** **

**U.S. SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

** **

# **FORM 10-Q**

# ** **

| **(Mark  One)**                                                                                                                                                                    |       |                                                                                                    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                               |       |                                                                                                    |
| **ý**                                                                                                                                                                         | ** ** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|                                                                                                                                                                               |       |                                                                                                    |
| **For the quarterly period ended  July 1, 2005 or**                                                                                                                           |
|                                                                                                                                                                               |       |                                                                                                    |
| **o**                                                                                                                                                                              | ** ** | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                                               |       |                                                                                                    |
| **For the transition 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 Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements 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 Exchange Act).

 

ýYes  oNo

 

Asof August 2, 2005, the number of outstanding shares of the Registrant’sCommon Stock was 48,980,729

 

 

----

 

**AVOCENT CORPORATION**

**FORM 10-Q**

**July 1, 2005**

 

**INDEX**

 
| Part I  | Financial Information |                                                                                                                         |
|--------------|-----------------------|------------------------------------------------------------------------------------------------------------------------------|
|         |                  |                                                                                                                         |
|         | Item 1.               | Financial  Statements (unaudited)                                                                                            |   |
|         |                  |                                                                                                                         |   |
|         |                  | Condensed Consolidated  Statements of Operations for the Three and Six Months Ended July 1, 2005  and July 2, 2004 |   |
|         |                  |                                                                                                                         |   |
|         |                  | Condensed  Consolidated Balance Sheets at July 1, 2005 and December 31, 2004                                       |   |
|         |                  |                                                                                                                         |   |
|         |                  | Condensed Consolidated  Statements of Cash Flows for the Six Months Ended July 1, 2005 and  July 2, 2004           |   |
|         |                  |                                                                                                                         |   |
|         |                  | Notes  to Condensed Consolidated Financial Statements                                                                        |   |
|         |                  |                                                                                                                         |   |
|         | 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  2.              | Unregistered Sales of Equity  Securities and Use of Proceeds                                                                 |   |
|         |                  |                                                                                                                         |   |
|         | Item  4.              | Submission  of Matters to a Vote of Security Holders                                                                         |   |
|         |                  |                                                                                                                         |   |
|         | Item 6.               | Exhibits                                                                                                                     |   |
|         |                  |
| Signatures   |                  |

 

2

----

 

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

** **

**AVOCENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

(Unaudited, in thousands,except per share data)

#### ** **

| ** **                                                     | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                     | ** ** | **July 1,  2005**         | ** ** | **July 2,  2004**       | ** ** | **July 1,  2005** | ** ** | **July 2,  2004** | ** ** |
| ** **                                                     | ** ** | ** **                     | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                      |       | $                              | 89,538     |                         | $          | 87,796 |   | $ | 166,343 |   | $ | 173,881 |   |
| Cost of sales                                                  |       | 36,711                         |       | 37,196                       |       | 69,934 |   | 73,179 |   |
| Gross profit                                                   |       | 52,827                         |       | 50,600                       |       | 96,409 |   | 100,702 |   |
|                                                           |       |                           |       |                         |       |   |   |   |   |
| Research and  development expenses                             |       | 14,388                         |       | 11,226                       |       | 28,855 |   | 20,654 |   |
| Acquired  in-process research and development expense          |       | —                         |       | 21,720                       |       | — |   | 28,210 |   |
| Selling, general  and administrative expenses                  |       | 24,025                         |       | 22,037                       |       | 46,305 |   | 42,372 |   |
| Amortization of  intangible assets                             |       | 6,623                          |       | 6,412                        |       | 13,245 |   | 11,174 |   |
| Total operating  expenses                                      |       | 45,036                         |       | 61,395                       |       | 88,405 |   | 102,410 |   |
|                                                           |       |                           |       |                         |       |   |   |   |   |
| Income (loss)  from operations                                 |       | 7,791                          |       | (10,795                      | )          | 8,004 |   | (1,708 | ) |
|                                                           |       |                           |       |                         |       |   |   |   |   |
| Income from  settlement of lawsuit                             |       | 5,000                          |       | —                       |       | 5,000 |   | — |   |
| Net investment  income                                         |       | 2,260                          |       | 1,046                        |       | 4,316 |   | 2,297 |   |
| Net realized  investment losses                                |       | (206                           | )          | (104                         | )          | (383 | ) | (168 | ) |
| Other expense,  net                                            |       | (115                           | )          | (98                          | )          | (54 | ) | (148 | ) |
|                                                           |       |                           |       |                         |       |   |   |   |   |
| Income (loss) before  income taxes                             |       | 14,730                         |       | (9,951                       | )          | 16,883 |   | 273 |   |
| Provision for  income taxes                                    |       | 3,631                          |       | 3,441                        |       | 3,950 |   | 5,122 |   |
|                                                           |       |                           |       |                         |       |   |   |   |   |
| Net income  (loss)                                             |       | $                              | 11,099     |                         | $          | (13,392 | ) | $ | 12,933 |   | $ | (4,849 | ) |
|                                                           |       |                           |       |                         |       |   |   |   |   |
| Earnings (loss)  per share:                                    |       |                           |       |                         |       |   |   |   |   |
| Basic                                                          |       | $                              | 0.22       |                         | $          | (0.27 | ) | $ | 0.26 |   | $ | (0.10 | ) |
| Diluted                                                        |       | $                              | 0.22       |                         | $          | (0.27 | ) | $ | 0.25 |   | $ | (010 | ) |
|                                                           |       |                           |       |                         |       |   |   |   |   |
| Weighted average  shares used in computing earnings per share: |       |                           |       |                         |       |   |   |   |   |
| Basic                                                          |       | 49,475                         |       | 49,065                       |       | 49,859 |   | 48,958 |   |
| Diluted                                                        |       | 50,417                         |       | 49,065                       |       | 50,819 |   | 48,958 |   |

 

See notes accompanyingthese condensed consolidated financial statements

 

3

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**AVOCENT CORPORATION**

**CONDENSED CONSOLIDATED BALANCESHEETS**

(Unaudited, in thousands,except per share data)

 
| ** **                                                                                                                                                                                                    | ** **   | **July 1,  2005** | ** **   | **December 31,  2004** | ** **   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------|--------------|-----------------------------|--------------|
|                                                                                                                                                                                                          | *** *** | *** ***           | *** *** | *** ***                | *** *** |
| **ASSETS**                                                                                                                                                                                                    |         |                   |         |                        |         |
| Current assets:                                                                                                                                                                                               |         |                   |         |                        |         |
| Cash and cash  equivalents                                                                                                                                                                                    |         | $                      | 38,066       |                        | $            | 44,724 |   |
| Investments  maturing within one year                                                                                                                                                                         |         | 212,985                |         | 195,075                     |         |
| Accounts  receivable, net                                                                                                                                                                                     |         | 53,083                 |         | 60,948                      |         |
| Inventories, net                                                                                                                                                                                              |         | 22,807                 |         | 21,232                      |         |
| Other current  assets                                                                                                                                                                                         |         | 8,203                  |         | 5,923                       |         |
| Deferred tax  assets, net                                                                                                                                                                                     |         | 6,377                  |         | 6,720                       |         |
| Total current  assets                                                                                                                                                                                         |         | 341,521                |         | 334,622                     |         |
| Investments                                                                                                                                                                                                   |         | 64,551                 |         | 90,217                      |         |
| Property held  for lease, net                                                                                                                                                                                 |         | 1,232                  |         | 1,330                       |         |
| Property and  equipment, net                                                                                                                                                                                  |         | 39,221                 |         | 39,896                      |         |
| Goodwill                                                                                                                                                                                                      |         | 269,992                |         | 269,892                     |         |
| Other intangible  assets, net                                                                                                                                                                                 |         | 20,896                 |         | 33,981                      |         |
| Other assets                                                                                                                                                                                                  |         | 893                    |         | 843                         |         |
| Total assets                                                                                                                                                                                                  |         | $                      | 738,306      |                        | $            | 770,781 |   |
|                                                                                                                                                                                                          |         |                   |         |                        |         |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                |         |                   |         |                        |         |
| Current  liabilities:                                                                                                                                                                                         |         |                   |         |                        |         |
| Accounts payable                                                                                                                                                                                              |         | $                      | 6,538        |                        | $            | 9,171 |   |
| Accrued wages  and commissions                                                                                                                                                                                |         | 9,968                  |         | 12,197                      |         |
| Accrued  liabilities                                                                                                                                                                                          |         | 18,355                 |         | 15,661                      |         |
| Income taxes  payable                                                                                                                                                                                         |         | 9,426                  |         | 8,494                       |         |
| Other current  liabilities                                                                                                                                                                                    |         | 1,486                  |         | 1,106                       |         |
| Total current  liabilities                                                                                                                                                                                    |         | 45,773                 |         | 46,629                      |         |
|                                                                                                                                                                                                          |         |                   |         |                        |         |
| Deferred tax  liabilities, net                                                                                                                                                                                |         | 3,644                  |         | 8,985                       |         |
| Other  non-current liabilities                                                                                                                                                                                |         | 1,733                  |         | 1,870                       |         |
| Total  liabilities                                                                                                                                                                                            |         | 51,150                 |         | 57,484                      |         |
|                                                                                                                                                                                                          |         |                   |         |                        |         |
| Commitments and  contingencies                                                                                                                                                                                |         |                   |         |                        |         |
|                                                                                                                                                                                                          |         |                   |         |                        |         |
| Stockholders’  equity:                                                                                                                                                                                   |         |                   |         |                        |         |
| Preferred stock,  $0.001 par value; 5,000 shares authorized, no shares issued and outstanding  as of July 1, 2005 and December 31, 2004, respectively                                               |         | —                 |         | —                      |         |
| Common stock,  $0.001 par value; 200,000 shares authorized, July 1, 2005 – 50,799  shares issued and 48,924 outstanding; December 31, 2004 – 50,332 shares  issued and 50,232 outstanding |         | 51                     |         | 50                          |         |
| Additional  paid-in capital                                                                                                                                                                                   |         | 1,085,851              |         | 1,075,171                   |         |
| Accumulated  other comprehensive loss                                                                                                                                                                         |         | (560                   | )            | (56                         | )            |
| Deferred  compensation                                                                                                                                                                                        |         | (1,019                 | )            | (2,038                      | )            |
| Accumulated  deficit                                                                                                                                                                                          |         | (342,919               | )            | (355,852                    | )            |
| Treasury stock,  at cost; July 1, 2005 – 1,875 shares; December 31, 2004 – 100  shares                                                                                                    |         | (54,248                | )            | (3,978                      | )            |
| Total  stockholders’ equity                                                                                                                                                                              |         | 687,156                |         | 713,297                     |         |
| Total  liabilities and stockholders’ equity                                                                                                                                                              |         | $                      | 738,306      |                        | $            | 770,781 |   |

