations;

 

•              Risksrelating to intellectual property rights;

 

•              Theimpact on our R&D resources as we localize our product offerings to meetlocal user requirements such as language translations and hardwarecompatibility 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 be denominatedin euros instead of U.S. dollars. Fluctuations in the value of foreigncurrencies 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.

 

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

 

We acquired Equinox Systems Inc. in early 2001and 2C Computing, Inc. in the third quarter of 2002. In the future, we mayacquire technologies or companies or make investments in complementarycompanies, products, or technologies. These acquisitions entail many risks, anyof which could materially harm our business. These risks include:

 

•              Difficultyassimilating the acquired company’s personnel and operations;

 

•              Diversionof management’s attention;

 

•              Lossof key personnel;

 

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

 

•              Assumptionof liabilities of the acquired company; and

 

•              Incurringsubstantial expenses as a result of the transaction.

 

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

 

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

 

Provisions in our charter documents could discouragepotential acquisition proposals and could delay or prevent a change in controltransaction that stockholders may favor. These provisions could have the effectof discouraging others from making tender offers for shares, and as a result,these provisions may prevent the market price of our common stock from reflectingthe effects of actual or rumored takeover attempts and may prevent stockholdersfrom reselling their shares at or above the price at which they purchased theirshares. These provisions may also prevent changes in management thatstockholders may favor. Our charter documents do not permit stockholders to actby written consent, limit the ability of stockholders to call a stockholdersmeeting, and provide for a classified board of directors, which meansstockholders can only elect, or remove, a limited number of directors in anygiven year. Furthermore, the board of directors has the authority to issue upto five million shares of preferred stock in one or more series. The board ofdirectors can fix the price, rights, preferences, privileges and restrictionsof such preferred stock without any further vote or action by our stockholders.The issuance of shares of preferred stock may delay or prevent a change incontrol transaction without further action by our stockholders.

 

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

 

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

 

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

 

**Item 2. Properties.**

 

Our headquarters, occupying 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 $71,000 per month, plus taxes,insurance, and maintenance of approximately $18,000 per month.

 

Avocent International Ltd. is currently locatedin a 60,500 square foot leased facility located in the Shannon Free Trade Zonein Shannon, Ireland. The Shannon facility houses administrative, sales,marketing, research and development, engineering, manufacturing, anddistribution operations. In February 2003, we cancelled this 25-year lease withthe Shannon Development Authority and paid an early cancellation fee ofapproximately $500,000. We continue to lease the facility on a month-to-monthbasis with monthly rent of approximately $30,000. We have agreed in principle,subject to completion of inspections and signing of definitive contracts, topurchase a facility in Shannon for approximately 6.0 million euros to replaceour currently leased space in Shannon. We expect to occupy and transfer ouroperations to the new facility in the summer of 2003.

 

Our Steinhagen, Germany facility consists ofapproximately 9,900 square feet, contains sales and administrative personnel,and is located on leased property. The lease, which provides for annual rent ofapproximately $86,000, can be terminated or renewed in February 2004.

 

We lease approximately 5,000 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 rent is approximately $92,000.

 

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

 

We lease approximately 8,600 square feet for $210,000per year in Chelmsford, Massachusetts. This facility houses marketing functionsand the engineering team responsible for visual display technology andproducts.

 

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, Avocent Redmond Corp. (our wholly-ownedsubsidiary formerly known as Apex Inc.) 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 Apex patents.  After a seven day bench trial in New York inJanuary 2002, U.S. District Judge Milton Pollack found that therewas no infringement of three Apex patents by Raritan and ordered that judgmentbe entered in favor of Raritan.  We haveappealed the judgment, and oral arguments were held before the United StatesCourt of Appeals for the Federal Circuit Court in Washington, D.C. in December2002.

 

**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, 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 |   |
| Quarter ended  December 31, 2001  |   | $        | 27.26  |    | $      | 12.55 |   |
| Quarter ended  September 28, 2001 |   | $        | 27.00  |    | $      | 12.00 |   |
| Quarter ended  June 29, 2001      |   | $        | 28.10  |    | $      | 16.50 |   |
| Quarter ended  March 30, 2001     |   | $        | 40.13  |    | $      | 18.00 |   |

 

As of March 18, 2003, there were 254 holders of recordof our common stock.

 

**Dividend Policy**

 

We did not declare or pay any cash dividends in 2002or 2001 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 2003 proxy statement.

 

**Item 6. Selected Financial Data.**

(Amounts in thousands,except per share data.)

 
|                                       |   | **2002** |    | **2001** |   | **2000** |   | **1999** |     | **1998** |   |
|--------------------------------------------|--------|----------|---------|----------|--------|----------|--------|----------|----------|----------|--------|
| Net sales                                  |   | $        | 260,600 |     | $      | 255,911  |   | $        | 222,372  |     | $      | 107,288 |   | $ | 75,640 |   |
| Net income  (loss)                         |   | $        | 10,738  |     | $      | (320,466 | )      | $        | (130,556 | )        | $      | 21,243 |   | $ | 15,710 |   |
| Basic per share  income (loss)             |   | $        | 0.24    |     | $      | (7.22    | )      | $        | (3.92    | )        | $      | 0.94 |   | $ | 0.71 |   |
| Diluted per  share income (loss)           |   | $        | 0.24    |     | $      | (7.22    | )      | $        | (3.92    | )        | $      | 0.90 |   | $ | 0.69 |   |
| Total assets                               |   | $        | 568,607 |     | $      | 547,198  |   | $        | 815,246  |     | $      | 104,314 |   | $ | 73,375 |   |
| Long-term  obligations and preferred stock |   | —   |    | —   |   | —   |   | —   |     | —   |   |
| Cash dividends  declared per share         |   | —   |    | —   |   | —   |   | —   |     | —   |   |

 

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

 

THE INFORMATION IN THIS ITEM7—”MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS” CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITATION,STATEMENTS RELATING TO OUR REVENUES, EXPENSES, MARGINS, LIQUIDITY, CAPITALNEEDS, MERGER 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 formedas a result of a merger transaction in July 2000 between Apex Inc. and CybexComputer Products Corporation, which was accounted for as an acquisition ofCybex by Apex.  Subsequent acquisitionsinclude Equinox Systems Inc. in January 2001 and 2C Computing, Inc. in August2002.

 

We design, manufacture, and sellanalog and digital KVM (keyboard, video and mouse) switching systems, serialconnectivity devices, extension and remote access products, technologies,software, and display products for the computer industry. Data center managersand network administrators have increasingly complex and growing serverpopulations, and our analog, digital, and serial switching solutions, as wellas our extension and remote access products, technologies, and software, helpthem manage multiple servers and serially controlled devices from a singlelocal or remote console consisting of a keyboard, video monitor, andmouse.  Specifically, our products canprovide significant cost reductions including lower initial investment, reducedutility costs, and space savings, as well as more efficient technical supportcapabilities.

 

We provide “plug and play”switching systems for many network administration, management, and storageproblems faced by corporate customers, data centers, and server farms. Ourswitching solutions include products, technologies and software sold orlicensed under the Avocent, Apex, Cybex, Equinox, and 2C brands, including our *AutoViewTM,DS SeriesTM, OutLook®,*and*XP®4000 Series* products. Our switchingsystems and solutions help facilities managers and network administratorsaccess multiple servers and serially controlled devices from one or morecentralized or remote consoles, consolidate hardware requirements, and providedirect hardwired connections between the switch and the attached servers tofacilitate access to those servers, even when the network is down. Our Equinox branded products addhigh-performance, reliable, and affordable server-based products for serial anddial-up access applications.  TheEquinox *SuperSerialTM* product line provides serialcommunications for security, commercial point-of-sale, process control,industrial automation, data collection, remote access, fax servers, Internetaccess, and custom applications. Our 2C product line includes the *CstationTM* product.  Initial applications for  Cstation include financial trading floorswhere space is at a premium, industrial plant control environments that benefitfrom remote 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 linesduring 2002.  In the first quarter of2002, we announced two power management solutions, the *SPCTM800*and *SPCTM1600*, which expandour *DS Series* of products.  In the second quarter of 2002, we announcedthe *AMXTM* the latest in our KVM analogsolutions.  The AMX switch addressescontinued growth opportunities in the analog market segment and provides simpleraccess and easier manageability of servers in multi-rack, multi-platformenvironments.  In the third quarter of2002, we began shipping of original equipment server manufacturer, or OEM,versions of our DSR product family.

 

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 a limitednumber of direct customers. For 2002, sales to our OEM customers were 46% ofnet sales, sales to our reseller and distributor network were 51% of net sales,and sales through our direct customers were 3% of net sales. We do not havecontracts with many of these customers, and in general, they are obligated topurchase products from us only pursuant to binding purchase orders.  The loss of, or material decline in ordersfrom, our OEM customers would have a material adverse effect on our business,financial condition, results of operation, and cash flow.  Our top five customers, which include OEMsand distributors, accounted for 65% of our sales in 2002.

 

We sell products to dealers, end-users and OEMs in theUnited States, Canada, Europe and Asia as well as in other foreignmarkets.  Sales within the United Statesaccounted for approximately 60% of 2002 sales, while sales outside of theUnited States accounted for 40% of 2002 sales. Sales to customers in the United Kingdom accounted for 15% of 2002sales.  No other country accounted formore than 10% of 2002 sales.

 

With recent industry-wideinitiatives to reduce all channel inventories and to shorten lead times, trendswith our major customers are, generally, to reduce the number of weeks offorward-committed firm orders. This trend is currently affecting ourbusiness with certain 

 

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distributors, OEMs and other servermanufacturers, and we believe that it will make our future sales more difficultto predict and inventory levels more difficult to manage.

 

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

 

Presently, certainlocations of our company are operating with certification to ISO 9000standards.  We have completed an ISOinternal process review and implemented certain changes and new procedures. Weexpect to achieve global ISO 9000:2000 accreditation during 2003.  We believe ISO accreditation will become arequirement for doing business with several of our OEM customers.

 

Many of ourexecutive officers and directors are vested in significant amounts of optionsto purchase shares of our common stock and continue to vest in additionalshares on a regular basis.  Theseofficers and directors have informed us that they have sold and may selladditional shares of our common stock to provide liquidity and diversify theirportfolios.

 

During 2003 weplan to commence implementation of a new enterprise resource planning systemwhich we expect to have fully operational in 2004.  We paid approximately $1.6 million in the fourth quarter of 2002to an ERP system provider and expect the total cost of implementing the systemto be in the range of $11.0 million to $12.2 million.  We expect the new system will provide many benefits, includingmore detailed information to improve the ways we manage inventory, customerrelationships and operating expenses on more a timely basis.  However, the implementation of the newsystem involves a number of risks, as detailed above in our Risk Factors.

 

**CriticalAccounting Policies**

 

We believe thefollowing critical accounting policies affect the more significant judgmentsand estimates used in the preparation of our consolidated financial statements:

 

•              We review customer contracts todetermine if all of the requirements for revenue recognition have been metprior to recording revenues from sales transactions.  We generally record sales revenue upon shipment of our products,net of any discounts, since we generally do not have significant post deliveryobligations, the product price is fixed and determinable, collection of theresulting receivable is probable, and product returns are reasonably estimable.  We generally ship products upon receipt of apurchase order from a customer.  Werecord revenue in accordance with the applicable terms of each respectivecustomer contract.  Accordingly, revenueon products shipped FOB destination is recorded when the customer takespossession of the goods, and revenue on products shipped FOB shipping point isrecorded when the goods leave our facilities. Shipping and handling fees are included in net sales, and the relatedcosts are included in cost of sales in the accompanying consolidated statementsof 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 $3.8million and $2.6 million at December 31, 2002 and 2001, 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 be uncollectible(and for which a specific reserve had been established), a reduction in ourallowance for doubtful accounts may be required.  Our allowance for doubtful accounts was $2.6 million and $4.1million at December 31, 2002 and 2001, respectively.

 

•              We carry our inventory at thelower of cost or market, with cost being determined using the first-in,first-out method.  We use standard costsfor material, labor, and manufacturing overhead to value our inventory.  We review and revise our standard costs on aquarterly basis.  Therefore, ourinventory costs approximate actual costs at the end of each reporting period.  Wewrite down our inventory for estimated obsolescence or unmarketable inventoryto the estimated market value based upon assumptions about future demand andmarket conditions.  If actual future 

 

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demand or market conditions are less favorable thanthose projected by management, additional inventory write-downs may berequired.  Our reserve for excess andobsolete inventory was $7.5 million and $15.3 million at December 31, 2002 and2001, respectively.

 

•              We provide for the estimated costof product warranties at the time revenue is recognized.  While we engage in extensive product qualityprograms and processes, including actively monitoring and evaluating thequality of our component suppliers and contract manufacturers, our warrantyobligation is affected by product failure rates, failure rates of purchasedcomponents integrated into our products, material usage, and other rework costsincurred in correcting a product failure. Should actual product failure rates, material usage, or other reworkcosts differ from our estimates, revisions to our estimated warranty liabilitymay be required.  Our warranty reservewas $2.4 million and $4.2 million at December 31, 2002 and 2001, respectively.

 

•              We hold investments in variouspublicly traded equity and debt securities, including mortgaged-backed andother asset-backed securities.  Werecord an investment impairment charge when we believe an investment hasexperienced a decline in value that is other than temporary.  Future adverse changes in market conditionsor poor operating results of underlying investments could result in losses oran inability to recover the carrying value of the investments that may not bereflected in an investments current carrying value, thereby possibly requiringan impairment charge in the future. We recorded $4.9 million ofother-than-temporary impairment charges against investments in 2001.   There were no other-than-temporaryimpairment charges recorded against investments in 2002 or 2000.

 

                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 initial investment.  We record impairment charges on investmentshaving a carrying value that is greater than the value that we would reasonablyexpect to receive in an arm’s length sale of the investment.  We recorded $550,000 of write-downs againstsuch investments for the year ended December 31, 2002.  We did not record any such write-downsagainst such investments in 2001 or 2000.

 

**•**              Effective January 1,2002, we adopted SFAS No. 142 and ceased amortizing goodwill.  Our initial test for goodwill impairment asof January 1, 2002 determined that no adjustment for impairment wasrequired.  Additionally, our annual testfor goodwill impairment, performed in the fourth quarter of 2002, determinedthat no adjustment for impairment was required.  Our testing indicated that the implied fair value of our goodwillexceeded its carrying value; accordingly, in accordance with SFAS 142, nofurther impairment analysis was required. If economic conditions deteriorate and indicators of impairment becomepresent, an adjustment to the carrying value of goodwill and other intangibleassets may be required.

** **

**Results ofOperations**

 

Our consolidated statements ofoperations, stockholders’ equity, and cash flows for 2000 include thetwelve-month results of Apex for the period January 1, 2000 throughDecember 31, 2000 and the six-month results of Cybex for the post-mergerperiod July 1, 2000 through December 31, 2000.  The results of acquired companies are included in the consolidatedresults from the respective dates of acquisition.  Certain reclassificationshave been made to the prior year financial statements to conform to the currentyear presentation.

 

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

 

 
|                                                                              |   | **Years  Ended December 31,** |   |
|-----------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                              |   | **2002**                      |   | **2001** |   | **2000** |   |
| Net sales                                                                         |   | 100.0                         | %      | 100.0 | % | 100.0 | % |
| Cost of sales                                                                     |   | 49.5                          |   | 58.6 |   | 50.6 |   |
| Gross profit                                                                      |   | 50.5                          |   | 41.4 |   | 49.4 |   |
| Operating expenses:                                                               |   |                          |   |   |   |   |   |
| Research and development expenses                                                 |   | 10.2                          |   | 8.8 |   | 5.8 |   |
| Acquired in-process research and development expense and other  acquisition costs |   | 2.3                           |   | 1.8 |   | 46.8 |   |
| Selling, general and administrative expenses                                      |   | 25.7                          |   | 29.2 |   | 23.5 |   |
| Amortization of intangible assets                                                 |   | 8.5                           |   | 51.9 |   | 28.0 |   |
| Impairment write-down of intangible assets                                        |   | —                        |   | 76.4 |   | — |   |
| Total operating expenses                                                          |   | 46.7                          |   | 168.1 |   | 104.1 |   |
| Income (loss) from operations                                                     |   | 3.8                           |   | (126.7 | ) | (54.7 | ) |
| Net investment income                                                             |   | 2.2                           |   | 2.5 |   | 2.7 |   |
| Net realized investment gains (losses)                                            |   | (0.1                          | )      | (2.1 | ) | (0.2 | ) |
| Other income (expense), net                                                       |   | (0.1                          | )      | (0.1 | ) | 0.0 |   |
| Income (loss) before provision for (benefit from) income taxes                    |   | 5.8                           |   | (126.4 | ) | (52.2 | ) |
| Provision for (benefit from) income taxes                                         |   | 1.7                           |   | (1.2 | ) | 6.5 |   |
| Net income (loss)                                                                 |   | 4.1                           | %      | (125.2 | )% | (58.7 | )% |

 

*Years EndedDecember 31, 2002 and 2001*

 

*Net sales.*  Our net sales consist of sales of console switching systems, digital connectivitysolutions, serial connectivity devices, and extension and remote accesssolutions. Net sales increased 2% to$260.6 million for 2002 from $255.9 million for 2001. This increasein sales resulted from increased demand from our OEM customers and increasedsales through our resellers and distributors. On a percentage basis, OEM salesfor 2002 increased 3% over 2001, and reseller and distributor sales for 2002increased 5% over 2001. OEM sales were 46% of sales for both 2002 and2001.  Reseller and distributor saleswere 51% of sales for 2002, compared to 49% of sales for 2001.  Direct sales were 3% of sales for 2002 and5% of sales for 2001.  The 2Cacquisition 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 in 2002 from2001, the increase in sales of our digital solutions more than offset thedecline in analog product sales.  Salesof our digital solutions accounted for $60.2 million or 23.1% of sales in 2002compared with $19.8 million or 7.7% of sales for 2001.  We expect our digital product sales tocontinue to increase as a percentage of sales in 2003, as we receive thebenefit of a full year of sales of the OEM versions of our digital productfamily that were released in mid 2002.

