** **

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

**WASHINGTON, D.C. 20549**

 

# **FORM 10-Q**

 
| **(Mark One)** |
|----------------|
|           |
| **ý**     | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**For the quarterly period ended June28, 2002 or**

 
| **o** | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For the period from                 to                 /**

 

**Commission file number: 000-30575**

 

 

| **AVOCENT CORPORATION**                                           |
|-------------------------------------------------------------------|
| (Exact Name of  Registrant as Specified in Its Charter)           |
|                                                              |   |   |
| **Delaware**                                                      |   | **91-2032368** |
| (State or Other  Jurisdiction of   Incorporation or Organization) |   | (I.R.S. Employer  Identification Number) |
|                                                              |   |   |
| **4991  Corporate Drive   Huntsville, Alabama**                   |   | **35805** |
| (Address of Principal  Executive Offices)                         |   | (Zip Code) |
|                                                              |   |   |
| **256-430-4000**                                                  |
| (Registrant’s Telephone  Number, Including Area Code)        |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934, as amended, during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90 days.

 

ý  Yes  oNo

 

As of August 7, 2002, the number ofoutstanding shares of the Registrant’s Common Stock was 45,024,281.

 

 

----

 

**AVOCENT CORPORATION**

**FORM 10-Q**

**JUNE 28, 2002**

 

**INDEX**

 
|       | **Page(s)**                                                                                                                      |
|------------|----------------------------------------------------------------------------------------------------------------------------------|
| Part I     | Financial Information                                                                                                            |   |
|       |                                                                                                                             |
|       | Item  1.                                                                                                                         | Financial Statements |   |
|       |                                                                                                                             |
|       | Condensed  Consolidated Statements of Operations (unaudited) for the Three and Six  Months Ended June 28, 2002 and June 29, 2001 | 3 |
|       | Condensed  Consolidated Balance Sheets at June 28, 2002 (unaudited) and December 31,  2001                                       | 4 |
|       | Condensed  Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended  June 28, 2002 and June 29, 2001           | 5 |
|       |                                                                                                                             |   |
|       | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                | 6-11 |
|       |                                                                                                                             |   |
|       | Item  2.                                                                                                                         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 12-18 |
|       |                                                                                                                             |   |   |
|       | Item  3.                                                                                                                         | Quantitative  and Qualitative Disclosures about Market Risks | 19 |
|       |                                                                                                                             |   |   |
| Part  II   | Other Information                                                                                                                |   |
|       |                                                                                                                             |   |
|       | Item  1.                                                                                                                         | Legal Proceedings | 20 |
|       | Item  4.                                                                                                                         | Submission  of Matters to a Vote of Security Holders | 20 |
|       | Item  6.                                                                                                                         | Exhibits and Reports  on Form 8-K | 20 |
|       |                                                                                                                             |
| Signatures | 21                                                                                                                               |

 

2

----

 

**PART I****- FINANCIAL INFORMATION**

 

Item 1.  FinancialStatements

 

**AVOCENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(In thousands, except pershare data)

 
|                                                                      |   | **For the  three months ended** |   | **For the  six months ended** |   |
|---------------------------------------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                                                      |   | **June 28,  2002**              |   | **June 29,  2001**            |   | **June 28,  2002** |   | **June 29,  2001** |   |
|                                                                      |   | **(unaudited)**                 |   | **(unaudited)**               |   | **(unaudited)** |   | **(unaudited)** |   |
|                                                                      |   |                            |   |                          |   |   |   |   |   |
| Net sales                                                                 |   | $                               | 63,018 |                          | $      | 65,079 |   | $ | 125,122 |   | $ | 138,254 |   |
| Cost of sales                                                             |   | 31,402                          |   | 46,008                        |   | 63,243 |   | 83,349 |   |
| Gross profit                                                              |   | 31,616                          |   | 19,071                        |   | 61,879 |   | 54,905 |   |
|                                                                      |   |                            |   |                          |   |   |   |   |   |
| Research and  development expenses                                        |   | 6,972                           |   | 6,042                         |   | 13,409 |   | 11,735 |   |
| In-process  research and development expenses and other acquisition costs |   | —                          |   | —                        |   | — |   | 4,570 |   |
| Selling, general  and administrative expenses                             |   | 15,468                          |   | 20,613                        |   | 35,391 |   | 40,254 |   |
| Amortization of  intangible assets                                        |   | 5,297                           |   | 33,377                        |   | 10,594 |   | 66,437 |   |
| Total operating  expenses                                                 |   | 27,737                          |   | 60,032                        |   | 59,394 |   | 122,996 |   |
|                                                                      |   |                            |   |                          |   |   |   |   |   |
| Income (loss)  from operations                                            |   | 3,879                           |   | (40,961                       | )      | 2,485 |   | (68,091 | ) |
| Other income,  net                                                        |   | 1,244                           |   | 1,509                         |   | 2,608 |   | 2,810 |   |
|                                                                      |   |                            |   |                          |   |   |   |   |   |
| Income (loss)  before income taxes                                        |   | 5,123                           |   | (39,452                       | )      | 5,093 |   | (65,281 | ) |
| Provision for  (benefit from) income taxes                                |   | 1,556                           |   | (2,597                        | )      | 1,223 |   | (304 | ) |
|                                                                      |   |                            |   |                          |   |   |   |   |   |
| Net income  (loss)                                                        |   | $                               | 3,567  |                          | $      | (36,855 | ) | $ | 3,870 |   | $ | (64,977 | ) |
|                                                                      |   |                            |   |                          |   |   |   |   |   |
| Earnings (loss)  per share:                                               |   |                            |   |                          |   |   |   |   |   |
| Basic                                                                     |   | $                               | 0.08   |                          | $      | (0.83 | ) | $ | 0.09 |   | $ | (1.47 | ) |
| Diluted                                                                   |   | $                               | 0.08   |                          | $      | (0.83 | ) | $ | 0.08 |   | $ | (1.47 | ) |
|                                                                      |   |                            |   |                          |   |   |   |   |   |
| Weighted average  shares used in computing earnings per share:            |   |                            |   |                          |   |   |   |   |   |
| Basic                                                                     |   | 44,947                          |   | 44,307                        |   | 44,888 |   | 44,147 |   |
| Diluted                                                                   |   | 45,625                          |   | 44,307                        |   | 45,685 |   | 44,147 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

3

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**AVOCENT CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(In thousands, except pershare data)

