**U.S. SECURITIES AND EXCHANGECOMMISSION**

**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  September 26, 2003 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 Registrantas 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 TelephoneNumber, Including Area Code)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934, as amended, duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.

 

ýYes  oNo

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended).

 

ýYes  oNo

 

As of October 28, 2003, the number ofoutstanding shares of the Registrant’s Common Stock was 46,899,938.

 

 

----

 

**AVOCENT CORPORATION**

**FORM 10-Q**

**SEPTEMBER 26, 2003**

 

**INDEX**

 
| Part I     | Financial  Information |
|------------|------------------------|
|       |                   |
|       | Item  1.               | Financial  Statements |
|       |                   |   |
|       |                   | Condensed  Consolidated Statements of Operations (unaudited) for the Three and Nine  Months Ended September 26, 2003 and September 27, 2002 |
|       |                   | Condensed Consolidated  Balance Sheets at September 26, 2003 (unaudited) and December 31, 2002 |
|       |                   | Condensed  Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended  September 26, 2003 and September 27, 2002 |
|       |                   | Notes to  Condensed Consolidated Financial Statements (unaudited) |
|       |                   |   |
|       | Item  2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|       |                   |   |
|       | Item  3.               | Quantitative  and Qualitative Disclosures about Market Risks |
|       |                   |   |
|       | Item  4.               | Controls  and Procedures |
|       |                   |   |
| Part  II   | Other  Information     |
|       |                   |
|       | Item 1.                | Legal  Proceedings |
|       | Item  6.               | Exhibits  and Reports on Form 8-K |
|       |                   |   |
| Signatures |

 

2

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**PART I****–FINANCIALINFORMATION**

 

**Item 1****.  Financial Statements**

 

**AVOCENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited in thousands,except per share data)

#### ** **

|                                                                  |   | **For the  three months ended** |     | **For the  nine months ended** |     |
|-----------------------------------------------------------------------|--------|---------------------------------|----------|--------------------------------|----------|
|                                                                  |   | **September  26,  2003**        |     | **September  27,  2002**       |     | **September  26,  2003** |   | **September  27,  2002** |   |
|                                                                  |   |                            | * * |                           | * * |   | * * |   | * * |
| Net sales                                                             |   | $                               | 76,482   |                           | $        | 64,490 |   | $ | 218,256 |   | $ | 189,612 |   |
| Cost of sales                                                         |   | 32,909                          |     | 31,252                         |     | 94,401 |   | 94,495 |   |
| Gross profit                                                          |   | 43,573                          |     | 33,238                         |     | 123,855 |   | 95,117 |   |
|                                                                  |   |                            |     |                           |     |   |   |   |   |
| Research and  development expenses                                    |   | 7,103                           |     | 6,176                          |     | 21,569 |   | 19,585 |   |
| Acquired  in-process research and development expense                 |   | —                          |     | 6,000                          |     | — |   | 6,000 |   |
| Selling, general  and administrative expenses                         |   | 16,838                          |     | 15,262                         |     | 51,621 |   | 50,653 |   |
| Amortization of  intangible assets                                    |   | 4,739                           |     | 5,474                          |     | 17,051 |   | 16,068 |   |
| Total operating  expenses                                             |   | 28,680                          |     | 32,912                         |     | 90,241 |   | 92,306 |   |
|                                                                  |   |                            |     |                           |     |   |   |   |   |
| Income from  operations                                               |   | 14,893                          |     | 326                            |     | 33,614 |   | 2,811 |   |
|                                                                  |   |                            |     |                           |     |   |   |   |   |
| Net investment  income                                                |   | 1,182                           |     | 1,364                          |     | 3,689 |   | 4,229 |   |
| Net realized  investment gains (losses)                               |   | 3,014                           |     | (125                           | )        | 2,804 |   | (269 | ) |
| Other income  (expense), net                                          |   | 1                               |     | (28                            | )        | (417 | ) | (141 | ) |
|                                                                  |   |                            |     |                           |     |   |   |   |   |
| Income before  provision for income taxes                             |   | 19,090                          |     | 1,537                          |     | 39,690 |   | 6,630 |   |
| Provision for  income taxes                                           |   | 5,614                           |     | 1,862                          |     | 10,701 |   | 3,085 |   |
|                                                                  |   |                            |     |                           |     |   |   |   |   |
| Net income  (loss)                                                    |   | $                               | 13,476   |                           | $        | (325 | ) | $ | 28,989 |   | $ | 3,545 |   |
|                                                                  |   |                            |     |                           |     |   |   |   |   |
| Earnings (loss)  per share:                                           |   |                            |     |                           |     |   |   |   |   |
| Basic                                                                 |   | $                               | 0.29     |                           | $        | (0.01 | ) | $ | 0.63 |   | $ | 0.08 |   |
| Diluted                                                               |   | $                               | 0.28     |                           | $        | (0.01 | ) | $ | 0.61 |   | $ | 0.08 |   |
|                                                                  |   |                            |     |                           |     |   |   |   |   |
| Weighted average  shares used in computing earnings (loss) per share: |   |                            |     |                           |     |   |   |   |   |
| Basic                                                                 |   | 46,347                          |     | 45,016                         |     | 45,900 |   | 44,931 |   |
| Diluted                                                               |   | 47,770                          |     | 45,016                         |     | 47,261 |   | 45,473 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

3

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**AVOCENT CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(In thousands, except pershare data)