 

Sales within the United States were 60% of salesin 2002 and 62% of sales in 2001, while international sales accounted for 40%of sales in 2002 and 38% of sales in 2001. Sales in the U.S. declined from $159.8 million in 2001 to $155.6 millionin 2002, while international sales increased from $96.1 million in 2001 to$105.0 million in 2002.  The decline insales in the U.S. can be attributed to the general weakness in the technologysector of the economy.  The relativestrength in our international sales was most evident in the European and theAsia Pacific regions.  We believe thestrength 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 quarters.

 

*Gross profit.*  Gross profit is affected by a variety of factors, including: theratio of sales among our distribution channels, as OEM sales typically havelower gross margins than our reseller and distributor sales and direct sales;absorption of fixed costs as sales levels fluctuate; product mix, rawmaterials, 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 50.5% in 2002 from 41.4% in 2001.  Gross margin in 2002 benefited from higher sales of our digitalsolutions, which have a higher margin than our analog products, and accountedfor over 23% of sales in 2002 compared to only 8% of sales in 2001.  Also, AMX, our new analog matrix switch,began shipping in the third quarter of 2002 and has a higher gross margin thanour other analog products. Additionally, gross margins were significantly affected by $13 millionof write-downs for excess and obsolete inventories during 2001.  These write-downs were made to reduceinventory valuations to bring them in line with current replacement values andto the 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 affectedunfavorably by a DS1800 list price reduction. We expect gross margins to be inthe 50% to 52% range during the first quarter of 2003.

 

*Research and development expenses.*  Research and development expenses includecompensation for engineers, support personnel, outside contracted services andmaterials costs, and are expensed as they are incurred. Research anddevelopment expenses were $26.5 million, or 10.2% of net sales in 2002,compared to $22.5 million, or 8.8% of net sales in 2001. The increase inresearch and 

 

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development expenses was due to an increase in contracted services andother costs related to the new product roll-outs in the second half of 2002 andto the impact of the acquisition of 2C in August 2002. We expect to continue tofocus on new products, enhancements to our AMX and digital products families,as well as new solutions for blade servers and traditional servers.  We believe that the timely development ofinnovative new products and enhancements to existing products is essential tomaintaining our competitive position, and we expect research and developmentexpenditures to remain flat as a percentage of sales during the first quarterof 2003.

 

*Acquired in-process research and development expense andother acquisition costs.* Acquisition related expenses in 2002 are comprised solely of the one-time write-off of $6.0 million of in-process research anddevelopment expense related to the acquisition of 2C.  Acquisition related expenses in 2001 are comprised solelyof the one-time write-off of$4.6 million of in-process research and development expense related to theacquisition 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 option compensationrelated expenses and a reduction in bad debt expense.  Approximately $8.5 million of selling, general and administrativeexpenses in 2002 related to the amortization of deferred compensation for stockoptions as a result of the merger transaction between Apex and Cybex,  the acquisition of Equinox and theacquisition of 2C, while approximately $13.2 million of selling, generaland administrative expenses in 2001 related to the amortization of deferredcompensation for stock options as a result of the merger transaction betweenApex and Cybex and the acquisition of Equinox. In addition,selling, general and administrative expenses in 2002 benefited from a $1.4million recapture of a receivable, previously reserved in 2001, related to acontract manufacturer that had filed for bankruptcy.  We received a favorable ruling by the bankruptcy judge, whichallowed the offset of receivables and payables between the contractmanufacturer and certain customers, including Avocent. Partially offsetting thedecline in selling, general and administrative expenses was $2.7 million in legal fees related to the patentinfringement lawsuit we brought against one of our competitors challenging theuse 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.  We expect selling, general andadministrative expenses to remain flat as percentage of sales in the firstquarter of 2003.

 

*Impairmentwrite-down of intangible assets.*  The 2001impairment write-down of intangible assets is comprised solely of a write-downof goodwill, created as a result of the merger transaction between Apex andCybex and the acquisition of Equinox, recorded as the result of a cash flowanalysis performed under the applicable provisions of SFAS No. 121 during 2001.We performed a cash flow analysis to determine if the remaining balance ofgoodwill created at the merger of Apex and Cybex and the acquisition of Equinoxhad been impaired.  The study wasperformed in accordance with SFAS No. 121*“Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to be Disposed Of.” *As a result of this study, in 2001, we recorded a $195.4million reduction in the carrying value of goodwill created upon the merger ofApex and Cybex.  The write-off of thegoodwill was based on an analysis of projected cash flows, which were no longerconsidered adequate to support the value of goodwill associated with themerger.

 

*Amortizationof intangible assets.*  Amortization of $22.2 millionin 2002 is comprised of the amortization of the identifiable intangible assetscreated as a result of the merger transaction between Apex and Cybex, the acquisitionsof Equinox and 2C, while amortization of $132.9 million in 2001 includes theamortization of the identifiable intangible assets created as a result of themerger transaction between Apex and Cybex, the acquisition of Equinox and theamortization of goodwill created as a result of these transactions.  The primary reason for the decline inamortization was the cessation of goodwill amortization in 2002.  We adopted SFAS No. 142, *Goodwill andOther Intangible Assets,*on January 1, 2002.  On that date, under the provisions of SFASNo. 142, goodwill ceased to be amortized. The amortization of goodwill was approximately $111.0 million during2001.

 

*Netinvestment income**.** *Net******investment income decreased from $6.3 million in 2001to $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). *The decline in net realized investmentlosses from $5.3 million in 2001 to $305,000 in 2002 relates mainly to a $4.9million charge recorded in the fourthquarter of 2001 for an “other-than-temporary” decline in the market value ofour investment portfolio.

 

*Other income (expense), net.*  Net other expense decreased from $303,000 in 2001, to $178,000 in2002. The decline related primarily to a reduction in interest expense in 2002as a result of the interest incurred in the first quarter of 2001 related to$45.0 million in short-term borrowings for the Equinox acquisition.

 

*Provision for (benefit from) income taxes.*  The provision for income taxes was $4.5million in 2002 as compared to a benefit from income taxes of approximately$2.9 million in 2001. Excluding merger related adjustments to federaltaxes, the effective tax rate for 2002 

 

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was approximately 25.5%, compared to 29.0% for 2001, primarily due toshifting of international sales to our Shannon, Ireland facility. Our Shannonfacility operates under a 10% tax rate.

 

*Net income (loss).*  Net income for 2002 was $10.7 million compared to a net lossof $320.5 million for 2001, as a result of the above factors, includingthe reduction 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.

 

*Years EndedDecember 31, 2001 and 2000*

 

*Net sales.*  Our net sales consist of sales of console switching systems, digital connectivitysolutions, serial connectivity devices, and extension and remote accesssolutions. Net sales increased 15% to$255.9 million for 2001 from $222.4 million for 2000. This increasewas due to the timing of the merger of Apex and Cybex and acquisition ofEquinox. Only six months of revenue from the Cybex products was included in2000, while 12 months of revenue from the Cybex products and the Equinoxproducts was included in 2001.  Equinoxproducts contributed over $19 million of net sales in 2001. In addition,this increase in sales resulted from increased demand from our OEM customersand increased sales through our resellers and distributors.

 

On a percentage basis, OEM sales for 2001increased 14% over 2000, and resellers and distributor sales for 2001 increased26% over 2000. OEM sales were 46% of sales for both 2001 and 2000.  Reseller and distributor sales were 49% ofsales for 2001, compared to 45% of sales for 2000, and direct sales were 5% ofsales for 2001 and 9% of sales for 2000. Sales within the United States were 62% of sales for both 2001 and 2000,while sales to the rest of the world accounted for 38% of sales for both 2001and 2000.

 

*Gross profit.*  Gross profit is affected by a variety of factors, including: theratio of sales among our distribution channels, as OEM sales typically havelower gross margins than our reseller and distributor sales and direct sales;absorption of fixed costs as sales levels fluctuate; product mix, rawmaterials, and labor costs; new product introductions by us and by ourcompetitors; and the level of our outsourcing of manufacturing and assemblyservices.  Gross margins were significantlyaffected by $13 million of write-downs for excess and obsolete inventoriesduring 2001.  These write-downs weremade to reduce inventory valuations to bring them in line with then currentreplacement values and to the level necessary to support then current salesdemand.  Another charge of over $1million was taken at one of our locations due to physical count shortagesduring the fourth quarter of 2001. An increase in deferred compensation chargesto approximately $2.3 million in 2001 from $1.2 million in 2000 alsoaffected our margins.  This deferredcompensation amortization related to stock options for manufacturing employeeswas recognized as a result of the merger of Apex and Cybex that occurred in mid2000 and the acquisition of Equinox in January 2001.  Due to the timing of the merger and acquisition, only six monthsof deferred compensation expense from the merger was recognized in 2000, while12 months of deferred compensation from the merger and the acquisition wasrecognized in 2001.  Gross profitdecreased to 41.4% for 2001 from 49.4% for 2000, due primarily to the factorsdiscussed above.

 

*Research and development expenses.*  Research and development expenses includecompensation for engineers, support personnel, outside contracted services, andmaterials costs and are expensed as they are incurred. Research and developmentexpenses were $22.5 million, or 8.8% of net sales, in 2001, compared to$12.9 million, or 5.8% of net sales, in 2000. The increase in research anddevelopment expenses in absolute dollars and as a percentage of sales was dueprimarily to the addition of Cybex expenses as a result of the merger of Apexand Cybex on July 1, 2000 and the addition of Equinox expenses as theresult of the acquisition on January 3, 2001. The additional costs attributableto Cybex and Equinox include over $4 million in deferred compensationamortization in 2001 as compared to $2 million of deferred compensationamortization in 2000. Deferred compensation amortization, related to stockoptions for research and development employees, was recognized as a result ofthe merger of Apex and Cybex and the acquisition of Equinox.  Due to the timing of the merger, only sixmonths of deferred compensation expense from the merger were recognized in2000, while 12 months of deferred compensation from the merger and theacquisition were recognized in 2001.

 

*Acquired in-process research and development expense andother acquisition costs.* Acquisition related expense in 2001 is comprised solely of the one-time write-off of $4.6 million of in-process research anddevelopment expense related to the acquisition of Equinox.  Merger related expenses of $104 millionin 2000 included the one-time write-off of $94 million of in-processresearch and development expense and an additional $10 million of non-recurringcharges comprised mainly of fees to professional advisors.

 

*Selling, general and administrative expenses.*  Selling, general and administrative expensesinclude certain merger and acquisition related expenses, personnel costs foradministration, finance, information systems, human resources, sales and marketingand general management, as well as rent, utilities, legal and accountingexpenses, bad debts, advertising, promotional material, trade show expenses andrelated travel costs. The increase in selling, general and administrativeexpenses in absolute dollars and as a percentage of sales was due primarily tothe addition of Cybex expenses as a result of the merger transaction betweenApex and Cybex on July 1, 2000 and the addition of Equinox expenses as theresult of the acquisition of Equinox on January 3, 2001. Selling, general andadministrative expenses were $74.8 million, or 29.2% of net sales for 2001compared to $52.1 million, or 23.5% of net sales for 2000. Approximately$13.2 million of selling, general and administrative expenses in 2001related to the amortization of deferred compensation for stock options as aresult of the merger transaction between Apex and Cybex and the acquisition ofEquinox.  Approximately$15.3 million of selling, general and administrative expenses in 2000related to the amortization of deferred compensation for stock options as aresult of the merger transaction between Apex and Cybex, includingapproximately $9.8 million related to the discretionary acceleration of stockoptions by the Apex 

 

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Board of Directors in connection with the merger.  Additionally, 2001 selling, general andadministrative expenses include $1.3 million of severance costs related to headcountreductions in the U.S. and Europe. Also, bad debt expense increasedapproximately $2.6 million in 2001 when compared to 2000 as we increasedreserves to address collectability issues in light of the general economicdecline.  The $2.6 million of bad debtexpense recorded in 2001 included $1.8 million related to a receivable due froma contract manufacturer that filed for bankruptcy during the year.   In the second half of 2001 selling, generaland administrative expenses declined in absolute dollars and as a percentage ofsales due to cost control measures that included headcount reductions and areduction in advertising and promotion programs.

 

*Amortizationand write-down of intangible assets.*  Amortizationand write-down of intangible assets is comprised of the amortization of theidentifiable intangible assets and goodwill created as a result of the mergertransaction between Apex and Cybex and the acquisition of Equinox and awrite-down of goodwill recorded as the result of a cash flow analysis performedunder the applicable provisions of SFAS No. 121 during 2001. Amortization ofidentifiable intangible assets and goodwill was $132.8 million or 52.0% of netsales for 2001 compared to $62.4 million or 28.0% of net sales for2000.  We performed a cash flow analysisin 2001 to determine if the remaining balance of goodwill created at the mergerof Apex and Cybex and the acquisition of Equinox had been impaired.  The study was performed in accordance withSFAS No. 121*“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto be Disposed Of.” *As aresult of this study, in 2001 we recorded a $195.4 million reduction in thecarrying value of goodwill created upon the merger of Apex and Cybex.  The write-off of the goodwill was based onan analysis of projected cash flows, which were no longer considered adequateto support the value of goodwill associated with the merger.  Additionally, we adopted SFAS No. 142, *Goodwill andOther Intangible Assets,*on January 1, 2002.  On that date, under the provisions of SFASNo. 142, goodwill ceased to be amortized. The amortization of goodwill was approximately $111.0 million during2001.

 

*Netinvestment income**. ***Net****investment income increased from $6.1million in 2000 to $6.3 million in 2001. The increase in income related primarily to the increase in fundsavailable for investing as a result of the merger.  This increase was offset slightly by lower interest rates on funds invested**.**

 

*Netrealized investment gains (losses). *The increase in net realized losses from$433,000 in 2000 to $5.3 million in 2001 relates mainly to a $4.9 million charge recorded in the fourth quarter of 2001 foran “other-than-temporary” decline in the market value of our investmentportfolio.

 

*Other income (expense), net.*  Net other income (expense) decreased from income of $73,000 in2000 to expense of $303,000 in 2001. The decline related primarily to anincrease in interest expense in 2001 as a result of the interest incurred inthe first quarter of 2001 related to the $45.0 million in short-term borrowingsfor the Equinox acquisition.

 

*Provision for (benefit from) income taxes.*  The benefit from income taxes wasapproximately $2.9 million for 2001, compared to a provision for incometaxes of $14.6 million in 2000. Excluding merger related adjustments tofederal taxes, the effective tax rate for 2001 was approximately 29.0%,compared to 32.2% for 2000, primarily due to shifting of international sales toour Shannon, Ireland facility. Our Shannon facility operates under a 10% taxrate.

 

*Net loss.*  Our net loss for 2001 was $320.5 million compared to$130.6 million for 2000, 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.  The net loss as apercentage of sales for 2001 was 125.2%, compared to 58.7% for 2000.

 

**Liquidity andCapital Resources**

 

As of December 31, 2002 our principalsources of liquidity consisted of approximately $214 million in cash, cashequivalents, and investments.  We had a bank lineof credit for borrowings of up to $2.0 million at LIBOR + 2.25% with a maturitydate of May 2002, which we did not renew. We determined that our cash position and expected maturities ofinvestments were, and continue to be, adequate to cover our current and futureliabilities and capital needs.  InAugust 2002, we acquired 2C and assumed a short-term note in the principalamount of $890,000. We repaid the entire balance shortly after the closing ofthe acquisition.  There were noborrowings during 2002.

 

Our operating activities generated cash ofapproximately $71.1 million for 2002, $72.6 million for 2001, and$19.1 million for 2000. The continued strong cash flow from operations in2002 is evidence of our increased focus on balance sheet management that beganin 2001 and continued through all of 2002. Receivables declined to approximately $36.3 million at December 31, 2002from $49.1 million at December 31, 2001, despite significantly higher sales inthe fourth quarter of 2002 as compared to the fourth quarter of 2001.  The decline in receivables was accomplishedby the sustained efforts of our collections team to maintain past duereceivables at a minimum level, and because sales in the fourth quarter of 2002(compared to the fourth quarter of 2001) were spread more evenly throughout thequarter allowing us to collect receivables from sales earlier in that quarterby the end of 2002 while sales in the fourth quarter of 2001 were heavier inDecember with the result that a higher percentages of sales in that quarterremained uncollected at the end of 2001. Inventories declined from $27.2 million at the end of 2001 to $24.4million at the end of 2002.  The declinein inventory was the result of the efforts of our operations group, at all ofour locations, to increase turnover by consuming existing supplies whilemaintaining adequate inventory to meet customer demands.  Inventories were also affected by increasesto our reserves and valuation accounts. We anticipate that inventories will trend downward slightly during2003.   The decrease in receivables andinventories was partially offset by a decline in 

 

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accounts payable.  The declinein accounts payable was the result of reduced inventory purchases as ouroperations group continued its effort to reduce the levels of inventory.