 
|                                                                                                                                                                 |   | **June 28,  2002** |    | **December  31,  2001** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
| **ASSETS**                                                                                                                                                           |   | **(unaudited)**    |    | **(audited)**           |   |
| Current assets:                                                                                                                                                      |   |               |    |                    |   |
| Cash and cash  equivalents                                                                                                                                           |   | $                  | 62,394  |                    | $      | 80,506 |   |
| Investments  maturing within one year                                                                                                                                |   | 128,846            |    | 84,270                  |   |
| Accounts  receivable, net                                                                                                                                            |   | 34,634             |    | 49,091                  |   |
| Income taxes  receivable                                                                                                                                             |   | 1,185              |    | 2,330                   |   |
| Other  receivables, net                                                                                                                                              |   | 1,554              |    | 2,115                   |   |
| Inventories, net                                                                                                                                                     |   | 20,243             |    | 27,155                  |   |
| Other current  assets                                                                                                                                                |   | 1,753              |    | 2,134                   |   |
| Deferred tax  assets                                                                                                                                                 |   | 11,987             |    | 10,839                  |   |
| Total current  assets                                                                                                                                                |   | 262,596            |    | 258,440                 |   |
| Investments                                                                                                                                                          |   | 22,593             |    | 7,718                   |   |
| Property held  for lease, net                                                                                                                                        |   | 1,821              |    | 1,919                   |   |
| Property and  equipment, net                                                                                                                                         |   | 22,696             |    | 21,343                  |   |
| Goodwill                                                                                                                                                             |   | 188,489            |    | 186,147                 |   |
| Other intangible  assets, net                                                                                                                                        |   | 56,766             |    | 71,014                  |   |
| Other assets                                                                                                                                                         |   | 554                |    | 617                     |   |
|                                                                                                                                                                 |   | $                  | 555,515 |                    | $      | 547,198 |   |
|                                                                                                                                                                 |   |               |    |                    |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                       |   |               |    |                    |   |
| Current  liabilities:                                                                                                                                                |   |               |    |                    |   |
| Accounts payable                                                                                                                                                     |   | $                  | 7,922   |                    | $      | 8,579 |   |
| Accrued wages  and commissions                                                                                                                                       |   | 5,039              |    | 4,727                   |   |
| Accrued  liabilities                                                                                                                                                 |   | 12,197             |    | 15,496                  |   |
| Income taxes  payable                                                                                                                                                |   | 9,567              |    | 7,016                   |   |
| Other accrued  expenses                                                                                                                                              |   | 395                |    | 719                     |   |
| Total current  liabilities                                                                                                                                           |   | 35,120             |    | 36,537                  |   |
| Deferred tax  liability                                                                                                                                              |   | 19,891             |    | 24,053                  |   |
| Total  liabilities                                                                                                                                                   |   | 55,011             |    | 60,590                  |   |
| Stockholders’  equity:                                                                                                                                          |   |               |    |                    |   |
| Preferred stock,  $0.001 par value; 5,000 shares authorized, no shares issued and outstanding                                                                        |   | —             |    | —                  |   |
| Common stock,  $0.001 par value; 200,000 shares authorized, 44,976 and 43,820 shares issued  and outstanding as of June 28, 2002 and December 31, 2001, respectively |   | 45                 |    | 45                      |   |
| Additional  paid-in capital                                                                                                                                          |   | 929,218            |    | 926,746                 |   |
| Accumulated  other comprehensive income (loss)                                                                                                                       |   | 443                |    | (42                     | )      |
| Deferred  compensation                                                                                                                                               |   | (9,895             | )       | (16,964                 | )      |
| Retained deficit                                                                                                                                                     |   | (419,307           | )       | (423,177                | )      |
| Total  stockholders’ equity                                                                                                                                     |   | 500,504            |    | 486,608                 |   |
|                                                                                                                                                                 |   | $                  | 555,515 |                    | $      | 547,198 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

4

----

 

**AVOCENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In thousands)

 
|                                                                                      |   | **For the  six months ended** |       |
|-------------------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                                      |   | **June 28,  2002**            |       | **June 29,  2001** | ** ** |
|                                                                                      |   | **(unaudited)**               |       | **(unaudited)** | * * |
| Cash flows from  operating activities:                                                    |   |                          | * *   |   | * * |
| Net income  (loss)                                                                        |   | $                             | 3,870      |   | $ | (64,977 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |   |                          |       |   |   |
| Depreciation                                                                              |   | 2,137                         |       | 2,127 |   |
| Amortization of  intangible assets                                                        |   | 10,595                        |       | 66,437 |   |
| Stock-based  compensation                                                                 |   | 8,911                         |       | 9,608 |   |
| Purchased  in-process research and development expenses                                   |   | —                        |       | 4,570 |   |
| Amortization of  discounts on investments                                                 |   | 1,022                         |       | 14 |   |
| Changes in  operating assets and liabilities:                                             |   |                          |       |   |   |
| Accounts  receivable, net                                                                 |   | 14,457                        |       | 12,557 |   |
| Other  receivables, net                                                                   |   | 561                           |       | 10,800 |   |
| Inventories, net                                                                          |   | 6,912                         |       | 81 |   |
| Other assets                                                                              |   | 1,853                         |       | (1,444 | ) |
| Accounts payable                                                                          |   | (657                          | )          | (4,506 | ) |
| Accrued wages and  commissions                                                            |   | 312                           |       | 848 |   |
| Accrued  liabilities                                                                      |   | (3,623                        | )          | 1,263 |   |
| Income taxes,  current and deferred                                                       |   | (3,418                        | )          | (1,351 | ) |
| Net cash  provided by operating activities                                                |   | 42,932                        |       | 36,027 |   |
|                                                                                      |   |                          | ** ** |   | ** ** |
| Cash flows from  investing activities:                                                    |   |                          | ** ** |   | ** ** |
| Purchase of Equinox  Systems Inc., net of cash and investments                            |   | —                        |       | (31,725 | ) |
| Purchases of  property and equipment                                                      |   | (3,491                        | )          | (2,451 | ) |
| Purchases of  investments                                                                 |   | (102,383                      | )          | (46,599 | ) |
| Maturities of  investments                                                                |   | 42,043                        |       | 31,047 |   |
| Proceeds from  sales of investments                                                       |   | 305                           |       | 20,145 |   |
| Net cash used in  investing activities                                                    |   | (63,526                       | )          | (29,583 | ) |
|                                                                                      |   |                          | ** ** |   | ** ** |
| Cash flows from  financing activities:                                                    |   |                          | ** ** |   | ** ** |
| Proceeds from  issuance of short-term debt                                                |   | —                        |       | 45,000 |   |
| Repayment of  short-term debt                                                             |   | —                        |       | (45,000 | ) |
| Proceeds from  employee stock plans                                                       |   | 2,435                         |       | 8,305 |   |
| Net cash  provided by financing activities                                                |   | 2,435                         |       | 8,305 |   |
|                                                                                      |   |                          |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                             |   | 47                            |       | (99 | ) |
|                                                                                      |   |                          |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                     |   | (18,112                       | )          | 14,650 |   |
| Cash and cash  equivalents at beginning of period                                         |   | 80,506                        |       | 44,106 |   |
| Cash and cash  equivalents at end of period                                               |   | $                             | 62,394     |   | $ | 58,756 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

5

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**AVOCENT CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited, in thousands)

 

Note 1.   Basisof Presentation

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inconformity with generally accepted accounting principles and reflect alladjustments consisting of normal recurring adjustments which, in the opinion ofmanagement, are necessary for a fair presentation of the results for theperiods shown.  The results ofoperations for these periods are not necessarily indicative of the resultsexpected for the full fiscal year or for any future periods.  The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates and assumptions.  Certain reclassifications have been made tothe prior year financial statements to conform to the current yearpresentation.

 

The accompanyingunaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and the relatednotes contained in our Annual Report on Form 10-K for the year ended December31, 2001, which is on file with the Securities and Exchange Commission.

 

We report our annualresults based on years ending December 31. We report our quarterly results for the first three interim periodsbased on 13 week periods ending on Fridays and for the fourth interim periodending on December 31.

 

Our financialstatements are consolidated and include the accounts of Avocent Corporation(“Avocent” or the “Company”) and its wholly owned subsidiaries.  Significant inter-company transactions andbalances have been eliminated in consolidation.

 

Note 2.   Inventories

 

Inventories consisted ofthe following at:

 
|             |   | **June 28,  2002** |   | **December  31,  2001** |   |
|------------------|--------|--------------------|--------|-------------------------|--------|
|             |   | **(unaudited)**    |   | **(audited)**           |   |
| Raw materials    |   | $                  | 8,400  |                    | $      | 13,034 |   |
| Work-in-process  |   | 472                |   | 446                     |   |
| Finished goods   |   | 11,371             |   | 13,675                  |   |
| Inventories, net |   | $                  | 20,243 |                    | $      | 27,155 |   |

 

Note 3.   Stock Options and DeferredCompensation

 

Deferredcompensation – We recorded $41,165 of deferred compensation related to Cybexemployee stock options at the time of the merger of Apex and Cybex on July 1,2000.  Additionally, we recorded $2,752of deferred compensation related to the Equinox employee stock options at thetime of the acquisition on January 3, 2001. The deferred compensation is being amortized over the vesting period ofthe options for which it was recorded.

 

Stock option exercises –Options to purchase 297 shares of our Common Stock were exercised during thesix months ended June 28, 2002.  Also,29 shares of our Common Stock were issued during the six months ending June 28,2002 under our Employee Stock Purchase Plan. In addition, we allowed shares issued upon the exercise of certain stockoptions by a former executive of the Company to be traded as payment for thecost of the options and related taxes. Under applicable accounting rules, this cashless exercise required variableplan accounting for these options.  As aresult, we recorded $2.0 million of compensation expense in the first quarterof 2002.