 
|                                                                                                                                                                      |   | **September  26,  2003** |     | **December  31,  2002** |     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|----------|-------------------------|----------|
|                                                                                                                                                                      |   | **(unaudited)**          |     | **(audited)**           |     |
| **ASSETS**                                                                                                                                                                |   |                     | * * |                    | * * |
| Current assets:                                                                                                                                                           |   |                     |     |                    |     |
| Cash and cash  equivalents                                                                                                                                                |   | $                        | 59,264   |                    | $        | 61,699 |   |
| Investments  maturing within one year                                                                                                                                     |   | 121,164                  |     | 107,619                 |     |
| Accounts  receivable, net                                                                                                                                                 |   | 47,387                   |     | 36,313                  |     |
| Income taxes  receivable                                                                                                                                                  |   | 398                      |     | 609                     |     |
| Other  receivables, net                                                                                                                                                   |   | 534                      |     | 1,191                   |     |
| Inventories, net                                                                                                                                                          |   | 17,529                   |     | 24,422                  |     |
| Other current  assets                                                                                                                                                     |   | 5,289                    |     | 3,256                   |     |
| Deferred tax  assets                                                                                                                                                      |   | 4,574                    |     | 5,932                   |     |
| Total current  assets                                                                                                                                                     |   | 256,139                  |     | 241,041                 |     |
| Investments                                                                                                                                                               |   | 91,007                   |     | 44,849                  |     |
| Property held  for lease, net                                                                                                                                             |   | 1,575                    |     | 1,723                   |     |
| Property and  equipment, net                                                                                                                                              |   | 36,316                   |     | 24,313                  |     |
| Goodwill                                                                                                                                                                  |   | 203,625                  |     | 203,625                 |     |
| Other intangible  assets, net                                                                                                                                             |   | 35,460                   |     | 52,601                  |     |
| Other assets                                                                                                                                                              |   | 587                      |     | 455                     |     |
|                                                                                                                                                                      |   | $                        | 624,709  |                    | $        | 568,607 |   |
|                                                                                                                                                                      |   |                     |     |                    |     |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                             |   |                     |     |                    |     |
| Current  liabilities:                                                                                                                                                     |   |                     |     |                    |     |
| Accounts payable                                                                                                                                                          |   | $                        | 7,038    |                    | $        | 6,416 |   |
| Accrued wages  and commissions                                                                                                                                            |   | 7,330                    |     | 7,743                   |     |
| Accrued  liabilities                                                                                                                                                      |   | 14,682                   |     | 13,662                  |     |
| Income taxes  payable                                                                                                                                                     |   | 9,757                    |     | 6,901                   |     |
| Total current  liabilities                                                                                                                                                |   | 38,807                   |     | 34,722                  |     |
| Deferred tax  liabilities                                                                                                                                                 |   | 11,481                   |     | 16,213                  |     |
| Total  liabilities                                                                                                                                                        |   | 50,288                   |     | 50,935                  |     |
| 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, 46,465 and 45,210 shares issued  and outstanding as of September 26, 2003 and December 31, 2002, respectively |   | 46                       |     | 45                      |     |
| Additional  paid-in capital                                                                                                                                               |   | 959,837                  |     | 936,288                 |     |
| Accumulated  other comprehensive income                                                                                                                                   |   | 219                      |     | 14                      |     |
| Deferred compensation                                                                                                                                                     |   | (2,231                   | )        | (6,236                  | )        |
| Accumulated  deficit                                                                                                                                                      |   | (383,450                 | )        | (412,439                | )        |
| Total  stockholders’ equity                                                                                                                                          |   | 574,421                  |     | 517,672                 |     |
|                                                                                                                                                                      |   | $                        | 624,709  |                    | $        | 568,607 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

4

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**AVOCENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited, in thousands)

 
|                                                                                    |   | **For the  nine months ended** |       |
|-----------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                    |   | **September  26,  2003**       |       | **September  27,  2002** |   |
|                                                                                    |   |                           | * *   |   | * * |
| Cash flows from  operating activities:                                                  |   |                           | * *   |   | * * |
| Net income                                                                              |   | $                              | 28,989     |   | $ | 3,545 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:      |   |                           |       |   |   |
| Depreciation                                                                            |   | 3,445                          |       | 3,288 |   |
| Amortization of  intangible assets                                                      |   | 17,051                         |       | 16,068 |   |
| Stock-based  compensation                                                               |   | 3,994                          |       | 10,722 |   |
| Acquired  in-process research and development expense                                   |   | —                         |       | 6,000 |   |
| Amortization of  premiums on investments                                                |   | 2,574                          |       | 1,637 |   |
| Net realized  investment (gains) losses                                                 |   | (2,804                         | )          | 269 |   |
| Income tax  benefit from exercise of stock options                                      |   | 5,537                          |       | — |   |
| Changes in  operating assets and liabilities, net of effects of purchase of 2C in 2002: |   |                           |       |   |   |
| Accounts  receivable, net                                                               |   | (11,074                        | )          | 12,558 |   |
| Other  receivables, net                                                                 |   | 657                            |       | 951 |   |
| Inventories, net                                                                        |   | 6,893                          |       | 2,593 |   |
| Other assets                                                                            |   | (1,927                         | )          | 436 |   |
| Accounts payable                                                                        |   | 622                            |       | 1,857 |   |
| Accrued wages  and commissions                                                          |   | (413                           | )          | 1,483 |   |
| Accrued  liabilities                                                                    |   | 1,020                          |       | (3,398 | ) |
| Income taxes,  current and deferred                                                     |   | (307                           | )          | (2,691 | ) |
| Net cash  provided by operating activities                                              |   | 54,257                         |       | 55,318 |   |
|                                                                                    |   |                           | ** ** |   | ** ** |
| Cash flows from  investing activities:                                                  |   |                           | ** ** |   | ** ** |
| Purchase of 2C  Computing Inc., net of cash acquired                                    |   | —                         |       | (23,224 | ) |
| Purchases of  property and equipment                                                    |   | (15,447                        | )          | (5,023 | ) |
| Purchases of  investments                                                               |   | (157,858                       | )          | (120,272 | ) |
| Maturities of  investments                                                              |   | 95,129                         |       | 61,403 |   |
| Proceeds from  sales of available-for-sale investments                                  |   | 3,350                          |       | 36 |   |
| Net cash used in  investing activities                                                  |   | (74,826                        | )          | (87,080 | ) |
|                                                                                    |   |                           | ** ** |   | ** ** |
| Cash flows from  financing activities:                                                  |   |                           | ** ** |   | ** ** |
| Repayment of  short-term debt assumed in the 2C acquisition                             |   | —                         |       | (890 | ) |
| Proceeds from  employee stock option exercises                                          |   | 16,215                         |       | 1,920 |   |
| Proceeds from  employee stock purchase plan                                             |   | 1,809                          |       | 1,243 |   |
| Net cash  provided by financing activities                                              |   | 18,024                         |       | 2,273 |   |
|                                                                                    |   |                           |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                           |   | 110                            |       | 52 |   |
|                                                                                    |   |                           |       |   |   |
| Net decrease in  cash and cash equivalents                                              |   | (2,435                         | )          | (29,437 | ) |
| Cash and cash  equivalents at beginning of period                                       |   | 61,699                         |       | 80,506 |   |
| Cash and cash  equivalents at end of period                                             |   | $                              | 59,264     |   | $ | 51,069 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

5

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**AVOCENT CORPORATION**

**NOTESTO CONDENSED****CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited, in thousands)

 

Note 1.   Basis of 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 expenses duringthe reporting period.  Actual resultscould differ from those estimates and assumptions.  Certain reclassifications have been made to the prior yearfinancial statements to conform to the current year presentation.

 

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 endedDecember 31, 2002, which is on file with the Securities and ExchangeCommission and is also available on our website.

 

We report ourannual results based on years ending December 31.  We report our quarterly results for the first three interimperiods based on 13 week periods ending on Fridays and for the fourth interimperiod ending on December 31.

 

Our financialstatements are consolidated and include the accounts of Avocent Corporation andour wholly owned subsidiaries. Significant inter-company transactions and balances have been eliminatedin consolidation.

 

Note 2.   Inventories

 

Inventories consisted ofthe following:

 
|             |   | **September  26,  2003** |   | **December  31,  2002** |   |
|------------------|--------|--------------------------|--------|-------------------------|--------|
|             |   | **(unaudited)**          |   | **(audited)**           |   |
| Raw materials    |   | $                        | 4,870  |                    | $      | 7,560 |   |
| Work-in-process  |   | 1,025                    |   | 851                     |   |
| Finished goods   |   | 11,634                   |   | 16,011                  |   |
| Inventories, net |   | $                        | 17,529 |                    | $      | 24,422 |   |

 

Inventoriesabove have been reduced by reserves for excess and obsolete inventories of$5,081 and $7,502, as of September 26, 2003 and December 31, 2002,respectively.