 

In February 2003 we agreed in principle, subjectto completion of inspections and signing of definitive contracts, to purchase afacility in Shannon, Ireland for approximately 6.0 million euros to replace ourcurrently leased space in Shannon.  Weexpect to occupy and transfer our operations to the new facility in the summerof 2003.  Additionally, in February 2003we paid an early cancellation fee of approximately $500,000 the owner of ourcurrent leased facility, which we will recognize as an expense in the firstquarter of 2003.

 

We intend to use a portion of our cash andinvestments for strategic acquisitions of technologies and companies that will enhanceand complement our existing technologies and help increase our sales.

 

                Future minimumrental payments under non-cancelable operating leases total approximately $1.6million in 2003, $1.3 million in 2004, $1.1 million in 2005, $826,000 in 2006,$773,000 in 2007 and $968,000 thereafter. Additionally, at any given time, there are shipments of inventorypurchases in transit which we are generally obligated to pay for upon receipt.  We believe that existing cash balances andcash generated from operations will be sufficient to fund our operationsthrough 2003.

 

**CertainTransactions**

 

*Acquisitionof 2C Computing, Inc.*

 

On August 20, 2002, we acquired 2C for approximately $22.8 million incash, plus the assumption of liabilities and stock options.  2C, headquartered in Huntsville, Alabama, has developed digital extensiontechnology that splits the PCI bus of a PC and allows the PC motherboard,processor, hard drive, and other user devices to be located at a distance fromthe user and connected using CAT 5 or fiber cable.

 

In 2000, 2C and Cybex, our wholly-owned subsidiary,formed a joint venture, CyCom L.L.C., to focus on computer technology andresearch for products in the desktop computer and server industry.  Cybex owned 40% of CyCom and the other 60%of CyCom was owned by 2C.  Upon theformation of CyCom, Cybex contributed a license to certain of its intellectualproperty related to the split bus concept, and 2C contributed managementservices and capital funding.  Theinitial products developed from the digital extension technology were announcedin late 2001.  Shipments of the productstotaled approximately $1.5 million through August 20, 2002.

 

Under the terms of the joint venture membershipagreement, 2C was responsible for all technology development efforts.  The net profits of CyCom were to be split60% to 2C and 40% to Cybex after 2C recouped its accumulated losses from thedevelopment and marketing of CyCom products. The carrying value of our investment in CyCom was zero prior to ouracquisition of 2C because our contribution to it consisted of previouslyexpensed research and development costs related to the technology and CyCom hadearned no profits to date.  We dissolved CyCom upon theclosing of our acquisition of 2C.

 

2C was founded byRemigius G. Shatas and Robert R. Asprey, who served as directors of 2C prior toour acquisition of 2C.  Mr. Shatas wasformerly a member of the Board of Directors of Cybex (before the mergertransaction with Apex Inc. that created Avocent) and served as executive vicepresident and chief technology officer of Cybex. Mr. Shatas remains astockholder of Avocent.  Mr. Asprey wasalso formerly an officer of Cybex, and he too is a current Avocent stockholder.  David S. Butler, who also was a director of2C prior to our acquisition of 2C, is a former director of Cybex and a currentAvocent stockholder. Mr. Shatas, Mr. Asprey, and Mr. Butler own lessthan 2% of Avocent’s outstanding shares in the aggregate. A number of other former 2C shareholders are also Avocent stockholders.  No officer or director of Avocent was anofficer, director, shareholder or affiliate of 2C prior to our acquisition of2C.

 

The acquisition was recordedunder the purchase method of accounting, and the purchase price was allocatedbased on the fair value of the assets acquired and liabilities assumed. Inaccordance with generally accepted accounting principles, purchased research and development costsallocated to developed technology were capitalized and will be amortized overthe respective estimated useful lives. The remaining amounts of purchased research and development wereexpensed upon the closing of the transaction. The goodwill recorded as a result of the acquisition will not beamortized but will be included in our annual review of goodwill and otherintangible assets for impairment.  Theamortization of other intangible assets from the 2C acquisition will beapproximately $2.1 million in 2003.

 

*RymicSystems, Inc.*

 

In the second quarter of2002, we made a $1.0 million 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.  We purchased 400,000 shares of Rymic’scommon stock, giving us approximately a 14% equity position in Rymic.  In addition, as part of the investment,we  received certain rights of co-saleregarding the shares of stock that were purchased and certain rights of firstrefusal regarding shares of stock of Rymic held by its major 

 

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shareholders.  We also enteredinto a Strategic Partnership Agreement with Rymic to share certain technologiesand other expertise, and we became an authorized reseller of Rymic’s line ofrymicNETTM remote monitoring and control products in the computer, server, anddata center management markets. Subsequent to the initial investment, wereceived 200,000 additional shares in Rymic in November 2002 as a result ofRymic failing to meet certain pre-defined operational targets. During 2002, werecorded equity-method losses and an impairment charge totaling $550,000against our investment in Rymic, which was included in research and developmentexpenses in the accompanying consolidated statements of operations.

 

Early in the firstquarter of 2001 and prior to our investment in Rymic, Doyle C. Weeks, one ofour directors and Executive Vice President for Group Operations and BusinessDevelopment, purchased 10,000 shares of common stock of Rymic at the price of$2.50 per share.  Mr. Weeks alsoreceived a gift of 5,000 shares of Rymic common stock from one of its majorshareholders.  At approximately the sametime, Gary R. Johnson, our Senior Vice President of Global Sales and Marketing,purchased 10,000 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 our investment, Mr. Weeks was awarded nonqualified stockoptions to purchase 5,000 shares of Rymic common stock at $2.50 per share thatvested upon receipt.  Mr. Weeks did notreceive any fees from Rymic.  Mr. Weeksremains on the board of directors of Rymic, but will not receive any additionaldirector fees or stock options for as long as the Company holds its equityposition in Rymic.

 

Subsequent to December31, 2002, we entered into a research and development agreement with Rymicwhereby we will pay $300,000 to Rymic for the development of certaintechnologies.  The costs associated withthis agreement will be expensed and included in research and developmentexpenses in 2003.

 

*MirechoLabs, Inc.*

 

In the third quarter of 2002, we engagedMirecho Labs, Inc., a privately-held company based in Acton, Massachusetts, toprovide software research and development services to support the recentlyacquired 2C product line.  Victor Odrynais one of Mirecho’s founders and serves as its President and Chief ExecutiveOfficer.  Through July 2001, Mr. Odrynawas our Senior Vice President of Corporate Strategic Marketing.  During the second quarter of 2002 two of ourofficers, Douglas E. Pritchett, our Senior Vice President of Finance, ChiefFinancial Officer, Treasurer and Assistant Secretary, and Kieran MacSweeney,our Managing Director of International Operations, and Stephen F. Thornton, theChairman of our Board of Directors, invested a total of $175,000 inMirecho.  We paid Mirecho $200,000 forresearch and development services performed prior to termination of theagreement on November 1, 2002.  The costof these research and development services was expensed during 2002.

 

 

**Recently Issued Accounting Standards**

 

In October 2001, theFinancial Accounting Standards Board issued Statement of Financial Accounting StandardsNo. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, which has aneffective date for financial statements for fiscal years beginning afterDecember 15, 2001.  We adopted thisstatement effective January 1, 2002. This statement, which supersedes SFAS No. 121, *Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed Of*,requires that long-lived assets that are to be disposed of by sale be measuredat the lower of book value or fair value less cost to sell.  Additionally, this statement expands thescope of discontinued operations to include all components of an entity withoperations that (1) can be distinguished from the rest of the entity and (2)will be eliminated from the ongoing operations of the entity in a disposaltransaction.  The impact of SFAS No. 144on our financial statements was not material in 2002.

** **

**InJuly 2002, the Financial Accounting Standards Board issued SFAS No. 146, *Accountingfor Costs Associated with Exit or Disposal*, which is effective fordisposal or exit activities that are initiated after December 31, 2002. Weadopted this statement effective January 1, 2003.**  This statementaddresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, *LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (Including Certain Costs Incurred in a Restructuring)*.  The statement requires that a liability fora cost associated with an exit or disposal activity be recognized and measuredinitially at its fair value in the period in which liability is incurred,except for liabilities for one-time termination benefits that are accrued overtime.  In the unusual circumstance inwhich fair value cannot be reasonably estimated, the liability shall berecognized initially in the period in which fair value can be reasonablyestimated.  The impact of SFAS No. 146on our financial statements is not expected to be material.

** **

**InDecember 2002, the Financial Accounting Standards Board issued SFAS No. 148, *Accountingfor Stock Based Compensation — Transition and Disclosure,*which hasan effective date of fiscal years beginning after December 31, 2002.  We adopted this statement effective January1, 2003.**  * *This statement**providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation. In addition,this statement amends the disclosure requirements of Statement 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. The disclosure requirements of SFAS No.148 have been included in Note 2 to our consolidated financial statements.

 

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**InDecember 2002, the Financial Accounting Standards Board issued FASBInterpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*.  The interpretation’s initial recognition andinitial measurement provisions are effective for guarantees issued or modifiedafter December 31, 2002. The disclosure requirements are effective for fiscalyears ending after December 15, 2002. We adopted this interpretation effective December 31, 2002. Thisinterpretation elaborates on the disclosures to be made by a guarantor in itsfinancial statements about its obligations under certain guarantees that it hasissued and clarifies when to recognize a liability for the fair value of theobligation undertaken in issuing the guarantee. We have included the disclosurerequirements of FIN 45 in Note 9 to our consolidated financial statements.  The impact of the accounting requirements ofFIN 45 on our financial statements was not material.**

 

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

 

Our primary market risk is thepotential loss arising from increases in interest rates, which could have anadverse impact on the fair value of our investment securities. Our investmentpolicy is to manage our investment portfolio to preserve principal andliquidity while maximizing the return on our investment portfolio through theinvestment of available funds. We diversify our investment portfolio byinvesting in a variety of highly-rated investment-grade securitiesand through the use of different investment managers. Our investment securitiesportfolio is primarily invested in securities with maturities (or interest rateresets) of two years or less with at least an investment grade rating tominimize interest rate and credit risk as well as to provide for an immediatesource of funds. Market risk, 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, 2002. We generally holdinvestment securities until maturity.

 

We are also exposed to equity price risks on ourinvestments in publicly traded equity securities. These investments aregenerally in companies having operations or technology in areas within ourstrategic focus. We do not attempt to reduce or eliminate our market exposureon these securities. As of December 31, 2002, the fair value of ouravailable-for-sale equity investments was $783,000. A 20% adversechange in equity prices would result in a decrease of approximately $157,000 inthe fair value of our available-for-sale equity securities as ofDecember 31, 2002.

 

We also face foreign currency exchange rate riskto the extent that the value of certain foreign currencies relative to the U.S.dollar affects our financial results. Our international operations transact a portion of our business incurrencies other than the U.S. dollar, predominantly the euro, and changes inexchange rates may positively or negatively affect our revenues, gross margins,operating expenses, and retained earnings since these transactions are reportedby us in U.S. dollars.  We occasionallypurchase foreign currency forwards aimed at limiting the impact of currencyfluctuations.  These instruments provideonly limited protection against currency exchange risks, and there can be noassurance that such an approach will be successful, especially if a significantand sudden decline occurs in the value of local currencies. There were no suchinstruments outstanding as of December 31, 2002.

 

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**Item 8.Financial Statements.**

 

**Index to Consolidated FinancialStatements**

 
|                                                                                                             |   |
|------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                             |   |
|                                                                                                             |   |
| Report of Independent  Accountants                                                                               |   |
| Consolidated Financial  Statements:                                                                              |   |
| Consolidated Balance Sheets  as of December 31, 2002 and 2001                                               |   |
| Consolidated  Statements of Operations for the years ended December 31, 2002, 2001 and  2000                |   |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31,  2002, 2001 and 2000 |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2002, 2001 and  2000                |   |
| Notes to  Consolidated Financial Statements                                                                      |   |
| Schedule  II — Valuation and Qualifying Accounts                                                            |   |

 

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### **Reportof Independent Accountants**

 

 

 

To the Board of Directors and Stockholders

of Avocent Corporation

 

 

In our opinion,the consolidated financial statements listed in the accompanying index presentfairly, in all material respects, the financial position of Avocent Corporationand its subsidiaries at December 31, 2002 and 2001, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2002 in conformity with accounting principles generally acceptedin the United States of America.  Inaddition, in our opinion, the financial statement schedule listed in theaccompanying index presents fairly, in all material respects, the informationset forth therein when read in conjunction with the related consolidatedfinancial statements.  These financialstatements and financial statement schedule are the responsibility of theCompany’s management; our responsibility is to express an opinion on thesefinancial statements and financial statement schedule based on our audits.  We conducted our audits of these statementsin accordance with auditing standards generally accepted in the United Statesof America, which require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

As explained inNotes 2 and 8 to the consolidated financial statements, the Company adoptedSFAS No. 142, *Goodwill and Intangible Assets*,effective January 1, 2002.

 

 

#### PricewaterhouseCoopersLLP

Birmingham,Alabama

February 18, 2003,except for Note 13,

as to which thedate is February 27, 2003

 

 

30

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**AvocentCorporation**

**Consolidated Balance Sheets**

**December31, 2002 and 2001**

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

 
|                                                                                                                                                                      |   | **2002** |    | **2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| **ASSETS**                                                                                                                                                                |   |     |    |     |   |
| Current assets:                                                                                                                                                           |   |     |    |     |   |
| Cash and cash  equivalents                                                                                                                                                |   | $        | 61,699  |     | $      | 80,506 |   |
| Investments  maturing within one year                                                                                                                                     |   | 107,619  |    | 84,270   |   |
| Accounts  receivable, less allowance for doubtful accounts of $2,563 and $4,052 at  December 31, 2002 and 2001, respectively                                              |   | 36,313   |    | 49,091   |   |
| Income taxes  receivable                                                                                                                                                  |   | 609      |    | 2,330    |   |
| Other  receivables, net                                                                                                                                                   |   | 525      |    | 2,115    |   |
| Inventories, net                                                                                                                                                          |   | 24,422   |    | 27,155   |   |
| Other current  assets                                                                                                                                                     |   | 3,922    |    | 2,134    |   |
| Deferred tax  assets                                                                                                                                                      |   | 5,932    |    | 8,955    |   |
| Total current  assets                                                                                                                                                     |   | 241,041  |    | 256,556  |   |
|                                                                                                                                                                      |   |     |    |     |   |
| Investments                                                                                                                                                               |   | 44,849   |    | 7,718    |   |
| Property held  for lease, net                                                                                                                                             |   | 1,723    |    | 1,919    |   |
| Property and  equipment, net                                                                                                                                              |   | 24,313   |    | 21,343   |   |
| Goodwill                                                                                                                                                                  |   | 203,625  |    | 186,147  |   |
| Other intangible  assets, net                                                                                                                                             |   | 52,601   |    | 71,014   |   |
| Other assets                                                                                                                                                              |   | 455      |    | 617      |   |
| Total assets                                                                                                                                                              |   | $        | 568,607 |     | $      | 545,314 |   |
|                                                                                                                                                                      |   |     |    |     |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                            |   |     |    |     |   |
| Current  liabilities:                                                                                                                                                     |   |     |    |     |   |
| Accounts payable                                                                                                                                                          |   | $        | 6,416   |     | $      | 8,579 |   |
| Accrued wages  and commissions                                                                                                                                            |   | 7,743    |    | 4,727    |   |
| Accrued  liabilities                                                                                                                                                      |   | 13,007   |    | 15,496   |   |
| Income taxes  payable                                                                                                                                                     |   | 6,901    |    | 7,016    |   |
| Other current  liabilities                                                                                                                                                |   | 655      |    | 719      |   |
| Total current  liabilities                                                                                                                                                |   | 34,722   |    | 36,537   |   |
|                                                                                                                                                                      |   |     |    |     |   |
| Deferred tax  liabilities                                                                                                                                                 |   | 16,213   |    | 22,169   |   |
| Total  liabilities                                                                                                                                                        |   | 50,935   |    | 58,706   |   |
|                                                                                                                                                                      |   |     |    |     |   |
| 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; 2002 — 45,210 shares  issued and outstanding; 2001 — 44,650 shares issued and outstanding |   | 45       |    | 45       |   |
| Additional  paid-in capital                                                                                                                                               |   | 936,288  |    | 926,746  |   |
| Accumulated  other comprehensive income (loss):                                                                                                                           |   |     |    |     |   |
| Unrealized gain  on investments, net of deferred taxes                                                                                                                    |   | 43       |    | 78       |   |
| Foreign currency  translation adjustment, net of deferred taxes                                                                                                           |   | (29      | )       | (120     | )      |
| Accumulated  deficit                                                                                                                                                      |   | (412,439 | )       | (423,177 | )      |
| Deferred  compensation                                                                                                                                                    |   | (6,236   | )       | (16,964  | )      |
| Total  stockholders’ equity                                                                                                                                          |   | 517,672  |    | 486,608  |   |
|                                                                                                                                                                      |   |     |    |     |   |
| Total  liabilities and stockholders’ equity                                                                                                                          |   | $        | 568,607 |     | $      | 545,314 |   |