 

See notes accompanyingthese condensed consolidated financial statements

 

4

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**AVOCENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

(Unaudited, in thousands)

 
| ** **                                                                                | ** **   | **For the six months ended** | ** ** |
|-------------------------------------------------------------------------------------------|--------------|------------------------------|------------|
| ** **                                                                                | ** **   | **July 1, 2005**        | ** ** | **July 2, 2004** | ** ** |
| *** ***                                                                              | *** *** | ** **                   | ** ** | ** ** | *** *** |
| Cash flows from  operating activities:                                                    | * *     | * *                     | * *   | * * | * * |
| Net income  (loss):                                                                       |         | $                            | 12,933     |   | $ | (4,849 | )  |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |         |                         |       |   |   |   |   |
| Depreciation                                                                              |         | 3,278                        |       | 2,993 |   |
| Amortization of  intangible assets                                                        |         | 13,245                       |       | 11,174 |   |
| Stock-based  compensation                                                                 |         | 1,019                        |       | 2,864 |   |
| Acquired  in-process research and development expenses                                    |         | —                       |       | 28,210 |   |
| Amortization of  premiums on investments                                                  |         | 650                          |       | 2,101 |   |
| Net loss on  sales of investments                                                         |         | 383                          |       | 168 |   |
| Income tax  benefit from exercise of stock options                                        |         | 2,131                        |       | 2,256 |   |
| Changes in  operating assets and liabilities (net of effects of acquisitions):            |         |                         |       |   |   |
| Accounts  receivable, net                                                                 |         | 7,863                        |       | (3,465 | ) |
| Inventories, net                                                                          |         | (1,575                       | )          | (555 | ) |
| Other assets                                                                              |         | (2,636                       | )          | 1,619 |   |
| Accounts payable                                                                          |         | (2,625                       | )          | (3,840 | ) |
| Accrued wages  and commissions                                                            |         | (2,229                       | )          | (1,659 | ) |
| Accrued  liabilities                                                                      |         | 3,193                        |       | (60 | ) |
| Income taxes,  current and deferred                                                       |         | (4,323                       | )          | (4,415 | ) |
| Net cash  provided by operating activities                                                | ** **   | 31,307                       | ** ** | 32,542 | ** ** |
| ** **                                                                                | ** **   | ** **                   | ** ** | ** ** | ** ** |
| Cash flows from  investing activities:                                                    |         |                         |       |   |   |
| Purchase of OSA,  net of cash received  (1)                                          |         | —                       |       | (47,179 | ) |
| Purchase of  Crystal Link, net of cash received  (1)                                 |         | —                       |       | (3,311 | ) |
| Purchases of  property and equipment                                                      |         | (2,603                       | )          | (3,690 | ) |
| Purchases of  investments                                                                 |         | (135,947                     | )          | (108,898 | ) |
| Maturities and  proceeds from sales of investments                                        |         | 142,429                      |       | 124,836 |   |
| Net cash provided  by (used in) investing activities                                      |         | 3,879                        |       | (38,242 | ) |
| ** **                                                                                | ** **   | ** **                   | ** ** | ** ** | ** ** |
| Cash flows from  financing activities:                                                    | ** **   | ** **                   | ** ** | ** ** | ** ** |
| Repayment of  debt assumed at the acquisition of Crystal Link                             |         | —                       |       | (1,798 | ) |
| Proceeds from  employee stock option exercises                                            |         | 6,440                        |       | 7,803 |   |
| Proceeds from  employee stock purchase plan                                               |         | 2,108                        |       | 1,371 |   |
| Purchases of  treasury stock                                                              |         | (50,270                      | )          | — |   |
| Net cash (used-in)  provided by financing activities                                      |         | (41,722                      | )          | 7,376 |   |
|                                                                                      |         |                         |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                             |         | (122                         | )          | 126 |   |
|                                                                                      |         |                         |       |   |   |
| Net (decrease) increase  in cash and cash equivalents                                     |         | (6,658                       | )          | 1,802 |   |
| Cash and cash  equivalents at beginning of period                                         |         | 44,724                       |       | 76,492 |   |
| Cash and cash  equivalents at end of period                                               |         | $                            | 38,066     |   | $ | 78,294 |   |

 

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(1)   Supplementaldisclosure – In addition to the cash paid at the respective closings, we issued106 shares of our common stock valued at $3,500 to Crystal Link shareholders and1,229 shares of our common stock valued at $45,831 to OSA shareholders. Theissuance of common stock was recorded as non-cash consideration for theacquisition.  

 

See notes accompanyingthese condensed consolidated financial statements.

 

5

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**AVOCENT CORPORATION**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

(Unaudited, in thousands)

 

Note 1.   Basisof Presentation

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inconformity with generally accepted accounting principles and reflect all adjustmentsconsisting of normal recurring adjustments which, in the opinion of management,are necessary for a fair presentation of the results for the three and sixmonths ended July 1, 2005 and July 2, 2004.  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 acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts 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 endedDecember 31, 2004, which is on file with the Securities and ExchangeCommission. The balance sheet presented in the accompanying financialstatements for December 31, 2004, was derived from the audited financialstatements filed in our 10-K for the period ended December 31, 2004.

 

We report ourannual results based on years ending December 31.  We report our quarterly results for the firstthree interim periods based on 13 week periods ending on Fridays and for thefourth interim period 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 at:

 

| ** **       | ** ** | **July 1,   2005** | ** ** | **December 31,   2004** | ** ** |
|------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **       | ** ** | ** **              | ** ** | ** **                   | ** ** |
| Raw materials    |       | $                       | 5,003      |                         | $          | 4,411 |   |
| Work-in-process  |       | 440                     |       | 356                          |       |
| Finished goods   |       | 17,364                  |       | 16,465                       |       |
| Inventories, net |       | $                       | 22,807     |                         | $          | 21,232 |   |

 

Inventoriesabove have been reduced by reserves for excess and obsolete inventories of $4,701and $3,785 as of July 1, 2005 and December 31, 2004, respectively.

 

Note 3.   StockOptions and Deferred Compensation

 

Deferredcompensation — We recorded $41,165 of deferred compensation related to Cybexemployee stock options at the time of the merger of Apex and Cybex on July 1,2000, $2,752 of deferred compensation related to the Equinox employee stockoptions at the time of the acquisition on January 3, 2001 and $6,350 ofdeferred compensation related to the OSA employee stock options at the time ofthe acquisition on April 6, 2004. The deferred compensation is being amortized over the vesting period ofthe options for which it was recorded. Amortization of deferred compensationtotaled $510 for the three months ended July 1, 2005 and $2,143 for thethree months ended and July 2, 2004. Amortization of deferred compensation totaled $1,019 for the six monthsended July 1, 2005 and $2,864 for the six months ended July 2, 2004.

 

Stock optionexercises — Shares of our common stock issued as a result of option exercisestotaled 380 shares during the six months ended July 1, 2005 and 436 sharesduring the six months ended July 2, 2004. Total proceeds received from these option exercises were $6,440 for the sixmonths ended July 1, 2005 and $7,803 for the six months ended July 2,2004. Common stock issued under our Employee Stock Purchase Plan (“ESPP”) totaled87 shares during the six months ended July 1, 2005 and 89 shares duringthe six months ended July 2, 2004. Total proceeds received from the shares issued under the ESPP were $2,108for the six months ended July 1, 2005 and $1,371 for the six months ended July 2,2004. 

 

6

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Stock repurchases — During the fourth quarter of 2004 our Board of Directorsapproved a stock re-purchase plan and we have purchased shares on the openmarket through various brokers under the approved plan. We repurchased 1,075shares of our common stock during the quarter ended July 1, 2005 at a costtotaling $28,408. We repurchased 1,775 shares of our common stock during thesix months ended July 1, 2005 at a cost totaling $50,270.  We may repurchase a total of 4,000 sharesunder the plan.  We have repurchased 1,875shares under the plan since the approval of the plan in 2004.

 

Note 4.   AccumulatedOther Comprehensive Loss

 

We record unrealized gains and losseson our foreign currency translation adjustments and unrealized holding gains orlosses on our available-for-sale securities, net of tax, as accumulated othercomprehensive income (loss), which is included as a separate component ofstockholders’ equity.  Comprehensiveincome for the first six months of 2005 of $12,429 consists of $12,933 of netincome, $242 of unrealized losses on investments (net of deferred income taxes)and $262 of foreign currency translation loss.  Comprehensive loss for the first sixmonths of 2004 of $5,242 consists of $4,849 of net loss, $519 of unrealized losseson investments (net of deferred income taxes) and $126 of foreign currencytranslation gain.  As of July 1,2005 and December 31, 2004, total accumulated other comprehensive loss was($560) and ($56), respectively.

