** **

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

**WASHINGTON, D.C. 20549**

 

# **FORM 10-Q**

 

**(Mark One)**

** **

**ý****        Quarterly report pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

** **

**For the quarterly period endedSeptember 28, 2001 or**

** **

**o****        Transition report pursuant to Section 13 or 15(d) of theSecurities 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          |   | (I.R.S. Employer  Identification Number) |
| Incorporation or  Organization)           |   |                                     |
|                                      |   |                                     |
| **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

 

 

As of November 8, 2001, the number ofoutstanding shares of the Registrant’s Common Stock was44,608,919.

 

 

**AVOCENT CORPORATION**

**FORM 10-Q**

**September 28, 2001**

 

**INDEX**

 
|       |                  |                                                                                                                                          |   |
|------------|-----------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Part I     | Financial Information |                                                                                                                                          |
|       |                  |                                                                                                                                          |   |
|       | Item 1.               | Financial Statements                                                                                                                          |   |
|       |                  |                                                                                                                                          |   |
|       |                  | Condensed  Consolidated Statements of Operations (unaudited)   for the Three and Nine Months Ended  September 28, 2001 and September 29, 2000 |   |
|       |                  | Condensed  Consolidated Balance Sheets at September 28, 2001   (unaudited) and December 31, 2000                                              |   |
|       |                  | Condensed  Consolidated Statements of Cash Flows (unaudited)   for the Nine Months Ended September 28, 2001 and   September 29, 2000          |   |
|       |                  | 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                                                                                  |   |
|       |                  |                                                                                                                                          |   |
| Part II    | Other Information     |                                                                                                                                          |
|       |                  |                                                                                                                                          |   |
|       | Item 1.               | Legal Proceedings                                                                                                                             |   |
|       | Item 6.               | Exhibits and  Reports on Form 8-K                                                                                                             |   |
|       |                  |                                                                                                                                          |   |
| Signatures |                  |

 

**PARTI –FINANCIAL INFORMATION**

 

Item 1. Financial Statements

 

**AVOCENT CORPORATIONCONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**(In thousands, except per share data)

 
|                                                                                    |   | **For the three months ended** | **For the nine months ended** |
|-----------------------------------------------------------------------------------------|--------|--------------------------------|-------------------------------|
|                                                                                    |   | **September 28,**              |                          | **September 29,** |   | **September 28,** |   | **September 29,** |   |
|                                                                                    |   | **2001**                       |                          | **2000** |   | **2001** |   | **2000** |   |
|                                                                                    |   | **(unaudited)**                |                          | **(unaudited)** |   | **(unaudited)** |   | **(unaudited)** |   |
|                                                                                    |   |                           |                          |   |   |   |   |   |   |
| Net sales                                                                               |   | $                              | 55,095                        |   | $ | 77,154 |   | $ | 193,349 |   | $ | 141,845 |   |
| Cost of sales                                                                           |   | 30,149                         |                          | 38,481 |   | 113,498 |   | 72,720 |   |
| Gross profit                                                                            |   | 24,946                         |                          | 38,673 |   | 79,851 |   | 69,125 |   |
|                                                                                    |   |                           |                          |   |   |   |   |   |   |
| Research and  development expenses                                                      |   | 5,403                          |                          | 4,778 |   | 17,137 |   | 7,901 |   |
| In-process  research and development expenses and other acquisition costs               |   | --                             |                          | 104,092 |   | 4,570 |   | 104,092 |   |
| Selling, general  and administrative expenses                                           |   | 18,203                         |                          | 25,879 |   | 58,458 |   | 34,715 |   |
| Amortization of  intangible assets                                                      |   | 33,221                         |                          | 31,126 |   | 99,658 |   | 31,126 |   |
| Total operating  expenses                                                               |   | 56,827                         |                          | 165,875 |   | 179,823 |   | 177,834 |   |
|                                                                                    |   |                           |                          |   |   |   |   |   |   |
| Loss from  operations                                                                   |   | (31,881                        | )                             | (127,202 | ) | (99,972 | ) | (108,709 | ) |
| Other income,  net                                                                      |   | 1,543                          |                          | 1,594 |   | 4,352 |   | 3,583 |   |
|                                                                                    |   |                           |                          |   |   |   |   |   |   |
| Loss before  income taxes                                                               |   | (30,338                        | )                             | (125,608 | ) | (95,620 | ) | (105,126 | ) |
| Provision for  (benefit from) income taxes                                              |   | (1,079                         | )                             | (1,253 | ) | (1,383 | ) | 5,688 |   |
|                                                                                    |   |                           |                          |   |   |   |   |   |   |
| Net loss                                                                                |   | $                              | (29,259                       | ) | $ | (124,355 | ) | $ | (94,237 | ) | $ | (110,814 | ) |
|                                                                                    |   |                           |                          |   |   |   |   |   |   |
| Loss per common  and common equivalent share:                                           |   |                           |                          |   |   |   |   |   |   |
| Basic                                                                                   |   | $                              | (0.66                         | ) | $ | (2.89 | ) | $ | (2.13 | ) | $ | (3.73 | ) |
| Diluted                                                                                 |   | $                              | (0.66                         | ) | $ | (2.89 | ) | $ | (2.13 | ) | $ | (3.73 | ) |
|                                                                                    |   |                           |                          |   |   |   |   |   |   |
| Weighted average  common and common equivalent shares used in computing loss per share: |   |                           |                          |   |   |   |   |   |   |
| Basic                                                                                   |   | 44,572                         |                          | 42,999 |   | 44,290 |   | 29,717 |   |
| Diluted                                                                                 |   | 44,572                         |                          | 42,999 |   | 44,290 |   | 29,717 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