 

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, 2002, 2001 and 2000**

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

 
|                                                                                         |   | **2002** |    | **2001** |   | **2000** |   |
|----------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Net sales                                                                                    |   | $        | 260,600 |     | $      | 255,911  |   | $ | 222,372 |   |
|                                                                                         |   |     |    |     |   |     |   |
| Cost of sales                                                                                |   | 128,873  |    | 149,925  |   | 112,598  |   |
|                                                                                         |   |     |    |     |   |     |   |
| Gross profit                                                                                 |   | 131,727  |    | 105,986  |   | 109,774  |   |
|                                                                                         |   |     |    |     |   |     |   |
| Research and  development expenses                                                           |   | 26,522   |    | 22,520   |   | 12,881   |   |
| Acquired  in-process research and development expense and other acquisition costs *(Note 3)* |   | 6,000    |    | 4,570    |   | 104,092  |   |
| Selling, general  and administrative expenses                                                |   | 66,891   |    | 74,800   |   | 52,109   |   |
| Amortization of  intangible assets                                                           |   | 22,189   |    | 132,879  |   | 62,394   |   |
| Impairment  write-down of intangible assets *(Note 8)*                                       |   | —   |    | 195,365  |   | —   |   |
|                                                                                         |   |     |    |     |   |     |   |
| Total operating  expenses                                                                    |   | 121,602  |    | 430,134  |   | 231,476  |   |
|                                                                                         |   |     |    |     |   |     |   |
| Income (loss)  from operations                                                               |   | 10,125   |    | (324,148 | )      | (121,702 | )      |
|                                                                                         |   |     |    |     |   |     |   |
| Net investment  income                                                                       |   | 5,598    |    | 6,340    |   | 6,059    |   |
| Net realized  investment gains (losses)                                                      |   | (305     | )       | (5,302   | )      | (433     | )      |
| Other income  (expense), net                                                                 |   | (178     | )       | (303     | )      | 73       |   |
|                                                                                         |   |     |    |     |   |     |   |
| Income (loss)  before provision for (benefit from) income taxes                              |   | 15,240   |    | (323,413 | )      | (116,003 | )      |
|                                                                                         |   |     |    |     |   |     |   |
| Provision for  (benefit from) income taxes                                                   |   | 4,502    |    | (2,947   | )      | 14,553   |   |
|                                                                                         |   |     |    |     |   |     |   |
| Net income  (loss)                                                                           |   | $        | 10,738  |     | $      | (320,466 | )      | $ | (130,556 | ) |
|                                                                                         |   |     |    |     |   |     |   |
| Net income  (loss) per common share:                                                         |   |     |    |     |   |     |   |
| Basic                                                                                        |   | $        | 0.24    |     | $      | (7.22    | )      | $ | (3.92 | ) |
|                                                                                         |   |     |    |     |   |     |   |
| Diluted                                                                                      |   | $        | 0.24    |     | $      | (7.22    | )      | $ | (3.92 | ) |
|                                                                                         |   |     |    |     |   |     |   |
| Weighted average  common shares outstanding:                                                 |   |     |    |     |   |     |   |
| Basic                                                                                        |   | 44,977   |    | 44,374   |   | 33,266   |   |
|                                                                                         |   |     |    |     |   |     |   |
| Diluted                                                                                      |   | 45,549   |    | 44,374   |   | 33,266   |   |

 

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, 2002, 2001 and 2000**

**(In thousands)**
|                                                                                    |   | **Common Stock** |   | **Additional Paid-In** |   | **Unrealized Gain (Loss) on** |   | **Foreign Currency Translation** |   | **Retained Earnings (Accumulated** |   | **Deferred** |   |             |   |
|-----------------------------------------------------------------------------------------|--------|------------------|--------|------------------------|--------|-------------------------------|--------|----------------------------------|--------|------------------------------------|--------|--------------|--------|------------------|--------|
|                                                                                    |   | **Shares**       |   | **Amount**             |   | **Capital**                   |   | **Investments**                  |   | **Adjustment**                     |   | **Deficit)** |   | **Compensation** |   | **Total** |   |
|                                                                                    |   |             |   |                   |   |                          |   |                             |   |                               |   |         |   |             |   |   |   |
| Balance, December 31, 1999                                                              |   | 22,676           |   | $                      | 66,583 |                          | $      | —                           |   | $                                  | — |         | $      | —           |   | $ | 27,845 |   | $ | (35 | ) | $ | 94,393 |   |
| Acquisition of Cybex                                                                    |   | 19,441           |   | (66,541                | )      | 862,012                       |   | —                           |   | —                             |   | —       |   | (41,165          | )      | 754,306 |   |
| Net loss                                                                                |   | —           |   | —                 |   | —                        |   | —                           |   | —                             |   | (130,556     | )      | —           |   | (130,556 | ) |
| Acceleration of unvested stock option awards                                            |   | —           |   | —                 |   | 9,821                         |   | —                           |   | —                             |   | —       |   | (9,821           | )      | — |   |
| Change in foreign currency translation adjustment, net of deferred  income taxes of $19 |   | —           |   | —                 |   | —                        |   | —                           |   | (33                                | )      | —       |   | —           |   | (33 | ) |
| Change in net unrealized losses on investments, net of deferred  income taxes of $1,637 |   | —           |   | —                 |   | —                        |   | (2,848                           | )      | —                             |   | —       |   | —           |   | (2,848 | ) |
| Issuance of common stock                                                                |   | 1,703            |   | 2                      |   | 1,936                         |   | —                           |   | —                             |   | —       |   | —           |   | 1,938 |   |
| Income tax benefit from exercise of stock options                                       |   | —           |   | —                 |   | 24,641                        |   | —                           |   | —                             |   | —       |   | —           |   | 24,641 |   |
| Stock-based compensation                                                                |   | —           |   | —                 |   | —                        |   | —                           |   | —                             |   | —       |   | 18,339           |   | 18,339 |   |
| Balance, December 31, 2000                                                              |   | 43,820           |   | 44                     |   | 898,410                       |   | (2,848                           | )      | (33                                | )      | (102,711     | )      | (32,682          | )      | 760,180 |   |
| Acquisition of Equinox                                                                  |   | —           |   | —                 |   | 13,331                        |   | —                           |   | —                             |   | —       |   | (2,752           | )      | 10,579 |   |
| Net loss                                                                                |   | —           |   | —                 |   | —                        |   | —                           |   | —                             |   | (320,466     | )      | —           |   | (320,466 | ) |
| Change in foreign currency translation adjustment, net of deferred  income taxes of $51 |   | —           |   | —                 |   | —                        |   | —                           |   | (87                                | )      | —       |   | —           |   | (87 | ) |
| Change in net unrealized gains on investments, net of deferred income  taxes of $1,824  |   | —           |   | —                 |   | —                        |   | 2,926                            |   | —                             |   | —       |   | —           |   | 2,926 |   |
| Issuance of common stock                                                                |   | 830              |   | 1                      |   | 10,078                        |   | —                           |   | —                             |   | —       |   | —           |   | 10,079 |   |
| Income tax benefit from exercise of stock options                                       |   | —           |   | —                 |   | 3,561                         |   | —                           |   | —                             |   | —       |   | —           |   | 3,561 |   |
| 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 | ) |
| Issuance 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 |   |

----

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$305 of realized losses that are included in net realized investment gains(losses) in the accompanying consolidated statement of 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$272 of realized losses and a $4,899 write-down on investments that areincluded in net realized investment gains (losses) in the accompanyingconsolidated statement of operations.

Comprehensiveloss in 2000 of $133,437 consists of $130,556 of net loss, $2,848 of unrealizedloss on investments (net of deferred income taxes) and $33 of foreign currencytranslation adjustment (net of deferred income taxes).  The unrealized loss on investments is net of$433 of realized losses on investments that are included in net realized investmentgains (losses)  in the accompanyingconsolidated statement of operations.

 

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

 

33

----

 

**AvocentCorporation**

**ConsolidatedStatements of Cash Flows**

**For theYears Ended December 31, 2002, 2001 and 2000**

**(Inthousands)**
|                                                                                      |   | **2002** |   | **2001** |   | **2000** |   |
|-------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Cash flows from  operating activities:                                                    |   |     |   |     |   |     |   |
| Net income  (loss)                                                                        |   | $        | 10,738 |     | $      | (320,466 | )      | $ | (130,556 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |   |     |   |     |   |     |   |
| Depreciation                                                                              |   | 4,361    |   | 4,709    |   | 2,223    |   |
| Amortization of  intangible assets                                                        |   | 22,189   |   | 132,879  |   | 62,394   |   |
| Impairment  write-down of intangible assets                                               |   | —   |   | 195,365  |   | —   |   |
| Stock-based  compensation                                                                 |   | 12,352   |   | 19,836   |   | 18,339   |   |
| Acquired  in-process research and development expenses and other acquisition costs        |   | 6,000    |   | 4,570    |   | 94,000   |   |
| Other-than-temporary  decline in fair value of investments                                |   | 550      |   | 4,899    |   | —   |   |
| Amortization of  premium on investments                                                   |   | 2,457    |   | —   |   | —   |   |
| Net loss on  sales of investments                                                         |   | 305      |   | 403      |   | 433      |   |
| Deferred income  taxes                                                                    |   | (5,735   | )      | (15,827  | )      | (6,409   | )      |
| Income tax  benefit from exercise of stock options                                        |   | 1,150    |   | 3,561    |   | 24,641   |   |
| Changes in  operating assets and liabilities (net of effects of acquisitions):            |   |     |   |     |   |     |   |
| Accounts  receivable, net                                                                 |   | 12,811   |   | 17,964   |   | (8,163   | )      |
| Income taxes  receivable                                                                  |   | 1,721    |   | 2,157    |   | (4,487   | )      |
| Other  receivables, net                                                                   |   | 1,590    |   | 8,685    |   | (9,993   | )      |
| Inventories, net                                                                          |   | 3,663    |   | 10,869   |   | (9,998   | )      |
| Other assets                                                                              |   | (220     | )      | (1,501   | )      | (2,042   | )      |
| Accounts payable                                                                          |   | (3,062   | )      | (2,256   | )      | (8,245   | )      |
| Accrued  liabilities, wages and commissions                                               |   | 393      |   | 819      |   | 4,425    |   |
| Income taxes  payable                                                                     |   | (115     | )      | 5,406    |   | (7,453   | )      |
| Other current  liabilities                                                                |   | (64      | )      | 558      |   | (28      | )      |
| Net cash  provided by operating activities                                                |   | 71,084   |   | 72,630   |   | 19,081   |   |
| Cash flows from  investing activities:                                                    |   |     |   |     |   |     |   |
| Purchase of 2C,  net of cash and investments acquired                                     |   | (23,189  | )      | —   |   | —   |   |
| Purchase of  Equinox, net of cash and investments acquired                                |   | —   |   | (31,725  | )      | —   |   |
| Cash acquired  from purchase of Cybex                                                     |   | —   |   | —   |   | 34,878   |   |
| Purchases of  property and equipment                                                      |   | (7,064   | )      | (3,343   | )      | (1,812   | )      |
| Purchases of  investments                                                                 |   | (166,103 | )      | (94,718  | )      | (97,015  | )      |
| Proceeds from  maturities and sales of investments                                        |   | 102,346  |   | 83,564   |   | 71,283   |   |
| Net cash provided  by (used in) investing activities                                      |   | (94,010  | )      | (46,222  | )      | 7,334    |   |
| 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 in the 2C acquisition                               |   | (890     | )      | —   |   | —   |   |
| Proceeds from  issuance of common stock                                                   |   | 4,918    |   | 10,079   |   | 1,938    |   |
| Net cash  provided by financing activities                                                |   | 4,028    |   | 10,079   |   | 1,938    |   |
|                                                                                      |   |     |   |     |   |     |   |
| Effect of  exchange rate changes on cash and cash equivalents                             |   | 91       |   | (87      | )      | (33      | )      |
|                                                                                      |   |     |   |     |   |     |   |
| Net increase  (decrease) in cash and cash equivalents                                     |   | (18,807  | )      | 36,400   |   | 28,320   |   |
| Cash and cash  equivalents, beginning of year                                             |   | 80,506   |   | 44,106   |   | 15,786   |   |
|                                                                                      |   |     |   |     |   |     |   |
| Cash and cash  equivalents, end of year                                                   |   | $        | 61,699 |     | $      | 80,506   |   | $ | 44,106 |   |
| Supplemental  disclosures of cash flow information:                                       |   |     |   |     |   |     |   |
| Cash paid during  the year for interest                                                   |   | $        | 1      |     | $      | 282      |   | $ | — |   |
|                                                                                      |   |     |   |     |   |     |   |
| Cash paid during  the year for income taxes                                               |   | $        | 7,845  |     | $      | 4,248    |   | $ | 6,568 |   |

 

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

 

34

----

 

 

**AvocentCorporation**

**Notes toConsolidated Financial Statements**

**For theYears Ended December 31, 2002, 2001 and 2000**

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

 

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

 

Avocent Corporation (the Company or Avocent) designs,manufactures and sells analog and digital console switching systems, serialconnectivity devices and extension and remote access products for the computerindustry.  The Company’s analog, digitaland serial switching solutions and the extension and remote access productshelp network administrators manage multiple servers and serially controlleddevices from a single keyboard, video monitor and mouse configuration fromextended distances or from remote locations, facilitating more efficientnetwork management and administration. The Company sells products todistributors, resellers, original equipment manufacturers and end-users in theUnited States and internationally.

 

Avocent was formed from the merger of Apex, Inc(“Apex”) and Cybex Computer Products Corporation (“Cybex”) on July 1, 2000,when both Apex and Cybex merged with wholly owned subsidiaries of Avocent.  The merger has been accounted for as apurchase of Cybex by Apex.  Avocent’sconsolidated statements of operations, stockholders’ equity, and cash flows forthe year ended December 31, 2000, include the 12-month results of Apex for theperiod January 1, 2000 through December 31, 2000, and the six-month results ofCybex for the post-merger period July 1, 2000 through December 31, 2000.  The results of acquired companies areincluded in the consolidated results from the respective dates of acquisition,including Equinox Systems Inc. (“Equinox”), which was acquired on January 3,2001 and 2C Computing, Inc. (“2C”), which was acquired on August 20, 2002.

 

**2.           Summaryof 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.

 

**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.  Amounts due from component sales are included in the accompanyingconsolidated statements of operations as a reduction of cost of sales. As ofDecember 31, 2001, the Company’s other receivables included an allowance foruncollectible accounts of approximately $1,800 for past due receivables from acontract manufacturer in bankruptcy. The Company released $1,400 of this reserve in the second quarter of2002 due to a favorable ruling by a bankruptcy judge.  As of December 31, 2002, there was no reserve for uncollectibleaccounts recorded against receivables from subcontractors.   Additionally, other receivables at December31, 2001 included a receivable of $760 due from an executive employee that wascollected in 2002.  There were noamounts due from executive employees at December 31, 2002.

 

**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 writesdown inventory for estimated obsolescence or unmarketable inventory to theestimated market value based upon assumptions about future demand and marketconditions.

 

**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’sinvestments consist primarily of bank deposits, corporate bonds, commercialpaper, asset-backed securities, U.S. government agency securities,mortgage-backed securities guaranteed by U.S. government agencies and commonstock.  Debt securities that the Companyhas the positive intent and ability to hold to maturity are classified as held-to-maturitysecurities and are reported at amortized cost. Debt and equity securities not classified as either held-to-maturitysecurities or trading securities and that have readily determinable fair valuesare classified as available-for-sale securities and are reported at fair value,with unrealized gains and losses excluded from earnings and reported as aseparate component of stockholders’ equity, net of deferred income taxes.Unrealized losses are charged against earnings when a decline in fair value isdetermined to be other than temporary. During 2001, the Company recognized gross losses of $4,899 on its equityinvestments due to impairments that were determined by management to be otherthan temporary.  There were no suchcharges to investments in 2002 or 2000. Realized gains and losses are accounted for on the specificidentification method.  Purchases andsales are recorded on a trade date basis. An investment impairment charge isrecorded when an investment has experienced a decline in value that Companymanagement determines is other than temporary.

 

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.  As of December 31,2002, 

 

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the Company had $450 of such investments.  These investments are included in totallong-term investments in the accompanying consolidated balance sheets.  The Company reviews its investments in theseentities periodically to determine if circumstances (both financial andnon-financial) exist that indicate that the investment will not be recovered.  Impairment charges are recorded oninvestments having a basis that is greater than the value that the Companywould reasonably expect to receive in an arm’s length sale of theinvestment.  The Company recognizedgross realized losses on these investments of $550 in 2002.  The Company did not recognize any grossrealized losses on such investments in 2001 or 2000 (*see note 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).*

 

**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 earnings.

 

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. Am 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 2002, 2001 or 2000.

 

**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          |
| Other                           |   | 3 – 7 years |

 

At each balance sheet date, or as changes incircumstances arise, the Company evaluates the recoverability of intangibleassets based upon utilization of related tangible assets and expectations offuture cash flows.  There were no suchlosses recognized during 2002, 2001 or 2000.