 

Note 5.   Earnings(loss) per Share

 
| ** **                                                           | ** ** | **Income**      | ** ** | **Shares**        | ** ** | **Per-Share  Amount** | ** ** |
|----------------------------------------------------------------------|------------|-----------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | ** **            | ** ** |
| **For the  three months ended July 1, 2005**                    |       |            |       |              |       |                  |       |
| **Basic  EPS**                                                       |       |            |       |              |       |                  |       |
| Net income  available to common stockholders                         |       | $               | 11,099     |              | 49,475     |                  | $          | 0.22 |   |
| **Effect  of Dilutive Securities**                                   |       |            |       |              |       |                  |       |
| Stock options                                                        |       | —          |       | 942               |       | —                |       |
| **Diluted  EPS**                                                     |       |            |       |              |       |                  |       |
| Net income  available to common stockholders and assumed conversions |       | $               | 11,099     |              | 50,417     |                  | $          | 0.22 |   |
|                                                                 |       |            |       |              |       |                  |       |
| **For the  three months ended July 2, 2004**                    |       |            |       |              |       |                  |       |
| **Basic  EPS**                                                       |       |            |       |              |       |                  |       |
| Net loss  available to common stockholders                           |       | $               | (13,392    | )                 | 49,065     |                  | $          | (0.27 | ) |
| **Effect  of Dilutive Securities**                                   |       |            |       |              |       |                  |       |
| Stock options                                                        |       | —          |       | —            |       | —                |       |
| **Diluted  EPS**                                                     |       |            |       |              |       |                  |       |
| Net loss  available to common stockholders and assumed conversions   |       | $               | (13,392    | )                 | 49,065     |                  | $          | (0.27 | ) |
|                                                                 |       |            |       |              |       |                  |       |
| **For the  six months ended July 1, 2005**                      |       |            |       |              |       |                  |       |
| **Basic  EPS**                                                       |       |            |       |              |       |                  |       |
| Net income  available to common stockholders                         |       | $               | 12,933     |              | 49,859     |                  | $          | 0.26 |   |
| **Effect  of Dilutive Securities**                                   |       |            |       |              |       |                  |       |
| Stock options                                                        |       | —          |       | 960               |       | —                |       |
| **Diluted  EPS**                                                     |       |            |       |              |       |                  |       |
| Net income  available to common stockholders and assumed conversions |       | $               | 12,933     |              | 50,819     |                  | $          | 0.25 |   |
| ** **                                                           | ** ** | ** **      | ** ** | ** **        | ** ** | ** **            | ** ** |
| **For the  six months ended July 2, 2004**                      |       |            |       |              |       |                  |       |
| **Basic  EPS**                                                       |       |            |       |              |       |                  |       |
| Net loss  available to common stockholders                           |       | $               | (4,849     | )                 | 48,958     |                  | $          | (0.10 | ) |
| **Effect  of Dilutive Securities**                                   |       |            |       |              |       |                  |       |
| Stock options                                                        |       | —          |       | —            |       | —                |       |
| **Diluted  EPS**                                                     |       |            |       |              |       |                  |       |
| Net loss  available to common stockholders and assumed conversions   |       | $               | (4,849     | )                 | 48,958     |                  | $          | (0.10 | ) |

 

7

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Anti-dilutive options to purchase commonstock outstanding were excluded from the calculations above.  Anti-dilutive options totaled 2,634 and 2,636for the three and six months ended July 1, 2005, respectively.  For the three and six months ended July 2,2004, options to purchase 7,907 shares of common stock were outstanding butwere not included in the computation of diluted net loss per share as inclusionof these options would have been anti-dilutive. 

 

Note 6.   Salesby Geographic Region

 

We have evaluated, andwill periodically re-evaluate, our business in light of the segment reportingrequirements prescribed by SFAS No. 131, *Disclosuresabout Segments of an Enterprise and Related Information.*  We have determined that we should report ouroperations as a single operating segment. However, we supplementally report net sales by geographic region, aswell as by customer type.  Following is apresentation of net sales by geographic region and by customer type for the threeand six months ended July 1, 2005 and July 2, 2004:

 

| ** **         | ** ** | **For the Three Months  Ended** | ** ** | **For the Six Months  Ended** | ** ** |
|--------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **         | ** ** | **July 1,  2005**          | ** ** | **July 2,   2004**       | ** ** | **July 1,   2005** | ** ** | **July 2,   2004** | ** ** |
| Net sales:         | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States      |       | $                               | 52,786     |                          | $          | 52,860 |   | $ | 92,750 |   | $ | 104,050 |   |
| Rest of the  World |       | 36,752                          |       | 34,936                        |       | 73,593 |   | 69,831 |   |
|               |       | $                               | 89,538     |                          | $          | 87,796 |   | $ | 166,343 |   | $ | 173,881 |   |

** **

| ** ** | ** ** | **For the Three Months  Ended** | ** ** | **For the Six Months  Ended** | ** ** |
|------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** ** | ** ** | **July 1,   2005**         | ** ** | **July 2,   2004**       | ** ** | **July 1,   2005** | ** ** | **July 2,   2004** | ** ** |
| ** ** | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales: | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Branded    |       | $                               | 45,796     |                          | $          | 49,990 |   | $ | 82,523 |   | $ | 100,699 |   |
| OEM        |       | 43,742                          |       | 37,806                        |       | 83,820 |   | 73,182 |   |
|       |       | $                               | 89,538     |                          | $          | 87,796 |   | $ | 166,343 |   | $ | 173,881 |   |

** **

We sell our productsinternationally to customers in several countries. Sales to customers in the Netherlands,including the European distribution facility for one of our OEM customers,accounted for 11% of sales in the first six months of 2004.  No other country accounted for more than 10%of sales in the first six months of either 2005 or 2004.

 

**As of July 1, 2005, long-livedassets totaled $331,341, which includes $311,605 held in the U.S. and $19,736held outside of the U.S.  As of December 31,2004, long-lived assets totaled $345,099, which includes $324,417 held in theU.S. and $20,682 held outside of the U.S.**

** **

**Note 7.**   Forward Contracts

** **

We use forward contracts to reduce our foreigncurrency exposure related to the net cash flows from our international 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 consolidated statements of operations.  As of July 1, 2005, we had one 30 day openforward contract, maturing on July 27, 2005, with a fair value of ($6).

 

8

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**Note 8.**   Goodwill and Other Intangible Assets

** **

**Acquired other intangible assets subjectto amortization were as follows:**

** **

| ** **                        | ** ** | **July 1, 2005**        | ** ** | **December 31, 2004**     | ** ** |
|-----------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated   Amortization** | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated   Amortization** | ** ** |
|                              |       |                         |       |                           |       |   |   |   |   |   |   |   |   |
| Developed  technology             |       | $80,560                      |       | $71,139                        |       | $80,560 |   | $62,293 |   |
| Patents and  trademarks           |       | 21,741                       |       | 16,707                         |       | 21,508 |   | 14,318 |   |
| Customer base  and certifications |       | 6,483                        |       | 2,758                          |       | 6,483 |   | 1,961 |   |
| Non-compete  agreements           |       | 5,793                        |       | 4,036                          |       | 5,793 |   | 3,070 |   |
| Other                             |       | 1,814                        |       | 855                            |       | 1,814 |   | 535 |   |
|                              |       | $116,391                     |       | $95,495                        |       | $116,158 |   | $82,177 |   |
|                                   |            |                              |            |                                |            |  |  |  |  |  |  |  |  |

** **

**For the three months ended July 1,2005 and July 2, 2004, amortization expense for other intangible assetswas $6,623 and $6,412, respectively. For the six months ended July 1, 2005and July 2, 2004, amortization expense for other intangible assets was $13,245and $11,174, respectively. The approximate estimated annual amortization forother intangibles is as follows:**

** **

| **Years ending December 31:** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
| 2005 (*remaining six months*)      |       | $          | 6,500      |   |
| 2006                               |       | $          | 9,400      |   |
| 2007                               |       | $          | 3,500      |   |
| 2008                               |       | $          | 1,100      |   |
| 2009                               |       | $          | 396        |   |

** **

**For the six months ended July 1,2005, we recorded $100 of additional goodwill related to the Crystal LinkTechnologies acquisition. **

** **

**Note 9.** Product Warranties

** **

**The activity within the liability for warranty returns forthe six months ended July 1, 2005 was as follows:**

 

| ** **                                                | ** ** | **2005** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|
|                                                      |       |     |       |
| Balance,  January 1, 2005                            |       | $        | 2,760      |   |
|                                                      |       |     |       |
| Accruals for  product warranties issued during the period |       | 181      |       |
|                                                      |       |     |       |
| Settlements made  during the period                       |       | (126     | )          |
|                                                      |       |     |       |
| Balance,  July 1, 2005                               |       | $        | 2,815      |   |

 

Deferred revenue relatedto our extended warranty program was $1,781 for the six months ended July 1,2005.  We recorded earned revenue fromthe amortization of deferred revenue related to extended warranties of $414 forthe six months ended July 1, 2005. In addition, we recorded new extended warranties of $530 during the six monthsended July 1, 2005.

 

Note 10.  Income Taxes 

 

The provision for incometaxes was $3,950 for the six months ended July 1, 2005, compared to $5,122for the six months ended July 2, 2004.  The decrease in the effectivetax rate is primarily attributable to the impact of $21,720 of acquiredin-process research and development expense recorded during the second quarter of2004 as a result of the 

 

9

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acquisitionof OSA and is not deductible for tax purposes.   

 

Note 11.  Patent Dispute 

 

In May 2001, wefiled a complaint for patent infringement in the United States District Courtfor the Southern District of New York against Raritan Computer Inc. The Raritancomplaint sought injunctive relief, damages, attorneys’ fees and costs underthree patents.  After a seven day benchtrial in New York in January of 2002, U.S. District Judge Milton Pollackfound that there was no infringement of these patents by Raritan and orderedthat judgment be entered in favor of Raritan. In April 2003, the United States Court of Appeals for the FederalCircuit issued its ruling on our appeal in this patent litigation.  The Court of Appeals ruled in our favor byvacating the non-infringement decision of the District Court for the SouthernDistrict of New York and remanding the case for further proceedings consistentwith the Court of Appeals’ opinion.  In September 2003, Raritan petitionedthe United States Supreme Court for a Writ of Certiorari to review the Court ofAppeals decision.  The Supreme Courtdeclined to review Raritan’s petition in December 2003, and the case wassent back to the United States District Court for the Southern District of NewYork. 

 

In May 2005, wesettled the patent infringement lawsuit with Raritan. Under the terms of theagreement, we licensed certain patents to Raritan, and the parties entered intoa worldwide, five-year litigation stand-still agreement that resolves allclaims between the parties. The terms of the settlement called for an initiallump sum payment of $5,000 related to past product sales by Raritan andsettlement of the lawsuit and 20 consecutuve quarterly royalty payments to bethe greater of $750 or a fixed percentage of covered product revenues.  During the quarter ended July 1, 2005, werecorded the lump sum payment of $5,000 received at the settlement in otherincome and recorded the first quarterly royalty installment of $1,063 in netrevenues. 