 

6

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Note 4.   Accumulated OtherComprehensive Income (Loss)

 

We record, net of related deferredincome taxes, unrealized gains and losses on our foreign currency translationadjustments and unrealized holding gains or losses on our available-for-salesecurities as accumulated other comprehensive income (loss), which is includedas a separate component of stockholders’ equity.  For the six months ended June 28, 2002 and December 31, 2001,total other comprehensive income amounted to $485 and $(42), respectively.  As of June 28, 2002 and June 29, 2001, totalaccumulated other comprehensive income (loss) was $443 and ($2,429),respectively.

 

Note 5.   Earnings (Loss) perShare, (*unaudited*)

 
|                                                                 |   | **Income (loss)  (Numerator)** |       | **Shares  (Denominator)** |       | **Per-Share  Amount** |       |
|----------------------------------------------------------------------|--------|--------------------------------|------------|---------------------------|------------|-----------------------|------------|
| **For the three months ended June 28, 2002**                         |   |                           |       |                      |       |                  |       |
| **Basic EPS**                                                        |   |                           |       |                      |       |                  |       |
| Net income available to common stockholders                          |   | $                              | 3,567      |                      | 44,947     |                  | $          | 0.08 |   |
| **Effect of Dilutive Securities**                                    |   |                           |       |                      |       |                  |       |
| Stock options                                                        |   |                           |       | 678                       |       |                  |       |
| **Diluted EPS**                                                      |   |                           |       |                      |       |                  |       |
| Net income available to common stockholders and assumed  conversions |   | $                              | 3,567      |                      | 45,625     |                  | $          | 0.08 |   |
|                                                                 |   |                           |       |                      |       |                  |       |
| **For the six months ended June 28, 2002**                           |   |                           |       |                      |       |                  |       |
| **Basic EPS**                                                        |   |                           |       |                      |       |                  |       |
| Net income available to common stockholders                          |   | $                              | 3,870      |                      | 44,888     |                  | $          | 0.09 |   |
| **Effect of Dilutive Securities**                                    |   |                           |       |                      |       |                  |       |
| Stock options                                                        |   |                           |       | 797                       |       |                  |       |
| **Diluted EPS**                                                      |   |                           |       |                      |       |                  |       |
| Net income available to common stockholders and assumed  conversions |   | $                              | 3,870      |                      | 45,685     |                  | $          | 0.08 |   |
|                                                                 |   |                           | ** ** |                      | ** ** |                  | ** ** |
| **For the three months ended June 29, 2001**                         |   |                           |       |                      |       |                  |       |
| **Basic EPS**                                                        |   |                           |       |                      |       |                  |       |
| Net loss available to common stockholders                            |   | $                              | (36,855    | )                         | 44,307     |                  | $          | (0.83 | ) |
| **Effect of Dilutive Securities**                                    |   |                           |       |                      |       |                  |       |
| Stock options                                                        |   |                           |       | —                    |       |                  |       |
| **Diluted EPS**                                                      |   |                           |       |                      |       |                  |       |
| Net loss available to common stockholders and assumed  conversions   |   | $                              | (36,855    | )                         | 44,307     |                  | $          | (0.83 | ) |
|                                                                 |   |                           |       |                      |       |                  |       |
| **For the six months ended June 29, 2001**                           |   |                           |       |                      |       |                  |       |
| **Basic EPS**                                                        |   |                           |       |                      |       |                  |       |
| Net loss available to common stockholders                            |   | $                              | (64,977    | )                         | 44,147     |                  | $          | (1.47 | ) |
| **Effect of Dilutive Securities**                                    |   |                           |       |                      |       |                  |       |
| Stock options                                                        |   |                           |       | —                    |       |                  |       |
| **Diluted EPS**                                                      |   |                           |       |                      |       |                  |       |
| Net loss available to common stockholders and assumed  conversions   |   | $                              | (64,977    | )                         | 44,147     |                  | $          | (1.47 | ) |

 

7

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Note 6.   Sales

 

Avocent reportsoperations as a single operating segment. However, we do report sales by geographic region.  Following is a presentation of sales bygeographic region for the periods ended June 28, 2002 and June 29, 2001:

 
|               |   | **For the  Three Months  Ended** |       | **For the  Six Months  Ended** |       |
|--------------------|--------|----------------------------------|------------|--------------------------------|------------|
|               |   | **June 28,  2002**               |       | **June 29,  2001**             |       | **June 28,  2002** |   | **June 29,  2001** |   |
|               |   | **(unaudited)**                  |       | **(unaudited)**                |       | **(unaudited)** |   | **(unaudited)** | ** ** |
| Net sales:         |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| United States      |   | $                                | 40,509     |                           | $          | 44,271 |   | $ | 77,856 |   | $ | 88,399 |   |
| Rest of the  World |   | 22,509                           |       | 20,808                         |       | 47,266 |   | 49,855 |   |
|               |   | $                                | 63,018     |                           | $          | 65,079 |   | $ | 125,122 |   | $ | 138,254 |   |

 

**As of June 28, 2002, long-lived assets totaled $269,772,which includes $267,659 held in the U.S. and $2,113 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.**

 

**Sales to our top five OEM and distribution customersaccounted for 63% of sales for both the three and six months ended June 28,2002. Sales to our top five OEM and distribution customers accounted for 60%and 54% of sales for the three and six months ended June 29, 2001,respectively.**

 

**Note 7.   ForwardContracts**

 

**The Company uses forward contracts toreduce its foreign currency exposure related to the net cash flows from itsEuropean operations.  The majority ofthese contracts are short-term contracts (three months or less) and aremarked-to-market each quarter and included in trade payables, with theoffsetting gain or loss included in other revenues in the accompanyingstatements of operations.  At June 28,2002, we had no open foreign currency forward contracts.**

 

**Note 8.   Goodwill andOther Intangible Assets**

 

**Effective January 1, 2002, theCompany adopted Statements of Financial Accounting Standards No. 142, *Goodwill andIntangible Asset*s and No. 141, *Business Combinations*, which were issuedby the Financial Accounting Standards Board in July 2001.  Under these standards, the Company ceasedamortizing goodwill totaling $188 million (including $2.0 million, net of $1.4million of accumulated amortization for the assembled workforce, classified asother intangible assets as of December 31, 2001) as of January 1, 2002.  The three and six months ended June 29, 2001included $27.9 million and $55.5 million, respectively, in amortization expenseunder the previous standards.**

 

**The following tables present theimpact of the new standards on income (loss) from  operations, net income (loss) and earnings (loss) per share, asif they had been in effect for the three and six months ended June 29, 2001.**

 
|                               |   | **For the  Three Months Ended** |   |
|------------------------------------|--------|---------------------------------|--------|
|                               |   | **June 28,  2002  As Reported** |   | **June 29,  2001  As Reported** | ** ** | **June 29,  2001  As Adjusted** | ** ** |
| Income (loss)  from operations     |   | $                               | 3,879  |   | $ | (40,961 | ) | $ | (13,058 | ) |
| Net income  (loss)                 |   | $                               | 3,567  |   | $ | (36,855 | ) | $ | (8,952 | ) |
| Basic earnings  (loss) per share   |   | $                               | 0.08   |   | $ | (0.83 | ) | $ | (0.20 | ) |
| Diluted earnings  (loss) per share |   | $                               | 0.08   |   | $ | (0.83 | ) | $ | (0.20 | ) |

 

8

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**Note 8.   Goodwill andOther Intangible Assets *(continued)***

 
|                               |   | **For the  Six Months Ended**   |   |
|------------------------------------|--------|---------------------------------|--------|
|                               |   | **June 28,  2002  As Reported** |   | **June 29,  2001  As Reported** | ** ** | **June 29,  2001  As Adjusted** | ** ** |
| Income (loss)  from operations     |   | $                               | 2,485  |   | $ | (68,091 | ) | $ | (12,587 | ) |
| Net income  (loss)                 |   | $                               | 3,870  |   | $ | (64,977 | ) | $ | (9,473 | ) |
| Basic earnings  (loss) per share   |   | $                               | 0.09   |   | $ | (1.47 | ) | $ | (0.21 | ) |
| Diluted earnings  (loss) per share |   | $                               | 0.08   |   | $ | (1.47 | ) | $ | (0.21 | ) |