 

**Goodwill -** The Company records goodwill whenthe cost of an acquired entity exceeds the net amounts assigned to assetsacquired and liabilities assumed.  In accordance with SFAS No. 142, the Companycompleted a transitional impairment test of all goodwill and intangible assetsas of January 1, 2002.  The test concluded that noadjustment was required upon adoption. Additionally, the Company performed an annual impairment test ofgoodwill, as prescribed by this standard, in the fourth quarter of 2002.  The test in the fourth quarter concludedthat there had been no impairment of goodwill and that no adjustment wasrequired.

 

**PatentDefense Costs**-The Company capitalizes legal fees related to the defense of existingpatents.  Upon the successful defense ofpatent infringement actions, the respective patent defense costs are amortizedover the estimated remaining useful life of the related patents.  Upon receiving an unfavorable ruling in anypatent infringement action, the respective capitalized patent defense costs arewritten off and future costs of appeal are expensed as incurred *(see Note19)*.

 

**Allowancefor Sales Returns -**The Company’s sales generally include a one-month unconditional return policy.  The Company also allows additional rights ofreturn to certain of its distributors, which generally extend the return periodto 90 

 

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days. The Company reserves for sales returns as areduction of revenue and cost of sales at the time the product revenue isrecognized based on historical sales return experience, which managementbelieves provides a reasonable estimate of future returns.  The allowance for sales returns totaledapproximately $3,769 and $2,607 at December 31, 2002 and 2001, respectively.The reserve is included as a reduction in the carrying value of accountsreceivable in the accompanying consolidated balance sheets.

 

**Liabilityfor Warranty Returns**- The Company’s products generally include warranties of one to three years forproduct defects. The Company accrues for warranty returns at cost to repair orreplace products. The liability for warranty returns totaled approximately$2,435 and $4,157 at December 31, 2002 and 2001, respectively. Theseliabilities are included in accrued liabilities in the accompanyingconsolidated balance sheets.

 

**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 Cybex thatexisted as of the merger date and unvested options of Equinox and 2C thatexisted as of their respective acquisition dates, the intrinsic value wascomputed as of the consummation date and the pro rata portion related to futureservice was deferred (included in deferred compensation in the consolidatedbalance sheets) and is being amortized over the remaining vesting period of thestock options. The fair value of these unvested options as of the consummationdate was computed and the amount in excess of the intrinsic value was includedin the respective purchase consideration (*see**Note 3*).

 

The Companyapplies Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued toEmployees*, and related Interpretations in accounting for its stockplans. Had compensation cost for the Company’s stock-based compensation plansbeen determined based on the fair value at the grant dates for awards underthose plans 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:

 
|                                                                                                                                    |   | **2002** |    | **2001** |   | **2000** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Net income  (loss) — as reported                                                                                                   |   | $        | 10,738  |     | $      | (320,466 | )      | $ | (130,556 | ) |
| Add: Stock-based  employee compensation expense included in reported net income (loss), net of  related tax effects                     |   | 11,110   |    | 18,183   |   | 14,464   |   |
| Deduct: Total  stock based employee compensation expense determined under fair value method  for all awards, net of related tax effects |   | (36,717  | )       | (46,131  | )      | (27,850  | )      |
| Net income  (loss) — pro forma                                                                                                     |   | $        | (14,869 | )        | $      | (348,414 | )      | $ | (143,942 | ) |
|                                                                                                                                    |   |     |    |     |   |     |   |
| Basic earnings  (loss) per share — as reported                                                                                     |   | $        | 0.24    |     | $      | (7.22    | )      | $ | (3.92 | ) |
| Basic loss per  share — pro forma                                                                                                  |   | $        | (0.33   | )        | $      | (7.85    | )      | $ | (4.33 | ) |
| Diluted earnings  (loss) per share — as reported                                                                                   |   | $        | 0.24    |     | $      | (7.22    | )      | $ | (3.92 | ) |
| Diluted loss per  share — pro forma                                                                                                |   | $        | (0.33   | )        | $      | (7.85    | )      | $ | (4.33 | ) |

 

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:

 
|                     |   | **2002**         |   | **2001**         |   | **2000**         |   |
|--------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
| Dividend yield           |   | 0.0              | %      | 0.0              | %      | 0.0              | %      |
| Expected life  (years)   |   | 5                |   | 5                |   | 5                |   |
| Expected  volatility     |   | 67.5             | %      | 89.9             | %      | 87.3             | %      |
| Risk-free  interest rate |   | 2.93 — 4.47 | %      | 4.09 — 4.79 | %      | 5.70 — 6.47 | %      |

 

**Concentrationsof Customer Base and Credit Risk —**Three customers each exceeded 10% of the Company’ssales for 2002, while only one customer exceeded 10% of sales for 2001 and2000.** **The****three customers accountedfor 47% of net sales for 2002.  The onecustomer accounted for 23% of net sales for 2001 and 32% of net sales for 2000.Accounts receivable from these three customers represented approximately 56% oftrade receivables at December 31, 2002 and the one customer represented 26% oftrade receivables at December 31, 2001. The Company’s top five customers accounted for 65%, 55% and 61% of netsales for 2002, 2001 and 2000, respectively.

 

37

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

 

**Income Taxes** - The Company accounts for income taxes using theasset and liability method. The Company provides for income taxes currentlypayable and, in addition, provides deferred income taxes for temporarydifferences between the tax bases of assets and liabilities and their reportedamounts in the financial statements. Temporary differences relate principallyto the allowance for doubtful accounts, allowance for sales returns, liabilityfor warranty claims, unrealized gain (loss) on investments, acquired in-processresearch and development expenses, acquired intangible assets, foreignsubsidiary intangibles, 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 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 inincome. Adjustments from translating financial statements of internationalsubsidiaries are recorded as a separate component of stockholders’ equity.

 

The Company uses forward contracts to reduce itsforeign currency exposure related to the net cash flows from its European andAsian operations. The majority of these contracts are short-term contracts(three months or less) and are marked-to-market each quarter and included intrade payables, with the offsetting gain or loss included in other revenues inthe accompanying statements of operations. At December 31, 2002 and December31, 2001, the Company had no open forward contracts.

 

**Revenue Recognition** - The Company generally records sales upon shipmentof the related product, net of any discounts (as the Company generally has nosignificant post delivery obligations), the product price is fixed anddeterminable, collection of the resulting receivable is probable, and productreturns are reasonably estimable. Product shipments occur upon receipt of apurchase order from a customer. Shipping terms are evaluated, and revenue onproducts shipped FOB destination is recorded when the customer takes possessionof the goods. The Company’s shipping and handling fees are included in netsales, and the related costs are included in cost of sales in the accompanyingconsolidated statements of operations. At December 31, 2001, certain shipmentsof approximately $1,100 did not meet the criteria for revenue recognition asdescribed above and were not recorded as revenue in 2001. At December 31, 2002,there were no shipments for which Avocent deferred revenue as the result of notmeeting the Company’s criteria for revenue recognition.

 

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.

 

The Company offers extended warranties to customersand recognizes the revenue associated with the extended warranties over the lifeof the warranty.

 

**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. Costs incurred during the application development stage have not beenmaterial to date.  The Company hascommitted to implement a new Enterprise Resource Planning system in 2003 — 2004and will capitalize the costs of the new system.  As of December 31, 2002, $1,600 had been capitalized for this newsystem.

 

**Advertising Expense****—** Advertising costs are expensed asincurred. Advertising expense totaled approximately $6,983, $8,079 and $5,205for the years ended December 31, 2002, 2001 and 2000, respectively.

 

**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 investements when a decline in fair value is determined bymanagement to be other than temporary.

 

38

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**Other Income (Expense) —**Other income (expense) consists primarily of gains orlosses realized upon the sale of property and equipment, foreign currency exchange gains or losses andinterest expense.

 

**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 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 the2001 and 2000 consolidated financial statements in order to conform to the 2002presentation. These reclassifications had no effect on previously reported netincome (loss), cash flows from operations or total stockholders’ equity.

 

**Recently Issued Accounting Standards** - In October 2001, the FinancialAccounting Standards Board issued Statement of Financial Accounting Standards(“SFAS”) No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*,which has an effective date for financial statements for fiscal years beginningafter December 15, 2001.  The Companyadopted this statement effective January 1, 2002.  This statement, which supersedes SFAS No. 121, *Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of*, requires that long-lived assets that are to be disposedof by sale be measured at the lower of book value or fair value less cost tosell.  Additionally, this statementexpands the scope of discontinued operations to include all components of anentity with operations that (1) can be distinguished from the rest of theentity and (2) will be eliminated from the ongoing operations of the entity ina disposal transaction.  The impact ofSFAS No. 144 on the financial statements was not material.

** **

**InJuly 2002, the Financial Accounting Standards Board issued SFAS No. 146, *Accountingfor Costs Associated with Exit or Disposal*, which is effective fordisposal or exit activities that are initiated after December 31, 2002. TheCompany will adopt this statement effective January 1, 2003.** This statementaddresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, *LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (Including Certain Costs Incurred in a Restructuring)*.  The statement requires that a liability fora cost associated with an exit or disposal activity shall be recognized andmeasured initially at its fair value in the period in which liability isincurred, except for liabilities for one-time termination benefits that areaccrued over time.  In the unusualcircumstance in which fair value cannot be reasonably estimated, the liabilityshall be recognized initially in the period in which fair value can bereasonably estimated.  The impact ofSFAS No. 146 on the financial statements is not expected to be material.

** **

**InDecember 2002, the Financial Accounting Standards Board issued SFAS No. 148, *Accountingfor Stock Based Compensation — Transition and Disclosure,*which hasan effective date of fiscal years beginning after December 31, 2002.**  The Company will adoptthis statement effective January 1, 2003.  This statement**providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation. In addition,this statement amends the disclosure requirements of Statement 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. The disclosure requirements of SFAS No.148 have been included elsewhere in this Note 2 to the consolidated financialstatements.

** **

**InDecember 2002, the Financial Accounting Standards Board issued FASBInterpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*.  The interpretation’s initial recognition andinitial measurement provisions are effective for guarantees issued or modifiedafter December 31, 2002. The disclosure requirements are effective for fiscalyears ending after December 15, 2002. The Company adopted this interpretation effective December 31, 2002.This interpretation elaborates on the disclosures to be made by a guarantor inits financial statements about its obligations under certain guarantees that ithas issued and clarifies when to recognize a liability for the fair value ofthe obligation undertaken in issuing the guarantee. The applicable additionaldisclosure requirements of FIN 45 have been included in Note 9 to theconsolidated financial statements.  Theimpact of the accounting requirements of FIN 45 on the financial statements wasnot material.**

**3.            Merger and Acquisitions**

 

**Acquisition of 2C -**On August 20, 2002, the Companyacquired the outstanding preferred and common shares of 2C for 

** **

**39**

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** **

**approximately$22.8 million in cash, plus the assumption of liabilities and stockoptions.  The results of 2C’s operationshave been included 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 cable.**

 

In 2000, 2C and Cybex, Avocent’s wholly-ownedsubsidiary, formed a joint venture, CyCom L.L.C., to focus on computertechnology and research for products in the desktop computer and serverindustry.  Cybex owned 40% of CyCom andthe other 60% of CyCom was owned by 2C. Upon the formation of CyCom, Cybex contributed a license for certain ofits intellectual property related to the split bus concept, and 2C contributedmanagement services and capital funding. The initial products developed from the digital extension technologywere announced in late 2001.  Shipmentsof the products totaled approximately $1.5 million through August 20, 2002.

 

Under the terms of the joint venture membershipagreement, 2C was responsible for all technology development efforts.  The net profits of CyCom were to be split60% to 2C and 40% to Cybex after 2C recouped its accumulated losses from thedevelopment and marketing of CyCom products. The carrying value of the Company’s investment in CyCom was zero priorto the acquisition of 2C because Cybex’s contribution to it consisted ofpreviously expensed research and development costs related to the technology and CyCom hadearned no profits to date.  The Company dissolved CyComupon the closing of the acquisition of 2C.

 

2C was founded byRemigius G. Shatas and Robert R. Asprey, who served as directors of 2C prior tothe Company’s acquisition of 2C.  Mr.Shatas was formerly a member of the Board of Directors of Cybex (before themerger transaction with Apex Inc. that created Avocent) and served as executivevice president and chief technology officer of Cybex. Mr. Shatas remains astockholder of Avocent.  Mr. Asprey wasalso formerly an officer of Cybex, and he too is a current Avocentstockholder.  David S. Butler, who alsowas a director of 2C prior to the Company’s acquisition of 2C, is a formerdirector of Cybex and a current Avocent stockholder. Mr. Shatas,Mr. Asprey, and Mr. Butler own less than 2% of Avocent’s outstanding shares inthe aggregate.  A number of other former 2C shareholders arealso Avocent stockholders.  No officeror director of Avocent was an officer, director, shareholder or affiliate of 2Cprior to our acquisition of 2C.

 

The acquisition was recorded under the purchase method of accounting,and the purchase price was allocated based on the fair value of the assetsacquired and liabilities assumed. In accordance with generally acceptedaccounting principles, purchasedresearch and development costs allocated to patented 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 and other intangible assets forimpairment.  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 wasallocated to the estimated fair values of the assets acquired and liabilitiesassumed, as follows:

 
|                                                  |   | **Purchase   Price   Allocation** |   | **Amortization    Period** |   |
|-------------------------------------------------------|--------|-----------------------------------|--------|----------------------------|--------|
| Tangible assets                                       |   | $                                 | 1,306  |                       | — |   |
| In-process  research and development                  |   | 6,000                             |   | —                     |   |
| Patents                                               |   | 370                               |   | 5 years                    |   |
| Non-compete  agreements                               |   | 3,273                             |   | 3 years                    |   |
| 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 was funded through availablecash.  On the closing of the 2Ctransaction, the Company acquired $32 in cash held by 2C.

 

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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.

 

2C’s in-process research and development activitiesconsisted of a redesign of its C-Link card to a PMC form factor, bladedevelopment that integrates its existing C-Link cards with a cPCI blade cardwith PMC connections, C-switch products that allow for transmitting/receivingand switching 2C’s Digital Extension Technology over standard IP protocol, developingan ASIC for 2C’s Digital Extension Technology and NextGen development ofDigital Extension Technology to support peripherals and other architectures.The work remaining to be performed on these projects varied, but at the time ofthe acquisition, the projects were considered to be in early concept form,prototype form, or mid-design form.  Allof the projects were still in process at the end of 2002.

 

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 2007, with 95% of 2C’s revenue in 2004 comingfrom projects currently in development. Therefore, net income attributable to IPR&D was calculated byapplying Avocent’s overall projected gross, operating and net profit margins toIPR&D revenue.

 

Revenue growth related to the in-process research anddevelopment is embodied in products to be launched in fiscal years 2003 and2004. These products have estimated economic lives ranging from approximatelythree to five years. The product life cycle is characterized by an approximate1 to 2 year ramp up period, followed by a 1 to 2 year plateau, followed by a 1to 2 year decline period. Operating margins are projected to be below overallAvocent margins in the early years, but will improve for these products over theirlives as the products mature, as costs are designed out of the products, and assales volumes increase. The discount rate used to value IPR&D was 21%.

 

**Acquisition of Equinox** - OnJanuary 3, 2001, the Company acquired Equinox Systems Inc. for cashequal to $9.75 for each outstanding share of Equinox capital stock. Equinox,headquartered in Sunrise, Florida, makes products that provide communicationsport management and remote control capabilities. The products are distributedthrough a two-tier distribution channel, a network of value-added resellers andOEMs.

 

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

 

A summary of the total purchaseconsideration is as follows:

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

 

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The purchase consideration wasallocated to the estimated fair values of the assets acquired and liabilitiesassumed, as follows:
|                                                  |   | **Purchase   Price   Allocation** |   | **Amortization    Period** |   |
|-------------------------------------------------------|--------|-----------------------------------|--------|----------------------------|--------|
|                                                  |   |                              |   |                       |   |
| Tangible assets                                       |   | $                                 | 38,981 |                       | — |   |
| In-process  research and development                  |   | 4,570                             |   | —                     |   |
| Patents and  trademarks                               |   | 1,680                             |   | 7 years                    |   |
| Developed  technology                                 |   | 6,250                             |   | 5 years                    |   |
| Assembled  workforce                                  |   | 1,800                             |   | 3 years                    |   |
| Customer base  and certification                      |   | 2,500                             |   | 3 — 6 years           |   |
| Goodwill                                              |   | 21,165                            |   | —                     |   |
| Deferred tax  liability on intangible assets acquired |   | (5,962                            | )      | Various                    |   |
| Assumed  liabilities                                  |   | (4,385                            | )      | —                     |   |
|                                                  |   |                              |   |                       |   |
|                                                  |   | $                                 | 66,599 |                       |   |   |

 

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

 

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

 

A summary of the total purchaseconsideration is as follows:

 
| Common stock                  |   | $      | 723,788 |   |
|-------------------------------|--------|--------|---------|--------|
| Outstanding  options assumed  |   | 30,518 |    |
| Acquisition  costs            |   | 5,987  |    |
|                          |   |   |    |
| Total purchase  consideration |   | $      | 760,293 |   |

 

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

 
|                                                  |   | **Purchase   Price   Allocation** |    | **Amortization   Period** |   |
|-------------------------------------------------------|--------|-----------------------------------|---------|---------------------------|--------|
| Tangible assets                                       |   | $                                 | 109,011 |                      | — |   |
| In-process  research and development                  |   | 94,000                            |    | —                    |   |
| Patents and  trademarks                               |   | 12,018                            |    | 5 — 7 years          |   |
| Developed  technology                                 |   | 59,490                            |    | 5 years                   |   |
| Assembled  workforce                                  |   | 1,600                             |    | 3 years                   |   |
| Reseller network                                      |   | 17,000                            |    | 3 years                   |   |
| Goodwill                                              |   | 523,070                           |    | —                    |   |
| Deferred tax  liability on intangible assets acquired |   | (33,930                           | )       | Various                   |   |
| Assumed  liabilities                                  |   | (21,966                           | )       | —                    |   |
|                                                  |   |                              |    |                      |   |
|                                                  |   | $                                 | 760,293 |                      |   |   |

 

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

 

**Pro Forma Financial Information -**The following unaudited pro forma summarycombines the results of operations of Avocent and 2C as if the acquisition hadoccurred on January 1, 2001.  Certainadjustments have been made to reflect the impact of the purchase transactions.These pro forma results have been prepared for comparative purposes only and donot purport to be indicative of what would have occurred had the acquisitionsbeen made at the beginning of 2001, or of results which may occur in thefuture.