 

Note 3.   StockOptions and Deferred Compensation

 

Deferred compensation — We recorded $41,165 of deferredcompensation related to Cybex employee stock options at the time of the mergerof Apex and Cybex on July 1, 2000. Additionally, we recorded $2,752 of deferred compensation related to theEquinox employee stock options at the time of the acquisition on January 3,2001.  The deferred compensation isbeing amortized over the vesting period of the options for which it wasrecorded.

 

Stock option exercises —Options to purchase 1,124 shares of our Common Stock were exercised during thenine months ended September 26, 2003. We received proceeds totaling $16,215 from these option exercises. Also,131 shares of our Common Stock were issued during the nine months endingSeptember 26, 2003 under our Employee Stock Purchase Plan.  We received proceeds totaling $1,809 fromthese share issuances.

 

Note 4.   AccumulatedOther Comprehensive Income

 

Werecord foreign currency translation adjustments and unrealized holding gains orlosses on our available-for-sale securities as accumulated other comprehensiveincome, which is included as a separate component of stockholders’ equity.  For the nine months ended September 26, 2003and September 27, 2002, total other comprehensive income (loss) amounted to$205 and ($5), respectively.  As ofSeptember 26, 2003 and December 31, 2002, total accumulated other comprehensiveincome was $219 and $14, respectively.

 

6

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Note 5.   Earnings(Loss) Per Share

 
|                                                                 |   | **Income (Loss)  (Numerator)** |       | **Shares  (Denominator)** |       | **Per-Share  Amount** |       |
|----------------------------------------------------------------------|--------|--------------------------------|------------|---------------------------|------------|-----------------------|------------|
|                                                                 |   |                           | ** ** |                      | ** ** |                  | ** ** |
| **For the three months ended September 26, 2003**                    |   |                           |       |                      |       |                  |       |
| **Basic EPS**                                                        |   |                           |       |                      |       |                  |       |
| Net income available to common stockholders                          |   | $                              | 13,476     |                      | 46,347     |                  | $          | 0.29 |   |
| **Effect of Dilutive Securities**                                    |   |                           |       |                      |       |                  |       |
| Stock options                                                        |   | —                         |       | 1,423                     |       | —                |       |
| **Diluted EPS**                                                      |   |                           |       |                      |       |                  |       |
| Net income available to common stockholders and  assumed conversions |   | $                              | 13,476     |                      | 47,770     |                  | $          | 0.28 |   |
|                                                                 |   |                           |       |                      |       |                  |       |
| **For the three months ended September 27, 2002**                    |   |                           |       |                      |       |                  |       |
| **Basic EPS**                                                        |   |                           |       |                      |       |                  |       |
| Net loss available to common stockholders                            |   | $                              | (325       | )                         | 45,016     |                  | $          | (0.01 | ) |
| **Effect of Dilutive Securities**                                    |   |                           |       |                      |       |                  |       |
| Stock options                                                        |   | —                         |       | —                    |       | —                |       |
| **Diluted EPS**                                                      |   |                           |       |                      |       |                  |       |
| Net loss available to common stockholders and  assumed conversions   |   | $                              | (325       | )                         | 45,016     |                  | $          | (0.01 | ) |
|                                                                 |   |                           |       |                      |       |                  |       |
| **For the nine months ended September 26, 2003**                     |   |                           |       |                      |       |                  |       |
| **Basic EPS**                                                        |   |                           |       |                      |       |                  |       |
| Net income available to common stockholders                          |   | $                              | 28,989     |                      | 45,900     |                  | $          | 0.63 |   |
| **Effect of Dilutive Securities**                                    |   |                           |       |                      |       |                  |       |
| Stock options                                                        |   | —                         |       | 1,361                     |       | —                |       |
| **Diluted EPS**                                                      |   |                           |       |                      |       |                  |       |
| Net income available to common stockholders and  assumed conversions |   | $                              | 28,989     |                      | 47,261     |                  | $          | 0.61 |   |
|                                                                 |   |                           |       |                      |       |                  |       |
| **For the nine months ended September 27, 2002**                     |   |                           |       |                      |       |                  |       |
| **Basic EPS**                                                        |   |                           |       |                      |       |                  |       |
| Net income available to common stockholders                          |   | $                              | 3,545      |                      | 44,931     |                  | $          | 0.08 |   |
| **Effect of Dilutive Securities**                                    |   |                           |       |                      |       |                  |       |
| Stock options                                                        |   | —                         |       | 542                       |       | —                |       |
| **Diluted EPS**                                                      |   |                           |       |                      |       |                  |       |
| Net income available to common stockholders and  assumed conversions |   | $                              | 3,545      |                      | 45,473     |                  | $          | 0.08 |   |

 

7

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Note 6.   Salesby Geographic Region

 

We report operations as asingle operating segment; however, we report sales by geographic region.  Following is a presentation of sales bygeographic region for the three and nine month ended September 26, 2003 and September27, 2002:

 
|               |   | **For the  Three Months  Ended** |       | **For the  Nine Months  Ended** |       |
|--------------------|--------|----------------------------------|------------|---------------------------------|------------|
|               |   | **Sept. 26,  2003**              |       | **Sept. 27,  2002**             |       | **Sept 26,  2003** |   | **Sept. 27,  2002** |   |
| Net sales:         |   |                             | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| United States      |   | $                                | 48,870     |                            | $          | 38,987 |   | $ | 135,361 |   | $ | 116,843 |   |
| Rest of the  World |   | 27,612                           |       | 25,503                          |       | 82,895 |   | 72,769 |   |
|               |   | $                                | 76,482     |                            | $          | 64,490 |   | $ | 218,256 |   | $ | 189,612 |   |

 

**As of September 26, 2003, long-lived assets totaled$276,976, which includes $269,016 held in the U.S. and $7,960 held outside ofthe U.S.  As of December 31, 2002,long-lived assets totaled $282,262, which includes $280,423 held in the U.S.and $2,305 held outside of the U.S.**

** **

**Note 7.**   Forward Contracts

** **

**We use forward contracts to reduceour foreign currency exposure related to the net cash flows from ourinternational operations. The majority of these contracts are short-termcontracts (three months or less) and are marked-to-market each quarter andincluded in trade payables, with the offsetting gain or loss included in otherincome (expense) in the accompanying statements of operations. At September 26,2003, we had a liability related to one open forward contract, maturing in thefourth quarter of 2003, with a fair value at September 26, 2003 ofapproximately $1.**