 

**Acquired other intangible assetssubject to amortization are as follows:**

 
|                             |   | **June 28,  2002**           |   | **December  31, 2001**        |   |
|----------------------------------|--------|------------------------------|--------|-------------------------------|--------|
|                             |   | **Gross  Carrying  Amounts** |   | **Accumulated  Amortization** |   | **Gross  Carrying  Amounts** |   | **Accumulated  Amortization** |   |
| Developed  technology            |   | $                            | 65,740 |                          | $      | 26,401 |   | $ | 65,740 |   | $ | 19,931 |   |
| Patents and  trademarks          |   | 12,390                       |   | 3,361                         |   | 14,152 |   | 2,478 |   |
| Customer base  and certification |   | 19,500                       |   | 12,583                        |   | 19,500 |   | 9,333 |   |
| Assembled  workforce             |   | —                       |   | —                        |   | 3,400 |   | 1,400 |   |
| Other                            |   | 2,006                        |   | 525                           |   | 1,814 |   | 450 |   |
|                             |   | $                            | 99,636 |                          | $      | 42,870 |   | $ | 104,606 |   | $ | 33,592 |   |

 

**For the three months ended June 28,2002 and June 29, 2001, amortization expense for other intangible assets was$5.3 million and $5.5 million, respectively. For the six months ended June 28, 2002 and June 29, 2001, amortizationexpense for other intangible assets was $10.6 million and $10.9 million,respectively.  The approximate estimatedannual amortization for other intangibles is as follows:**

 

| **Years ending December 31:** |   |   |   |
|-------------------------------|--------|--------|--------|
| 2002                          |   | $      | 22,000 |   |
| 2003                          |   | $      | 19,100 |   |
| 2004                          |   | $      | 15,200 |   |
| 2005                          |   | $      | 8,900  |   |
| 2006                          |   | $      | 1,600  |   |

 

**In accordance with FinancialAccounting Standards No. 141 and No. 142 the Company completed a transitionalimpairment test of all goodwill and intangible assets as of January 1, 2002.**  The testconcluded that no adjustment was required upon adoption.  The Company will test goodwill at leastannually for impairment, as prescribed by these standards.

 

**The Company expensed $2.7 million inlegal fees during the quarter ended March 29, 2002.  Approximately $1.8 million of these fees were deferred fromprevious periods (which were included as other intangible assets at December31, 2001) and $900 thousand of fees were incurred during the quarter endedMarch 29, 2002.  These fees related tothe Company’s patent infringement lawsuit brought against a competitorchallenging the use of on-screen technology in the competitor’s switches.  A court decision was reached in February2002 that found no infringement of the three Avocent patents involved in thelawsuit.  While the judgment iscurrently on appeal and the Company intends to continue to pursue the lawsuit,Avocent’s management decided to expense these costs due to the uncertainty ofthe outcome of the litigation.**

 

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**Note 9.   RecentlyIssued Accounting Standards**

 

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

 

**In October 2001, the Financial Accounting Standards Boardissued SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, which has an effective date for financialstatements for fiscal years beginning after December 15, 2001.  This statement, which supercedes SFAS No.121, *Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of*, requires that long-lived assets that are to be disposedof by sale be measured at the lower of book value or fair value less cost tosell.  Additionally, this statementexpands the scope of discontinued operations to include all components of anentity with operations that (1) can be distinguished from the rest of theentity and (2) will be eliminated from the ongoing operations of the entity ina disposal transaction.  The Companyadopted SFAS No. 144 effective January 1, 2002.  The impact of SFAS No. 144 was not material to the Company’sfinancial statements as of June 28, 2002.**

 

**In July 2002, the Financial Accounting Standards Boardissued SFAS No. 146, *Accounting for Costs Associated with Exit or Disposal*,which is effective for disposal or exit activities that are initiated afterDecember 31, 2002. This statement addresses financial accounting and reportingfor costs associated with exit or disposal activities and nullifies EmergingIssues Task Force Issue No. 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (Including CertainCosts Incurred in a Restructuring)*. The statement requires that a liability for a cost associated with anexit or disposal activity shall be recognized and measured initially at itsfair value in the period in which liability is incurred, except for liabilitiesfor one-time termination benefits that are accrued over time.  In the unusual circumstance in which fairvalue cannot be reasonably estimated, the liability shall be recognizedinitially in the period in which fair value can be reasonably estimated.  The impact of SFAS No. 146 on the Company’sfinancial statements is not expected to be material.**

 

Note 10.  Investment in Rymic Systems, 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’s commonstock, giving us approximately a 14% equity position in Rymic.  In addition, as part of our investment, wereceived certain rights of co-sale regarding the shares of stock we purchasedand certain rights of first refusal regarding shares of stock of Rymic held byits major 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.

 

Early in the first quarterof 2001 and prior to our investment, Doyle C. Weeks, one of our directors andour 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, our Senior Vice President of Worldwide Sales and Marketing, purchased10,000 shares of common stock at the price of $2.50 per share.  At the time of our investment, Mr. Weeks wasone of 6 directors of Rymic, and in connection with his services as a directorand prior to our investment, Mr. Weeks was awarded nonqualified stock optionsto purchase 5,000 shares of Rymic common stock at $2.50 per share that vested uponreceipt.  Mr. Weeks did not receive anyfees from Rymic.  Mr. Weeks remains onthe board of directors of Rymic, but will not receive any additional directorfees or stock options for as long as we hold our equity position in Rymic.

 

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Note 11.  Subsequent Event

 

On August 5, 2002,we announced that we signed a definitive agreement to acquire 2C Computing,Inc. (“2C”) for approximately $22.8 million in cash.  2C has developed digital extension technology that splits the PCIbus of a PC and allows the PC motherboard, processor, hard drive, and otheruser devices to be located at a distance from the user and connected using CAT5 or fiber cable.  The acquisition iscontingent upon the approval of 2C’s shareholders and other customaryconditions to closing, and is expected to close on or before August 20, 2002.

 

In 2000, 2C and Cybex Computer Products Corporation(“Cybex”), our wholly-owned subsidiary, formed a joint venture, CyCom L.L.C.,to focus on computer technology and research for products in the desktopcomputer and server industry.  Cybexowns 40% of CyCom and the other 60% of CyCom is owned by 2C.  Upon the formation of CyCom, Cybexcontributed a license for certain of its intellectual property related to thesplit bus concept, and 2C contributed management services and capitalfunding.  The initial products developedfrom the digital extension technology were announced in late 2001.  Shipments of the products totaledapproximately $1.5 million through July 31, 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 is zero because Cybex’scontribution to it consisted of previously expensed research and developmentcosts related to the technology and CyCom has earned no profits to date.  We have no obligation to provide funding orother financial support to CyCom in future periods.  Upon closing our acquisition of 2C, which will include its 60%interest in CyCom, we intend to dissolve CyCom.

 

2C was founded byRemigius G. Shatas and Robert R. Asprey, who currently serve as directors of2C.  Mr. Shatas was formerly a member ofthe Board of Directors of Cybex (before the merger transaction with Apex Inc.that created Avocent) and served as executive vice president and chief technologyofficer of Cybex. Mr. Shatas remains a shareholder of Avocent.  Mr. Asprey was also formerly an officer ofCybex, and he too is a current Avocent shareholder.  David S. Butler, who is currently a director of 2C, is a formerdirector of Cybex and a current Avocent shareholder. Mr. Shatas, Mr. Asprey, and Mr. Butler ownless than 2% of Avocent’s outstanding shares in the aggregate.  A number of other 2C shareholders are alsoAvocent shareholders.  No officer ordirector of Avocent is an officer, director, shareholder or affiliate of 2C.