 

42

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|                     |   | **Year Ended  December 31,** |       |
|--------------------------|--------|------------------------------|------------|
|                     |   | **2002**                     |       | **2001** |   |
|                     |   |                         |       |   |   |
| Net sales                |   | $                            | 262,034    |   | $ | 255,970 |   |
| Net income  (loss)       |   | $                            | 14,670     |   | $ | (324,127 | ) |
| Income (loss)  per share |   | $                            | 0.32       |   | $ | (7.30 | ) |
|                     |   |                         | ** ** |   | ** ** |

**4.            Inventories**

 

Inventories consist of the following at December 31,2002 and 2001:

 
|                  |   | **2002** |   | **2001** |   |
|-----------------------|--------|----------|--------|----------|--------|
| Raw materials,  net   |   | $        | 7,560  |     | $      | 13,034 |   |
| Work in process,  net |   | 851      |   | 446      |   |
| Finished goods,  net  |   | 16,011   |   | 13,675   |   |
|                  |   |     |   |     |   |
| Inventories, net      |   | $        | 24,422 |     | $      | 27,155 |   |

 

As of December 31, 2002 and2001, inventories above have been reduced by reserves for excess and obsoleteinventories of $7,502 and $15,279, respectively.

** **

**5.            Investments**

 

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

 
|                                                               |   | **December  31, 2002**         |   |
|--------------------------------------------------------------------|--------|--------------------------------|--------|
| **Current investments:**                                           |   | **Cost or   Amortized   Cost** |   | **Gross   Unrealized   Gains** |   | **Gross   Unrealized   Losses** |   | **Estimated   Fair   Value** |   |
| 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

----

 
|                                                               |   | **December  31, 2002**         |   |
|--------------------------------------------------------------------|--------|--------------------------------|--------|
| **Non-current investments:**                                       |   | **Cost or   Amortized   Cost** |   | **Gross   Unrealized   Gains** |   | **Gross   Unrealized   Losses** |   | **Estimated   Fair   Value** |   |
| 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  securities                                                 |   | 1,131                          |   | — |   | (348 | ) | 783 |   |
| Totals                                                             |   | $                              | 42,345 |   | $ | 332 |   | $ | (352 | ) | $ | 42,325 |   |

 
|                                                               |   | **December  31, 2001**         |   |
|--------------------------------------------------------------------|--------|--------------------------------|--------|
| **Current investments:**                                           |   | **Cost or   Amortized   Cost** |   | **Gross   Unrealized   Gains** |   | **Gross   Unrealized   Losses** |   | **Estimated   Fair   Value** |   |
| Held-to-maturity  investments:                                     |   |                           |   |   |   |   |   |   |   |
| Corporate bonds                                                    |   | $                              | 46,092 |   | $ | — |   | $ | — |   | $ | 46,092 |   |
| Mortgage-backed  securities guaranteed by U.S. government agencies |   | 2,015                          |   | — |   | — |   | 2,015 |   |
| Totals                                                             |   | $                              | 48,107 |   | $ | — |   | $ | — |   | $ | 48,107 |   |
|                                                               |   |                           |   |   |   |   |   |   |   |
| Available-for-sale  securities:                                    |   |                           |   |   |   |   |   |   |   |
| Mortgage-backed  securities guaranteed by U.S. government agencies |   | $                              | 36,000 |   | $ | 176 |   | $ | (13 | ) | $ | 36,163 |   |

 
|                                                               |   | **December  31, 2001**         |   |
|--------------------------------------------------------------------|--------|--------------------------------|--------|
| **Non-Current investments:**                                       |   | **Cost or   Amortized   Cost** |   | **Gross   Unrealized   Gains** |   | **Gross   Unrealized   Losses** |   | **Estimated   Fair   Value** |   |
| Held-to-maturity  investments:                                     |   |                           |   |   |   |   |   |   |   |
| Corporate bonds                                                    |   | $                              | 5,847  |   | $ | — |   | $ | — |   | $ | 5,847 |   |
| Mortgage-backed  securities guaranteed by U.S. government agencies |   | 1,020                          |   | — |   | — |   | 1,020 |   |
|                                                               |   |                           |   |   |   |   |   |   |   |
|                                                               |   | $                              | 6,867  |   | $ | — |   | $ | — |   | $ | 6,867 |   |
|                                                               |   |                           |   |   |   |   |   |   |   |
| Available-for-sale  securities:                                    |   |                           |   |   |   |   |   |   |   |
| Equity  securities                                                 |   | $                              | 851    |   | $ | — |   | $ | — |   | $ | 851 |   |
|                                                               |   |                           |   |   |   |   |   |   |   |

Maturities of non-current investments were as followsat December 31, 2002:

 
|                        |   | **Available-for-sale** |   | **Held-to-maturity**         |   |
|-----------------------------|--------|------------------------|--------|------------------------------|--------|
|                        |   | **Amortized   Cost**   |   | **Estimated   Fair   Value** |   | **Amortized   Cost** |   | **Estimated   Fair   Value** |   |
| Due within two  years       |   | $                      | 12,192 |                         | $      | 12,213 |   | $ | 2,524 |   | $ | 2,564 |   |
| Mortgage-backed  securities |   | 29,022                 |   | 29,329                       |   | — |   | — |   |
|                        |   |                   |   |                         |   |   |   |   |   |
| Totals                      |   | $                      | 41,214 |                         | $      | 41,542 |   | $ | 2,524 |   | $ | 2,564 |   |

 

44

----

 

Maturities of investments in mortgage-backedsecurities are included under available-for-sale securities and the Companyanticipates prepayment speeds of approximately 25% per year.

 

Gross realized gains on the sale of available-for-salesecurities were approximately $36 and gross realized losses were approximately$378 for the year ended December 31, 2002. During 2002, the Company includedgross unrealized losses of $213 on its equity investments and gross unrealizedgains of $246 on its investments in mortgage-backed securities as a separatecomponent of stockholder’s equity. Gross realized gains on the sale of available-for-sale securities wereapproximately $528 and gross realized losses were approximately $800 for theyear ended December 31, 2001. During 2001, the Company recognized gross lossesof $4,899 on its equity investments due to impairments that were determined bymanagement to be other than temporary. The remaining fair value of theseinvestments at December 31, 2001, was $851. Gross realized gains on the sale of available-for-sale securities wereapproximately $754 and gross realized losses were approximately $1,187 for theyear ended December 31, 2000.

 

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 400,000 shares ofRymic’s common stock, giving Avocent approximately a 14% equity position inRymic.  In addition, as part of theinvestment, the Company received certain rights of co-sale regarding the sharesof stock that were purchased and certain rights of first refusal regardingshares of stock of Rymic held by its major shareholders.  The Company also entered into a StrategicPartnership Agreement with Rymic to share certain technologies and otherexpertise, and the Company became an authorized reseller of Rymic’s line ofrymicNETTM remote monitoring and control products in the computer, server, anddata center management markets. Subsequent to the initial investment, theCompany received 200 additional shares in Rymic in November of 2002 as a resultof Rymic failing to meet certain pre-defined operational targets. During 2002,the Company recorded equity-method losses and an impairment charge totaling$550 against its investment in Rymic, which was included in research anddevelopment expenses in the accompanying consolidated statements of operations.

 

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 10,000 shares of common stock of Rymic at the price of $2.50 pershare.  Mr. Weeks also received a giftof 5,000 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 10,000 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 5,000 shares of Rymic common stock at $2.50 per sharethat vested upon receipt.  Mr. Weeks didnot receive any fees from Rymic.  Mr.Weeks remains on the board of directors of Rymic, but will not receive anyadditional director fees or stock options for as long as the Company holds itsequity position in Rymic.

 

Subsequent to December 31, 2002, the Company enteredinto a research and development agreement with Rymic whereby the Company willpay $300 to Rymic for the development of certain technologies.  The costs associated with this agreementwill be expensed and included in research and development expenses in 2003.

 

**6.            Property Held for Lease**

 

The Company owns a building in Huntsville, Alabama andhas executed a five-year agreement to lease the building to an unrelated party.The lease agreement contains renewal options for up to two three-yearextensions, subject to certain conditions. The lease agreement also providesfor early termination at the option of the lessee after three or four years,subject to certain conditions, including termination fees. Rental incometotaled approximately $221 for each of the years ended December 31, 2002 and2001.

 

Property held for lease consists of the following atDecember 31, 2002 and 2001:

 
|                          |   | **2002** |   | **2001** |   |
|-------------------------------|--------|----------|--------|----------|--------|
| Building                      |   | $        | 2,306  |     | $      | 2,306 |   |
| Accumulated  depreciation     |   | (583     | )      | (387     | )      |
|                          |   |     |   |     |   |
| Property held  for lease, net |   | $        | 1,723  |     | $      | 1,919 |   |

 

45

----

 

 

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

 

| **Year ending   December 31:** |   |   |   |
|--------------------------------|--------|--------|--------|
| 2003                           |   | $      | 221    |   |
| 2004                           |   | 221    |   |
| 2005                           |   | 93     |   |
|                           |   |   |   |
|                           |   | $      | 535    |   |

** **

**7.            Property and Equipment**

 

Property and equipment consists of the following atDecember 31, 2002 and 2001:

* *
|                             |   | **2002** |   | **2001** |   |
|----------------------------------|--------|----------|--------|----------|--------|
| Land and land  improvements      |   | $        | 3,152  |     | $      | 2,911 |   |
| Buildings                        |   | 16,873   |   | 13,476   |   |
| Leasehold  improvements          |   | 1,392    |   | 1,378    |   |
| Computer  software and equipment |   | 9,838    |   | 9,103    |   |
| Other equipment                  |   | 10,804   |   | 9,419    |   |
| Construction in  progress        |   | 2,002    |   | 443      |   |
|                             |   |     |   |     |   |
|                             |   | 44,061   |   | 36,730   |   |
| Less accumulated  depreciation   |   | (19,748  | )      | (15,387  | )      |
|                             |   |     |   |     |   |
| Property and  equipment, net     |   | $        | 24,313 |     | $      | 21,343 |   |

** **

Depreciation expense was $4,361, $4,709 and $2,223 forthe years ended December 31, 2002, 2001 and 2000, respectively.

 

The Company has signed a contract with an enterpriseresource planning system provider for the purchase of a system to beimplemented worldwide.  The Company paidapproximately $1,600 in the fourth quarter of 2002 and expects the total costof implementing the system to be in the range of $11,000 to $12,200.  The Company expects the system to beimplemented and operational by the middle of 2004.

 

In February 2003 the Company agreed in principle,subject to completion of inspections and signing of definitive contracts, topurchase a facility in Shannon, Ireland for approximately 6,000 euros toreplace the Company’s currently leased space, also in Shannon.  The Company expects to occupy the facilityin the summer of 2003.

 

**8.            **Goodwill and OtherIntangible Assets

** **

**Effective January 1, 2002, the Company adoptedStatements of Financial Accounting Standards No. 142, *Goodwill and Intangible Asset*sand No. 141, *Business Combinations*, which were issued by the FinancialAccounting Standards Board in July 2001. Under these standards, the Company ceased amortizing goodwill totaling$188,000 (including $2,000, net of $1,400 of accumulated amortization for theassembled workforce, classified as other intangible assets as of December 31,2001) as of January 1, 2002.  Thefinancial statements for the year ended December 31, 2001 includedapproximately $111,000 of amortization expense under the previous standards.**

** **

**The following tables present the impact of the newstandards on income (loss) from operations, net loss and loss per share, as ifthey had been in effect for the year ended December 31, 2001.**

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

** **

** **

**46**

----

** **

**Acquired other intangible assets subject toamortization, including the intangible assets from the 2C acquisition detailedin Note 3, are as follows:**

** **
|                              |   | **December  31, 2002**         |    | **December  31, 2001**          |   |
|-----------------------------------|--------|--------------------------------|---------|---------------------------------|--------|
|                              |   | **Gross   Carrying   Amounts** |    | **Accumulated    Amortization** |   | **Gross   Carrying   Amounts** |   | **Accumulated    Amortization** |   |
| Developed  technology             |   | $                              | 65,740  |                            | $      | 32,869 |   | $ | 65,740 |   | $ | 19,931 |   |
| Patents and  trademarks           |   | 17,350                         |    | 5,663                           |   | 15,966 |   | 2,928 |   |
| Customer base  and certifications |   | 21,113                         |    | 16,013                          |   | 19,500 |   | 9,333 |   |
| Non-compete  agreements           |   | 3,273                          |    | 364                             |   | — |   | — |   |
| Assembled  workforce              |   | —                         |    | —                          |   | 3,400 |   | 1,400 |   |
| Other                             |   | 101                            |    | 67                              |   | — |   | — |   |
|                              |   | $                              | 107,577 |                            | $      | 54,976 |   | $ | 104,606 |   | $ | 33,592 |   |

** **

**For the years ended December 31, 2002 and 2001,amortization expense for other intangible assets was $22.2 million and $21.9million, respectively.  The approximatefuture annual amortization for other intangible assets is as follows:**

** **

| **Years ending   December 31:** |   |   |   |
|---------------------------------|--------|--------|--------|
| 2003                            |   | $      | 21,200 |   |
| 2004                            |   | $      | 17,300 |   |
| 2005                            |   | $      | 10,500 |   |
| 2006                            |   | $      | 2,100  |   |
| 2007                            |   | $      | 1,500  |   |

** **

**In accordance with SFAS No. 142, the Companycompleted a transitional impairment test of all goodwill and intangible assetsas of January 1, 2002.**  The test concluded that noadjustment was required upon adoption. Additionally, the Company performed an annual impairment test ofgoodwill in the fourth quarter of 2002, as prescribed by this standard.  The test in the fourth quarter concludedthat there had been no impairment of goodwill and that no adjustment wasrequired.