 

InOctober 2003, we filed a complaint for patent infringement in the UnitedStates District Court for the Northern District of Alabama against ClearCubeTechnology, Inc.  The ClearCubecomplaint seeks injunctive relief, damages, attorneys’ fees, and costs under twoof our patents. ClearCube has filed counterclaims alleging non-infringement,unenforceability, invalidity, and misuse of the Avocent patents. AMarkman hearing on claims construction was originally set for February 2005,but in response to an inquiry from the Court, we agreed that the hearing shouldbe postponed until the United States Court of Appeals for the Federal Circuitissues its ruling on certain similar issues raised in an unrelated patent case.  This ruling was issued in June 2005 andwe expect our case to become active again during the third quarter of 2005.

 

**Note 12.** Stock Based Compensation  

** **

**We apply Accounting Principles BoardOpinion No. 25, *Accounting for StockIssued to Employees*, and related Interpretations in accounting for ourstock plans. 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, *Accounting for Stock-Based Compensation*, our net income andearnings per share would have been reduced to the pro forma amounts indicatedbelow.**

 
| ** **                                                                                                                              | ** ** | **Three Months ended** | ** ** | **Six Months Ended**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                              | ** ** | **July 1, 2005**  | ** ** | **July 2, 2004** | ** ** | **July 1, 2005** | ** ** | **July 2, 2004** | ** ** |
| Net income  (loss) — as reported                                                                                                   |       | $                      | 11,099     |                  | $          | (13,392 | ) | $ | 12,993 |   | $ | (4,849 | ) |
| Add: Stock-based  employee compensation expense included in reported net income, net of related  tax effects                            |       | 510                    |       | 2,098                 |       | 1,019 |   | 2,774 |   |
| Deduct: Total  stock based employee compensation expense determined under fair value method  for all awards, net of related tax effects |       | 7,717                  |       | 10,873                |       | 12,643 |   | 18,041 |   |
| Net income  (loss) — pro forma                                                                                                     |       | $                      | 3,892      |                  | $          | (22,167 | ) | $ | 1,369 |   | $ | (20,116 | ) |
|                                                                                                                                    |       |                   |       |                  |       |   |   |   |   |
| Basic earnings  (loss) per share — as reported                                                                                     |       | $                      | 0.22       |                  | $          | (0.27 | ) | $ | 0.26 |   | $ | (0.10 | ) |
| Basic earnings  (loss) per share — pro forma                                                                                       |       | $                      | 0.08       |                  | $          | (0.45 | ) | $ | 0.03 |   | $ | (0.41 | ) |
| Diluted earnings  (loss) per share — as reported                                                                                   |       | $                      | 0.22       |                  | $          | (0.27 | ) | $ | 0.25 | ) | $ | (0.10 | ) |
| Diluted earnings  (loss) per share — pro forma                                                                                     |       | $                      | 0.08       |                  | $          | (0.45 | ) | $ | 0.03 |   | $ | (0.41 | ) |

 

10

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The pro forma amounts reflected above are not representativeof the effects on reported net income (loss) in future years because, ingeneral, the options granted typically do not vest for several years andadditional awards are made each year. The fair value of each option grant isestimated on the grant date using the Black-Scholes option-pricing model usingthe following weighted-average assumptions:

 

 
| ** **               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|--------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **July 1, 2005**  | ** ** | **July 2, 2004** | ** ** | **July 1, 2005** | ** ** | **July 2, 2004** | ** ** |
| Dividend yield           |       | 0.0                    | %          | 0.0                   | %          | 0.0 | % | 0.0 | % |
| Expected life  (years)   |       | 1.5 - 4.5              |       | 1.0 - 4.5             |       | 1.5 - 4.5 |   | 4.5 |   |
| Expected  volatility     |       | 45.1                   | %          | 42.0                  | %          | 45.1 - 47.0 | % | 42.0 – 55.0 | % |
| Risk-free  interest rate |       | 3.16 - 3.84            | %          | 1.23 – 3.54      | %          | 3.16 - 3.84 | % | 1.23 – 2.79 | % |

 

On April 29, 2005, our Board of Directorsapproved a plan to accelerate vesting of all currently outstanding stockoptions with an exercise price of greater than $25.00 which areunvested on December 25, 2005. Under the provisions of APB 25, we estimate that there will be nocompensation expense related to accelerating these options as the optionsaffected by the acceleration had exercise prices higher that the closing priceof our common stock as of the modification date.  As a result of the Board’s action, weestimate that stock options to purchase approximately 1,100 shares of ourcommon stock will become exercisable effective December 25, 2005.  The exercise prices of the affected stockoptions range from $25.17 to $41.57 per share. The closing price of Avocent’s common stock on April 29, 2005 was$25.14.

 

**Our stockholders approved the adoptionof the Avocent Corporation 2005 Equity Incentive Plan at the 2005 stockholdersmeeting held in June 2005.  Underthe 2005 Equity Incentive Plan, an additional 2,500 shares of our common stockare reserved for issuance.  We expect tofile a registration statement on Form S-8 to register the sharesauthorized for issuance under this plan during the third quarter of 2005.  The 2005 plan allows for the issuance ofstock options, restricted stock, phantom stock, stock units, performanceshares, and stock grants as forms of equity compensation for directors,employees and service providers. Unissued and forfeited shares from our other equity plans were rolledinto the 2005 plan and are available for issuance under the terms of the 2005plan.  We issued 335 stock options in June 2005under the 2005 plan.**

 

Note 13. Certain Transactions

 

During the three monthsended July 1, 2005, we recorded approximately $1,300 in severance accrualsrelated to the closing of three satellite research and development sites andcertain other headcount reductions in our research and development and salesgroups.  We recorded approximately $800of the severance accruals within research and development expense andapproximately $500 of the severance accruals within selling, general andadministrative expense.  There were nosimilar charges in the three and six months ended July 2, 2004.

 

**Note 14.** Recently Issued Accounting Standards andRegulatory Standards

** **

In December 2004,the FASB issued SFAS No. 123 (revised 2004), *Share basedPayment*, which replaces SFAS No. 123. *Accountingfor Stock Based Compensation* and APB Opinion No 25 *Accounting for Stock Issued to Employees*.  SFAS 123R requires all share-based paymentsto employees, including grants of employee stock options, to be recognized inthe financial statements based on their fair values beginning with the firstannual period after June 15, 2005. The pro-forma disclosures previously permitted under SFAS No. 123no longer will be an alternative to inclusion of the expense in the financialstatements.  We are required to adoptSFAS 123R beginning January 1, 2006. Under SFAS 123R, we must determine the appropriate fair value model tobe used for valuing share-based payments, the amortization method forcompensation cost and the transition method to be used at date ofadoption.  The transition methods includeprospective and retroactive adoption options. We expect to utilize theprospective method which requires that compensation expense begin beingrecorded for all unvested stock options and restricted stock at the beginningof the first quarter of adoption of SFAS 123R. We are evaluating the requirements of SFAS 123R and expect the adoptionof SFAS 123R may have a material impact on our consolidated results ofoperations and earnings per share.  Wehave not determined the effect of adopting SFAS 123R and we have not determinedwhether the adoption will result in amounts similar to the current pro-formadisclosures under SFAS 123.  Under thecurrent approach of SFAS 123 we would have unamortized fair value of unvestedstock options of approximately $15,000 for currently outstanding stock optionsto be recognized as expense in our income statements after 2005, prior to theacceleration of vesting discussed in note 12. Following this acceleration we believe the balance to be expensed infuture periods will be reduced to approximately $2,000 for currentlyoutstanding stock options under the SFAS 123 methodology.

 

On October 22, 2004, the American JobsCreation Act of 2004 became law. This legislation repeals export tax

 

11

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benefits,which have historically reduced our effective tax rate. This legislation phasesin the repealed export tax benefits by allowing 100 percent of the repealedexport benefits in 2004, 80 percent in 2005 and 60 percent in 2006.  We do not expect this change to have amaterial impact on our effective tax rate or provision for taxes in 2005.

 

The legislation also transitions in a new taxdeduction for qualifying U.S. manufacturing activities. Underthe guidance in FASB Staff Position No. FAS 109-1 whicharticulates the application of SFAS 109, “Accounting for Income Taxes,” to thetax deduction on qualified production activities provided by this Act, thededuction will be treated as a “special deduction” as described in SFAS 109. Assuch, we expect the new manufacturing activities deduction provision of the newlegislation will reduce our effective rate in future periods as the deductionis taken on our tax returns.  We do notexpect the deduction to have a material impact on our effective tax rate orincome tax provision in 2005.

 

The legislation also provides for the optionalrepatriation of earnings from foreign subsidiaries allowing an 85 percentdividends received deduction. The deduction is subject to a number oflimitations.   We have not yet initiatedan analysis nor determined if we will repatriate any overseas earnings pursuantto this provision.  If our intention topermanently reinvest overseas earnings in our overseas operations changes andwe decide to repatriate any of the earnings to the U.S., we would incuradditional income tax expense equal to the incremental U.S. income tax inexcess of the credits available for taxes already paid overseas.

 

**Note 15.** Subsequent Events

** **

During the period from July 2, 2005 throughAugust 2, 2005, we repurchased 200 additional shares of our common stockon the open market under our Board approved stock repurchase program, for atotal cost of $5,923.  

 

12

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**Item 2.**  Management’s Discussion and Analysis of Financial Condition andResults of Operations.