**AVOCENT CORPORATION****CONDENSEDCONSOLIDATED BALANCE SHEETS******(In thousands)

 
|                                                                                                                                                                             |   | **September 28,** |     | **December 31,** |     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|----------|------------------|----------|
|                                                                                                                                                                             |   | **2001**          |     | **2000**         |     |
|                                                                                                                                                                             |   | **(unaudited)**   | * * |             | * * |
| **ASSETS**                                                                                                                                                                       |   |              |     |             |     |
| Current assets:                                                                                                                                                                  |   |              |     |             |     |
| Cash and cash  equivalents                                                                                                                                                       |   | $                 | 74,053   |             | $        | 44,106 |   |
| Investments  maturing within one year                                                                                                                                            |   | 77,534            |     | 77,372           |     |
| Accounts  receivable, net                                                                                                                                                        |   | 49,401            |     | 63,532           |     |
| Income taxes  receivable                                                                                                                                                         |   | 2,271             |     | 4,487            |     |
| Other  receivables                                                                                                                                                               |   | --                |     | 10,800           |     |
| Inventories, net                                                                                                                                                                 |   | 36,299            |     | 34,458           |     |
| Other current  assets                                                                                                                                                            |   | 3,170             |     | 3,029            |     |
| Deferred tax  assets                                                                                                                                                             |   | 8,638             |     | 5,560            |     |
| Total current  assets                                                                                                                                                            |   | 251,366           |     | 243,344          |     |
| Investments                                                                                                                                                                      |   | 642               |     | 3,891            |     |
| Property held  for lease, net                                                                                                                                                    |   | 1,956             |     | 2,102            |     |
| Property and  equipment, net                                                                                                                                                     |   | 22,802            |     | 16,062           |     |
| Intangible  assets, net                                                                                                                                                          |   | 484,778           |     | 549,910          |     |
| Other assets                                                                                                                                                                     |   | 787               |     | 580              |     |
|                                                                                                                                                                             |   | $                 | 762,331  |             | $        | 815,889 |   |
|                                                                                                                                                                             |   |              |     |             |     |
| **LIABILITIES AND STOCKHOLDERS'  EQUITY**                                                                                                                                        |   |              |     |             |     |
| Current  liabilities:                                                                                                                                                            |   |              |     |             |     |
| Accounts payable                                                                                                                                                                 |   | $                 | 6,660    |             | $        | 8,869 |   |
| Accrued wages  and commissions                                                                                                                                                   |   | 6,436             |     | 3,965            |     |
| Accrued  liabilities                                                                                                                                                             |   | 15,054            |     | 13,523           |     |
| Income taxes  payable                                                                                                                                                            |   | 5,742             |     | 1,610            |     |
| Total current  liabilities                                                                                                                                                       |   | 33,892            |     | 27,967           |     |
| Deferred tax  liability                                                                                                                                                          |   | 26,723            |     | 27,742           |     |
|                                                                                                                                                                             |   | 60,615            |     | 55,709           |     |
| Stockholders'  equity:                                                                                                                                                           |   |              |     |             |     |
| Preferred stock,  $0.001 par value, 5,000 and 1,000 shares authorized; no shares issued and  outstanding as of September 28, 2001 and December 31, 2000, respectively            |   | --                |     | --               |     |
| Common stock,  $0.001 par value; 200,000 shares authorized, 44,596 and 43,820 shares issued  and outstanding as of September 28, 2001 and   December 31, 2000, respectively |   | 45                |     | 44               |     |
| Additional  paid-in capital                                                                                                                                                      |   | 922,898           |     | 898,410          |     |
| Accumulated  other comprehensive loss                                                                                                                                            |   | (3,139            | )        | (2,881           | )        |
| Deferred  compensation                                                                                                                                                           |   | (21,140           | )        | (32,682          | )        |
| Retained deficit                                                                                                                                                                 |   | (196,948          | )        | (102,711         | )        |
| Total  stockholders' equity                                                                                                                                                      |   | 701,716           |     | 760,180          |     |
|                                                                                                                                                                             |   | $                 | 762,331  |             | $        | 815,889 |   |

 

See notes accompanying thesecondensed consolidated financial statements.

 

**AVOCENT CORPORATION****CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS******(In thousands)

 
|                                                                                                                           |   | **For the nine months ended** |
|--------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|
|                                                                                                                           |   | **September 28,**        |   | **September 29,** |   |
|                                                                                                                           |   | **2001**                      |   | **2000** | ** ** |
|                                                                                                                           |   | **(unaudited)**               |   | **(unaudited)** | ** ** |
| Cash flows from operating activities:                                                                                          |   |                          | * * |   | * * |
| Net loss                                                                                                                       |   | $                             | (94,237 | ) | $ | (110,814 | ) |
| Adjustments to reconcile net loss to net cash provided by (used  in) operating activities:                                     |   |                          |   |   |   |
| Depreciation                                                                                                                   |   | 3,294                         |   | 1,269 |   |
| Amortization of intangible assets                                                                                              |   | 99,658                        |   | 31,126 |   |
| Stock-based compensation                                                                                                       |   | 15,991                        |   | 4,277 |   |
| Purchased  research and development expenses and other acquisition costs                                                       |   | 4,570                         |   | 94,000 |   |
| Net loss on sale of investments                                                                                                |   | 91                            |   | 75 |   |
| Changes in operating assets and liabilities, net of effects of  purchases of Equinox and Cybex in 2001 and 2000, respectively: |   |                          |   |   |   |
| Accounts receivable, net                                                                                                       |   | 17,654                        |   | (4,384 | ) |
| Other receivables                                                                                                              |   | 10,800                        |   | -- |   |
| Inventories, net                                                                                                               |   | 1,725                         |   | (8,021 | ) |
| Other assets                                                                                                                   |   | (1,775                        | ) | (707 | ) |
| Accounts payable                                                                                                               |   | (4,175                        | ) | 764 |   |
| Accrued wages and commissions                                                                                                  |   | 1,616                         |   | 88 |   |
| Accrued liabilities                                                                                                            |   | 309                           |   | (3,847 | ) |
| Income taxes, current and deferred                                                                                             |   | (2,661                        | ) | (4,323 | ) |
| Total adjustments                                                                                                              |   | 147,097                       |   | 110,317 |   |
| Net cash provided by (used in) operating activities                                                                            |   | 52,860                        |   | (497 | ) |
|                                                                                                                           |   |                          | ** ** |   | ** ** |
| Cash flows from investing activities:                                                                                          |   |                          | ** ** |   | ** ** |
| Purchase of Equinox Systems Inc., net of cash and investments  acquired                                                        |   | (31,725                       | ) | -- |   |
| Purchase of Cybex, cash received                                                                                               |   | --                            |   | 34,878 |   |
| Purchases of property and equipment                                                                                            |   | (3,387                        | ) | (1,012 | ) |
| Purchases of investments                                                                                                       |   | (67,130                       | ) | (86,524 | ) |
| Maturities of investments                                                                                                      |   | 49,633                        |   | 48,012 |   |
| Proceeds from sales of investments                                                                                             |   | 20,253                        |   | 6,214 |   |
| Net cash provided by (used in) investing activities                                                                            |   | (32,356                       | ) | 1,568 |   |
|                                                                                                                           |   |                          | ** ** |   | ** ** |
| Cash flows from financing activities:                                                                                          |   |                          | ** ** |   | ** ** |
| Proceeds from issuance of short-term debt                                                                                      |   | 45,000                        |   | -- |   |
| Repayment of short-term debt                                                                                                   |   | (45,000                       | ) | -- |   |
| Proceeds from employee stock plans                                                                                             |   | 9,459                         |   | 19,522 |   |
| Net cash provided by financing activities                                                                                      |   | 9,459                         |   | 19,522 |   |
|                                                                                                                           |   |                          |   |   |   |
| Effect of exchange rate changes on cash and cash equivalents                                                                   |   | (16                           | ) | (70 | ) |
|                                                                                                                           |   |                          |   |   |   |
| Net increase in cash and cash equivalents                                                                                      |   | 29,947                        |   | 20,523 |   |
| Cash and cash equivalents beginning of period                                                                                  |   | 44,106                        |   | 15,786 |   |
| Cash and cash equivalents end of period                                                                                        |   | $                             | 74,053 |   | $ | 36,309 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