 

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

** **

**9.            Product Warranties**

 

                The activitywithin the liability for warranty returns in 2002 is as follows:

 

|                                                      |   | **2002** |   |
|-----------------------------------------------------------|--------|----------|--------|
|                                                      |   |     |   |
| Balance, January  1                                       |   | $        | 4,157  |   |
|                                                      |   |     |   |
| Accruals for  product warranties issued during the period |   | 398      |   |
| Accruals for  pre-existing warranties                     |   | —   |   |
| Settlements made  during the period                       |   | (2,132   | )      |
| Warranty  liability assumed upon the acquisition of 2C    |   | 12       |   |
|                                                      |   |     |   |
| Balance,  December 31                                     |   | $        | 2,435  |   |

 

47

----

 

** **

**10.          Income Taxes**

 

The provision for (benefit from) income taxes for theyears ended December 31, 2002, 2001 and 2000 is comprised of the following:

 
|                                             |   | **2002** |   | **2001** |   | **2000** |   |
|--------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| U.S. operations:                                 |   |     |   |     |   |     |   |
| Current:                                         |   |     |   |     |   |     |   |
| Federal                                          |   | $        | 8,262  |     | $      | 12,174   |   | $ | 17,144 |   |
| State                                            |   | (1,468   | )      | (309     | )      | 935      |   |
|                                             |   |     |   |     |   |     |   |
|                                             |   | 6,794    |   | 11,865   |   | 18,079   |   |
| Deferred:                                        |   |     |   |     |   |     |   |
| Federal                                          |   | (4,615   | )      | (14,517  | )      | (3,948   | )      |
| State                                            |   | (677     | )      | (821     | )      | (208     | )      |
|                                             |   |     |   |     |   |     |   |
|                                             |   | (5,292   | )      | (15,338  | )      | (4,156   | )      |
|                                             |   |     |   |     |   |     |   |
| Total U.S. operations  tax provision (benefit)   |   | 1,502    |   | (3,473   | )      | 13,923   |   |
| Total foreign  operations tax provision          |   | 3,000    |   | 526      |   | 630      |   |
|                                             |   |     |   |     |   |     |   |
| Total provision  for (benefit from) income taxes |   | $        | 4,502  |     | $      | (2,947   | )      | $ | 14,553 |   |

 

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

 
|                                                                  |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Computed  “expected” federal income tax provision (benefit) |   | $        | 5,334  |     | $      | (113,195 | )      | $ | (40,601 | ) |
| Add (deduct):                                                         |   |     |   |     |   |     |   |
| Foreign sales  corporation income                                     |   | (29      | )      | (305     | )      | (798     | )      |
| State income tax  deduction                                           |   | (1,041   | )      | (499     | )      | (140     | )      |
| Tax effect  resulting from foreign activities                         |   | (6,154   | )      | (1,741   | )      | (1,472   | )      |
| Acquired  in-process research and development                         |   | 2,100    |   | 1,599    |   | 32,900   |   |
| Goodwill  amortization and write-off of intangibles                   |   | —   |   | 106,830  |   | 18,257   |   |
| Compensation  expense                                                 |   | 3,897    |   | 5,599    |   | 2,190    |   |
| Acquisition  expenses                                                 |   | —   |   | —   |   | 2,485    |   |
| Other                                                                 |   | 395      |   | (1,235   | )      | 1,732    |   |
|                                                                  |   |     |   |     |   |     |   |
|                                                                  |   | $        | 4,502  |     | (2,947 | )        | $      | 14,553 |   |
|                                                                       |        |          |        |          |        |          |        |  |  |  |

 

48

----

The components of the net deferred income tax assetsand liabilities at December 31, 2002 and 2001, are as follows:

 
|                                                            |   | **2002** |    | **2001** |   |
|-----------------------------------------------------------------|--------|----------|---------|----------|--------|
| Net current  deferred income tax assets:                        |   |     |    |     |   |
| Allowance for  doubtful accounts                                |   | $        | 661     |     | $      | 1,919 |   |
| Allowance for  sales returns and liability for warranty returns |   | 1,928    |    | 1,932    |   |
| Inventory  reserves                                             |   | 2,511    |    | 4,546    |   |
| Other                                                           |   | 832      |    | 558      |   |
|                                                            |   |     |    |     |   |
|                                                            |   | $        | 5,932   |     | $      | 8,955 |   |
|                                                            |   |     |    |     |   |
| Net noncurrent  deferred income tax liabilities:                |   |     |    |     |   |
| Accumulated  depreciation                                       |   | $        | (1,682  | )        | $      | (1,627 | ) |
| Foreign  subsidiary intangibles                                 |   | 2,039    |    | 2,005    |   |
| Acquired  in-process research and development expenses          |   | 1,236    |    | 1,322    |   |
| Acquired  intangible assets                                     |   | (19,867  | )       | (25,043  | )      |
| Loss on  write-down of investments                              |   | 1,753    |    | 1,884    |   |
| Other                                                           |   | 2,347    |    | 1,295    |   |
|                                                            |   |     |    |     |   |
|                                                            |   | (14,174  | )       | (20,164  | )      |
| Less valuation  allowance                                       |   | (2,039   | )       | (2,005   | )      |
|                                                            |   |     |    |     |   |
|                                                            |   | $        | (16,213 | )        | $      | (22,169 | ) |

 

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

 

**11.          Stockholders’ Equity**

 

**Preferred Stock** - The Company has 5,000 shares of $0.001 par valuepreferred stock authorized and no shares issued and outstanding at December 31,2002 and 2001.

 

**Common Stock** - The Company has 200,000 shares of $0.001 par valuecommon stock authorized.  There were45,210 and 44,650 shares issued and outstanding at December 31, 2002 and 2001,respectively.  Upon the merger of Apexand Cybex to form Avocent on July 1, 2000, each share of Apex common stock wasexchanged for 1.0905 shares of Avocent common stock.  All capital stock and stock option information included in theseconsolidated financial statements and related notes have been given retroactiveeffect for this exchange rate.

 

49

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

 

A summary of thecalculation of basic and diluted earnings (loss) per share (EPS) for the yearsended December 31, 2002, 2001 and 2000, is as follows:

 
|                                                                 |   | **Income   (loss)   (Numerator)** |     | **Shares   (Denominator)** |   | **Per-Share   Amount** |   |
|----------------------------------------------------------------------|--------|-----------------------------------|----------|----------------------------|--------|------------------------|--------|
|                                                                 |   |                              |     |                       |   |                   |   |
| **For  the Year Ended December 31, 2002**                            |   |                              |     |                       |   |                   |   |
| **Basic  EPS**                                                       |   |                              |     |                       |   |                   |   |
| Net income  available to common stockholders                         |   | $                                 | 10,738   |                       | 44,977 |                   | $      | 0.24 |   |
| **Effect  of Dilutive Securities**                                   |   |                              |     |                       |   |                   |   |
| Stock options                                                        |   |                              |     | 572                        |   |                   |   |
| **Diluted  EPS**                                                     |   |                              |     |                       |   |                   |   |
| Net income  available to common stockholders and assumed conversions |   | $                                 | 10,738   |                       | 45,549 |                   | $      | 0.24 |   |
|                                                                 |   |                              |     |                       |   |                   |   |
| **For  the Year Ended December 31, 2001**                            |   |                              |     |                       |   |                   |   |
| **Basic  EPS**                                                       |   |                              |     |                       |   |                   |   |
| Net loss  available to common stockholders                           |   | $                                 | (320,466 | )                          | 44,374 |                   | $      | (7.22 | ) |
| **Effect  of Dilutive Securities**                                   |   |                              |     |                       |   |                   |   |
| Stock options                                                        |   |                              |     | —                     |   |                   |   |
| **Diluted  EPS**                                                     |   |                              |     |                       |   |                   |   |
| Net loss  available to common stockholders and assumed conversions   |   | $                                 | (320,466 | )                          | 44,374 |                   | $      | (7.22 | ) |
|                                                                 |   |                              |     |                       |   |                   |   |
| **For  the Year Ended December 31, 2000**                            |   |                              |     |                       |   |                   |   |
| **Basic  EPS**                                                       |   |                              |     |                       |   |                   |   |
| Net loss  available to common stockholders                           |   | $                                 | (130,556 | )                          | 33,266 |                   | $      | (3.92 | ) |
| **Effect  of Dilutive Securities**                                   |   |                              |     |                       |   |                   |   |
| Stock options                                                        |   |                              |     | —                     |   |                   |   |
| **Diluted  EPS**                                                     |   |                              |     |                       |   |                   |   |
| Net loss  available to common stockholders and assumed conversions   |   | $                                 | (130,556 | )                          | 33,266 |                   | $      | (3.92 | ) |

 

At December 31, 2002, 2001 and 2001, options topurchase 5,470, 7,188 and 5,825 shares of common stock, respectively, wereoutstanding but were not included in the computation of diluted net earnings(loss) per share because inclusion of such options would have been anti-dilutive.

 

**13.          Commitments and Contingencies**

 

The Company leases buildings and certain equipmentunder various operating leases. Rent expense under these leases totaledapproximately $2,882, $2,871 and $1,503 for the years ended December 31, 2002,2001 and 2000, respectively.  Futureminimum rental payments under non-cancelable operating leases are approximatelyas follows:

 
| **Year ending   December 31:** |   |   |   |
|--------------------------------|--------|--------|--------|
| 2003                           |   | $      | 1,629  |   |
| 2004                           |   | 1,275  |   |
| 2005                           |   | 1,068  |   |
| 2006                           |   | 826    |   |
| 2007                           |   | 773    |   |
| Thereafter                     |   | 968    |   |
|                           |   |   |   |
|                           |   | $      | 6,539  |   |

 

These rental payments exclude futurerentals on the Shannon, Ireland leased facility after the move to the Company’spurchased facility described in Note 7. The Company paid a lease termination penalty of approximately $500,000on February 27, 2003 upon notification to the landlord of the Company’sintentions to cancel the lease.  Thispayment will be expensed in the first quarter of 2003.

 

The Company has been involved from time totime in litigation in the normal course of business. Management is not aware ofany pending or threatened litigation matters that will have a material adverseeffect on the Company’s business, operations, financial condition or cash flows(*see Note19*).

 

50

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**14.          Related Party Transactions**

 

In the third quarter of 2002, the Companyengaged Mirecho Labs, Inc., a privately-held company based in Acton,Massachusetts, to provide software research and development services to supportthe Company’s recently acquired 2C product line.  Victor Odryna is one of Mirecho’s founders and serves as Presidentand Chief Executive Officer.  ThroughJuly 2001, Mr. Odryna was Avocent’s Senior Vice President of CorporateStrategic Marketing.  During the secondquarter of 2002 two of the Company’s officers, Douglas E. Pritchett, SeniorVice President of Finance, Chief Financial Officer, Treasurer and AssistantSecretary, and Kieran MacSweeney, Managing Director of InternationalOperations, and the Chairman of the Board of Directors, Stephen F. Thornton,invested a total of $175 in Mirecho. The Company paid Mirecho $200 for research and development servicesperformed prior to termination of the agreement on November 1, 2002.  The cost of these research and developmentservices was expensed during 2002.  SeeNote 2 for further disclosure related to the acquisition of 2C and Note 5 forfurther disclosure related to the investment in Rymic.

 

 

**15.          Stock Option and Stock Purchase Plans**

 

The Company has stock option plans coveringsubstantially all of its employees and directors. Avocent assumed the stockoption plans and the related underlying options of Apex and Cybex at the mergereffective July 1, 2000, of Equinox at the acquisition effective January 3, 2001and of 2C at the acquisition effective August 20, 2002. No additional optionshave been or will be granted under these pre-existing plans. Optionsoutstanding under the Apex plan were converted to Avocent options at 1.0905 peroutstanding option. Options outstanding under the Cybex plans were converted ona one-for-one basis. Options outstanding under the Equinox plan were convertedto Avocent options at 0.4575 per outstanding option.  Options outstanding under the 2C plan were converted to Avocentoptions at 0.3553 per outstanding option.

 

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

 

Cybex had adopted three plans, includingthe 1995 Employee Stock Option Plan (the Plan), the 1995 Outside DirectorsOption Plan (the 1995 Plan), and the 1998 Employee Stock Incentive Plan (the1998 Plan). The 1995 Employee Stock Option Plan provided for nonqualified and incentive stock optionsfor officers and employees. At the time ofthe merger there were options to purchase 1,167 shares of common stockoutstanding under the Plan. Options under the Plan will generally expire 10years from the date of grant. Purchase prices for common stock subject tooptions issued under the Plan generally approximate the fair market value ofthe related shares at the date of grant. Generally, options vest over fiveyears.

 

The 1995 Outside Directors Plan provided for nonqualified options foroutside directors. At the time of themerger there were options to purchase 37 shares of common stock outstandingunder the 1995 Plan. Options under the 1995 Plan will generally expire 5 yearsfrom the date of grant. Purchase prices for common stock subject to optionsissued under the 1995 Plan generally approximate the fair market value of therelated shares at the date of grant. Options vest and become exercisableimmediately upon issuance.

 

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

 

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

 

2C had adopted an option plan(the 2C Plan) thatprovided for nonqualified stock options forofficers, directors and employees.  Atthe time of the merger there were options to purchase 152 shares (afterconversion to Avocent options at 0.3553 per outstanding option) of common stockoutstanding under the 2C Plan.  Optionsunder this plan generally expire 10 years from the date of grant. Purchaseprices for common stock subject to options issued under the 2C Plan generallyapproximate the fair market value of the related shares at the date of grant.Generally, options vest annually over two years.

 

51

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

 

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

 

Pertinent information regarding the Company’s plans isas follows:

 
|                                             |   | **Number of   Options** |   | **Range of   Exercise   Prices** |   | **Weighted   Average   Exercise   Price** |   |
|--------------------------------------------------|--------|-------------------------|--------|----------------------------------|--------|-------------------------------------------|--------|
| Options  outstanding, December 31, 1999          |   | 3,600                   |   | $0.11 – $22.01              |   | $                                         | 11.35  |   |
| Options assumed  due to merger of Apex and Cybex |   | 2,375                   |   | $3.78 – $37.45              |   | $                                         | 13.82  |   |
| Options granted                                  |   | 2,247                   |   | $24.00 – $70.94             |   | $                                         | 49.59  |   |
| Options  forfeited and cancelled                 |   | (356                    | )      | $5.50 – $58.50              |   | $                                         | 13.37  |   |
| Options  exercised                               |   | (2,032                  | )      | $0.11 – $27.17              |   | $                                         | 9.88   |   |
|                                             |   |                    |   |                             |   |                                      |   |
| Options  outstanding, December 31, 2000          |   | 5,834                   |   | $0.11 – $70.94              |   | $                                         | 27.52  |   |
| Options assumed  due to acquisition 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  due to 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  |   |

 

Included in the stock options outstanding at December31, 2001, were 290 shares for which vesting was accelerated as the result ofemployment agreements for certain employees that terminated during 2001.  These options would have been forfeited hadthe vesting not been accelerated.  As aresult, the Company recorded compensation expense in 2001 of approximately$2,600 based on the excess of the intrinsic value at the acceleration date overthe intrinsic value at the grant date. There were no options with accelerated vesting outstanding as ofDecember 31, 2002. However, in the first quarter of 2002, the Company allowedshares issued upon the exercise of certain stock options by a former executiveof the Company to be traded as payment for the cost of the options and relatedtaxes.  Under applicable accountingrules, this cashless exercise required variable plan accounting for theseoptions.  As a result, the Companyrecorded approximately $2,000 of compensation expense in the first quarter of2002.

 

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

 

52

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The following table summarizes information about stockoptions outstanding at December 31, 2002:

 
|                          |   | **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            |   | 665                      |   | 4.98                                                 |   | $ | 8.02 |   | 517 |   | $ | 7.61 |   |
| $10.05 – $20.00          |   | 1,937                    |   | 6.58                                                 |   | $ | 13.92 |   | 1,305 |   | $ | 13.17 |   |
| $20.10 – $29.38          |   | 3,575                    |   | 8.54                                                 |   | $ | 22.79 |   | 1,285 |   | $ | 23.41 |   |
| $30.21 – $44.25          |   | 74                       |   | 7.09                                                 |   | $ | 33.05 |   | 39 |   | $ | 32.50 |   |
| $46.19 – $70.94          |   | 1,692                    |   | 7.72                                                 |   | $ | 52.52 |   | 1,089 |   | $ | 52.52 |   |
|                          |   |                     |   |                                                 |   |   |   |   |   |   |   |
|                          |   | 7,943                    |   |                                                 |   |   |   | 4,235 |   |   |   |

 

The options above were issued with exercise pricesthat approximated fair value at the date of grant. At December 31, 2002, 1,132shares are available for grant under the Company’s stock option plans.

 

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

 

On December 6, 2000, the stockholders approved anemployee stock purchase plan for all Avocent employees (the AESPP), throughwhich qualified employees may participate in common stock ownership. The AESPPqualifies as a non-compensatory plan under Section 423 of the Internal RevenueCode. The Company has reserved 1,500 shares of common stock for issuance underthe AESPP. The price of stock purchased under the AESPP is generally 85% of thelower of the fair market value of the common stock (i) at the beginning of theoffering period or (ii) at the end of the purchase period. In the event thefair market value at the end of a purchase period is less than the fair marketvalue at the beginning of the offering period, the participants will bewithdrawn from the current offering period following exercise and automaticallyre-enrolled in a new offering period. The new offering period will use thelower fair market value as of the first date of the new offering period todetermine the purchase price for future purchase periods. The AESPPadministrator administers and interprets all rules and regulations applicableto the AESPP.  Pursuant to the AESPP, 78shares were issued at a weighted average price of $16.01 per share for the yearended December 31, 2002 and 37 shares were issued at a weighted average priceof $21.63 per share for the year ended December 31, 2001.  There were no shares issued under the AESPPas of December 31, 2000.

** **

**16.          Retirement Plans**

 

The Company sponsors a 401(k) savings plan coveringsubstantially all U.S. employees and a profit-sharing plan coveringsubstantially all international employees. Under the 401(k) savings plan, the Company will match 50% of anemployee’s contributions up to 6% of the employee’s compensation. The Companymay also elect to make discretionary contributions as determined by its Boardof Directors. No discretionary contributions were made during the years endedDecember 31, 2002, 2001 or 2000 under the 401(k) savings plan. The Company’sexpense for contributions under these plans totaled approximately $907, $710and $449 for the years ended December 31, 2002, 2001 and 2000, respectively.