** **

*THE INFORMATION IN THISITEM 2**“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS”**CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTSRELATING TO OUR FUTURE BUSINESS PROSPECTS AND ECONOMIC CONDITIONS IN GENERAL;STATEMENTS REGARDING OUR ABILITY TO PREDICT FUTURE SALES AND MANAGE INVENTORYLEVELS; STATEMENTS REGARDING PRICING PRESSURE; STATEMENTS REGARDING THEFLUCTUATION OF OUR REVENUE GROWTH IN RELATION TO ECONOMIC CONDITIONS AND ITRELATED SPENDING TRENDS; STATEMENTS REGARDING OUR PRODUCT PLATFORMS AND OURABILITY TO GENERATE GROWTH IN OUR OVERALL BUSINESS; STATEMENTS REGARDINGINCREASED SALES OF OUR DIGITAL PRODUCTS AND EMBEDDED SOLUTIONS AND THEIRABILITY TO OFFSET PRICE DECLINES AND COMPETITIVE FACTORS; STATEMENTS REGARDINGOUR REVENUES, GROSS MARGINS, OUR RESEARCH AND DEVELOPMENT EXPENSES AND OURSELLING, GENERAL AND ADMINISTRATIVE EXPENSES IN THE THIRD QUARTER OF 2005; STATEMENTSREGARDING OUR SARBANES-OXLEY COMPLIANCE COSTS; STATEMENTS REGARDING OUR LEGALCOSTS FOR PATENT LITIGATION CASES; AND STATEMENTS REGARDING THE IMPACT OF SFAS123R ON OUR RESULTS OF OPERATIONS AND EARNINGS PER SHARE.*

* *

*THESE FORWARD-LOOKINGSTATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE OURACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THEFORWARD-LOOKING STATEMENTS.  FACTORS THATMIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THE RISKSASSOCIATED WITH GENERAL ECONOMIC CONDITIONS, RISKS ASSOCIATED WITH THEINTRODUCTION OF NEW PRODUCTS, RISKS ATTRIBUTABLE TO FUTURE PRODUCT DEMAND,SALES, AND EXPENSES, RISKS ASSOCIATED WITH PRODUCT DESIGN EFFORTS, RISKSASSOCIATED WITH RELIANCE ON A LIMITED NUMBER OF COMPONENT SUPPLIERS AND SINGLESOURCE COMPONENTS, THE LOSS OF ONE OF OUR OEM CUSTOMERS, A REDUCTION ORFLUCTUATIONS IN SALES OF OUR OEM OR BRANDED PRODUCTS, INTENSE COMPETITION ANDNEW PRODUCTS AND TECHNOLOGIES FROM EXISTING AND NEW COMPETITORS, RISKS RELATEDTO OBTAINING AND PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS, FLUCTUATIONS INFOREIGN CURRENCIES, RISKS RELATED TO ACQUISITIONS AND THEIR SUBSEQUENTINTEGRATION, AND OTHER RISKS DETAILED IN OUR ANNUAL REPORT ON FORM 10-K,WHICH WAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 14,2005.*

 

**Overview**

 

Avocent designs,manufactures, licenses, and sells solutions that provide connectivity andcentralized management of IT infrastructure. We provide connectivity and management products and technologiesthat centralize control of servers, mobile devices, and network appliances,increasing the efficiency of IT personnel. Server manufacturers rely on AvocentKVM switches and embedded technology in their systems, and companies large andsmall depend on our products and technologies for managing their growing ITinfrastructure.

 

Our innovations include IP-based switching,centralized management, and intuitive software interfaces. Our products andtechnologies manage servers, serial devices, wireless devices, mobile devices,and embedded infrastructure. With more than two decades of experience, we havegrown through product innovations, global expansion, and strategicacquisitions.  Formed as a result of themerger in 2000 between Apex Inc. and Cybex Computer Products Corporation, wesubsequently acquired Equinox Systems Inc. in 2001, 2C Computing, Inc. in2002, Soronti, Inc. in 2003, and Crystal Link Technologies, OSATechnologies, Inc., and Sonic Mobility, Inc. in 2004.

 

Our KVM switching systems eliminate the need for extrakeyboards, monitors, and mice and allow businesses to save critical space intheir data centers.  Our KVM over IPswitching systems eliminate distance limitations and provide 24/7 access and controlof an almost unlimited number of servers, even when the servers are dispersedin different physical locations.  Our *DSView* software management and KVM over IP switching systemsallow IT managers to use a single console to gain secure, local and remoteaccess and control of servers and other network data center devices from anylocation.

 

Our innovative advances for the data center includemulti-platform switching, analog matrix switching, KVM extension over CAT 5,PCI bus extension, a proprietary on-screen menu switching system, remote KVMover IP connectivity, digital serial over IP, digital-analog integrated accessto multiple servers, intelligent platform management interface (IPMI)solutions, wireless KVM, PDA and hand-held management solutions, andcentralized management software for access and control of networkinfrastructure.

 

Our DSSeries*®*switchescombine analog and digital connections, serial connectivity, and external modemsupport in one switch. These appliances integrate our KVM over IP switchingtechnology and CAT 5 connectivity.  ITmanagers and network administrators gain worldwide access and control of theirservers and serial devices and can track them all from a single computerscreen.  In addition, we provide plug andplay switching systems for the many network administration, management, andstorage problems faced by corporate customers, data centers, and mid-sizebusinesses. Our connectivity solutions include products and technologies soldor licensed under the Avocent, Cybex, and Equinox brands, including our *AMX*TM,***AutoView*TM*, Cstation*TM,*DSView®, DS Series, LongView*TM*,**OutLook®, SuperSerial*, *SwitchView® ,Emerge*TM, *SonicAdmin*TM, and *SonicSentinel*TMproducts.

 

13

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We market and sell our products around the world to adiversified group of original equipment manufacturers (OEMs) dealers,distributors, resellers, and end users, primarily through our sales andcustomer support staff, advertisements in trade publications, and participationin major industry trade shows.

 

A substantial portion of our revenue is derived fromsales to a limited number of OEMs who purchase our switching systems on aprivate-label or branded basis for integration and sale with their ownproducts, sales through our reseller and distributor network, and sales to alimited number of direct customers. Sales to our OEM customers accounted for50% of sales in the first six months of 2005 and 42% of sales in the first sixmonths of 2004.  Sales to our brandedcustomers accounted for 50% of sales in the first six months of 2005 and 58% ofsales in the first six months of 2004. We do not have contracts with many ofour branded customers, and in general, our OEM and branded business customersare obligated to purchase products from us only pursuant to binding purchaseorders.  The loss of, or material declinein orders from, these customers would have a material adverse effect on ourbusiness, financial condition, results of operations, and cash flows.  Our top five customers include both OEM andbranded customers, and accounted for 62% of sales in the first six months of2005 and 64% of sales in the first six months of 2004.

 

We sell products to dealers, end-users, and OEMs inthe United States, Canada, Europe, and Asia as well as in other foreignmarkets.  Sales within the United Statesaccounted for approximately 59% of sales in the first six months of 2005 and60% of sales in the first six months of 2004. Sales outside of the United States accounted for 41% of sales in thefirst six months of 2005 and 40% of sales in the first six months of 2004.  Sales to customers in the Netherlands,including the European distribution facility for one of our OEM customers,accounted for 11% of our sales in the first six months of 2004.  No other country accounted for more than 10%of sales in the first six months of either 2005 or 2004.

 

With continued industry-wide initiatives to reduce allchannel inventories and to shorten lead times, trends with our major customersare, generally, to reduce the number of weeks of forward-committed firm orders.This trend continues to affect our business with certain distributors,OEMs and other server manufacturers, and we believe that it will continueto make our future sales more difficult to predict and inventory levels moredifficult to manage.

 

We continue to experiencesignificant price competition in the market for all of our products, and weexpect that pricing pressures will continue in the future.  In addition, general economic conditions arenot predictable, and we expect our revenue growth rate to fluctuate in relationto economic conditions and IT related spending trends.  Depending on future general economicconditions and other factors, our revenue could decline in the future.

 

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

 

On April 29,2005, our Board of Directors approved a plan to accelerate vesting of allcurrently outstanding stock options with an exercise price of greater than$25.00 which are unvested on December 25,2005.  Under the provisions of APB 25, weestimate that there will be no compensation expense related to acceleratingthese options because the options affected by the acceleration had exerciseprices higher that the closing price of our common stock on the modificationdate.  As a result of the Board’s action,stock options to purchase approximately 1.1 million shares of our common stockwill become exercisable effective December 25, 2005.  The exercise prices of the affected stockoptions range from $25.17 to $41.57 per share. The closing price of Avocent’s common stock on April 29, 2005 was$25.14.

 

Also on April 29,2005, our Board of Directors authorized the repurchase of an additional 2.0million shares of our common stock to be repurchased under the stock repurchaseprogram. A total of 4.0 million shares is authorizedto be repurchased under the Board approved program, 1.9 of which had beenrepurchased since the inception of the repurchase program. 

 

Our stockholders approvedthe adoption of the Avocent Corporation 2005 Equity Incentive Plan at the 2005stockholders meeting held in June 2005. Under the 2005 Equity Incentive Plan, an additional 2.5 million sharesof our common stock are reserved for issuance. We expect to file a registration statement on Form S-8 toregister the shares authorized for issuance under this plan during the thirdquarter of 2005.  The 2005 plan allowsfor the issuance of stock options, restricted stock, phantom stock, stockunits, performance shares, and stock grants as forms of equity compensation fordirectors, employees and service providers. Unissued and forfeited shares from our other equity plans were rolledinto the 2005 plan and are available for issuance under the terms of the 2005plan.  We issued 335,000 stock options inJune 2005 under the 2005 plan. We believe equity incentive awards are animportant element of our compensation and benefits programs to attract andretain talented and skilled employees and directors.