 

**The acquisition will be recorded under the purchase methodof accounting, and the purchase price will be allocated based on the fair valueof the assets and liabilities acquired. In accordance with generally accepted accounting principles, purchasedresearch and development costs allocated to developed technology will becapitalized and amortized over the respective estimated useful lives.  The remaining amounts of purchased researchand development will be expensed upon the closing of the transaction. Anygoodwill resulting from the acquisition will not be amortized but will beincluded in our annual review of goodwill and other intangible assets forimpairment.  We expect to complete thepreliminary allocation of the purchase price during the third quarter of 2002.**

 

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**Item 2.**  Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

 

*THE INFORMATION IN THIS ITEM 2 “MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS” CONTAINS FORWARD-LOOKINGSTATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTS RELATING TO OUR FUTUREBUSINESS PROSPECTS AND ECONOMIC CONDITIONS IN GENERAL, STATEMENTS REGARDING OURENGINEERING AND DESIGN ACTIVITIES, PRODUCT DEVELOPMENT, AND NEW PRODUCTINTRODUCTIONS, STATEMENTS RELATING TO FUTURE PRODUCT DEMAND AND OUR FUTURESALES, EARNINGS, GROSS PROFIT, INCOME, AND EXPENSES, STATEMENTS REGARDINGINTERNATIONAL SALES, STATEMENTS REGARDING MERGER ACCOUNTING, ACQUISITION, ANDTRANSACTION COSTS AND ADJUSTMENTS, STATEMENTS ABOUT THE RATIO OF SALES AMONGOUR DISTRIBUTION CHANNELS, STATEMENTS REGARDING FUTURE INVENTORY LEVELS,STATEMENTS REGARDING OUR ACHIEVEMENT OF ISO 9000:2000 ACCREDITATION, AND STATEMENTSRELATING TO ANTICIPATED CAPITAL NEEDS.*

 

*THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TOCERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFERMATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS.  FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCEINCLUDE, BUT ARE NOT LIMITED TO, THE RISKS ASSOCIATED WITH GENERAL ECONOMICCONDITIONS, RISKS ATTRIBUTABLE TO FUTURE PRODUCT DEMAND, SALES, AND EXPENSES,RISKS ASSOCIATED WITH PRODUCT DESIGN EFFORTS, RISKS ASSOCIATED WITH RELIANCE ONA LIMITED NUMBER OF COMPONENT SUPPLIERS AND SINGLE SOURCE COMPONENTS, THE LOSSOF ONE OF OUR OEM CUSTOMERS, A REDUCTION OR FLUCTUATIONS IN SALES OF OUR OEM ORBRANDED PRODUCTS, INTENSE COMPETITION AND NEW PRODUCTS AND TECHNOLOGIES FROMEXISTING AND NEW COMPETITORS, RISKS RELATED TO PROTECTING OUR INTELLECTUALPROPERTY RIGHTS, FLUCTUATIONS IN FOREIGN CURRENCIES, RISKS RELATED TO MERGERINTEGRATION, AND OTHER RISKS DETAILED IN OUR ANNUAL REPORT ON FORM 10-K, WHICH WAS FILED WITH THE SECURITIES AND EXCHANGECOMMISSION ON MARCH 29, 2002.*

 

**Overview**

 

We design, manufacture, and sellanalog and digital console switching systems, serial connectivity devices, andextension and remote access products for the computer industry.  Data center managers and networkadministrators have increasingly complex and growing server populations, andour analog, digital, and serial switching solutions, as well as our extensionand remote access products, help them manage multiple servers and seriallycontrolled devices from one or more local or remote consoles consisting of akeyboard, video monitor, and mouse. Specifically, our products can provide significant cost reductionsincluding lower initial investment, reduced utility costs, and space savings,as well as more efficient technical support capabilities.

 

We provide “plug and play”switching systems for many network administration, management, and storageproblems faced by corporate customers, data centers, and server farms.  Our switching solutions include products soldunder the Avocent, Apex, Cybex, and Equinox brands, including our *AMXTM,AutoViewTM, DS SeriesTM, OutLook®,* and *XP®4000 Series* products. Our switching products help facilities managers and networkadministrators access multiple servers and serially controlled devices from oneor more centralized or remote consoles, consolidate hardware requirements, andprovide direct hardwired connections between the switch and the attachedservers to facilitate access to those servers, even when the network is down.  Our Equinox branded products addhigh-performance, reliable, and affordable server-based products for serial anddial access applications.  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.  In thefirst quarter of 2002, we announced two power management solutions, the *SPC*TM*800* and *SPC*TM*1600*, which expand our DSSeries of products.  When combined withAvocent’s *CPS*TM**serial-based network appliances,data center managers can securely control almost any connected device in thedata center.  Additionally, in thesecond quarter of 2002, we announced the AMX, the latest in our KVM analogsolutions.  The AMX switch addressescontinued growth opportunities in the analog market segment and providessimpler access and easier manageability of servers in multi-rack,multi-platform environments.

 

Our revenue is derived (i) from sales to a limitednumber of original equipment server manufacturers, or OEMs, who purchase ourswitching systems on a private-label or branded basis for integration and salewith the their own products, (ii) from sales through our reseller anddistributor network, and (iii) from sales to a limited amount of directcustomers.  For the six months endedJune 28, 2002, sales to our reseller and distributor network were 53% of netsales, sales to our OEM customers were 44% of net sales, and sales to ourdirect customers were 3% of net sales. We do not

 

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have contracts with many of these customers, and in general, they areonly obligated to purchase products from us pursuant to binding purchaseorders.  The merger between Compaq andHewlett-Packard will result in a further concentration of sales with a singleOEM customer.  The loss of, or materialdecline in orders from, our OEM customers would have a material adverse effecton our business, financial condition, results of operation, and cash flow.  We sell products to dealers, end-users andOEMs in the United States, Canada, Europe and Asia as well as in other foreignmarkets.  Sales within the United Statesaccounted for approximately 62% of sales for the first six months of 2002,while sales outside the United States accounted for the remaining 38% of sales.Additionally, sales to our top five OEM and distribution customers accountedfor 63% of sales for both the three and six months ended June 28, 2002. Salesto our top five OEM and distribution****customers accounted for 60% and 54% ofsales for the three and six months ended June 29, 2001, respectively.

 

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 our business with certainOEMs and other server manufacturers, and we believe that it will make oursales more difficult to 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, generaleconomic conditions are not as favorable as they were in prior years, and ourrevenue growth rate has slowed. Depending on future general economic conditions and other factors, ourrevenue could decline in the future.

 

We expect toachieve ISO 9000:2000 accreditation during 2003.  We believe ISO accreditation will become a requirement for doingbusiness with several of our OEM customers.

 

**CriticalAccounting Policies**

 

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

 

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

 

**•**                                          Wemaintain allowances for doubtful accounts for estimated losses resulting fromthe inability of our customers to make required payments.  If the financial condition of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required.  If circumstances change with regards to individual receivablebalances that had previously been determined to be uncollectible (and for whicha specific reserve had been established), a reduction in our allowance fordoubtful accounts may be required.

 

**•**                                          Weprovide for the estimated cost of product warranties at the time revenue isrecognized.  While we engage inextensive product quality programs and processes, including actively monitoringand evaluating the quality of our component suppliers, our warranty obligationis affected by product failure rates, failure rates of purchased components integratedinto our products, material usage, and other rework costs incurred incorrecting a product failure.  Shouldactual product failure rates, material usage, or other rework costs differ fromour estimates, revisions to our estimated warranty liability may be required.

 

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

 

**•**                                          Wehold minority interests in companies having operations or technology in areaswithin or adjacent to our strategic focus, some of which are in publicly tradedcompanies with share prices that are volatile and some of which are inprivately-held companies with values that are difficult to determine.  We record an investment

 

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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 investment’s current carrying value, thereby possibly requiringan impairment charge in the future.

 

**•**                                          Weestimate allowances for sales returns based on our experiences from historicalcustomer returns.  If actual futurecustomer returns are less favorable than those projected by management,additional sales return expenses may be required.