** **

**Note 8.**   Goodwill and Other IntangibleAssets

** **

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

** **
|                             |   | **September  26, 2003**      |   | **December  31, 2002**        |   |
|----------------------------------|--------|------------------------------|--------|-------------------------------|--------|
|                             |   | **Gross  Carrying  Amounts** |   | **Accumulated  Amortization** |   | **Gross  Carrying  Amounts** |   | **Accumulated  Amortization** |   |
|                             |   |                         |   |                          |   | **(audited)** |   | **(audited)** |   |
| Developed  technology            |   | $                            | 65,740 |                          | $      | 42,575 |   | $ | 65,740 |   | $ | 32,869 |   |
| Patents and  trademarks          |   | 17,549                       |   | 8,593                         |   | 17,350 |   | 5,663 |   |
| Customer base  and certification |   | 4,113                        |   | 2,874                         |   | 21,113 |   | 16,013 |   |
| Non-compete  agreements          |   | 3,273                        |   | 1,182                         |   | 3,273 |   | 364 |   |
| Other                            |   | 101                          |   | 92                            |   | 101 |   | 67 |   |
|                             |   | $                            | 90,776 |                          | $      | 55,316 |   | $ | 107,577 |   | $ | 54,976 |   |

** **

**During the third quarter of 2003, weretired $17,000 of fully amortized customer base assets and the relatedaccumulated amortization, which were recorded in 2000 at the merger of ApexInc. and Cybex Computer Products Corporation and had a three year estimateduseful life.  The retirement had noimpact on reported earnings.**

** **

**The approximate estimated annualamortization for other intangible assets is as follows:**

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

 

8

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**In accordance with Statement ofFinancial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*, we**test goodwill at least annually for impairment.  Unless conditions warrant earlier review, weperform the annual impairment test in the fourth quarter of each year.  There were no additions or deletions to thecarrying amount of goodwill for the three and nine months ended September 26,2003.

** **

**Note 9.**   Shannon Building Purchase

** **

In June 2003, we purchased a facility in the free trade zonein Shannon, Ireland, for approximately $6,400. We transferred our European headquarters and manufacturing operations tothe new building in July 2003 and vacated the previously leased facility, alsoin Shannon.

 

**Note 10.  StockBased Compensation**

 

We apply the intrinsic value methodin Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued toEmployees*, and related Interpretations in accounting for our stockplans. Had compensation cost for our stock-based compensation plans beendetermined based on the fair value at the grant dates for awards under thoseplans consistent with the method prescribed in SFAS No. 123, *Accountingfor Stock-Based Compensation*, our net income and earnings per sharewould have been reduced to the pro forma amounts indicated below:

 
|                                                                                                                                    |   | **Three  Months ended** |   | **Nine  Months Ended** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                                                                                                    |   | **Sept. 26,  2003**     |   | **Sept. 27,  2002**    |   | **Sept. 26,  2003** |   | **Sept. 27,  2002** |   |
| Net income  (loss)  — as reported                                                                                             |   | $                       | 13,476 |                   | $      | (325 | ) | $ | 28,989 |   | $ | 3,545 |   |
| Add: Stock-based  employee compensation expense included in reported net income, net of related  tax effects                            |   | 709                     |   | 1,582                  |   | 3,706 |   | 9,370 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value method  for all awards, net of related tax effects |   | 6,700                   |   | 8,072                  |   | 22,053 |   | 28,650 |   |
| Net income  (loss) — pro forma                                                                                                     |   | $                       | 7,485  |                   | $      | (6,815 | ) | $ | 10,642 |   | $ | (15,735 | ) |
|                                                                                                                                    |   |                    |   |                   |   |   |   |   |   |
| Basic earnings  (loss) per share — as reported                                                                                     |   | $                       | 0.29   |                   | $      | (0.01 | ) | $ | 0.63 |   | $ | 0.08 |   |
| Basic earnings  (loss) per share — pro forma                                                                                       |   | $                       | 0.16   |                   | $      | (0.15 | ) | $ | 0.23 |   | $ | (0.35 | ) |
| Diluted earnings  (loss) per share — as reported                                                                                   |   | $                       | 0.28   |                   | $      | (0.01 | ) | $ | 0.61 |   | $ | 0.08 |   |
| Diluted earnings  (loss) per share — pro forma                                                                                     |   | $                       | 0.16   |                   | $      | (0.15 | ) | $ | 0.23 |   | $ | (0.35 | ) |

 

The pro forma amounts reflected aboveare not representative of the effects on reported net income in future yearsbecause, in general, the options granted typically do not vest for severalyears and additional awards are made each year. The fair value of each optiongrant is estimated on the grant date using the Black-Scholes option-pricingmodel using the following weighted-average assumptions:

 
|                    |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|-------------------------|--------|-------------------------|--------|------------------------|--------|
|                    |   | **Sept. 26,  2003**     |   | **Sept. 27,  2002**    |   | **Sept. 26,  2003** |   | **Sept. 27,  2002** |   |
| Dividend yield          |   | 0.0                     | %      | 0.0                    | %      | 0.0 | % | 0.0 | % |
| Expected life (years)   |   | 4.5                     |   | 5.0                    |   | 4.5 |   | 5.0 |   |
| Expected volatility     |   | 60.0                    | %      | 67.5                   | %      | 60.0 | % | 67.5 | % |
| Risk-free interest rate |   | 2.88                    | %      | 2.93                   | %      | 2.38 – 2.88 | % | 2.93 - 4.47 | % |

 

**Note 11.  SubsequentEvent**

** **

InOctober 2003, Avocent Huntsville Corp. (formerly Cybex Computer ProductsCorporation), a wholly-owned subsidiary of Avocent Corporation, filed acomplaint for patent infringement in the United States District Court for theNorthern District of Alabama against ClearCube Technology, Inc.  The ClearCube complaint seeks injunctiverelief, damages, attorneys’ fees, and costs under three Avocent patents.

 

9

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**Item 2.**  Management’s Discussion and Analysis ofFinancial 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 ABOUT THE RATIO OF SALES AMONG OUR DISTRIBUTIONCHANNELS, STATEMENTS REGARDING FUTURE INVENTORY LEVELS, STATEMENTS ABOUT THETIMING, IMPLEMENTATION, AND BENEFITS OF OUR NEW ERP SYSTEM, STATEMENTS RELATINGTO THE ENFORCEMENT OF OUR INTELLECTUAL PROPERTY RIGHTS, AND STATEMENTS RELATINGTO ANTICIPATED CAPITAL SOURCES, NEEDS, AND USES.*

 

*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 ANDEXCHANGE COMMISSION ON MARCH 27, 2003.*

** **

**Overview**

 

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

 

We provide “plug and play”switching systems for many network administration, management, and storageproblems faced by corporate customers, data centers, and server farms. Ourswitching solutions include products, technologies, and software sold orlicensed under the Avocent, Apex, Cybex, Equinox, and 2C brands, including our *AMXTM*,*AutoViewTM,DS SeriesTM, SwitchView®, OutLook®, and XP®4000 Series* products. Ourswitching systems and solutions help facilities managers and networkadministrators access multiple servers and serially controlled devices from oneor more centralized or remote consoles, consolidate hardware requirements, andprovide direct hardwired connections between the switch and the attachedservers to facilitate access to those servers, even when the network is down. OurEquinox branded products add high-performance, reliable, and affordableserver-based products for serial and dial-up access applications.  The Equinox *SuperSerialTM* product line provides serial communications forsecurity, commercial point-of-sale, process control, industrial automation,data collection, remote access, fax servers, Internet access, and customapplications. Our Digital Desktops product line includes the *CstationTM* product.  Initial applications for Cstation includefinancial trading floors where space is at a premium, industrial plant controlenvironments that benefit from remote computers due to harsh or unsecuredenvironments, and government installations that require high security affordedthrough the remote location of the computer and hard disk.