 

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Results of Operations

 

The following table setsforth, for the periods indicated selected statement of operations dataexpressed as a percentage of net sales: 

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **July 1,  2005** | ** ** | **July 2,  2004** | ** ** | **July 1,  2005** | ** ** | **July 2,  2004** | ** ** |
|                                                  |       |                   |       |                   |       |   |   |   |   |
| Net sales                                             |       | 100.0                  | %          | 100.0                  | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                         |       | 41.0                   |       | 42.4                   |       | 42.0 |   | 42.1 |   |
| Gross profit                                          |       | 59.0                   |       | 57.6                   |       | 58.0 |   | 57.9 |   |
| Operating  expenses:                                  |       |                   |       |                   |       |   |   |   |   |
| Research and  development expenses                    |       | 16.1                   |       | 12.8                   |       | 17.3 |   | 11.9 |   |
| Acquired  in-process research and development expense |       | —                 |       | 24.7                   |       | — |   | 16.2 |   |
| Selling, general  and administrative expenses         |       | 26.8                   |       | 25.1                   |       | 27.8 |   | 24.4 |   |
| Amortization of  intangible assets                    |       | 7.4                    |       | 7.3                    |       | 8.0 |   | 6.4 |   |
| Total operating  expenses                             |       | 50.3                   |       | 69.9                   |       | 53.1 |   | 58.9 |   |
| Income (loss)  from operations                        |       | 8.7                    |       | (12.3                  | )          | 4.9 |   | (1.0 | ) |
| Income from  settlement of lawsuit                    |       | 5.6                    |       | —                 |       | 3.0 |   | — |   |
| Net investment  income                                |       | 2.5                    |       | 1.2                    |       | 2.6 |   | 1.3 |   |
| Net realized  investment losses                       |       | (0.2                   | )          | (0.1                   | )          | (0.2 | ) | (0.1 | ) |
| Other expense,  net                                   |       | (0.1                   | )          | (0.1                   | )          | (0.1 | ) | (0.1 | ) |
| Income (loss)  before income taxes                    |       | 16.5                   |       | (11.3                  | )          | 10.2 |   | 0.1 |   |
| Provision for  income taxes                           |       | 4.1                    |       | 3.9                    |       | 2.4 |   | 2.9 |   |
| Net income  (loss)                                    |       | 12.4                   | %          | (15.2                  | )%         | 7.8 | % | (2.8 | )% |

 

*Netsales.*  Our netsales consist of sales of keyboard, video, and mouse console switching systems,digital connectivity solutions, serial connectivity devices, wireless extensionproducts, IPMI, extension and remote access and management solutions androyalties from licensing our intellectual property.  Net sales increased 2% to $89.5 million forthe second quarter of 2005 from $87.8 million for the second quarter of 2004 asa result of various factors.  One factorwas the increase in OEM sales in the second quarter of 2005 as compared to thesecond quarter of 2004.  OEM sales wereapproximately $5.9 million higher in the second quarter of 2005 as compared tothe second quarter of 2004.  Revenuesfrom one of our major OEM customers, which were lower than anticipated in thefirst quarter of 2005, returned to expected levels during the second quarter of2005.  Revenues from our ManageabilitySolutions group, which includes embedded KVM offerings and our IPMI managementsolutions, contributed approximately $5 million in the second quarter of 2005,compared to $1 million in the second quarter of 2004.  We also recorded approximately $1.1 inroyalty revenue during the second quarter of 2005 as part of the settlement ofour patent infringement lawsuit against Raritan.  Sales of our digital products continued toincrease and represented 53% of our revenue in the second quarter of 2005 ascompared to 47% of our revenue in the second quarter of 2004. Partiallyoffsetting the growth from these areas of our business, branded sales declined$4.2 million in the second quarter of 2005 as compared to the second quarter of2004, as a result of the continuing impact early in the second quarter of problemsassociated with the DSView3 product launch early in the first quarter of2005.  However, our branded revenuesshowed significant improvement from the first quarter of 2005 as the DSViewre-launch and training programs initiated late in first quarter of 2005 beganto take effect later in the second quarter of 2005. 

 

OEM sales grew 16% from $37.8 million in the secondquarter of 2004 to $43.7 million in the second quarter of 2005.  OEM sales were 49% of sales for the secondquarter of 2005, compared to 43% of sales for the second quarter of 2004.  Branded sales declined 9% from $50.0 millionin the second quarter of 2004 to $45.8 million in the second quarter of2005.  As a percentage of sales, brandedsales accounted for 51% of sales in the second quarter of 2005 and 57% ofrevenue in the second quarter of 2004. 

 

Sales within the United States declined slightly to$52.8 million in the second quarter of 2005 from $52.9 million in the secondquarter of 2004.  International salesincreased 5%, to $36.7 million in the second quarter of 2004 from $34.9 millionin the second quarter of 2004.  Saleswithin the United States were 59% of sales for the second quarter of 2005 and60% of sales for the second quarter of 2004. International sales were 41% of sales for the second quarter of 2005 and40% of sales for the second quarter of 2004.

 

Netsales decreased 4% to $166.3 million for the first six months of 2005 from$173.9 million for the first six months of 2004, primarily as a result of theissues related to the revenue shortfall in the first quarter of 2005 ascompared to the first quarter of 2004.  However, the six month results benefited from the sequential rebound inrevenue during the second quarter of 2005, as discussed above.  Sales within the United States decreased byapproximately 11% to $92.8 million in the first six months of 2005 from $104.1

 

15

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millionin the first six months of 2004. International sales increased approximately 5% to $73.6 million in thefirst six months of 2005 from $69.8 million in the first six months of2004.  Additionally, sales to our brandedcustomers decreased 18% to $82.5 million in the first six months of 2005 from$100.7 in the first six months of 2004, while sales to our OEM customersincreased 15% to $83.8 million in the first six months of 2005 from $73.2 inthe first six months of 2004.

 

Our outlook for the third quarter of 2005 is cautiousbut positive.  We remain positive aboutthe repositioning of our product platforms, but we see some concern in certainmarket sectors regarding general economic conditions.  In addition, the market remains competitivewith increased levels of spending by our competitors on advertising andpromotions.  Considering these factors,we believe our revenues will be $94 million to $98 million in the third quarterof 2005.  This estimate includes theongoing quarterly royalty payment from Raritan. 

 

*Gross profit.* Gross profitmay be affected by a variety of factors, including: the ratio of sales amongour distribution channels, as OEM sales typically have lower gross margins thanour branded sales; absorption of fixed costs as sales levels fluctuate; productmix, raw materials, and labor costs; new product introductions by us and by ourcompetitors; the level of our outsourcing of manufacturing and assemblyservices; and the result of royalty revenue, which typically has no associatedcost of goods sold.    Gross marginimproved to 59.0% in the second quarter of 2005 as compared to 57.6% in thesecond quarter of 2004.  Gross marginswere positively affected by the $1.1 million of Raritan royalty revenuerecorded during the second quarter of 2005. Our digital, embedded, and IPMI revenues all increased as well.  These product lines typically have highermargins compared to our other product lines. Gross margin increased slightly to 58.0% for the first six months of2005 from 57.9% for the first six months of 2004, primarily as a result of thehigher digital, embedded, IPMI, and royalty revenues for the first half of2005, which offset the lower gross margins we experienced in the first quarterof 2005 as a result of our lower than expected revenue.

 

We expect gross marginsto remain in the 59% range for the third quarter of 2005.  We expect the continuing growth of revenuefrom our digital products and higher revenues from our embedded solutions willcontinue to be sufficient to offset price declines and competitivepressures.  

 

*Research and development expenses.*  Research and development expenses includecompensation for engineers, support personnel, outside contracted services andmaterials costs, and are expensed as they are incurred.  Research and development expenses were $14.4million, or 16.1% of net sales, in the second quarter of 2005 compared to $11.2million, or 12.8% of net sales, for the second quarter of 2004.  The increase in the amount spent on researchand development can be attributed to an increase in headcount, and new projectsand products under development. Additionally, we recorded almost $800,000 of severance accruals in thesecond quarter of 2005 related to the closing of three satellite research and developmentsites.  After an in-depth review of ourongoing and planned research and development programs, we decided to close ouroffices in Chelmsford, Massachusetts, Phoenix, Arizona and Steinhagen, Germany.  Research and development expenses for the firstsix months of 2005 increased to $28.9 million from $20.7 million for the firstsix months of 2004 primarily as a result of the additional headcount from theacquisitions completed in 2004, as well as for the reasons listed for thequarter.  As a percentage of net sales,year-to-date research and development expenses increased to 17.3% from11.9%.  

 

We have implemented plansto contain our research and development spending, but due to the timing ofthese changes, most of the impact will not be realized until the fourth quarterof 2005.  In light of the current levelsof commitment in place for the third quarter, we expect research anddevelopment spending to be approximately $700,000 to $1.2 million lower in thethird quarter of 2005 compared to the second quarter of 2005.

 

*Acquired in-process research and developmentexpense.* Acquisition related expenses in the second quarter of 2004 werecomprised solely of the write-off of $21.7 million of in-process researchand development expense related to the acquisition of OSA. Acquisition relatedexpenses in the first six months of 2004 also include the write-off of$6.5 million of in-process research and development expense related to theacquisition of Crystal Link. There were no such charges in the first six monthsof 2005.

 

***Selling,general and administrative expenses.*** Selling, general and administrative expenses include personnel costs foradministration, finance, information systems, human resources, sales andmarketing and general management, as well as some merger and acquisitionrelated expenses, rent, utilities, legal and accounting expenses, bad debts,advertising, promotional material, trade show expenses and related travelcosts.  Selling, general and administrativeexpenses were $24.0 million, or 26.8% of net sales, for the second quarter of2004 compared to $22.0 million, or 25.1% of net sales, for the second quarterof 2004.  The increase in selling,general and administrative expenses is primarily related to higher legal feesassociated with protecting our intellectual property rights. We alsoexperienced higher advertising and promotion costs as we continue to promoteour new digital products and other new products introduced since the end of2004.  Selling, general andadministrative costs in the second quarter of 2005 also included severanceaccruals of approximately $500,000 related to certain headcountreductions.  Year-to-date selling,general, and administrative expenses increased to

 

16

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**$46.3 million,or 27.8% of net sales for 2005, from $42.4 million, or 24.4% of year-to-datenet sales in 2004, as a result of the factors mentioned above. **

** **

**We expect our selling, general and administrativeexpenses to be approximately $1 million lower in the third quarter of 2005 whencompared sequentially to the second quarter of 2005.  Legal fees associated with our patentlitigation should decline as we settled the lawsuit against Raritan during thesecond quarter of 2005.  However, weexpect a slight increase in legal fees associated with other patent litigation.**

** **

***Amortizationof intangible assets***.  Amortization of $6.6 million inthe second quarter of 2005 was comprised of the amortization of theidentifiable intangible assets created as a result of the merger transactionbetween Apex and Cybex and the acquisitions of Equinox, 2C, Soronti, CrystalLink, OSA, and Sonic Mobility. Amortization of $6.4 million in the secondquarter of 2004 was comprised of the amortization of the identifiableintangible assets created as a result of the merger transaction between Apexand Cybex and the acquisitions of Equinox, 2C, Soronti, Crystal Link, andOSA.  The increase in amortizationexpense relates primarily to the addition of intangibles from the threeacquisitions completed during 2004. Amortization expense increased from $11.2million in the first six months of 2004 to $13.2 million in the first sixmonths of 2005 as a result of the factors mentioned above.  Amortization expense in the third quarter of2005 is expected to decline slightly when compared to the amount from thesecond quarter of 2005.