 

**•**                                          EffectiveJanuary 1, 2002, we adopted SFAS No. 142. Our initial test for goodwill impairment as of January 1, 2002 determinedthat no adjustment for impairment was required.  If economic conditions deteriorate and indicators of impairmentbecome present, an adjustment to the carrying value of goodwill and otherintangible assets may be required.

 

**Results of Operations**

 

The following table sets forth, for the periods indicated, selectedstatement of operations data expressed as a percentage of net sales: 

 
|                                                                      |   | **Three Months Ended** |   | **Six Months Ended** |   |
|---------------------------------------------------------------------------|--------|------------------------|--------|----------------------|--------|
|                                                                      |   | **June 28,  2002**     |   | **June 29,  2001**   |   | **June 28,  2002** |   | **June 29,  2001** |   |
|                                                                      |   |                   |   |                 |   |   |   |   |   |
| Net sales                                                                 |   | 100.0                  | %      | 100.0                | %      | 100.0 | % | 100.0 | % |
| Cost of sales                                                             |   | 49.8                   |   | 70.7                 |   | 50.5 |   | 60.3 |   |
| Gross profit                                                              |   | 50.2                   |   | 29.3                 |   | 49.5 |   | 39.7 |   |
| Operating expenses:                                                       |   |                   |   |                 |   |   |   |   |   |
| Research and development expenses                                         |   | 11.1                   |   | 9.3                  |   | 10.7 |   | 8.5 |   |
| In-process research and development expenses and other  acquisition costs |   | —                 |   | —               |   | — |   | 3.3 |   |
| Selling, general and administrative expenses                              |   | 24.5                   |   | 31.7                 |   | 28.3 |   | 29.1 |   |
| Amortization of intangible assets                                         |   | 8.4                    |   | 51.2                 |   | 8.5 |   | 48.0 |   |
| Total operating expenses                                                  |   | 44.0                   |   | 92.2                 |   | 47.5 |   | 88.9 |   |
| Income (loss) from operations                                             |   | 6.2                    |   | (62.9                | )      | 2.0 |   | (49.2 | ) |
| Other income, net                                                         |   | 2.0                    |   | 2.3                  |   | 2.1 |   | 2.0 |   |
| Income (loss) before income taxes                                         |   | 8.2                    |   | (60.6                | )      | 4.1 |   | (47.2 | ) |
| Provision for (benefit from) income taxes                                 |   | 2.5                    |   | (4.0                 | )      | 1.0 |   | (0.2 | ) |
| Net income (loss)                                                         |   | 5.7                    | %      | (56.6%               | )      | 3.1 | % | (47.0% | ) |

 

*Net sales.*  Our net sales consist of sales of consoleswitching systems, digital connectivity solutions, serial connectivity devices,and extension and remote-access products. Net sales decreased 3% to $63.0 million for the second quarter of 2002from $65.1 million for the second quarter of 2001.  The decrease in sales resulted from the general weakness in thetechnology sector of the economy when compared to the second quarter of last year.  Sequentially, our sales increased more than$900 thousand from the first quarter of 2002. The sequential improvement in sales was due to improvement in ourbranded and direct business, which collectively increased 5%.  Salesthrough our reseller and distributor channel increased less than 1% from $33.2million in the second quarter of 2001 to $33.3 million in the second quarter of2002.  Direct sales decreased 27% from$3.6 million in the second quarter of 2001 to $2.6 million in the secondquarter of 2002.  OEM sales decreasedjust over 4 % from $28.3 million in the second quarter of 2001 to $27.1 millionin the second quarter of 2002.  Resellerand distributor sales were 53% of sales for the second quarter of 2002,compared to 51% of sales for the second quarter of 2001.  OEM sales were 43% of sales for the secondquarter of 2002, compared to 44% of sales for the second quarter of 2001.  Direct sales were 4% of sales for the secondquarter of 2002, compared to 5% of sales for the second quarter of 2001.

 

Sales within the United States decreased by over 8% to $40.5million in the second quarter of 2002 from $44.3 million in the second quarterof 2001.  Rest of the world sales increased over 8% to $22.5 million in thesecond quarter of 2002 from $20.8 million in the second quarter of 2001.  Net sales decreased 9% to $125.1million for the first six months

 

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of 2002 from $138.3million for the first six months of 2001. As with the quarter, the decrease in sales resulted from the generalweakness in the technology sector of the economy when compared to lastyear.  The weakness in sales was evidentin both the United States and in the rest of the world.  Sales within the United States decreased byalmost 12% to $77.8 million in the first six months of 2002 from $88.4 millionin the first six months of 2001.  Rest of world sales decreased over 5% from $49.9million in the first six months of 2001 to $47.3 million in the first sixmonths of 2002.  We believe our recentlyannounced AMX switch and our embedded switching technology for blade andtraditional rack mounted servers will contribute to sales in the second half of2002.

 

*Gross profit. *Gross profit is affected by a variety of factors,including: the ratio of sales among our distribution channels, as our OEM salestypically have lower gross margins than our reseller and distributor sales andour directs sales; varying absorption of fixed costs as sales levels fluctuate;product mix, raw materials and labor costs; new product introductions by us andby our competitors; and the level of our outsourcing of manufacturing andassembly services.  Gross marginsignificantly improved to 50.2% in the second quarter of 2002 from 29.3% in thesecond quarter of 2001.  Gross margin inthe second quarter of 2002 benefited from sales of our digital solutions, whichhave a higher margin, and accounted for 20% of our second quarter 2002 salescompared to 9% of sales for our second quarter of 2001.  Gross margins were significantly affected bya $11.7 million write-down for excess and obsolete inventories in the secondquarter of 2001.  This write-down wasmade to reduce inventory valuations to bring them in-line with current netrealizable values and to the level necessary to support then current salesdemand.  Gross margin for the yearincreased to 49.5% for the first six months of 2002 from 39.7% for the firstsix months of 2001, also as a result of the factors discussed above.  We expect our OEM sales to return totraditional levels in the third quarter of 2002, as a result, we expect grossmargins to decline slightly.

 

*Research and development expenses.*  Research and development expenses includecompensation for engineers, support personnel, and materials costs and areexpensed as they are incurred.  Researchand development expenses were almost $7.0 million, or 11.1% of net sales, inthe second quarter of 2002 compared to $6.0 million, or 9.3% of net sales, forthe second quarter of 2001.  Theincrease in the amount spent on research and development can be attributed tothe increased cost in contracted services, increased headcount, and higher costs related to new products expected tobe released during 2002.  Year-to-date research and developmentexpenses for 2002 increased to $13.4 million from $11.7 million year-to-date in2001 for the reasons listed above.  As apercentage of net sales, year-to-date research and development expensesincreased to 10.7% from 8.5%.  Webelieve that the timely development of innovative products and enhancements toexisting products is essential to maintaining our competitive position.  We expect to continue to focus on newproducts in and enhancements to the AMX product family and the digital productfamilies, as well as new solutions for blade and traditional servers.  Due to continued activity as we approach theintroduction of our new products, we expect research and developmentexpenditures to remain at the second quarter level for the duration of 2002.

 

*In-process research and developmentexpense. *Thein-process research and development expense of $4.6 million in the first sixmonths of 2001 is comprised solely of the acquisition costs of Equinoxattributable to in-process technologies. The charge for Equinox in-process technologies is non-recurring.