**AVOCENT CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited, in thousands)

 

Note 1.   Basisof presentation

 

AvocentCorporation (“Avocent”)was formed from the merger of Apex Inc. (“Apex”) andCybex Computer Products Corporation (“Cybex”) on July 1, 2000 when both Apexand Cybex merged with wholly-owned subsidiaries of Avocent.  The merger has been accounted for as apurchase of Cybex by Apex. Avocent’s condensed consolidated statement ofoperations for the three months ended September 29, 2000 includes the resultsof both Apex and Cybex because the merger became effective at the beginning ofthe period.  Avocent’s condensedconsolidated statement of operations and condensed consolidated statement ofcash flows for the nine months ended September 29, 2000 include the nine monthresults of Apex for the period January 1, 2000 through September 29, 2000 andthe three month results of Cybex for the post merger period July 1, 2000through September 29, 2000.  Avocent’scondensed consolidated statement of operations and condensed consolidatedstatement of cash flows for the three and nine months ended September 28, 2001include the results of Apex, Cybex, and Equinox Systems Inc. (“Equinox”), whichwas acquired by Avocent on January 3, 2001. Avocent’s condensed consolidated balance sheet as of September 28, 2001includes the consolidated financial position of Apex, Cybex, and Equinox.Avocent’s condensed consolidated balance sheet as of December 31, 2000 includesthe consolidated financial position of Apex and Cybex. Certainreclassifications have been made to the prior year financial statements toconform to the current year presentation.

 

 The accompanying unaudited condensedconsolidated financial statements have been prepared in conformity withgenerally accepted accounting principles and reflect all adjustments consistingof normal recurring adjustments which, in the opinion of management, arenecessary for a fair presentation of the results for the periods shown.  The results of operations for these periodsare not necessarily indicative of the results expected for the full fiscal yearor for any future periods.  Thepreparation of financial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates and assumptions.

 

The accompanyingunaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and the relatednotes contained in our Annual Report on Form 10-K for the year ended December31, 2000, which is on file with the Securities and Exchange Commission.

 

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 and itswholly-owned subsidiaries.  Significantintercompany transactions and balances have been eliminated in consolidation.

 

Note 2.   Inventories

 

Inventories consisted ofthe following at:

 

|            |   | **September 28,2001** |   | **December 31,2000** |   |
|-----------------|--------|-----------------------|--------|----------------------|--------|
|            |   | **(unaudited)**       |   |                 |   |
|            |   |                  |   |                 |   |
| Raw materials   |   | $                     | 22,778 |                 | $      | 10,712 |   |
| Work-in-process |   | 2,527                 |   | 7,379                |   |
| Finished goods  |   | 10,994                |   | 16,367               |   |
|            |   | $                     | 36,229 |                 | $      | 34,458 |   |

 

We recorded a non-recurring charge, before income taxbenefit, of  $11.7 million for excessand obsolete inventories in the second quarter of 2001.  This write-down reduced inventories toreplacement value and to levels necessary to support then current sales demand.

 

Note 3.   Commonstock and deferred compensation

 

                Deferredcompensation – We recorded $41,165 of deferred compensation related to Cybexemployee stock options at the time of the merger.  Additionally, we recorded $2,752 of deferred compensation relatedto the Equinox employee stock options at the time of the acquisition.  The deferred compensation is being amortizedover the vesting period of the options for which it was recorded.

 

                Common Stock – Options topurchase 739 shares of our Common Stock were exercised during the nine monthsending September 28, 2001. Additionally, 36 shares of our Common Stock wereissued during the three months ending September 28, 2001 under our EmployeeStock Purchase Plan.

 

Note 4.   Accumulatedother comprehensive loss

 

We record unrealized gains and losses onour foreign currency translation adjustments and unrealized holding gains orlosses on our available-for-sale securities as accumulated other comprehensiveincome (loss), which is included as a separate component of stockholders’equity.  For the nine months endedSeptember 28, 2001, total other comprehensive loss amounted to ($258).  As of September 28, 2001, total accumulatedother comprehensive loss was ($3,139).

 

Note 5.   Loss per share

 

|                                                                                |   | **For the three months ended** | **For the nine months ended** |
|-------------------------------------------------------------------------------------|--------|--------------------------------|-------------------------------|
|                                                                                |   | **September 28,2001**          |                          | **September 29,2000** |   | **September 28,2001** |   | **September 29,2000** |   |
|                                                                                |   |                           |                          |   |   |   |   |   |   |
| Net loss                                                                            |   | $                              | (29,259                       | ) | $ | (124,355 | ) | $ | (94,237 | ) | $ | (110,814 | ) |
| Weighted average shares used in computing basic loss per share                      |   | 44,572                         |                          | 42,999 |   | 44,290 |   | 29,717 |   |
| Dilutive effect of employee stock options after application of the  treasury method |   | --                             |                          | -- |   | -- |   | -- |   |
| Weighted average shares used in computing diluted loss per share                    |   | 44,572                         |                          | 42,999 |   | 44,290 |   | 29,717 |   |
|                                                                                     |        |                                |                               |  |  |  |  |  |  |  |  |  |  |

** **

Note 6.   SegmentReporting

** **

                Subsequent to the acquisition ofCybex in July 2000, we reported segment information on a geographical basis inwhich we presented sales and gross profit information for Redmond, Washington;Huntsville, Alabama; and Shannon, Ireland.

 

                Following the merger in July2000, the previously separate businesses of Apex and Cybex began to beintegrated.  In recent quarters,shipments to certain international OEM customers which had historicallyoriginated from Redmond were shifted to Shannon.  As this occurred, the historical comparisons by location havebecome less meaningful.  Additionally,we have gradually realigned operating and management responsibilities withinthe Company to emphasize that we are “one company, operating around theworld.”  Consequently, we have evaluatedour business in light of the segment reporting requirements, and we have determinedthat we will report our operations as a single operating segment.  We will, however, report sales by geographicregion on a quarterly and annual basis. Following is a presentation of sales by geographic region for each ofthe three previous annual periods and for the quarterly periods in 2001 and2000.