** **

*Incomefrom settlement of lawsuit**.********** *The $5 million of income from thesettlement of lawsuit in the second quarter and six months to date of 2005 iscomprised entirely of the payment received in May 2005 as a result of thesettled patent infringement lawsuit brought by Avocent against RaritanComputer Inc. The terms of the settlement called for an initial payment of$5 million, related to past product sales by Raritan and settlement of thelawsuit.

 

*Netinvestment income**.********** *Net******investmentincome increased to $2.3 million in the second quarter of 2005 compared to $1.0million in the second quarter of 2004. The improved results were the result of higher interest rates oninvestments and higher amounts invested from cash generated fromoperations.  Net investment incomeincreased from $2.3 million in the first six months of 2004 to $4.3 million inthe first six months of 2005 as a result of the factors mentioned above.

* *

*Net realized investment losses. *Net realized investmentlosses increased from $104,000 in the second quarter of 2004 to $206,000 insecond quarter of 2005.  Net realizedinvestment losses increased from $168,000 in the first six months of 2004 to $383,000in first six months of 2005.  Theincrease resulted from certain sales of investments prior to maturity to fundour ongoing share repurchase program. 

 

*Otherexpense, net.* Net other expense increased slightly from $98,000 in the second quarterof 2004, to $115,000 in the second quarter of 2005. For the first half of theyear, net other expense improved from $148,000 in the first six months of 2004to $54,000 in the first six months of 2005. 

 

*Provisionfor income taxes.* The provision for income taxes was approximately $4.0 million in thefirst six months of 2005, compared to $5.1 million for the six months ended July 2,2004.  The decrease in the effective tax rate is primarily attributable tothe impact of $21.7 million of acquired in-process research and developmentexpense recorded during the second quarter of 2004 as a result of theacquisition of OSA, which is not deductible for tax purposes.   

 

*Net income (loss).*  Net income for the second quarter of 2005 was$11.1 million compared to a net loss of $13.4 million for the second quarter of2004, as a result of the above factors. As a percentage of sales, net income for the second quarter of 2005 was12.4%, compared to net loss of 15.2% for the second quarter of 2004. For thefirst half of the year, net income was $12.9 million, or 7.8% of net sales, in2005, compared to net loss of $4.8 million, or 2.8%, in 2004, as a result ofthe factors mentioned above.

 

**Liquidity and Capital Resources**

** **

As of July 1, 2005, our principal sources ofliquidity consisted of over $317 million in cash, cash equivalents, andinvestments.  We have no outstanding debtor available credit facilities as of this filing.

 

Our operating activities generated cash of over $31.3million in the first six months of 2005, compared to approximately $32.5million in the six months of 2004.  Thereduction in positive cash flow is the result of a variety of factors,primarily due to an increase in inventories and other assets, and decreases toaccounts receivable, accounts payables and accrued compensation.  Inventories increased from $21.2 million at December 31,2004 to $22.8 million at July 1, 2005. The increase in inventory was primarily the result of adding inventoryrelated to our recent product introductions. Our inventory turns declined to 6.4 for the second quarter of 2005,slightly below 6.7 from the second quarter of 2004, but are above the 5.5 levelfrom the first quarter of 2005.  We willcontinue to monitor our inventory

 

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closelyand expect our inventory turns to be closer to our stated target of 7.0 turns assales volume increases.  Our decrease inreceivables positively impacted cash flows for the quarter as accountsreceivable decreased from $60.9 million at December 31, 2004 to $53.1 millionat July 1, 2005.   Our DSOs, or dayssales outstanding, increased to 54 days, compared to 50 days from the secondquarter of 2004, but were improved from 59 days in the first quarter of 2005,and were better than our goal of 60 days. Our accounts receivable aging remainsstrong, with less than 1% of the balance greater than 30 days past due.   

 

In the ordinary course ofour business, we may at any point in time have a significant amount ofcontractual commitments not yet recognized in our financial statements. Thesecommitments relate primarily to our need to schedule the purchase ofinventories in advance of the related forecasted sales to customers. We havelonger lead times for the products we purchase from suppliers based in Asiathan those for our U.S. based and European suppliers. Our actual contractualcommitments are typically limited to products needed for one to three months offorecasted sales. The liabilities for these inventory purchases along with therelated inventory assets are typically recognized upon our receipt of theproducts. We also have at any point in time a variety of short term contractualcommitments for services such as advertising, marketing, accounting, legal, andresearch and development activities. The liabilities for these services and therelated expenses are typically recognized upon our receipt of the relatedservices.  As of July 1, 2005, wehad $30.8 million of such commitments. None of our expected purchase commitments required payment beyond thenext year. 

 

We intend to use a portion of our cash and investmentsfor strategic acquisitions of technologies and companies that will enhance andcomplement our existing technologies and help increase our sales.

 

We repurchased 1.1 million shares of our common stockduring the quarter ended July 1, 2005 at a cost totaling $28.4 million. Werepurchased 1.8 million shares of our common stock during the six months ended July 1,2005 at a cost totaling $50.3 million. During the period July 2, 2005 through August 2, 2005 we repurchasedan additional 200,000 shares under this program at a total cost ofapproximately $5.9 million.  We expect tocontinue to repurchase shares from time to time to offset the dilution fromstock option exercises and to return a portion of our cash and investments toshareholders.

 

**Investments**

 

Our investments consist primarily of bank deposits,money market funds, corporate bonds, municipal bonds, commercial paper,mortgage backed securities guaranteed by U.S. government agencies, and commonstock. We classify our debt and equity securities as available-for-salesecurities and report them 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-temporarydecline in value.   Upon review of ourinvestment portfolio as of July 1, 2005, one investment was considered tohave sustained an other-than-temporary decline, and animpairment charge of approximately $50,000 was recorded during the three monthsended July 1, 2005.

 

**Recently Issued Accounting Standards andRegulatory Standards**

** **

In December 2004, the FASB issued SFAS No. 123(revised 2004), *Share based Payme*nt, which replacesSFAS No. 123. *Accounting for Stock BasedCompensatio*n and APB Opinion No 25 *Accountingfor Stock Issued to Employees*. SFAS 123R requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased on their fair values beginning with the first annual period after June 15,2005.  The pro-forma disclosurespreviously permitted under SFAS No. 123 no longer will be an alternativeto inclusion of the expense in the financial statements.  We are required to adopt SFAS 123R beginning January 1,2006.  Under SFAS 123R, we must determinethe appropriate fair value model to be used for valuing share-based payments,the amortization method for compensation cost and the transition method to beused at date of adoption.  The transitionmethods include prospective and retroactive adoption options. We expect toutilize the prospective method which requires that compensation expense beginbeing recorded for all unvested stock options and restricted stock at thebeginning of the first quarter of adoption of SFAS 123R.  We are evaluating the requirements of SFAS123R and the adoption of SFAS 123R may have a material impact on ourconsolidated results of operations and earnings per share.  However, we have not determined the effect ofadopting SFAS 123R and we have not determined whether the adoption will resultin amounts similar to the current pro-forma disclosures under SFAS 123. Underthe current approach of SFAS 123 we would have unamortized fair value ofunvested stock options of approximately $15 million for currently outstandingstock options to be recognized as expense in our income statements after 2005,prior to the acceleration of vesting discussed previously.  Following this acceleration we believe thebalance to be expensed in future periods would be reduced to approximately $2million for currently outstanding stock options under the SFAS 123 methodology.

 

On October 22,2004, the American Jobs Creation Act of 2004 became law. This legislationrepeals export tax benefits, which have historically reduced our effective taxrate. This legislation phases in the repealed export tax benefits by allowing100 percent of the repealed export benefits in 2004, 80 percent in 2005 and 60percent in 2006.  We do not expect thischange will have a material

 

18

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impacton our effective tax rate or provision for taxes in 2005.

 

The legislation alsotransitions in a new tax deduction for qualifying U.S. manufacturingactivities. Under the guidance in FASB Staff Position No. FAS109-1 which articulates the application of SFAS 109, “Accounting forIncome Taxes,” to the tax deduction on qualified production activities providedby the Act, the deduction will be treated as a “special deduction” as describedin SFAS 109. As such, we expect the new manufacturing activities deductionprovision of the new legislation will reduce our effective rate in futureperiods as the deduction is taken on our tax returns. We do not expect thededuction to have a material impact on our effective tax rate or income taxprovision in 2005.

 

The legislation alsoprovides for the optional repatriation of earnings from foreign subsidiariesallowing an 85 percent dividends received deduction. The deduction is subjectto a number of limitations.   We have notyet initiated an analysis nor determined if we will repatriate any overseasearnings pursuant to this provision.  Ifour intention to permanently reinvest overseas earnings in our overseas operationschanges and we decide to repatriate any of the earnings to the U.S., we wouldincur additional income tax expense equal to the incremental U.S. income tax inexcess of the credits available for taxes already paid overseas.

 

**Item 3.****Quantitative and Qualitative Disclosures AboutMarket Risks.**

 

Our primary market risk is the potential loss arisingfrom increases in interest rates, which could have an adverse impact on thefair value of our investment securities. Our investment policy is to manage ourinvestment portfolio to preserve principal and liquidity while maximizing thereturn on our investment portfolio through the investment of available funds.We diversify our investment portfolio by investing in a variety of highly-ratedinvestment-grade securities and through the use of different investmentmanagers. Our investment securities portfolio is primarily invested insecurities with maturities (or interest rate resets) of two years or less withat least an investment grade rating to minimize interest rate and credit riskas well as to provide for an immediate source of funds. Market risk, calculatedas the potential change in fair value in our investment portfolio resultingfrom a hypothetical 10% change in interest rates, was not material at July 1,2005. 

