**U.S. SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

 

| **(Mark One)**                                                                                                                                                                                                                                                       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                 |   |
| **ý**                                                                                                                                                                                                                                                           | **Quarterly report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|                                                                                                                                                                                                                                                                 |   |
| **For the quarterly period ended  September 27, 2002 or**                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                 |   |
| **o**                                                                                                                                                                                                                                                                | **Transition report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|                                                                                                                                                                                                                                                                 |   |
| **For the period from                       to                     /** |
|                                                                                                                                                                                                                                                                 |   |
| **Commission file number: 000-30575**                                                                                                                                                                                                                                |   |
|                                                                                                                                                                                                                                                                      |  |  |

 

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

 

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

 

ý Yes  o No

 

As of November 4,2002, the number of outstanding shares of the Registrant’s Common Stock was45,076,243.

 

 

----

 

**AVOCENT CORPORATION**

**FORM 10-Q**

**September 27, 2002**

 

**INDEX**

 
| Part I                                            | Financial Information |                                                                                                                                        |
|---------------------------------------------------|-----------------------|---------------------------------------------------------------------------------------------------------------------------------------------|
|                                              |                  |                                                                                                                                        |
|                                              | Item 1.               | Financial Statements                                                                                                                        |
|                                              |                  |                                                                                                                                        |
|                                              |                  | Condensed  Consolidated Statements of Operations (unaudited) for the Three and Nine  Months Ended September 27, 2002 and September 28, 2001 |
|                                              |                  |                                                                                                                                        |
|                                              |                  | Condensed  Consolidated Balance Sheets at September 27, 2002 (unaudited) and December  31, 2001                                             |
|                                              |                  |                                                                                                                                        |
|                                              |                  | Condensed  Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended  September 27, 2002 and September 28, 2001           |
|                                              |                  |                                                                                                                                        |
|                                              |                  | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                           |
|                                              |                  |                                                                                                                                        |
|                                              | Item  2.              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                 |
|                                              |                  |                                                                                                                                        |
|                                              | Item  3.              | Quantitative  and Qualitative Disclosures about Market Risks                                                                                |
|                                              |                  |                                                                                                                                        |
|                                              | Item 4.               | Controls and  Procedures                                                                                                                    |
|                                              |                  |                                                                                                                                        |
| Part II                                           | Other Information     |
|                                              |                  |
|                                              | Item 1.               | Legal Proceedings                                                                                                                           |
|                                              | Item 6.               | Exhibits  and Reports on Form 8-K                                                                                                           |
|                                              |                  |                                                                                                                                        |
| Signatures                                        |                  |                                                                                                                                        |
| Sarbanes-Oxley  Act Section 302(a) Certifications |
|                                              |
|                                                   |                       |                                                                                                                                             |  |  |

 

2

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**PARTI – FINANCIAL INFORMATION**

 

Item 1. Financial Statements

 

**AVOCENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited, in thousands,except per share data)

 
|                                                                                              |   | **For the  three months ended** |     | **For the  nine months ended** |     |
|---------------------------------------------------------------------------------------------------|--------|---------------------------------|----------|--------------------------------|----------|
|                                                                                              |   | **September  27,  2002**        |     | **September  28,  2001**       |     | **September  27,  2002** |   | **September  28,  2001** |   |
|                                                                                              |   |                            | * * |                           | * * |   | * * |   | * * |
| Net sales                                                                                         |   | $                               | 64,490   |                           | $        | 55,095 |   | $ | 189,612 |   | $ | 193,349 |   |
| Cost of sales                                                                                     |   | 31,252                          |     | 30,149                         |     | 94,495 |   | 113,498 |   |
| Gross profit                                                                                      |   | 33,238                          |     | 24,946                         |     | 95,117 |   | 79,851 |   |
|                                                                                              |   |                            |     |                           |     |   |   |   |   |
| Research and  development expenses                                                                |   | 6,176                           |     | 5,403                          |     | 19,585 |   | 17,137 |   |
| Acquired  in-process research and development expenses                                            |   | 6,000                           |     | —                         |     | 6,000 |   | 4,570 |   |
| Selling, general  and administrative expenses                                                     |   | 15,262                          |     | 18,203                         |     | 50,653 |   | 58,458 |   |
| Amortization of  intangible assets                                                                |   | 5,474                           |     | 33,221                         |     | 16,068 |   | 99,658 |   |
| Total operating  expenses                                                                         |   | 32,912                          |     | 56,827                         |     | 92,306 |   | 179,823 |   |
|                                                                                              |   |                            |     |                           |     |   |   |   |   |
| Income (loss)  from operations                                                                    |   | 326                             |     | (31,881                        | )        | 2,811 |   | (99,972 | ) |
| Other income,  net                                                                                |   | 1,211                           |     | 1,543                          |     | 3,819 |   | 4,352 |   |
|                                                                                              |   |                            |     |                           |     |   |   |   |   |
| Income (loss)  before income taxes                                                                |   | 1,537                           |     | (30,338                        | )        | 6,630 |   | (95,620 | ) |
| Provision for  (benefit from) income taxes                                                        |   | 1,862                           |     | (1,079                         | )        | 3,085 |   | (1,383 | ) |
|                                                                                              |   |                            |     |                           |     |   |   |   |   |
| Net income  (loss)                                                                                |   | $                               | (325     | )                              | $        | (29,259 | ) | $ | 3,545 |   | $ | (94,237 | ) |
|                                                                                              |   |                            |     |                           |     |   |   |   |   |
| Income (loss)  per common and common equivalent share:                                            |   |                            |     |                           |     |   |   |   |   |
| Basic                                                                                             |   | $                               | (0.01    | )                              | $        | (0.66 | ) | $ | 0.08 |   | $ | (2.13 | ) |
| Diluted                                                                                           |   | $                               | (0.01    | )                              | $        | (0.66 | ) | $ | 0.08 |   | $ | (2.13 | ) |
|                                                                                              |   |                            |     |                           |     |   |   |   |   |
| Weighted average  common and common equivalent shares used in computing income (loss) per  share: |   |                            |     |                           |     |   |   |   |   |
| Basic                                                                                             |   | 45,016                          |     | 44,572                         |     | 44,931 |   | 44,290 |   |
| Diluted                                                                                           |   | 45,016                          |     | 44,572                         |     | 45,473 |   | 44,290 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

3

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**AVOCENT CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(In thousands, except pershare data)

 
|                                                                                                                                                                             |   | **September  27,  2002** |     | **December  31,  2001** |     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|----------|-------------------------|----------|
|                                                                                                                                                                             |   | ***(unaudited)***        |     | ***(audited)***         |     |
| **ASSETS**                                                                                                                                                                       |   |                     | * * |                    | * * |
| Current assets:                                                                                                                                                                  |   |                     |     |                    |     |
| Cash and cash  equivalents                                                                                                                                                       |   | $                        | 51,069   |                    | $        | 80,506 |   |
| Investments  maturing within one year                                                                                                                                            |   | 106,558                  |     | 84,270                  |     |
| Accounts  receivable, net                                                                                                                                                        |   | 36,566                   |     | 49,091                  |     |
| Income taxes  receivable                                                                                                                                                         |   | 585                      |     | 2,330                   |     |
| Other  receivables, net                                                                                                                                                          |   | 1,164                    |     | 2,115                   |     |
| Inventories, net                                                                                                                                                                 |   | 25,492                   |     | 27,155                  |     |
| Other current  assets                                                                                                                                                            |   | 3,275                    |     | 2,134                   |     |
| Deferred tax  assets                                                                                                                                                             |   | 12,090                   |     | 10,839                  |     |
| Total current  assets                                                                                                                                                            |   | 236,799                  |     | 258,440                 |     |
|                                                                                                                                                                             |   |                     |     |                    |     |
| Investments                                                                                                                                                                      |   | 42,358                   |     | 7,718                   |     |
| Property held  for lease, net                                                                                                                                                    |   | 1,772                    |     | 1,919                   |     |
| Property and  equipment, net                                                                                                                                                     |   | 23,345                   |     | 21,343                  |     |
| Goodwill                                                                                                                                                                         |   | 203,659                  |     | 186,147                 |     |
| Other intangible  assets, net                                                                                                                                                    |   | 58,591                   |     | 71,014                  |     |
| Other assets                                                                                                                                                                     |   | 529                      |     | 617                     |     |
| Total assets                                                                                                                                                                     |   | $                        | 567,053  |                    | $        | 547,198 |   |
|                                                                                                                                                                             |   |                     |     |                    |     |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                   |   |                     |     |                    |     |
| Current  liabilities:                                                                                                                                                            |   |                     |     |                    |     |
| Accounts payable                                                                                                                                                                 |   | $                        | 11,335   |                    | $        | 8,579 |   |
| Accrued wages  and commissions                                                                                                                                                   |   | 6,293                    |     | 4,727                   |     |
| Accrued  liabilities                                                                                                                                                             |   | 12,393                   |     | 15,496                  |     |
| Income taxes  payable                                                                                                                                                            |   | 11,966                   |     | 7,016                   |     |
| Other accrued  expenses                                                                                                                                                          |   | 475                      |     | 719                     |     |
| Total current  liabilities                                                                                                                                                       |   | 42,462                   |     | 36,537                  |     |
| Deferred tax  liability                                                                                                                                                          |   | 20,513                   |     | 24,053                  |     |
| Total  liabilities                                                                                                                                                               |   | 62,975                   |     | 60,590                  |     |
| Stockholders’  equity:                                                                                                                                                      |   |                     |     |                    |     |
|                                                                                                                                                                             |   |                     |     |                    |     |
| Preferred stock,  $0.001 par value; 5,000 shares authorized, no shares issued and outstanding                                                                                    |   | —                   |     | —                  |     |
|                                                                                                                                                                             |   |                     |     |                    |     |
| Common stock,  $0.001 par value; 200,000 shares authorized, 45,044 and 44,650 shares issued  and outstanding as of September 27, 2002 and   December 31, 2001, respectively |   | 45                       |     | 45                      |     |
| Additional  paid-in capital                                                                                                                                                      |   | 931,911                  |     | 926,746                 |     |
| Accumulated  other comprehensive loss                                                                                                                                            |   | (47                      | )        | (42                     | )        |
| Deferred  compensation                                                                                                                                                           |   | (8,199                   | )        | (16,964                 | )        |
| Accumulated  deficit                                                                                                                                                             |   | (419,632                 | )        | (423,177                | )        |
| Total  stockholders’ equity                                                                                                                                                 |   | 504,078                  |     | 486,608                 |     |
| Total  liabilities and stockholders’ equity                                                                                                                                 |   | $                        | 567,053  |                    | $        | 547,198 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