 

 

 

|          |   | **For the years ended** |
|---------------|--------|-------------------------|
|          |   | **December 31,2000**    |   | **December 31,1999** |   | **December 31,1998** |   |
|          |   |                    |   |   |   |   |   |
| Net sales:    |   |                    |   |   |   |   |   |
| United States |   | $                       | 138,249 |   | $ | 68,838 |   | $ | 51,605 |   |
| Rest of World |   | 84,123                  |   | 38,450 |   | 24,035 |   |
|          |   | $                       | 222,372 |   | $ | 107,288 |   | $ | 75,640 |   |

 

|          |   | **For the three months ended** |   | **For the nine months ended** |   |
|---------------|--------|--------------------------------|--------|-------------------------------|--------|
|          |   | **March 30,2001**              |   | **June 29,2001**              |   | **September 28,2001** |   | **September 28, 2001** |   |
|          |   |                           |   |                          |   |   |   |   |   |
| Net sales:    |   |                           |   |                          |   |   |   |   |   |
| United States |   | $                              | 44,127 |                          | $      | 44,271 |   | $ | 34,419 |   | $ | 122,817 |   |
| Rest of World |   | 29,048                         |   | 20,808                        |   | 20,676 |   | 70,532 |   |
|          |   | $                              | 73,175 |                          | $      | 65,079 |   | $ | 55,095 |   | $ | 193,349 |   |

 

|          |   | **For the three months ended** |
|---------------|--------|--------------------------------|
|          |   | **March 31,2000**              |   | **June 30,2000** |   | **September 29,2000** |   | **December 31,2000** |   |
|          |   |                           |   |   |   |   |   |   |   |
| Net sales:    |   |                           |   |   |   |   |   |   |   |
| United States |   | $                              | 16,868 |   | $ | 24,190 |   | $ | 49,647 |   | $ | 47,544 |   |
| Rest of World |   | 11,376                         |   | 12,257 |   | 27,507 |   | 32,983 |   |
|          |   | $                              | 28,244 |   | $ | 36,447 |   | $ | 77,154 |   | $ | 80,527 |   |

** **

**                As of September 28, 2001, long-lived assets totaled $509,536, which includes $507,028 held in the U.S. and$2,508 held in the Rest of World.   Asof December 31, 2000, long- lived assets totaled $568,074, which includes$563,948 held in the U.S. and $4,126 held in the Rest of World.**

** **

**Note7.   Acquisition of Equinox Systems Inc.**

** **

**               **On January 3, 2001, we acquired EquinoxSystems Inc. for cash equal to $9.75 for each outstanding share of Equinoxcapital stock. Equinox, headquartered in Sunrise, Florida, makes products thatprovide communications port management and remote control capabilities. Theproducts are distributed through a two-tier distribution channel, a network ofvalue added resellers and original equipment manufacturers.

 

                The acquisition was recordedunder the purchase method of accounting, and the purchase price was allocatedbased on the fair value of the assets acquired and liabilities assumed. Inaccordance with generally accepted accounting principles, costs allocated toresearch and development assets with alternative future uses were capitalizedand the remaining amounts of purchased in-process research and development wereexpensed upon the closing of the transaction. A summary of the total purchaseconsideration is as follows:

 

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

 

 

 

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

 

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

 

The acquisition was funded through available cash and the issuance ofshort-term debt.  We borrowed a total of$45,000 at the stated rate of 30-day LIBOR plus 1.75% (8.31% atJanuary 31, 2001).  All borrowingswere repaid during the quarter ended March 30, 2001.  On the closing of the Equinox transaction, we acquired $24,295 incash and short–term investments held by Equinox.

 

                **Pro Forma Financial Information**—The following unauditedpro forma summary combines the results of operations of Apex and Cybex as ifthe merger had occurred on January 1, 2000 and includes the results ofoperations of Equinox as if the acquisition had occurred on January 1, 2000. Certainadjustments have been made to reflect the impact of the purchase transaction.These pro forma results have been prepared for comparative purposes only and donot purport to be indicative of what would have occurred had the acquisitionbeen made at the beginning of the respective years, or of results which mayoccur in the future.

 

|           |   | **Nine Months  Ended(Unaudited)** |
|----------------|--------|-----------------------------------|
|           |   | **September 28,2001**             |   | **September 29,2000** |   |
|           |   |                              |   |   |   |
| Net sales      |   | $                                 | 193,349 |   | $ | 226,183 |   |
| Net loss       |   | $                                 | (88,803 | ) | $ | (178,184 | ) |
| Loss per share |   | $                                 | (2.01 | ) | $ | (4.18 | ) |

** **

**Note 8.   RecentlyIssued Accounting Standards**

** **

**In June 1999, the Financial AccountingStandards Board issued SFAS No. 137, (subsequently amended by SFASNo. 138) *Accounting for Derivative Instruments and Hedging Activities Deferral ofthe Effective Date of SFAS No. 133*, which deferred theeffective date provisions of SFAS No. 133 for us until the first quarterof 2001. These statements require all derivatives to be measured at fair valueand recognized as either assets or liabilities on the balance sheet. Changes insuch fair value are required to be recognized immediately in net income (loss)to the extent the derivatives are not effective as hedges. The impact of SFASNo. 133 on the financial statements was not material.**

** **

**The Company uses forward contracts to reduce itsforeign currency exposure related to the net cash flows from its Europeanoperations. The majority of these contracts are short-term contracts (threemonths or less) and are marked-to-market each quarter and included in tradepayables, with the offsetting gain or loss included in other revenues in theaccompanying statements of operations. At September 28, 2001, we had one openforward contract, maturing in the fourth quarter of 2001, to purchase $1,000 inforeign currency. The fair value of the contracts at September 28, 2001 wasapproximately $1,000.**

** **

** **

** **

**In June 2001, the Financial AccountingStandards Board issued SFAS No. 141, *Business Combinations,*which has aneffective date of June 30, 2001 for all business combinations initiated afterthis date.  This statement supersedesAPB Opinion No. 16, *Business Combinations,* and FASB StatementNo. 38, *Accountingfor Preacquisition Contingencies of Purchased Enterprises*.  This statement requires all businesscombinations within the scope of the Statement to be accounted for using thepurchase method of accounting.  Forbusiness combinations completed prior to June 30, 2001, the statement requirescompanies to recognize intangible assets apart from goodwill and expand thedisclosures about assets acquired and liabilities assumed.  We will adopt SFAS No. 141 effective January1, 2002.  The impact of SFAS No. 141 onthe financial statements is not expected to be material.**

** **

#### **In June 2001, the FinancialAccounting Standards Board issued SFAS No. 142, *Goodwill and Other Intangible Assets,*whichhas an effective date starting with fiscal years beginning after December 15,2001.  This Statement supersedes APBOpinion No. 17, *Intangible Assets*. This Statement addresses how intangible assets that are acquiredindividually or with a group of other assets should be accounted for infinancial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assetsshould be accounted for after they have been initially recognized in thefinancial statements.  Goodwill willcease to be amortized upon the implementation of the Statement and companieswill test goodwill at least annually for impairment.   We will adopt SFAS No 142 effective January 1, 2002, and managementis in the process of evaluating the impact of SFAS No. 142 on our financial statements.  The impact of SFAS No. 142 on the financial statements may bematerial.**

#### ** **

#### **In August 2001, the FinancialAccounting Standards Board issued SFAS No. 143, *Accounting for Asset RetirementObligations (“ARO”)*, which has an effective date for financialstatements for fiscal years beginning after June 15, 2002.  This statement addresses the diversity inpractice for recognizing asset retirement obligations and requires thatobligations associated with the retirement of a tangible long-lived asset berecorded as a liability when those obligations are incurred, with the amount ofthe liability initially measured at fair value.  Upon initially recognizing a liability for an ARO, an entity mustcapitalize the cost by recognizing an increase in the carrying amount of therelated long-lived asset.  Over time,the liability is accreted to its present value each period, and the capitalizedcost is depreciated over the useful life of the related asset.  Upon settlement of the liability, an entityeither settles the obligation for its recorded amount or incurs a gain or lossupon settlement.**  The impact of SFAS No. 143 on the financial statements isnot expected to be material.