 

We also face foreign currency exchange rate risk tothe extent that the value of certain foreign currencies relative to the U.S.dollar affects our financial results. Our international operations transact a portion of our business incurrencies other than the U.S. dollar, predominantly the euro, and changes inexchange rates may positively or negatively affect our revenues, gross margins,operating expenses, and retained earnings since these transactions are reportedby us in U.S. dollars.  We occasionallypurchase foreign currency forwards aimed at limiting the impact of currencyfluctuations.  These instruments provideonly limited protection against currency exchange risks, and there can be noassurance that such an approach will be successful, especially if a significantand sudden decline occurs in the value of local currencies. As of July 1,2005, we had one 30 day open forward contract, maturing on July 27, 2005, witha fair value of ($6,125).

 

**Item 4.****Controls and Procedures.**

 

a) *Evaluation of disclosure controls and procedures.*    Based on their evaluation as of July 1,2005, our Chief Executive Officer and Chief Financial Officer have concludedthat our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) are effectiveto ensure that information required to be disclosed by us in reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms.

 

(b) *Changes in internal control over financial reporting*.    There were no changes in our internalcontrols over financial reporting during the quarter ended July 1, 2005that materially affected or is reasonably likely to materially affect, ourinternal controls over financial reporting. However, we did automate theapproval process for our purchase requisitions within our ERP system during thesecond quarter of 2005.

 

19

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### **PART II — OTHER INFORMATION**

### ** **

**Item 1.****    Legal Proceedings.**

 

In May 2001, we filed a complaint for patentinfringement in the United States District Court for the Southern District ofNew York against Raritan Computer Inc. The Raritan complaint sought injunctiverelief, damages, attorneys’ fees and costs under three patents.  After a seven day bench trial in New York in January 2002,U.S. District Judge Milton Pollack found that there was no infringement ofthese patents by Raritan and ordered that judgment be entered in favor ofRaritan.  In April 2003, the UnitedStates Court of Appeals for the Federal Circuit issued its ruling on our appealin this patent litigation.  The Court ofAppeals ruled in our favor by vacating the non-infringement decision of theDistrict Court for the Southern District of New York and remanding the case forfurther proceedings consistent with the Court of Appeals’ opinion.  In September 2003,Raritan petitioned the United States Supreme Court for a Writ of Certiorari to reviewthe Court of Appeals decision.  TheSupreme Court declined to review Raritan’s petition in December 2003, andthe case was sent back to the United States District Court for the SouthernDistrict of New York. 

 

In May 2005, we settled the patent infringementlawsuit. Under the terms of the agreement, we licensed certain patents toRaritan, and the parties entered into a worldwide, five-year litigationstand-still agreement that resolves all claims between the parties. The termsof the settlement called for an initial payment of $5 million and 20consecutive quarterly royalty payments to be the greater of $750,000 or a fixedpercentage of covered product revenues. During the quarter ended July 1, 2005, we recorded the payment of$5 million received at the settlement in other income and recorded the firstquarterly royalty installment of over $1 million in net revenues. 

 

In October 2003, wefiled a complaint for patent infringement in the United States District Courtfor the Northern District of Alabama against ClearCube Technology, Inc.  The ClearCube complaint seeks injunctiverelief, damages, attorneys’ fees, and costs under two of our patents. ClearCubehas filed counterclaims alleging non-infringement, unenforceability,invalidity, and misuse of the Avocent patents. A Markman hearing onclaims construction was originally set for February 2005, but in responseto an inquiry from the Court, we agreed that the hearing should be postponeduntil the United States Court of Appeals for the Federal Circuit issues itsruling on certain similar issues raised in an unrelated patent case. Thisruling was issued in June 2005 and we expect our case to become activeagain during the third quarter of 2005.

 

**Item 2.****    Unregistered Sales of Equity Securities and Use of Proceeds.**

 

In the fourth quarter of 2004, our Board of Directorsapproved a stock repurchase program whereby we may, from time to time, purchaseup to two million shares of our common stock in the open market, in privatelynegotiated transactions or otherwise, at prices that we deem appropriate.  Our Board increased the amount we mayrepurchase to four million shares in April 2005.  The plan has no expiration date. Details ofpurchases made during the six months ended July 1, 2005 are as follows:

 
| **Period:**                                          | ** ** | **Total Number of  Shares Purchased  During the Period** | ** ** | **Average Price Paid  Per Share for  Period Presented** | ** ** | **Total Cumulative  Number of  Shares Purchased as  Part of Publicly  Announced Plan** | ** ** | **Maximum Number of  Shares Remaining to  Purchase Under the  Plan (1)** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
|                                                 |       |                                                     |       |                                                    |       |                                                                                        |       |                                                                     |       |
| January 1,  2005 – January 31, 2005   |       | 195,600                                                  |       | $                                                       | 36.04      |                                                                                        | 295,600    |                                                                     | 1,704,400  |   |
| February 1,  2005 – February 28, 2005 |       | 154,400                                                  |       | $                                                       | 35.41      |                                                                                        | 450,000    |                                                                     | 1,550,000  |   |
| March 1,  2005 – April 1, 2005        |       | 350,000                                                  |       | $                                                       | 26.70      |                                                                                        | 800,000    |                                                                     | 1,200,000  |   |
| Quarter ended  April 1, 2005                    |       | 700,000                                                  |       | $                                                       | 31.23      |                                                                                        |       |                                                                     |       |   |
|                                                 |       |                                                     |       |                                                    |       |                                                                                        |       |                                                                     |       |
| April 2,  2005 – April 29, 2005       |       | 275,000                                                  |       | $                                                       | 24.92      |                                                                                        | 1,075,000  |                                                                     | 2,925,000  |   |
| April 30,  2005 – May 27, 2005        |       | 294,969                                                  |       | $                                                       | 26.07      |                                                                                        | 1,369,969  |                                                                     | 2,630,031  |   |
| May 28,  2005 – July 1, 2005          |       | 505,031                                                  |       | $                                                       | 27.46      |                                                                                        | 1,875,000  |                                                                     | 2,125,000  |   |
| Quarter ended  July 1, 2005                     |       | 1,075,000                                                |       | $                                                       | 26.43      |                                                                                        |       |                                                                     |       |   |
|                                                 |       |                                                     |       |                                                    |       |                                                                                        |       |                                                                     |       |
| Totals                                               |       | 1,775,000                                                |       | $                                                       | 28.32      |                                                                                        |       |                                                                     |       |   |

 

----

(1)                                                     Includes additional two million sharesapproved by our Board of Directors for our stock repurchase program on April 29,2005. A total of four million shares is now authorizedto be repurchased under the board approved program.  

 

20

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

 

OnJune 23, 2005, we held our Annual Meeting of Stockholders.  The matters voted on at the meeting and theresults of these votes are as follows:

 

1.     Election of Class IIDirectors.

 
| ** **              | ** ** | **Votes for** | ** ** | **Votes Withheld** | ** ** |
|-------------------------|------------|---------------|------------|--------------------|------------|
| 1. John R.  Cooper      |       | 46,035,640    |       | 3,625,413          |       |
| 2. Harold D.  Copperman |       | 46,131,959    |       | 3,529,094          |       |
| 3. Edwin L.  Harper     |       | 46,132,159    |       | 3,528,894          |       |

 

2.     Approval ofthe adoption of the 2005 Equity Incentive Plan.

 
| **Votes  For** | ** ** | **Votes Against** | ** ** | **Votes Abstained** | ** ** |
|----------------|------------|-------------------|------------|---------------------|------------|
| 34,863,888     |       | 9,052,905         |       | 28,398              |       |

 

**Item 5.****Other Information.**

** **

We have enteredinto employment and noncompetition agreements with Edward H. Blankenship,Stephen M. Daly, Dudley A. DeVore, Thomas J. Miller, and Eugene F.Mulligan.  These employment andnoncompetition agreements detail the terms and conditions of each executive’semployment, severance arrangements, and noncompetition obligations, and areincorporated herein by reference and filed as Exhibits 10.31, 10.32, 10.33,10.34, and 10.35.

 

**Item 6.****    Exhibits.**

 

(a) Exhibits

 
| 10.31      |       | Employment and Noncompetition Agreement entered into  as of July 19, 2005 by and among Avocent Huntsville Corp., Avocent  Corporation, and Edward H. Blankenship.                              |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                |
| 10.32      |       | Amended and Restated Employment and Noncompetition  Agreement entered into as of February 8, 2005, by and among Avocent  Huntsville Corp., Avocent Corporation, and Stephen M. Daly.           |
|       |       |                                                                                                                                                                                                |
| 10.33      |       | Employment and Noncompetition Agreement entered into  as of February 8, 2005, by and among Avocent Huntsville Corp., Avocent  Corporation, and Dudley A. DeVore.                               |
|       |       |                                                                                                                                                                                                |
| 10.34      |       | Employment and Noncompetition Agreement entered into  as of May 3, 2005, by and among Avocent Texas L.P., Avocent Corporation,  and Thomas J. Miller.                                          |
|       |       |                                                                                                                                                                                                |
| 10.35      |       | Employment and Noncompetition Agreement entered into  as of February 8, 2005, by and among Avocent Redmond Corp., Avocent  Corporation, and Eugene F. Mulligan.                                |
|       |       |                                                                                                                                                                                                |
| **31.1**   | ** ** | **Sarbanes-Oxley Act of 2002  Section 302(a) Certification of the Chief Executive Officer**                                                                                               |
| ** ** | ** ** | ** **                                                                                                                                                                                          |
| **31.2**   | ** ** | **Sarbanes-Oxley Act of 2002  Section 302(a) Certification of the**Chief Financial Officer                                                                                                |
| ** ** | ** ** | ** **                                                                                                                                                                                          |
| 32.1       |       | Certification of the Chief  Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

ITEM 3 IS NOT APPLICABLE AND HAS BEEN OMITTED.

 

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### **SIGNATURES**

### ** **

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

 

 
|   |                | AVOCENT CORPORATION                                             |
|--------|---------------------|-----------------------------------------------------------------|
|   |                | (Registrant)                                                    |
|   |                |                                                            |
|   |                |                                                            |
|   |                |                                                            |
| Date:  | August 9, 2005 | /s/ Edward H.  Blankenship                                      |   |
|   |                | Edward H. Blankenship                                           |
|   |                | Senior Vice President of Finance, Chief Financial               |
|   |                | Officer, and Assistant Secretary (Principal  Financial Officer) |

 

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