 

Our revenue is derived from sales to a limited numberof OEMs who purchase our switching systems on a private-label or branded basisfor integration and sale with their own products and branded sales which aremade either through our reseller and distributor network or to a limited numberof direct customers. For the nine months ended September 26, 2003, brandedsales were 55% of net sales, while sales to our OEM customers were 45% of netsales. We do not have contracts with many of these customers, and in general,they are obligated to purchase products from us only pursuant to bindingpurchase orders.  The loss of, ormaterial decline in orders from, our OEM customers would have a materialadverse effect on our business, financial condition, results of operation, andcash flow.  Our top five customers,

 

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including OEMs anddistributors, accounted for approximately 63% of our sales for the nine monthsended September 26, 2003.

 

We sell our products in the United States, Canada,Europe, and Asia as well as in other foreign markets.  Sales within the United States accounted for approximately 62% ofsales in the nine months ended September 26, 2003, while sales outside of theUnited States accounted for 38% of sales in the nine months ended September 26,2003.

 

With continued industry-wideinitiatives to reduce all channel inventories and to shorten lead times, trendswith our major customers are generally to reduce the number of weeks of forward-committedfirm orders. This trend is currently affecting our business with certaindistributors, OEMs, and other server manufacturers.  We believe that it will make our futuresales more difficult to predict and inventory levels more difficult to manage.

 

We are currently experiencingincreased price competition in the market for all of our products, and weexpect that pricing pressures will continue to increase in the future.  In addition, general economicconditions are not as favorable as they were in prior years, and our revenuegrowth rate has slowed.  Depending onfuture general economic conditions and other factors, our revenue could declinein the future.

 

We received ISO 9000:2000accreditation for our global business processes during the first quarter of2003.  We believe ISO accreditation willbecome a requirement for doing business with several of our OEM customers.

 

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

 

Our stockholders approvedthe adoption of the Avocent Corporation 2003 Stock Option Plan at the annualmeeting of stockholders held in June 2003. Under the 2003 Stock Option Plan, 2.0 million shares of our common stockare reserved for issuance and we have issued approximately 496,000 optionsunder this plan through September 26, 2003. We expect to file a registration statement on Form S-8 to register theshares authorized for issuance under this plan during the fourth quarter of2003.

#### ** **

**Results ofOperations**

 

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

 
|                                                  |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|-------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|
|                                                  |   | **Sept. 26,  2003**    |   | **Sept. 27,  2002**   |   | **Sept. 26,  2003** |   | **Sept. 27,  2002** |   |
|                                                  |   |                   |   |                  |   |   |   |   |   |
| Net sales                                             |   | 100.0                  | %      | 100.0                 | %      | 100.0 | % | 100.0 | % |
| Cost of sales                                         |   | 43.0                   |   | 48.5                  |   | 43.3 |   | 49.8 |   |
| Gross profit                                          |   | 57.0                   |   | 51.5                  |   | 56.7 |   | 50.2 |   |
| Operating expenses:                                   |   |                   |   |                  |   |   |   |   |   |
| Research and development expenses                     |   | 9.3                    |   | 9.6                   |   | 9.9 |   | 10.3 |   |
| Acquired  in-process research and development expense |   | —                 |   | 9.3                   |   | — |   | 3.2 |   |
| Selling, general and administrative expenses          |   | 22.0                   |   | 23.6                  |   | 23.6 |   | 26.7 |   |
| Amortization of intangible assets                     |   | 6.2                    |   | 8.5                   |   | 7.8 |   | 8.5 |   |
| Total operating expenses                              |   | 37.5                   |   | 51.0                  |   | 41.3 |   | 48.7 |   |
| Income from operations                                |   | 19.5                   |   | 0.5                   |   | 15.4 |   | 1.5 |   |
| Net investment income                                 |   | 1.5                    |   | 2.2                   |   | 1.7 |   | 2.2 |   |
| Net realized investment gains (losses)                |   | 3.9                    |   | (0.2                  | )      | 1.3 |   | (0.1 | ) |
| Other income (expense), net                           |   | 0.1                    |   | (0.1                  | )      | (0.2 | ) | (0.1 | ) |
| Income before provision for income taxes              |   | 25.0                   |   | 2.4                   |   | 18.2 |   | 3.5 |   |
| Provision for income taxes                            |   | 7.4                    |   | 2.9                   |   | 4.9 |   | 1.6 |   |
| Net (loss) income                                     |   | 17.6                   | %      | (0.5                  | )%     | 13.3 | % | 1.9 | % |

 

11

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*Net sales.*  Net sales increased 19% to $76.5 million forthe third quarter of 2003 from $64.5 million for the third quarter of2002.  The increase in sales resultedfrom the strength of both our OEM and branded channels in the third quarter of2003 as compared to the third quarter of 2002. Both the branded channel and the OEM channel benefited from revenue fromincreased sales of our digital products and from new products introduced duringthe second half of 2002 and the first nine months of 2003. The new productsinclude the AMX, the AVR, and OEM versions of our digital product family.  Additionally, sales of our SwitchViewproduct line increased due to shipments of new products, as well as increasedsales of our Secure SwitchView SC products. Overall, new products accounted for approximately $7.6 million of thirdquarter 2003 net sales.

 

Sequentially, our salesincreased approximately $5.9 million from the second quarter of 2003.  The sequential increase in sales can beattributed primarily to strength in our U.S. sales.  U.S. branded sales increased 13% over the second quarter of 2003,while U.S. OEM sales increased 7%. International sales increased slightly, led primarily by a rebound inour branded and OEM business in Asia. Sales in the Asia Pacific region increased approximately $1.1 millionsequentially, while our business in Europe was relatively flat from the secondquarter of 2003.  Europe’s performancein the third quarter of 2003 was consistent with trends from prior years as theEuropean markets are usually slower in the third quarter due to extendedvacations taken during the later summer months.

 

On a year-over-yearbasis, sales through our branded channelincreased 23% from $35.0 million in the third quarter of 2002 to $43.1 millionin the third quarter of 2003. OEM sales increased 13% from $29.5 million in thethird quarter of 2002 to $33.4 million in the third quarter of 2003. Brandedsales were 56% of sales for the third quarter of 2003 compared to 54% of salesfor the third quarter of 2002.  OEMsales were 44% of sales for the third quarter of 2003 compared to 46% of salesfor the third quarter of 2002.

 

Ona year-over-year basis, we experienced an increase in sales both within theUnited States and internationally. Sales within the United States increased 25%to $48.9 million in the third quarter of 2003 from $39.0 million in the thirdquarter of 2002.  International salesincreased 8% to $27.6 million in the third quarter of 2003 from $25.5 millionin the third quarter of 2002.  Saleswithin the United States were 64% of sales for the third quarter of 2003 andwere 60% of sales in the third quarter of 2002.   International sales were 36% and 40% of sales for the thirdquarter of 2003 and 2002, respectively.