 

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

 

#### **Note 9.   PatentDispute**

 

In February 1998, Apex Inc., awholly-owned subsidiary of Avocent, filed patent infringement lawsuits againstcertain companies (including Rose Electronics), which were dismissed withoutprejudice by the agreement of the parties in early 1999 to allow certain patentissues raised in the litigation to be initially determined by the United StatesPatent and Trademark Office (the "PTO").  Apex also filed a complaint for patent infringement in UnitedStates District Court for the Western District of Washington in Seattle againstCCC Group in June 1998, which was filed but never formally served on CCC. Thislawsuit was stayed by the District Court in 1999 pending a ruling by the PTO,and subsequently, Apex voluntarily dismissed the CCC lawsuit in Seattle withoutprejudice.

 

**The issues raised in the PTO have now been resolved inApex’s favor, and in May 2001, Apex filed a complaint for patent infringementin the United States District Court for the Southern District of New Yorkagainst Raritan Computer Inc.  TheRaritan complaint seeks injunctive relief, damages, attorneys' fees andcosts.  Apex has also informed both RoseElectronics and CCC Group that Apex continues to believe that certain productssold by these companies infringe one or more of Apex's patents and that, absentcircumstances requiring earlier action, Apex intends to enforce its patentrights against Rose and CCC when the Raritan litigation is concluded.**

 

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

 

***THE INFORMATION IN THIS ITEM 2 - "MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITA­TION, STATEMENTSRELATING TO OUR REVENUES, EXPENSES, MARGINS, LIQUID­ITY,  NON-RECURRING CHARGES, INVENTORY, INVENTORYVALUATION AND WRITE-DOWNS, CAPITAL NEEDS, MERGER ACCOUNTING, ACQUISITION ANDTRANSACTION COSTS AND ADJUSTMENTS INCLUDING, AMONG OTHER THINGS, WRITE OFF OFIN-PROCESS RESEARCH AND DEVELOPMENT COSTS AND AMORTIZATION OF INTANGIBLEASSETS.  THESE FORWARD-LOOKING STATEMENTSARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTSTO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKINGSTATEMENTS.  FACTORS THAT MIGHT CAUSESUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN OURANNUAL REPORT ON FORM 10-K, WHICH WAS FILED WITH THE SECURITIES AND EXCHANGECOMMISSION ON MARCH 27, 2001.***

** **

**Formation ofAvocent by Merger of Apex and Cybex**

 

                In March 2000, Apex andCybex entered into a definitive agreement under which they agreed to combinethe two companies in a merger resulting in a new company, Avocent Corporation(formerly known as Aegean Sea Inc.). On March 31, 2000, Avocent fileda registration statement on Form S-4, which was declared effective by theSecurities and Exchange Commission on June 2, 2000. Apex and Cybexreceived final approval of the merger by their respective shareholders on June30, 2000. The merger was effective as of July 1, 2000. Prior to theeffective date of the merger, Avocent did not conduct any activities. Avocentis on a calendar year basis with December 31 as its year-end.

 

                The merger has been accountedfor as a purchase of Cybex by Apex in accordance with Accounting PrinciplesBoard Opinion No. 16, with the purchase price allocated to the assets andliabilities of Cybex based upon their fair values on the date of thetransaction. The excess of the purchase price over the fair value of the assetsand liabilities has been allocated to the identifiable intangible assets andgoodwill. Additionally, $94 million of the purchase price was expensed asin-process research and development upon the completion of the merger. Thepurchase price allocation was as follows: $109 million of tangible assets,$90 million of identifiable intangible assets, $34 million ofdeferred tax liability on intangible assets acquired, $524 million ofgoodwill, $94 million of in-process research and development, and$29 million of assumed liabilities and acquisition costs. The amortizationperiods are 3 to 7 years for identifiable intangibles and 5 years forgoodwill.

 

                Avocent’s condensedconsolidated statement of operations and condensed consolidated statement ofcash flows for the nine months ended September 29, 2000 include the nine monthresults of Apex for the period January 1, 2000 through September 29, 2000 andthe three month results of Cybex for the post merger period July 1, 2000through September 29, 2000.  Avocent’scondensed consolidated statement of operations and condensed consolidatedstatement of cash flows for the three and nine months ended September 28, 2001,include the results of Apex, Cybex, and Equinox, acquired January 3, 2001.  Avocent’s condensed consolidated balancesheet as of September 28, 2001 includes the consolidated financial position ofApex, Cybex, and Equinox. Avocent’s condensed consolidated balance sheet as ofDecember 31, 2000 includes the consolidated financial position of Apex andCybex.  Certain reclassifications have been made to the prior year financialstatements to conform to the current year presentation.

 

**Apex and CybexHistory**

 

                Apex operated as a division ofApex Computer Company through January 1993, providing computer maintenanceservices to Microsoft and selling integrated server cabinets and, to a limitedextent, stand–alone switching systems, primarily to Microsoft. In February 1993,the assets of that division were spun off as a dividend to the sole shareholderof Apex Computer Company, who contributed those assets as Apex's initialcapital. Throughout 1993, Apex derived revenue primarily from the provision ofcomputer maintenance services to Microsoft. In May 1994, Apex beganselling stand–alone switching systems to Compaq for integration intoserver cabinets. In June 1994, Apex discontinued its computer maintenanceservice business and decided to concentrate on sales of stand– aloneswitching products.

 

                Cybexengaged in the development of software and performed engineering consultingfrom 1981 to 1984 to finance its research and development efforts for computer–relatedproducts. In 1986, Cybex shipped its first computer–related hardwareproduct. In 1987, Cybex shipped its first product that allowed the computer tobe extended distances from the keyboard, monitor, and mouse. Subsequently in1989, Cybex shipped its first stand–alone switching system. Through theeffective date of the merger, Cybex derived primarily all of its revenues fromswitching, extension, and remote access products.