 

**17.          Segment Reporting**

 

The Company reports operations as a single operatingsegment. However, the Company reports sales by geographic region.  Following is a presentation of sales bygeographic region for the years ended December 31, 2002, 2001 and 2000:

 
|               |   | **2002** |    | **2001** |   | **2000** |   |
|--------------------|--------|----------|---------|----------|--------|----------|--------|
| Net sales:         |   |     |    |     |   |     |   |
| United States      |   | $        | 155,589 |     | $      | 159,799  |   | $ | 138,249 |   |
| Rest of the  World |   | 105,011  |    | 96,112   |   | 84,123   |   |
|               |   |     |    |     |   |     |   |
|               |   | $        | 260,600 |     | $      | 255,911  |   | $ | 222,372 |   |

** **

**TheCompany sells its products internationally to customers in severalcountries.  Sales to customers in theUnited Kingdom accounted for $38,559, $37,551 and $19,892 in 2002, 2001 and2000, respectively.  No other countryaccounted for more than**

** **

**53**

----

** **

**10%of sales in 2002, 2001 or 2000.**

** **

**Asof December 31, 2002, long-lived assets totaled $282,262, which includes$280,513 held in the U.S. and $1,749 held outside of the U.S.  As of December 31, 2001, long- lived assetstotaled $280,423, which includes $278,118 held in the U.S. and $2,305 heldoutside of the U.S.**

** **

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

 

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

 
|                               |   | **Three  Months Ended** |    |
|------------------------------------|--------|-------------------------|---------|
|                               |   | **March 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 |   |
|                               |   |                    |    |
|                               |   | **Three  Months Ended** |    |
|                               |   | **March 30,   2001**    |    | **June 29,   2001** |   | **September  28,   2001** |   | **December  31,   2001** |   |
| Net sales                          |   | $                       | 73,174  |   | $ | 65,079 |   | $ | 55,095 |   | $ | 62,563 |   |
| Gross profit                       |   | $                       | 35,834  |   | $ | 19,071 |   | $ | 24,946 |   | $ | 26,135 |   |
| Income (loss)  from operations (2) |   | $                       | (27,130 |   | $ | (40,961 | ) | $ | (31,881 | ) | $ | (224,176 | ) |
| Net income  (loss) (2)             |   | $                       | (28,123 | ) | $ | (36,855 | ) | $ | (29,259 | ) | $ | (226,229 | ) |
| Net income  (loss) per share (1):  |   |                    |    |   |   |   |   |   |   |
| Basic                              |   | $                       | (0.64   | ) | $ | (0.83 | ) | $ | (0.66 | ) | $ | (5.07 | ) |
| Diluted                            |   | $                       | (0.64   | ) | $ | (0.83 | ) | $ | (0.66 | ) | $ | (5.07 | ) |
|                                    |        |                         |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(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 valueof the Company’s Common stock during the year and the effect these variationshad on the shares outstanding calculation.

 

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

 

**19.          PatentDispute**

 

In May 2001, Avocent RedmondCorp. (the Company’s wholly-owned subsidiary formerly known as Apex) filed acomplaint for patent infringement in the United States District Court for theSouthern District of New York against Raritan Computer Inc.  The Raritan complaint sought injunctiverelief, damages, attorney’s fees and costs under three patents.  After a seven day bench trial in New York,U.S. District Judge Milton Pollack reached a decision in the first quarter of2002 that there was no infringement of the three patents by Raritan and orderedthat judgment be entered in favor of Raritan. Accordingly, the Company expensed $2,700 in legal fees incurred to dateduring the quarter ended March 29, 2002 due to the uncertainty of the outcomeof litigation.  Approximately$1,800 of these fees were deferred from previous periods (which were includedas other intangible assets at December 31, 2001) and $900 of fees were incurredduring the quarter ended March 29, 2002.** **The Company isin the process of appealing the judgment, and oral arguments before theappellate court were held in December of 2002.

 

54

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**Item 9.  Changes inand Disagreements With Accountants on Accounting and Financial Disclosure.**

 

None.

 

**PART III**

 

Information withrespect to Items 10 through 13 of this Part III may be found in thedefinitive proxy statement to be delivered to stockholders in connection withthe 2003 Annual Meeting of Stockholders. Such information is incorporatedherein by reference.

 

**Item 14. Disclosure Controls and Procedures.**

 

(a) *Evaluation of disclosure controls and procedures.*    Based on their evaluation as of a datewithin 90 days of the filing date of this Annual Report on Form 10-K, our ChiefExecutive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)under the Securities Exchange Act of 1934) are effective to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in Securities and Exchange Commission rules andforms.

 

(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.

 

55

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**PART IV**

 

**Item15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.**

 

**(a) Financial Statement Schedules**

 

**Schedule of Valuation and QualifyingAccounts**

*For the years ended December 31,2002, 2001 and 2000 (in thousands)*

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

----

(1)           Theseare the balances assumed from the acquisition of Cybex Computer ProductsCorporation during 2000, from the acquisition of Equinox Systems Inc. in 2001and from the acquisition of 2C Computing, Inc. in 2002.

 

(2)           Additionsto income and deductions from reserves for valuation and qualifying accountswere netted for presentation purposes due to being insignificant to theDecember 31, 2000 financial statements.

 

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  Bylaws of Avocent Corporation                                                                                                                                           |   |                          |   |   |   |   |   |   |   | X |
| 10.2                 |   | Apex  Inc. 1995 Employee Stock Plan                                                                                                                                              |   | SB-2                          |   | Apex |   | 12/12/96 |   | Ex.  10.9 |   |   |
| 10.2.1               |   | Form  of Nonstatutory Stock Option Letter Agreement related to Apex Inc. 1995  Employee Stock Plan                                                                               |   | SB-2                          |   | Apex |   | 12/12/96 |   | Ex.  10.10 |   |   |
| 10.3                 |   | Cybex  Computer Products Corporation 1995 Employee Stock Option Plan                                                                                                             |   | S-1                           |   | Cybex |   | 7/26/95 |   | Ex.  10.3 |   |   |
| 10.4                 |   | Cybex  Computer Products Corporation 1995 Outside Directors Stock Option Plan                                                                                                    |   | S-1                           |   | Cybex |   | 7/26/95 |   | Ex.  10.4 |   |   |
| 10.5                 |   | Cybex  Computer Products Corporation 1998 Employee Stock Incentive Plan                                                                                                          |   | 10-K                          |   | Cybex |   | 6/26/98 |   | Ex.  10.7 |   |   |
| 10.6                 |   | Apex  Inc. Employee Stock Purchase Plan                                                                                                                                          |   | SB-2                          |   | Apex |   | 12/12/96 |   | Ex.  10.11 |   |   |
| 10.7                 |   | Equinox  Systems Inc. 1992 Non-Qualified Stock Option Plan                                                                                                                       |   | S-8                           |   | AVCT |   | 1/23/01 |   | Ex.  4.6 |   |   |
| 10.8                 |   | Equinox  Systems Inc. 1993 Stock Option Plan                                                                                                                                     |   | S-8                           |   | AVCT |   | 1/23/01 |   | Ex.  4.7 |   |   |
| 10.9                 |   | Equinox  Systems Inc. Directors Stock Option Plan                                                                                                                                |   | S-8                           |   | AVCT |   | 1/23/01 |   | Ex.  4.8 |   |   |
| 10.10                |   | Equinox  Systems Inc. 2000 Directors Stock Option Plan                                                                                                                           |   | S-8                           |   | AVCT |   | 1/23/01 |   | Ex.  4.9 |   |   |
| 10.17                |   | Employment  and Non-competition Agreement dated March 7, 2000 by and between  Apex Inc. and C. David Perry                                                             |   | S-4/A                         |   | AVCT |   | 5/30/00 |   | Ex.  10.17 |   |   |
| 10.19                |   | Amendment  Agreement dated March 7, 2000 by and between Apex Inc. and Kevin J.  Hafer                                                                                  |   | 10-K                          |   | Apex |   | 5/30/00 |   | Ex.  10.3.3 |   |   |
| 10.19.1              |   | First  Amendment to Amendment Agreement dated December 1, 2000 between Apex  Inc. and Kevin J. Hafer                                                                        |   | 10-K                          |   | AVCT |   | 3/27/01 |   | Ex  10.19.1 |   |   |
| 10.20                |   | Purchase  Agreement dated September 19, 1994 between Apex Inc. and Compaq  Computer Corporation, as amended                                                            |   | SB-2                          |   | Apex |   | 12/12/96 |   | Ex.  10.6 |   |   |
|                      |        |                                                                                                                                                                                  |        |                               |  |  |  |  |  |  |  |  |  |

 

57

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| 10.21   |   | Amendment  to Purchase Agreement effective as of August 6, 1998 between  Apex Inc. and Compaq Computer Corporation(2)                                  |   | 10-Q |   | Apex |   | 11/9/98  |   | Ex.  10.6.2  |   |   |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|--------|------|--------|----------|--------|--------------|--------|--------|
| 10.22   |   | Amended  and Restated Employment and Noncompetition Agreement among Avocent Employment  Services Company, the Company, and R. Byron Driver                       |   | 10-Q |   | AVCT |   | 9/29/00  |   | Ex.  10.1    |   |   |
| 10.23   |   | Amended  and Restated Employment and Noncompetition Agreement among Apex, Inc.,  the Company, and Barry L. Harmon                                           |   | 10-Q |   | AVCT |   | 9/29/00  |   | Ex.  10.2    |   |   |
| 10.23.1 |   | Separation  and General Release Agreement among the Company, Apex Inc., and Barry L.  Harmon                                                                     |   | 10-Q |   | AVCT |   | 11/13/01 |   | Ex  10.23.1  |   |   |
| 10.24   |   | Amended  and Restated Employment and Noncompetition Agreement among Avocent Employment  Services Company, the Company, and Gary R. Johnson                       |   | 10-Q |   | AVCT |   | 9/29/00  |   | Ex.  10.3    |   |   |
| 10.25   |   | Amended  and Restated Employment and Noncompetition Agreement among Avocent  International Ltd., the Company, and Kieran MacSweeney                         |   | 10-Q |   | AVCT |   | 9/29/00  |   | Ex.  10.4    |   |   |
| 10.27   |   | Amended  and Restated Employment and Noncompetition Agreement among Avocent Employment  Services Company, the Company, and Douglas E. Pritchett                  |   | 10-Q |   | AVCT |   | 9/29/00  |   | Ex.  10.6    |   |   |
| 10.28   |   | Amended  and Restated Employment and Noncompetition Agreement among Apex, Inc.,  the Company, and Samuel F. Saracino                                        |   | 10-Q |   | AVCT |   | 9/29/00  |   | Ex.  10.7    |   |   |
| 10.29   |   | Amended  and Restated Employment and Noncompetition Agreement among Avocent Employment  Services Company, the Company, and Christopher L. Thomas                 |   | 10-Q |   | AVCT |   | 9/29/00  |   | Ex.  10.8    |   |   |
| 10.30   |   | Amended  and Restated Employment and Noncompetition Agreement among Avocent Employment  Services Company, the Company, and Stephen F. Thornton                   |   | 10-Q |   | AVCT |   | 9/29/00  |   | Ex.  10.9    |   |   |
| 10.30.1 |   | Amended  and Restated Amendment Agreement among the Company, Avocent Employment  Services Company, Cybex Computer Products Corporation, and Stephen F.  Thornton |   | 10-Q |   | AVCT |   | 8/9/02   |   | Ex.  10.30.1 |   |   |
| 10.31   |   | Amended  and Restated Employment and Noncompetition Agreement among Avocent Employment  Services Company, the Company, and Doyle C. Weeks                        |   | 10-Q |   | AVCT |   | 9/29/00  |   | Ex.  10.10   |   |   |
| 10.32   |   | Form  of Avocent Corporation Indemnification Agreement for Officers and Directors                                                                                |   | 10-Q |   | AVCT |   | 9/29/00  |   | Ex.  10.11   |   |   |

 

58

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| 10.33   |   | Avocent  Corporation 2000 Transition Nonstatutory Stock Option Plan                                                                                                                      |   | 10-Q        |   | AVCT   |   | 9/29/00 |   | Ex.  10.12   |   |   |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|--------|--------|---------|--------|--------------|--------|--------|
| 10.34   |   | Avocent  Corporation 2000 Stock Option Plan                                                                                                                                              |   | Sched.  14A |   | AVCT   |   | 11/3/00 |   | App.  A      |   |   |
| 10.35   |   | Avocent  Corporation 2000 Employee Stock Purchase Plan                                                                                                                                   |   | Sched.  14A |   | AVCT   |   | 11/3/00 |   | App.  B      |   |   |
| 10.36   |   | Employment  and Noncompetition Agreement among Cybex Computer Products Corporation, the  Company, and John R. Cooper                                                                     |   | 10-K        |   | AVCT   |   | 3/29/02 |   | Ex.  10.36   |   |   |
| 10.37.1 |   | 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                                                                                                                                                     |   |        |   |   |   |    |   |         |   | X      |
| 23.1    |   | Consent  of PricewaterhouseCoopers LLP, Independent Accountants                                                                                                                          |   |        |   |   |   |    |   |         |   | X      |
| 24.1    |   | Power  of Attorney(3)                                                                                                                                                                    |   |        |   |   |   |    |   |         |   | X      |
| 99.1    |   | Certification of the Chief Executive Officer and  the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |   |        |   |   |   |    |   |         |   | X      |

----

| (1)    |   | The following  abbreviations are used to identify corporate entities:                         |
|--------|--------|-----------------------------------------------------------------------------------------------|
|   |   |                                                                                          |
|   |   | AVCT = Avocent  Corporation                                                         |
|   |   |                                                                                          |
|   |   | AGI = Aegean  Sea Inc. (now known as Avocent Corporation)                      |
|   |   |                                                                                          |
|   |   | Apex = Apex Inc.  (now known as Avocent Redmond Corp.)                         |
|   |   |                                                                                          |
|   |   | Cybex = Cybex  Computer Products Corporation (now know as Avocent Huntsville Corp.) |
|   |   |                                                                                          |
| (2)    |   | Confidential treatment  has previously been requested for portions of these documents.        |
|   |   |                                                                                          |
| (3)    |   | Set forth on page 60  and incorporated herein by reference.                                   |

 

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

 

                On November 1,2002, we filed a Report on Form 8-Kwith the SEC announcing that our Board of Directors had voted to expandfrom seven to nine members and had elected two new members to the Board.

 

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 27, 2003 |

 

**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 in connectionwith this Form 10-K Report. Without limiting the generality of theforegoing power and authority, the powers granted include the power andauthority to sign the names of the undersigned officers and directors in thecapacities indicated below to this Form 10-K Report of amendments orsupplements thereto, and each of the undersigned hereby ratifies and confirmsall that said attorneys and agents or either of them, shall do or cause to bedone by virtue hereof. This Power of Attorney may be signed in severalcounterparts.

 

                IN WITNESSWHEREOF, each of the undersigned has executed this Power of Attorney as of thedate indicated opposite his name.

 

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

 
| **Signature**              |   | **Title**                                                                                      |   | **Date**       |
|----------------------------|--------|------------------------------------------------------------------------------------------------|--------|----------------|
|                       |   |                                                                                           |   |           |
| /s/ John R. Cooper         |   | President and   Chief Executive Officer and      Director                  |   | March 27, 2003 |
| 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 27, 2003 |
|                       |   |                                                                                           |   |           |
| /s/ Edward H.  Blankenship |   | Vice President of Accounting and Chief Accounting  Officer                                     |   | March 27, 2003 |
| Edward H. Blankenship      |   | (Principal Accounting Officer)                                                                 |   |           |
|                       |   |                                                                                           |   |           |
| /s/ Stephen F. Thornton    |   | Chairman of the Board and Director                                                             |   | March 27, 2003 |
| Stephen F. Thornton        |   |                                                                                           |   |           |
|                       |   |                                                                                           |   |           |
| /s/ Harold D. Copperman    |   | Director                                                                                       |   | March 27, 2003 |
| Harold D. Copperman        |   |                                                                                           |   |           |
|                       |   |                                                                                           |   |           |
| /s/ Francis A. Dramis, Jr. |   | Director                                                                                       |   | March 27, 2003 |
| Francis A. Dramis, Jr.     |   |                                                                                           |   |           |
|                       |   |                                                                                           |   |           |
| /s/ Barry L. Harmon        |   | Director                                                                                       |   | March 27, 2003 |
| Barry L. Harmon            |   |                                                                                           |   |           |
|                       |   |                                                                                           |   |           |
| /s/ Edwin L. Harper        |   | Director                                                                                       |   | March 27, 2003 |
| Edwin L. Harper            |   |                                                                                           |   |           |
|                       |   |                                                                                           |   |           |

 

60

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| /s/ William H. McAleer |   | Director |   | March 27, 2003 |
|------------------------|--------|----------|--------|----------------|
| William H. McAleer     |   |     |   |           |
|                   |   |     |   |           |
| /s/ David P. Vieau     |   | Director |   | March 27, 2003 |
| David P. Vieau         |   |     |   |           |
|                   |   |     |   |           |
| /s/ Doyle C. Weeks     |   | Director |   | March 27, 2003 |
| Doyle C. Weeks         |   |     |   |           |

 

61

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**Sarbanes-Oxley Act of 2002 Section 302(a)Certification of Chief Executive Officer**

I, JohnR. Cooper, certify that:

1.             Ihave reviewed this annual report on Form 10-K of Avocent Corporation;

2.             Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

4.             Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

a)             designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

b)            evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

c)             presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

5.             Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

a)             allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b)            anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

6.             Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

Date: March 27, 2003
|   |   |   |   |   |   |   |   |                                   |
|--------|--------|--------|--------|--------|--------|--------|--------|----------------------------------------|
|   |   |   |   |   |   |   |   | /s/ John R. Cooper                     |
|   |   |   |   |   |   |   |   | John R. Cooper                         |
|   |   |   |   |   |   |   |   | President and Chief Executive  Officer |

 

62

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**Sarbanes-Oxley Act of 2002 Section 302(a)Certification of Chief Financial Officer**

I,Douglas E. Pritchett, certify that:

1.             Ihave reviewed this annual report on Form 10-K of Avocent Corporation;

2.             Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

4.             Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

a)             designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

b)            evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

c)             presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

5.             Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

a)             allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b)            anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

6.             Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

Date: March 27, 2003
|   |   | /s/Douglas E. Pritchett                                                                         |
|--------|--------|-------------------------------------------------------------------------------------------------|
|   |   | Douglas E. Pritchett                                                                            |
|   |   | Senior  Vice President of Finance, Chief Financial Officer,   Treasurer and Assistant Secretary |

 

63

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