 

*Selling, general and administrativeexpenses.*  Selling,general and administrative expenses include personnel costs for administration,finance, human resources, sales and marketing and general management, as wellas some merger related expenses, rent, utilities and legal and accounting expenses, advertising, promotionalmaterial, trade show expenses and related travel costs.** **Selling, general and administrative expenses were $15.5million, or 24.5% of net sales, for the second quarter of 2002 compared to$20.6 million, or 31.7% of net sales, for the second quarter of 2001.  Selling, general and administrative expensesin the second quarter of 2002 benefited from a $1.4 million recapture of areceivable, previously reserved, related to a contract manufacturer that hadfiled for bankruptcy.  We received afavorable ruling by the bankruptcy judge, which allowed the offset ofreceivables and payables between the contract manufacturer and certaincustomers, including Avocent.  Also,selling, general and administrative expenses in the second quarter of 2001included $1.3 million of severance costs related to headcount reductions in theU.S. and Europe.  Year-to-date selling,general, and administrative expenses decreased to $35.4 million, or 28.3% ofnet sales for 2002 from $40.3 million, or 29.1% of year-to-date net sales in2001, due to the same reasons noted for the second quarter.  We expect selling, general andadministrative expenses to increase by about $2.0 million sequentially in thethird quarter of 2002, as we anticipate higher selling and marketing costsrelated to the roll-out of new products.

 

*Amortization of intangible assets.*  Amortization of intangible assets for the second quarter of 2002 iscomprised of the amortization of the amounts allocated to the identifiableintangible assets that were in excess of the purchase price over the fair valueof the Cybex assets and liabilities acquired by Apex in the merger transactionthat occurred in 2000.  Also included isthe amortization of similar assets created as a result of the acquisition ofEquinox in 2001.  The second quarter of2001 includes the amortization of these same assets as well as amortization ofgoodwill created at the merger and the

 

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acquisition.  Effective January 1, 2002, we adoptedStatement of Financial Accounting Standards No. 142, *Goodwill and Intangible Asset*s,and No. 141, *Business Combinations*, which were issued by the FinancialAccounting Standards Board in July 2001. Under these standards, we ceased amortizing goodwill of approximately$188 million as of January 1, 2002. Amortization of other identifiable intangible assets was $5.3 million or8.4% of net sales for the second quarter of 2002, while amortization of otheridentifiable intangible assets and goodwill was $33.4 million (including$27.9 million related to amortization of goodwill) or 51.3% of net sales, forthe second quarter of 2001. Year-to-date, amortization of other identifiable intangible assets was$10.6 million or 8.5% of net sales for the first six months of 2002, whileamortization of other identifiable intangible assets and goodwill was$66.4 million (including $55.5 million related to amortization ofgoodwill) or 48.1% of net sales, for the first six months of 2001.

 

*Other income,net.*  Other income was $1.2 million for thesecond quarter of 2002, down from $1.5 million for the second quarter of2001.  Although we have more cash andinvestments currently than in the prior year, interest income has declined dueto lower interest rates.  Additionally,the dollar has weakened against the Euro resulting in a $200 thousand exchangeswing, from a small exchange gain in the second quarter of 2001, to a $170thousand exchange loss in the second quarter of 2002.  For the year, other income decreased to $2.6 million for 2002,from $2.8 million for 2001, for the same reasons.

 

*Provision for(benefit from) income taxes.*  The provision for income taxes wasapproximately $1.6 million for the second quarter of 2002, compared to abenefit from income taxes of $2.6 million in the second quarter of2001.  Excluding merger relatedadjustments to federal taxes, the effective tax rate for the second quarter of2002 was a provision for income taxes of approximately 27.3%, compared to abenefit from income taxes of 31.9% for the second quarter of 2001, primarilydue to the mix of our pre-tax profit among our U.S. and internationalcompanies.  Shifting rest of worldshipments from Redmond, Washington to Shannon, Ireland leveraged the 10% taxrate in Ireland.  For the year, theprovision for income taxes was approximately $1.2 million for the first sixmonths of 2002, compared to a benefit from income taxes of $304 thousandfor the first six months of 2001. Excluding merger related adjustments to federal taxes, the effective taxrate for the first six months of 2002 was a provision for income taxes ofapproximately 25.9%, compared to a benefit from income taxes of 30.6% for thefirst six months of 2001, primarily for the reasons mentioned above.  We expect our effective tax rate for the rest of the yearto be between 25% and 28%, depending primarily on the mix of pre-tax profitbetween the U.S. locations and Ireland.

 

*Net income(loss).*  Our net income for the second quarter of2002 was $3.6 million compared to net loss of $36.9 million for thesecond quarter of 2001, as a result of the above factors, including theamortization of other identifiable intangible assets and discontinuing goodwillamortization upon the adoption of SFAS No. 142 on January 1, 2002.  Net income as a percentage of sales for thesecond quarter of 2002 was 5.7%, compared to net loss as a percentage of salesfor the second quarter of 2001 of 56.6%. Our net income for the first six months of 2002 was$3.9 million compared to a net loss of $65.0 million for the firstsix months of 2001, as a result of the above factors.  Net income as a percentage of sales for the first six months of2002 was 3.1%, compared to net loss as a percentage of sales for the first sixmonths of 2001 of 47.0%.

 

**Liquidity andCapital Resources**

 

As of June 28, 2002, our principal sources of liquidity consisted ofover $215 million in cash, cash equivalents and investments.  Inaddition, we had a bank line of credit for borrowings of $2.0 million at LIBOR+ 2.25% with a maturity date of mid May 2002, which we did not renew.  We determined that our cash position andexpected maturities of investments are adequate to cover our current and futureliabilities.

 

Our operating activities generated cash of almost $43 million in the firstsix months of 2002, compared to approximately $36 million in the first sixmonths of 2001.  After adjusting netincome for merger and acquisition related items, the increase in cash flow fromoperations for the first six months of 2002 compared to the firstsix months of 2001 resulted primarily from the decrease in accounts receivableand inventory.  Receivables declined to$35 million at June 28, 2002, from $49 million at December 31, 2001.  This decline in receivables is a result ofthe timing of sales, our increased collection efforts and increased reservesfor receivables to ensure accounts receivable are carried at their realizablevalue.  Inventory levels declined to $20million at June 28, 2002 from $27 million at December 31, 2001, due to our concertedefforts to consume existing supplies and due to increases in reserve andvaluation accounts.  The inventorylevels should continue to decline this year as we extend our efforts to reduceinventories on-hand.  The impact of thedecrease in receivables and inventory were partially offset by a decrease inaccrued liabilities, which declined to $12.2 million at June 28, 2002, from$15.5 million at December 31, 2001.  Theprimary reason for the decline in accrued liabilities was the payout of almost$1.6 million, after December 31, 2001, related to royalties for certainproducts.  During 2001, the productroyalties 

 

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accruedreached the maximum amount due under the royalty agreement and no furtheramounts are owed under the agreement.

 

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

 

We believe that our existing cash balances, investments and cashgenerated from operations will be sufficient to fund our operations through 2002.

 

 

**Investments**

 

Our investmentsconsist of corporate bonds, commercial paper, mortgage backed securitiesguaranteed by U.S. government agencies, and common stock.  Debt securities that we have the positiveintent 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 Vat fairvalue, with unrealized gains and losses excluded from earnings and reported asa separate component of stockholders’ equity. We periodically review our investment portfolio for investmentsconsidered to have sustained an other-than-temporary decline in value.  Upon review of our investment portfolio asof June 28, 2002, no investments were considered to have sustained another-than-temporary decline.

 

In the second quarter of 2002, we made a $1.0  million investment in Rymic Systems, Inc., a privately-heldcompany based in Huntsville, Alabama, that develops hardware and softwaresolutions for remote monitoring and control of vehicles and equipment over theinternet using standard desktop web browsers. We purchased 400,000 shares of Rymic’s common stock, giving usapproximately a 14% equity position in Rymic. In addition, as part of our investment, we received certain rights ofco-sale regarding the shares of stock we purchased and certain rights of firstrefusal regarding shares of stock of Rymic held by its major shareholders.  We also entered into a Strategic PartnershipAgreement with Rymic to share certain technologies and other expertise, and webecame an authorized reseller of Rymic’s line of rymicNETTM remote monitoringand control products in the computer, server, and data center managementmarkets.