 

**Overview**

 

                We design, manufacture, and sellconsole switching systems, digital connectivity solutions, serial connectivitydevices, and extension and remote access products for the computer industry.Data center managers and network administrators have increasingly complex andgrowing server populations.  Our analog,digital, and serial switching solutions and our extension and remote access productshelp network administrators manage multiple servers from a console containing asingle keyboard, video monitor, and mouse, from extended distances or fromremote locations. Specifically, our products can provide significant costreductions including lower initial investment, reduced utility costs, and spacesavings, as well as more efficient technical support capabilities.

 

                We provide comprehensive"plug and play" switching systems for many network administration,management, and storage problems faced by corporate customers, data centers,and server farms. Our switching solutions include products sold under theAvocent, Apex, Cybex, and Equinox brands including our *AutoViewTM, DS1800TM, OutLook®, ViewPoint®,* and *XP®4000 Series* products. Ourswitching products help facilities managers and network administrators accessmultiple servers from one or more centralized or remote consoles, consolidatehardware requirements, and provide direct hardwired connections between theswitch and the attached servers to facilitate access to those servers, evenwhen the network is down.

 

                A substantial portion of ourrevenue is derived from sales to a limited number of original equipment servermanufacturers, or OEMs, who purchase our switching systems on a private–labelor branded basis for integration and sale with the their own products, salesthrough our reseller and distributor network, and sales to a limited amount ofdirect customers.  We do not havecontracts with many of these customers, and in general, they are obligated topurchase products from us only pursuant to binding purchase orders.  Forthe nine months ended September 28, 2001, sales to our OEM customers, ourreseller and distributor network, and our direct sales were approximately 44%,51% and 5%, respectively, of our net sales.

 

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

 

Our executive officers have vested insignificant amounts of options to purchase shares of our Common Stock andcontinue to vest in additional shares on a regular (sometimes monthly)basis.  These officers have informed usthat they have sold shares and may sell additional shares  on a regular basis to provide liquidity anddiversify their portfolios.

 

**Acquisition of Equinox**

 

On January 3, 2001, we acquired Equinox Systems Inc.(“Equinox”) for cash equal to $9.75 for each outstanding share of Equinoxcapital stock. Equinox, headquartered in Sunrise, Florida, makes products thatprovide communications port management and remote control capabilities. Theproducts are distributed through a two-tier distribution channel, a network ofvalue added resellers and original equipment manufacturers.

 

                The acquisitionwas recorded under the purchase method of accounting, and the purchase pricewas allocated based on the fair value of the assets acquired and liabilitiesassumed. In accordance with generally accepted accounting principles, costsallocated to research and development assets with alternative future uses werecapitalized and the remaining amounts of purchased in-process research anddevelopment were expensed upon the closing of the transaction. The purchaseprice allocation was as follows: $39.0 million of tangible assets,$12.2 million of identifiable intangible assets, $6.0 million ofdeferred tax liability on intangible assets acquired, $20.8 million ofgoodwill, and $4.6 million of in-process research and development. Theamortization periods are 3 to 7 years for identifiable intangibles and5 years for goodwill.

 

**Results of Operations**

 

                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. 28, 2001**      |   | **Sept. 29, 2000**     |   | **Sept. 28, 2001** |   | **Sept. 29, 2000** |   |
|                                                                      |   |                    |   |                   |   |   |   |   |   |
| Net sales                                                                 |   | 100.0                   | %      | 100.0                  | %      | 100.0 | % | 100.0 | % |
| Cost of sales                                                             |   | 54.7                    |   | 49.9                   |   | 58.7 |   | 51.3 |   |
| Gross profit                                                              |   | 45.3                    |   | 50.1                   |   | 41.3 |   | 48.7 |   |
| Operating expenses:                                                       |   |                    |   |                   |   |   |   |   |   |
| Research and development expenses                                         |   | 9.8                     |   | 6.2                    |   | 8.9 |   | 5.6 |   |
| In-process research and development expenses and other  acquisition costs |   | —                  |   | 134.9                  |   | 2.4 |   | 73.4 |   |
| Selling, general and administrative expenses                              |   | 33.0                    |   | 33.5                   |   | 30.2 |   | 24.5 |   |
| Amortization of intangible assets                                         |   | 60.4                    |   | 40.4                   |   | 51.5 |   | 21.9 |   |
| Total operating expenses                                                  |   | 103.2                   |   | 215.0                  |   | 93.0 |   | 125.4 |   |
| Loss from operations                                                      |   | (57.9                   | )      | (164.9                 | )      | (51.7 | ) | (76.6 | ) |
| Other income, net                                                         |   | 2.8                     |   | 2.1                    |   | 2.3 |   | 2.5 |   |
| Loss before income taxes                                                  |   | (55.1                   | )      | (162.8                 | )      | (49.4 | ) | (74.1 | ) |
| Provision for (benefit from) income taxes                                 |   | (2.0                    | )      | (1.6                   | )      | (0.7 | ) | 4.0 |   |
| Net loss                                                                  |   | (53.1                   | )%     | (161.2                 | )%     | (48.7 | )% | (78.1 | )% |

 

                *Net sales.*  Our net sales consist of sales of switchingsystems, digital connectivity solutions, serial connectivity devices, extensionand remote-access products, and display products.  Net sales decreased 29% to $55.1 million for the third quarter of2001 from $77.2 million for the third quarter of 2000.

 

                In recent quarters, shipments to certaininternational OEM customers which had historically originated from Redmond wereshifted to Shannon.  As this occurred,the historical comparisons by location have become less meaningful.  Additionally, we have gradually realignedoperating and management responsibilities within the Company to emphasize thatwe are “one company, operating around the world.”  Consequently, we have evaluated our business in light of  the segment reporting requirements, and wehave determined that we will report our operations as a single operatingsegment.  We will, however, report salesby geographic region on a quarterly and annual basis.

 

                For the third quarter of 2001, sales in the U.S. were$34.4 million (or 62% of sales) compared to $49.6 million (or 64% of sales) inthe third quarter of 2000.  Additionally,Rest of World sales were $20.7 million (or 38% of sales) for the third quarterof 2001, as compared to $27.5 million (or 36% of sales) in the third quarter of2000.  U.S. and Rest of World salesdeclined in the third quarter of 2001 as a result of general economic weakness.Net sales increased 36% to $193.3million for the first nine months of 2001 from $141.8 million for the firstnine months of 2000.  This increase wasdue primarily to the impact of the merger of Apex and Cybex on July 1, 2000, aswell as from Equinox product sales during 2001.