 

Netsales increased 15% to $218.3 million for the first nine months of 2003 from$189.6 million for the first nine months of 2002.  As with the third quarter, the increase in sales resulted fromnew product introductions and from increased sales of our digitalproducts.  The strength in sales on ayear-to-date basis was evident both in U.S. and international sales.  Sales within the United States increased byapproximately 16% to $135.4 million in the first nine months of 2003 from$116.8 million in the first nine months of 2002.  International sales increasedapproximately 14% from $72.8 million in the first nine months of 2002 to $82.9million in the first nine months of 2002.

 

We anticipate growth in sales of our digital, AMX, andSwitchView product lines and modest increased revenue from our embeddedapplications and licensing arrangements to contribute to an increase in revenuefor both our branded and OEM businesses in the fourth quarter of 2003.  In the past, revenue in our fourth quarter of each year has typicallybeen higher than revenue in prior quarters for that year.  In addition, we typically see a sequentialdecline in revenue from the fourth quarter of a year to the first quarter ofthe following year.  While it isdifficult to predict revenue in any quarter, we expect that this pattern willcontinue in the future.

 

*Grossprofit.*Gross profit maybe affected by a variety of factors, including: the ratio of sales among ourdistribution channels, as OEM sales typically have lower gross margins than ourbranded sales; absorption of fixed costs as sales levels fluctuate; productmix, raw materials, and labor costs; new product introductions by us and by ourcompetitors; and the level of our outsourcing of manufacturing and assemblyservices.  Gross margin increased to 57.0% in the third quarter of 2003 ascompared to 51.5% in the third quarter of 2002.  The primary reasons for strong margins in the third quarter of2003 were cost reductions attained from our suppliers and a favorable customerand product mix.  Our costs declined inthe third quarter of 2003 primarily due to improved pricing from ourvendors.  Our U.S. branded salesincreased significantly from the prior year, and these sales typically carry ahigher gross margin than our OEM and international sales.  Our digital products and AMX products havehigher gross margins than our other products and accounted for over 40% oftotal sales for the third quarter of 2003, compared to 25% of sales for thethird quarter of 2002.  However, pricedecreases granted to our OEM customers and discounts given to certain newinternational customers during the third quarter offset the effect of thehigher sales of the newer products and resulted in the sequential decrease ingross margins from 57.6% in the second quarter of 2003.  Gross margin increased to 56.7% for thefirst nine months of 2003 from 50.2% for the first nine months of 2002, also asa result of the factors discussed above. In the fourth quarter of 2003, we expect gross margin to be in the 55%to 58% range as we anticipate OEM and international sales will increase as apercentage of our sales mix.  For the

 

12

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longer term, competitive and customer pressures may result in decreasedprices for our products, reducing our gross margins.

 

*Researchand development expenses.* Research and development expensesinclude compensation for engineers, support personnel, outside contractedservices and materials costs, and are expensed as they are incurred.  Research and development expenses were $7.1million, or 9.3% of net sales, in the third quarter of 2003 compared to $6.2million, or 9.6% of net sales, for the third quarter of 2002.  The increase in the amount spent on researchand development can be attributed to an increase in headcount, and an increasein materials, certification, and testing of products currently in development. The increase in headcount is the result of the hiringof software engineers to support software embedded within our expanding suiteof digital offerings.   In addition, wecontinue to establish more engineering test labs in order to improve completiontime for developing and testing new products. We believe that the timely development of innovative products andenhancements to existing products is essential to maintaining our competitiveposition.  Year-to-date research and development expenses for 2003 increased to$21.6 million from $19.6 million year-to-date in 2002 for the reasons listedabove.  As a percentage of net sales,year-to-date research and development expenses decreased slightly to 9.9% from10.3%.  We expect research anddevelopment expenditures to be 4% to 7% higher in the fourth quarter of 2003 ascompared to the third quarter of 2003.

 

*Acquiredin-process research and development expense.*The in-processresearch and development expense of $6.0 million in the three and nine monthsended September 27, 2002 is comprised solely of the acquisition costs of 2Cattributable to in-process technologies. The charges for in-processtechnologies are non-recurring.

 

***Selling, generaland administrative expenses.***  Selling, general and administrative expenses includepersonnel costs for administration, finance, information systems, humanresources, sales and marketing, and general management, as well as some mergerand acquisition related expenses, rent, utilities, legal and accountingexpenses, bad debts, advertising, promotional material, trade show expenses,and related travel costs.  Selling, general and administrative expenseswere $16.8 million, or 22.0% of net sales, for the third quarter of 2003compared to $15.3 million, or 23.6% of net sales, for the third quarter of2002.  The increase in selling, generaland administrative expenses was due primarily to increased labor costs as aresult of additions to headcount and higher advertising costs.  Our additions to headcount were the result of hiring sales staff in Europe, Asia, and certain regionsof the U.S. to strengthen our sales force in key regions and the hiring ofadditional information technology staff to support our enterprise resourceplanning information system project.   The increased advertisingexpense was the result of expenses related to the rollout of new products. Year-to-date selling, general, and administrativeexpenses increased slightly to $51.6 million, or 23.6% of net sales for 2003,from $50.7 million, or 26.7% of year-to-date net sales in 2002.  The first quarter of 2002 was heavily affected by $2.7 million inlegal fees related to patent litigation, as well as $2.0 million ofcompensation expense recorded as the result of a cashless option exercise.  Looking ahead, we expect legal and accounting costs related tocorporate governance initiatives (including the Sarbanes-Oxley Act of 2002 andother regulatory changes) and continued protection of our intellectual propertyrights to increase.  Additionally, weexpect increased costs related to additional sales staffing, product rolloutprograms, increased trade show activity, increased advertising activity, andincreased travel costs related to these efforts.  Accordingly, we expect selling, general and administrativeexpenditures to increase 4% to 7 % in the fourth quarter of 2003 from the levelwe experienced in the third quarter of 2003.

 

***Amortization ofintangible assets.***  Amortization of $4.7 million in the thirdquarter of 2003 is comprised of the amortization of the identifiable intangibleassets created as a result of the merger transaction between Apex and Cybex andthe acquisitions of Equinox and 2C, while amortization of $5.4 million in the thirdquarter of 2002 includes the amortization of the identifiable intangible assetscreated as a result of the merger transaction between Apex and Cybex, theacquisition of Equinox and one month of amortization of similar assets relatedto the acquisition of 2C.  The decreasein amortization expense relates primarily to recording no amortization expensefor the customer base recorded at the merger of Apex and Cybex, as this assethad an estimated life of three years and was fully amortized at the end of thesecond quarter of 2003.  The reductionin amortization expense was partially offset by the addition of a three monthsof expense for intangible assets recorded in connection with the acquisition of2C in August of 2002.  Year-to-date,amortization expense increased from $16.1 million in the first nine months of2002 to $17.1 million in the first nine months of 2003 as a result of thefactors mentioned above.