 

Early in the first quarter of 2001 and prior to our investment, DoyleC. Weeks, one of our directors and our Executive Vice President for GroupOperations and Business Development, purchased 10,000 shares of common stock ofRymic at the price of $2.50 per share. Mr. Weeks also received a gift of 5,000 shares of Rymic common stockfrom one of its major shareholders.  Atapproximately the same time, Gary R. Johnson, our Senior Vice President ofWorldwide Sales and Marketing, purchased 10,000 shares of common stock at theprice of $2.50 per share.  At the timeof our investment, Mr. Weeks was one of 6 directors of Rymic, and in connectionwith his services as a director and prior to our investment, Mr. Weeks wasawarded nonqualified stock options to purchase 5,000 shares of Rymic commonstock at $2.50 per share that vested upon receipt.  Mr. Weeks did not receive any fees from Rymic.  Mr. Weeks remains on the board of directorsof Rymic, but will not receive any additional director fees or stock optionsfor as long as we hold our equity position in Rymic.

 

**Subsequent Event**

 

On August 5, 2002,we announced that we signed a definitive agreement to acquire 2C Computing,Inc. (“2C”) for approximately $22.8 million in cash.  2C has developed digital extension technology that splits the PCIbus of a PC and allows the PC motherboard, processor, hard drive, and otheruser devices to be located at a distance from the user and connected using CAT5 or fiber cable.  The acquisition iscontingent upon the approval of 2C’s shareholders and other customary conditionsto closing, and is expected to close on or before August 20, 2002.

 

In 2000, 2C andCybex Computer Products Corporation (“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 owns 40% of CyCom and the other 60% ofCyCom is owned by 2C.  Upon theformation of CyCom, Cybex contributed a license for 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 July 31, 2002.

 

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Under the terms ofthe joint venture membership agreement, 2C was responsible for all technologydevelopment efforts.  The net profits ofCyCom were to be split 60% to 2C and 40% to Cybex after 2C recouped its accumulatedlosses from the development and marketing of CyCom products.  The carrying value of our investment inCyCom is zero because Cybex’s contribution to it consisted of previouslyexpensed research and development costs related to the technology and CyCom has earned no profits to date.  We have no obligation to provide funding orother financial support to CyCom in future periods.  Upon closing our acquisition of 2C, which will include its 60%interest in CyCom, we intend to dissolve CyCom.

 

2C was founded byRemigius G. Shatas and Robert R. Asprey, who currently serve as directors of2C.  Mr. Shatas was formerly a member ofthe Board of Directors of Cybex (before the merger transaction with Apex Inc.that created Avocent) and served as executive vice president and chieftechnology officer of Cybex. Mr. Shatas remains a shareholder of Avocent.  Mr. Asprey was also formerly an officer ofCybex, and he too is a current Avocent shareholder.  David S. Butler, who is currently a director of 2C, is a formerdirector of Cybex and a current Avocent shareholder. Mr. Shatas, Mr. Asprey, and Mr. Butler ownless than 2% of Avocent’s outstanding shares in the aggregate.  A number of other 2C shareholders are alsoAvocent shareholders.  No officer ordirector of Avocent is an officer, director, shareholder or affiliate of 2C.

 

The acquisition will be recorded under the purchase method ofaccounting, and the purchase price will be allocated based on the fair value ofthe assets and liabilities acquired.  Inaccordance with generally accepted accounting principles, purchased researchand development costs allocated to developed technology will be capitalized andamortized over the respective estimated useful lives.  The remaining amounts of purchased research and development willbe expensed upon the closing of the transaction. Any goodwill resulting fromthe acquisition will not be amortized but will be included in our annual reviewof goodwill and other intangible assets for impairment.  We expect to complete the preliminaryallocation of the purchase price during the third quarter of 2002.

 

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Item 3.  Quantitative and Qualitative Disclosures AboutMarket Risks.

 

Our primary market risk is thepotential loss arising from changes in interest rates, which could have anadverse impact on the fair value of our investment securities.  Our investment policy is to manage ourinvestment portfolio to preserve principal and liquidity while maximizing thereturn on the investment portfolio through the investment of availablefunds.  We diversify the investmentportfolio by investing in a variety of highly–rated investment–gradesecurities and through the use of different investment managers.  Our investment securities portfolio isprimarily invested in securities with maturities (or interest rate resets) oftwo years or less with at least an investment grade rating to minimize interestrate and credit risk as well as to provide for an immediate source of funds.  Market risk is estimated as the potentialchange in fair value in the investment portfolio resulting from a hypothetical10% change in interest rates, and was not material at June 28, 2002.  We generally hold investment securitiesuntil maturity and carry the securities at amortized cost, which approximatesfair value.

 

We are also exposed to equityprice risks on our investments in publicly traded equity securities.  These investments are generally in companieshaving operations or technology in areas within our strategic focus.  We do not attempt to reduce or eliminate ourmarket exposure on these securities.  Asof June 28, 2002, the fair value of our equity investments was $2.6million.  A 20% adverse change in equityprices would result in a decrease of approximately $520 thousand in the fairvalue of our equity securities as of June 28, 2002.

 

We also face foreign currencyexchange rate risk to the extent that the value of certain foreign currenciesrelative to the U.S. dollar affects our financial results.  Our international operations transact aportion of our business in currencies other than the U.S. dollar, predominantlythe euro, and changes in exchange rates may positively or negatively affect ourrevenues, gross margins, operating expenses, and retained earnings since thesetransactions are expressed in U.S. dollars. We engage in some hedging programs aimed at limiting the impact ofcurrency fluctuations.  These hedgingactivities provide only limited protection against currency exchange risks, andthere can be no assurance that such an approach will be successful, especiallyif a significant and sudden decline occurs in the value of local currencies.

 

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**PART II****- OTHER INFORMATION**

 

**Item 1****.    LegalProceedings.**

 

In May 2001, Apex (our wholly-owned subsidiary) fileda complaint for patent infringement in the United States District Court for theSouthern District of New York against Raritan Computer Inc.  The Raritan complaint sought injunctiverelief, damages, attorneys’ fees and costs under three Apex patents.  After a seven day bench trial in New York inJanuary of 2002, U.S.District Judge Milton Pollack found that there was no infringement of threeApex patents by Raritan and ordered that judgment be entered in favor of Raritan.  We are in the process of appealing thejudgment.

 

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

 

On June 13, 2002, we held our Annual Meeting ofShareholders.  The matters voted on atthe meeting and the results of these votes are as follows:

 

1.             Electionof Class II Directors.

 
|               |   | **Votes for** |   | **Votes Withheld** |   |
|--------------------|--------|---------------|--------|--------------------|--------|
| 1. John R. Cooper  |   | 39,275,507    |   | 1,018,467          |   |
| 2. Edwin L. Harper |   | 39,341,939    |   | 952,035            |   |

 

2.             Ratifyappointment of  PricewaterhouseCoopersLLP as independent auditors for the fiscal year ending December 31, 2002.

 
| **Votes For** |   | **Votes Against** |   | **Votes Abstained** |   |
|---------------|--------|-------------------|--------|---------------------|--------|
| 39,159,637    |   | 1,129,160         |   | 5,177               |   |

 

**Item 6****.    Exhibitsand Reports on Form 8-K.**

 

(a)   Exhibits

 

10.30.1    Amended and Restated Amendment Agreementamong Avocent Corporation, Avocent Employment Services Co., Cybex ComputerProducts Corporation, and Stephen F. Thornton.

 

99.2         Certificationof the Chief Executive Officer and the Chief Financial Officer Pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Actof 2002.

 

(b)   Reports on Form 8-K

 

OnAugust 7, 2002 we filed a Report on Form 8-K with the Securities and ExchangeCommission reporting the public dissemination of a press release announcingthat we have entered into a Plan and Agreement of Merger, pursuant to which wewill acquire 2C Computing, Inc. subject to the approval of the 2C shareholders.

 

ITEMS 2, 3, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                                              | AVOCENT CORPORATION.                                                                                    |
|---------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                              | (Registrant)                                                                                            |
|                                              |                                                                                                    |
|                                              |                                                                                                    |
| Date:     August 9, 2002 | /s/ Douglas E. Pritchett                                                                                |   |
|                                              | Douglas E. Pritchett                                                                                    |
|                                              | Senior Vice President of Finance, Chief Financial  Officer and  Treasurer (Principal Financial Officer) |

 

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