 

*                Gross profit.* Grossprofit is affected by a variety of factors, including: the ratio of sales amongour distribution channels, resellers and distributors, OEMs, and direct sales,as OEM sales typically have lower gross margins than our reseller anddistributor sales and direct sales; product mix, raw materials and labor costs;new product introductions by us and by our competitors; and the level of ouroutsourcing of manufacturing and assembly services.  Gross profit decreased to 45.3% in the third quarter of 2001 from50.1% in the third quarter of 2000. Gross profit in the third quarter of 2001was impacted by a DS1800 list price reduction, an increased proportion of OEMsales versus reseller and distributor sales and lower absorption of overheaddue to lower sales. Gross margin for the year decreased to 41.3% for the firstnine months of 2001 from 48.7% for the first nine months of 2000. Gross marginwas significantly affected by a $11.7 million write-down for excess andobsolete inventories in the second quarter of 2001.  This write-down reduced inventory valuations to bring themin-line with current replacement values and to the level necessary to supportthen current sales demand.  In addition,severance charges of over $50 thousand were incurred during the second quarterof 2001 related to headcount reductions made in the U.S. and Europe.  We expect gross profit to remain in the 46%range into the fourth quarter of 2001.

 

                *Research and development expenses.*  Research and development expenses includecompensation for engineers and materials costs and are expensed as they areincurred.  Research and developmentexpenses were$5.4 million, or 9.8% of net sales, inthe third quarter of 2001 compared to $4.8 million, or 6.2% of net sales, forthe third quarter of 2000.  The increasein the amount spent on research and development can be attributed to the impactof the acquisition of Equinox, effective January 3, 2001.  The additional costs of the Equinox researchand development teams include approximately$170 thousand in deferred compensation amortization for certain engineeringemployees recognized as a result of the acquisition.  Year-to-date research and development expenses for 2001 increasedto $17.1 from $7.9 million in year-to-date 2000 due to the impact of themerger effective July 1, 2000 and the acquisition of Equinox, effective January3, 2001.  The additional costs of theCybex and Equinox research and development teams include approximately $3.3 million in deferred compensationamortization for certain engineering employees recognized as a result of themerger and acquisition.  As a percentageof net sales, year-to-date research and development expenses increased to 8.9%from 5.6%.  We believe that thetimely development of innovative products and enhancements to existing productsis essential to maintaining our competitive position and we expect research anddevelopment expenditures to increase in absolute dollars and possibly as apercentage of net sales.

 

                *In-processresearch and development expense.*Merger related expenses of $104million in the third quarter of 2000 include the one time write-off of $94million of in-process research and development expense and an additional $10million of one-time charges comprised mainly of fees to professional advisors.The in-process research and development expense of $4.6 million in the firstquarter of 2001 is comprised solely of the acquisition costs of Equinoxattributable to in-process technologies. The charges for merger related expenses and in-process technologies arenon-recurring.

 

*                Selling, generaland administrative expenses.*  Selling, generaland administrative expenses include some merger related expenses, severancecosts, personnel costs for administration, finance, human resources, sales andmarketing and general management, as well as rent, utilities and legal andaccounting expenses, advertising, promotional material, trade show expenses andrelated travel costs.  Selling, generaland administrative expenses were $18.2 million, or 33.0% of net sales, for thethird quarter of 2001 compared to $25.9 million, or 33.5% of net sales, for thethird quarter of 2000.   Selling,general and administrative expenses in the third quarter of 2001 include $5.3million of merger and acquisition related expense that is comprised primarilyof $2.6 million of expense related to the acceleration of stock options forcertain employees that terminated during the year and $2.3 million of deferredcompensation amortization related to stock options assumed at the merger ofApex and Cybex and the acquisition of Equinox. Selling, general and administrative expenses in the third quarter of2000 include $12.5 million of merger related expense that is comprisedprimarily of $9.8 million of expense related to accelerated stock options forcertain employees that terminated during the third quarter and $2.6 million ofdeferred compensation amortization related to stock options assumed at themerger.  Excluding the  merger and acquisition related charges ineach year, selling, general and administrative expense decreased 4% for thethird quarter of 2001. This reduction reflects our extensive cost control efforts, which included headcount reductionsand a decrease in advertising expenses.

 

                Year-to-date selling, general,and administrative expenses increased to $58.5 million, or 30.2% of net salesfor 2001 from $34.7 million, or 24.5% of year-to-date net sales in 2000.  The increase in selling, general andadministrative expenses in absolute dollars and as a percentage of sales wasdue primarily to the addition of Cybex and Equinox expenses as a result of themerger between Apex and Cybex on July 1, 2000, and the acquisition of Equinoxon January 3, 2001.   Additionally, $1.3million in severance costs were expensed during the year.  We expectselling, general and administrative expenditures, in dollars, to increase inthe fourth quarter of 2001 as we increase advertising, trade show and otherpromotional activities.

 

*                Amortization of intangibleassets.*  Amortization of intangible assets iscomprised of the amortization of the amounts allocated to the identifiableintangible assets and goodwill that were in excess of the purchase price overthe fair value of the Cybex assets and liabilities acquired by Apex in themerger transaction. Also included is the amortization of similar assets createdas a result of the acquisition of Equinox. The amortization periods are 3 to 7 years for intangibles and5 years for goodwill. Amortization of identifiable intangible assets andgoodwill was $33.2 million or 60.4% of net sales for the third quarter of2001 compared to $31.1million or 40.4% of net sales for the third quarter of2000.  Year-to-date amortization ofintangibles was $99.7 million or 51.5% of net sales for the nine months endedSeptember 28, 2001 compared to $31.1 million or 21.9% of net sales foryear-to-date 2000.

 

                *Other income, net.*  Other income declined slightly to  $1.5 million for the third quarter of2001, down from $1.6 million for the third quarter of 2000. The decreaserelated primarily to the decline in interest rates, but was offset by anincrease in available funds invested as the result of strong cash flows fromoperations.  For the year, other incomeincreased to $4.4 million for 2001, from $3.6 million for 2000.  The increase related primarily to interestincome from increased cash and investments. The increase in cash and investments was provided by the addition of theCybex cash, cash equivalents, and investments as a result of the mergereffective July 1, 2000, the addition of the Equinox cash, cashequivalents, and investments as a result of the acquisition effective January3, 2001, and our positive cash flows from operations in 2001.

 

                *Provision for income taxes.*  For the third quarter, the benefit fromincome taxes was approximately $1.1 million for 2001, compared to$1.3 million in 2001. Excluding merger related adjustments to federaltaxes, the effective tax rate for the third quarter 2001 was approximately25.5%, compared to 32.7% for the third quarter of 2000, primarily due to themix of our pre-tax profit among our U.S. and international companies.  Shifting shipments to internationalwarehouses from Redmond to Shannon leveraged the 10% tax rate in Ireland. Lowerthan expected revenue in the U.S. reduced the U.S taxable income, which reducedthe consolidated effective tax rate. We expect our effective tax rate for thefourth quarter to be approximately 30%, just above the effective rate of 29.3%for the nine months ended September 28, 2001.