** **

*Net investment income.**** *Net******investment income decreased to $1.2 millionin the third quarter of 2003 from $1.4 million in the third quarter of2002.  For the first nine months, netinvestment income decreased to $3.7 million in 2003 from $4.2 million in2002.  Althoughwe had more cash and investments during the third quarter and in the first ninemonths of 2003 than in 2002, interest income declined due to lower interestrates.

 

***Net realizedinvestment gains (losses). ***Net realized investment gains (losses) increasedfrom a loss of $125,000 in the third quarter of 2002 to a gain of $3.0 millionin the third quarter of 2003, almost entirely as a result of a recognized gainon the disposition of an equity investment.  For thefirst nine months, net realizedinvestment gains (losses) increased from a

 

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**loss of $269,000 in 2002 to a gainof $2.8 million in 2003 as a result of the factors mentioned above.**

 

*Other income(expense), net.*  Net other income (expense) improved from anexpense of $28,000 in the third quarter of 2002, to income of $1,000 in the thirdquarter of 2003. The increase related primarily to an improvement in foreignexchange losses recorded in the third quarter of 2003 as compared to the lossesrecorded in the third quarter of 2002. This improvement relates primarily tothe change in the exchange rate of the dollar versus the euro. Due to largerforeign exchange losses in the first quarter of 2003 as compared to the firstquarter of 2002, net other income (expense) increased from an expense of$141,000 in the first nine months of 2002 to an expense of $418,000 in thefirst nine months of 2003.

 

*Provision for income taxes.*  Theprovision for income taxes was approximately $5.6 million for the thirdquarter of 2003 compared to $1.9 million in the third quarter of 2002.  The change in taxes resulted from the impactof merger related expenses on lower sales volume and taxable income in thesecond quarter of 2002 as compared to higher sales volume and higher taxableincome in 2003. Also affecting our tax rate was the mix of our pre-tax profit amongour U.S. and international subsidiaries. For the year, the provision for income taxes was approximately $10.7million for the first nine months of 2003, compared to $3.1 million forthe first nine months of 2002, as a result of the factors mentioned above.

 

*Net income (loss).*  Net income for the thirdquarter of 2003 was $13.5 million compared to a loss of $325,000 for the thirdquarter of 2002 as a result of the above factors, including the increase in ourrevenues, an increase in our margins, and an increase in realized investmentgains, partially offset by an increase in selling, general and administrativecharges and research and development expenses. In addition, there was aone-time expense in 2002 for in-process research and development costs acquiredfrom 2C without a similar expense in 2003. Net income as a percentage of sales for the third quarter of 2003 was17.6%, compared to a net loss as a percentage of sales of 0.5% for the thirdquarter of 2002. Our net income for the first nine months of 2003 was$29.0 million compared to $3.5 million for the first nine months of2002, again as a result of the above factors. Net income as a percentage of sales for the first nine months of 2003was 13.3%, compared to 1.9% for the first nine months of 2002.

 

**Liquidity and Capital Resources**

 

As of September 26, 2003, our principal sources ofliquidity consisted of over $271 million in cash, cash equivalents, andinvestments.  We have no outstandingdebt or available credit facilities as of this filing.

 

Our operating activities generated cash of over$54 million in the first nine months of 2003 compared to approximately $55million in the first nine months of 2002. The cash flow from operationsin the first nine months of 2003 is primarily the result of increased netincome and our continued focus on managing our inventory, which were offset byan increase in receivables as of September 26, 2003.  Inventories declined from $24.4 million at December 31, 2002 to$17.5 million at September 26, 2003. The decline in inventory was the result of the continued efforts of ourglobal operations group to increase turnover by consuming existing supplieswhile maintaining adequate inventory to meet customer demands.  Also affecting inventory levels was a strongincrease in sales during September. Revenues in our third quarter typically trend upward during September,as Europeans return from extended summer vacations. We anticipate thatinventories will be slightly higher at the end of  2003 as we replenish the supply of inventories sold at the end ofthe third quarter of 2003.  We recordeda tax benefit from the exercise of stock options of almost $5.5 million in thefirst nine months of 2003.  Weexperienced significant exercises of stock options in the first nine months of2003 as our stock achieved new 52-week highs at several points during2003.  An increase in receivablespartially offset the impact of the decline in inventory and the reduction inour current income tax payable due to the exercises of stock options.  The increase in receivables was a result ofthe timing and volume of sales in the latter part of the third quarter of2003.  In addition, we recorded arealized gain of almost $3.2 million during the third quarter related to thedisposition of an equity investment.

 

In the ordinary course ofbusiness, we may at any point in time have a significant amount of contractualcommitments not yet recognized in our financial statements. These commitmentsrelate primarily to our need to schedule the purchase of inventories in advanceof the related forecasted sales to customers. We have longer lead times for theproducts we purchase from suppliers based in Asia than those for our U.S. basedand European suppliers. Our actual contractual commitments are typically limitedto products needed for the next one to three months of forecasted sales. Theliabilities for these inventory purchases along with the related inventoryassets are typically recognized upon our receipt of the related products. Wealso have at any point in time a variety of short term contractual commitmentsfor services such as advertising, marketing, accounting, legal, and researchand development activities. The liabilities for these services and the relatedexpenses are typically recognized upon our receipt of the related services.

 

During 2003 we commencedimplementation of a new enterprise resource planning system which we expect tohave fully operational in 2004. We have capitalized costs related to the ERPproject of approximately $7.4 million through September 26, 2003.  We expect the total project cost ofimplementing the system to be in the range of $11.0

 

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million to $12.2million.  We expect the new system willprovide many benefits, including more detailed information to improve the wayswe manage inventory, customer relationships and operating expenses.  The implementation of the new systeminvolves a number of risks, as detailed in the Risk Factors contained in ourForm 10-K for December 31, 2002.

 

During the secondquarter of 2003, we purchased a facility in Shannon, Ireland for approximately$6.4 million.  We occupied the buildingduring July 2003.

 

Weintend to use a portion of our cash and investments for strategic acquisitionsof technologies and companies that will enhance and complement our existingtechnologies and help increase our sales.

 

**Investments**

 

Our investments consistof corporate bonds, municipal bonds, commercial paper, mortgage backedsecurities guaranteed by U.S. government agencies, and common stock. Debtsecurities that we have the positive intent and ability to hold to maturity areclassified as held-to-maturity securities and are reported at amortized cost.Debt and equity securities not classified as held-to-maturity securities andthat have readily determinable fair values are classified as available-for-salesecurities and are reported at fair value, with unrealized gains and lossesexcluded from earnings and reported as a 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 September 26, 2003, no investment was considered to have sustained an other-than-temporarydecline, and no impairment charges were recorded.