 

                *Net loss.*  Our net loss for the third quarter of 2001was $29.3 million compared to net loss of $124.4 million for thethird quarter of 2000, as a result of the above factors. Net loss as apercentage of sales for the third quarter of 2001 was 53.1%, compared to netloss as a percentage of sales for the third quarter of 2000 of 161.2%.   Our net loss for the first nine months of2001 was $94.2 million compared to net loss of $110.8 million for thefirst nine months of 2000, as a result of the above factors. Net loss as apercentage of sales for the first nine months of 2001 was 48.7%, compared tonet loss as a percentage of sales for the first nine months of 2000 of 78.1%.

 

**Liquidity andCapital Resources**

 

                As of September 28, 2001, ourprincipal sources of liquidity consisted of approximately $152 millionin cash, cash equivalents, and investments. In addition, we have a bank line ofcredit for borrowings of  $2.0 millionat LIBOR + 2.25% with a maturity date of May 2002.  There were no amounts outstanding under this credit facility atSeptember 28, 2001.  In early January2001, we borrowed a total of $45million at the stated rate of 30-day LIBOR plus 1.75% (8.31% atJanuary 31, 2001) to temporarily finance our acquisition of Equinox,pending maturity of certain short-term investments.   All borrowings were repaid during the first three months of2001. On the closing of the Equinox transaction, we acquired approximately$24.3 million in cash and short-term investments held by Equinox.

 

                Our operating activities generated cash ofapproximately $53 million in the first nine months of 2001, compared to usingapproximately $(497) thousand in the first nine months of 2000.   After adjusting the net loss for merger andacquisition related items, the large increase in cash flow from operations forthe first nine months of 2001 compared to the first nine months of 2000resulted primarily from the change in accounts receivable and otherreceivables. The decrease inreceivables from December 31, 2000 is a result of the timing of sales and ourcollection efforts.

 

                Inventorylevels increased in the first quarter of 2001 due to the purchase of long-lead items and transfer ofcompleted subassemblies from a vendor for our DS1800 product. During the fourthquarter of 2000, we sold a large amount of our DS1800 components to asubcontractor to produce DS1800 subassemblies.   The value of these components was carried as other receivablesat year-end and the value was transferred back to inventory from otherreceivables upon the receipt of the subassemblies.  The large increase in inventory during the first quarter of 2001was largely offset by a non-recurring, before tax benefit, charge of  $11.7 million for excess and obsoleteinventories recorded in the second quarter of 2001.  This write-down reduced inventories to replacement value and tolevels necessary to support then current sales demand.

 

                Webelieve that our existing cash balances, investments, cash generated fromoperations and the funds available to us under credit facilities will besufficient to fund our operations through 2001.

 

**Item 3.**    **Quantitative and QualitativeDisclosures About Market Risks.**

 

                Our primary market risk is thepotential loss arising from changes in interest rates, which could have anadverse impact on the fair value of our investment securities. Our investmentpolicy is to manage our investment portfolio to preserve principal andliquidity while maximizing the return on the investment portfolio through theinvestment of available funds. We diversify the investment portfolio byinvesting in a variety of highly–rated investment–grade securitiesand through the use of different investment managers. Our investment securitiesportfolio is primarily invested in short-term securities with at least aninvestment grade rating to minimize interest rate and credit risk as well as toprovide for an immediate source of funds. Market risk is estimated as thepotential change in fair value in the investment portfolio resulting from a hypothetical10 percent change in interest rates, and was not material at September 28,2001. We generally hold investment securities until maturity and carry thesecurities at amortized cost, which approximates fair value.

 

                We are also exposed to equityprice risks on our investments in publicly traded equity securities. Theseinvestments are generally in companies having operations or technology in areaswithin our strategic focus. We do not attempt to reduce or eliminate our marketexposure on these securities. As of September 28, 2001, the fair value of ouravailable–for–sale equity investments was $642 thousand. A 20percent adverse change in equity prices would result in a decrease ofapproximately $128 thousand in the fair value of our available–for–saleequity securities as of September 28, 2001.

 

                The value of certain foreigncurrencies versus the U.S. dollar affects our financial results. Ourinternational operations transact a portion of our business in currencies otherthan the U.S. Dollar, and changes in exchange rates may positively ornegatively affect our revenues, gross margins, operating expenses, and retaineddeficit since these transactions are expressed in U.S. dollars. We engage insome hedging programs aimed at limiting the impact of currency fluctuations.These hedging activities provide only limited protection against currencyexchange risks, and there can be no assurance that such an approach will besuccessful, especially if a significant and sudden decline occurs in the valueof local currencies.

 

**PARTII – OTHER INFORMATION**

 

**Item 1.    Legal Proceedings.**

 

In February 1998, Apex Inc., awholly-owned subsidiary of Avocent, filed patent infringement lawsuits againstcertain companies (including Rose Electronics), which were dismissed withoutprejudice by the agreement of the parties in early 1999 to allow certain patentissues raised in the litigation to be initially determined by the United StatesPatent and Trademark Office (the "PTO").  Apex also filed a complaint for patent infringement in UnitedStates District Court for the Western District of Washington in Seattle againstCCC Group in June 1998, which was filed but never formally served on CCC. Thislawsuit was stayed by the District Court in 1999 pending a ruling by the PTO,and subsequently, Apex voluntarily dismissed the CCC lawsuit in Seattle withoutprejudice.

 

Theissues raised in the PTO have now been resolved in Apex’s favor, and in May2001, Apex filed a complaint for patent infringement in the United StatesDistrict Court for the Southern District of New York against Raritan ComputerInc.  The Raritan complaint seeksinjunctive relief, damages, attorneys' fees and costs.  Apex has also informed both Rose Electronicsand CCC Group that Apex continues to believe that certain products sold bythese companies infringe one or more of Apex's patents and that, absentcircumstances requiring earlier action, Apex intends to enforce its patentrights against Rose and CCC when the Raritan litigation is concluded.

 

**Item6.    Exhibits and Reports on Form 8-K.**

 

(a)           Exhibits

 

10.23.1    Separation and General Release Agreementamong Avocent Corporation, Apex Inc., and Barry L. Harmon

 

(b)           Reportson Form 8-K

 

                Wefiled a current Report on Form 8-K on January 18, 2001 in connection with ouracquisition of Equinox Systems Inc., a Florida corporation.  The Acquisition wasconsummated on January 3, 2001, prior to which the shareholders of Equinox dulyapproved the Acquisition in accordance with the corporate laws of the State ofFlorida.

 

 

 

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

 

**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:  November 13, 2001 |   | /s/ Douglas E.  Pritchett                                                                               |
|                          |   | Douglas E.  Pritchett                                                                                   |
|                          |   | Senior Vice  President of Finance, Chief Financial Officer and Treasurer (Principal  Financial Officer) |