 

**CriticalAccounting Policies**

 

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

 

•              We review customercontracts to determine if all of the requirements for revenue recognition havebeen met prior to recording revenues from sales transactions.  We generally record sales revenue uponshipment of our products, net of any discounts, since we generally do not havesignificant post delivery obligations, the product price is fixed anddeterminable, collection of the resulting receivable is probable, and productreturns are reasonably estimable.  Wegenerally ship products upon receipt of a purchase order from a customer.  We record revenue in accordance with theapplicable terms of each respective customer contract.  Accordingly, revenue on products shipped FOBdestination is recorded when the customer takes possession of the goods, andrevenue on products shipped FOB shipping point is recorded when the goods leaveour facilities.  Shipping and handlingfees are included in net sales, and the related costs are included in cost ofsales in the accompanying consolidated statements of operations

 

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

 

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

 

•              We carry ourinventory at the lower of cost or market, with cost being determined using thefirst-in, first-out method.  We usestandard costs for material, labor, and manufacturing overhead to value ourinventory.  We review and revise ourstandard costs on a quarterly basis. Therefore, our inventory costs approximate actual costs at the end ofeach reporting period.  We write down our inventory forestimated obsolescence or unmarketable inventory to the estimated market valuebased upon assumptions about future demand and

 

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market conditions. If actual future demand or market conditions are less favorable thanthose projected by management, additional inventory write-downs may berequired.

 

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

 

•              We hold investmentsin various publicly-traded debt securities, including mortgaged-backed andother asset-backed securities.  Werecord an investment impairment charge when we believe an investment hasexperienced a decline in value that is other than temporary.  Future adverse changes in market conditionsor poor operating results of underlying investments could result in losses oran inability to recover the carrying value of the investments that may not bereflected in an investment’s current carrying value, thereby possibly requiringan impairment charge in the future.

 

We also invest in privately held entities and generallyrecord our investments in these entities at cost or we use the equity method ifwe have the ability to exercise significant influence over the entity.  We review our investments in these entitiesperiodically to determine if circumstances (both financial and non-financial)exist that indicate that we will not recover our initial investment.  We record impairment charges on investmentshaving a carrying value that is greater than the value that we would reasonablyexpect to receive in an arm’s length sale of the investment.

 

•              Duringthe first quarter of 2003 we began implementing a new ERP system.  In accordance with SOP 98-1, “Accounting forthe Costs of Computer Software Developed or Obtained for Internal Use,” we arecapitalizing the direct costs incurred during the application development stageof the implementation.  The costscapitalized to date for the new system totaled $7.4 million as of September 26,2003.

 

**Item 3****.  Quantitativeand Qualitative Disclosures About Market Risks.**

 

Ourprimary market risk is the potential loss arising from increases in interestrates, which could have an adverse impact on the fair value of our investmentsecurities. Our investment policy is to manage our investment portfolio topreserve principal and liquidity while maximizing the return on our investmentportfolio through the investment of available funds. We diversify ourinvestment portfolio by investing in a variety of highly-rated investment-gradesecurities and through the use of different investment managers. Our investmentsecurities portfolio is primarily invested in securities with maturities (orinterest rate resets) of two years or less with at least an investment graderating to minimize interest rate and credit risk as well as to provide for animmediate source of funds. Market risk, calculated as the potential change infair value in our investment portfolio resulting from a hypothetical 10% changein interest rates, was not material at September 26, 2003. We generally holdinvestment securities until maturity.

 

Weface foreign currency exchange rate risk to the extent that the value ofcertain foreign currencies relative to the U.S. dollar affects our financialresults.  Our international operationstransact a portion of our business in currencies other than the U.S. dollar,predominantly the euro, and changes in exchange rates may positively ornegatively affect our revenues, gross margins, operating expenses, and retainedearnings since these transactions are reported by us in U.S. dollars.  We occasionally purchase foreign currencyforwards aimed at limiting the impact of foreign currency fluctuations.  These instruments provide only limitedprotection against currency exchange risks, and there can be no assurance thatsuch an approach will be successful, especially if a significant and suddendecline occurs in the value of local currencies. At September 26, 2003, we hadone open forward contract, maturing in the fourth quarter of 2003, with a fairvalue at September 26, 2003 of approximately $1,000.

 

**Item 4****.  Controlsand Procedures.**

 

(a) *Evaluation of disclosure controls and procedures.**    *Based on their evaluationas of the end of the period covered by this Quarterly Report on Form 10-Q, ourChief Executive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)under the Securities Exchange Act of 1934) are effective to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in Securities and Exchange Commission rules andforms.

 

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(b) *Changes in internal control over financial reporting*.      There was no significantchange in our internal control overfinancial reporting that occurred during the period covered by thisQuarterly Report on Form 10-Q that has materially affected, or is reasonablylikely to materially affect, our internal control and financial reporting.However, we are in the process of implementing a new ERP system, which weexpect, when implemented, will enhance internal controls over financialreporting through the automation and standardization of certain controls andprocesses and support our anticipated future growth.

 

 

**PARTII****– OTHER INFORMATION**

 

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

 

In May 2001, AvocentRedmond Corp. (formerly Apex Inc.), our wholly-owned subsidiary, filed acomplaint for patent infringement in the United States District Court for theSouthern District of New York against Raritan Computer Inc. The Raritancomplaint sought injunctive relief, damages, attorneys’ fees and costs underthree Apex patents.  After a seven daybench trial in New York in January of 2002, U.S. District Judge Milton Pollack foundthat there was no infringement of these patents by Raritan and ordered thatjudgment be entered in favor of Raritan.

 

In April 2003, the United States Court of Appeals forthe Federal Circuit issued its ruling on our appeal in this patentlitigation.  The Court of Appeals ruledin favor of Avocent Redmond Corp. by vacating the non-infringement decision ofthe District Court for the Southern District of New York and remanding the casefor further proceedings consistent with the Court of Appeals’ opinion.

 

InSeptember 2003, Raritan petitioned the United States Supreme Court for a Writof Certiorari to review the Court of Appeals decision.  Our response to the petition will be filedwith the Supreme Court later this quarter.

 

In October 2003, Avocent Huntsville Corp. (formerlyCybex Computer Products Corporation), another wholly-owned subsidiary, filed acomplaint for patent infringement in the United States District Court for theNorthern District of Alabama against ClearCube Technology, Inc.  The ClearCube complaint seeks injunctiverelief, damages, attorneys’ fees, and costs under three Avocent patents.

 

 

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

 

(a)   Exhibits

 

**31.1**         Sarbanes-Oxley Act Section 302Certification of Chief Executive Officer

**31.2**         Sarbanes-Oxley Act Section 302Certification of Chief Financial Officer

**32.1**         Sarbanes-Oxley Act Section 906Certifications of Chief Executive Officer and Chief Financial Officer

 

(b)   Reports on Form 8-K

 

On July 17, 2003, we furnished a Report on Form 8-K with the SEC regarding the publicdissemination of a press release announcing the financial results forour second quarter and nine months ended June 27, 2003.

 

 

ITEMS 2, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

 

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### **SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                                                       | AVOCENT CORPORATION.                                                                                                         |   |
|------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                       | (Registrant)                                                                                                                 |
|                                                       |                                                                                                                         |
| Date:       October 31, 2003 | /s/ Douglas E. Pritchett                                                                                                     |   |
|                                                       | Douglas E. Pritchett                                                                                                         |
|                                                       | Senior Vice President of Finance, Chief Financial  Officer,  Treasurer and Assistant Secretary (Principal Financial Officer) |
|                                                            |                                                                                                                              |        |  |

 

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