4

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**AVOCENT CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited, in thousands)

 
|                                                                                                                         |   | **For the  nine months ended** |       |
|------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                                                         |   | **September  27,  2002**       |       | **September  28,  2001** |   |
|                                                                                                                         |   |                           | * *   |   | * * |
| Cash flows from  operating activities:                                                                                       |   |                           | * *   |   | * * |
| Net income  (loss)                                                                                                           |   | $                              | 3,545      |   | $ | (94,237 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities:                                    |   |                           |       |   |   |
| Amortization of  intangible assets                                                                                           |   | 16,068                         |       | 99,658 |   |
| Stock-based  compensation                                                                                                    |   | 10,722                         |       | 15,991 |   |
| Purchased  research and development expenses and other acquisition costs                                                     |   | 6,000                          |       | 4,570 |   |
| Depreciation                                                                                                                 |   | 3,288                          |       | 3,294 |   |
| Amortization of  premium on investments                                                                                      |   | 1,637                          |       | 91 |   |
| Changes in  operating assets and liabilities, net of effects of purchases of 2C and  Equinox in 2002 and 2001, respectively: |   |                           |       |   |   |
| Accounts  receivable, net                                                                                                    |   | 12,558                         |       | 17,654 |   |
| Other  receivables, net                                                                                                      |   | 951                            |       | 10,800 |   |
| Inventories, net                                                                                                             |   | 2,593                          |       | 1,725 |   |
| Other assets                                                                                                                 |   | 436                            |       | (1,775 | ) |
| Accounts payable                                                                                                             |   | 1,857                          |       | (4,175 | ) |
| Accrued wages  and commissions                                                                                               |   | 1,483                          |       | 1,616 |   |
| Accrued liabilities                                                                                                          |   | (3,398                         | )          | 309 |   |
| Income taxes,  current and deferred                                                                                          |   | (2,691                         | )          | (2,661 | ) |
| Net cash  provided by operating activities                                                                                   |   | 55,049                         |       | 52,860 |   |
|                                                                                                                         |   |                           | ** ** |   | ** ** |
| Cash flows from  investing activities:                                                                                       |   |                           | ** ** |   | ** ** |
| Purchase of 2C  Computing, Inc., net of cash acquired                                                                        |   | (23,224                        | )          | — |   |
| Purchase of  Equinox Systems Inc., net of cash and investments acquired                                                      |   | —                         |       | (31,725 | ) |
| Purchases of  property and equipment                                                                                         |   | (5,023                         | )          | (3,387 | ) |
| Purchases of  investments                                                                                                    |   | (120,272                       | )          | (67,130 | ) |
| Maturities of  investments                                                                                                   |   | 61,403                         |       | 49,633 |   |
| Proceeds from  sales of investments                                                                                          |   | 305                            |       | 20,253 |   |
| Net cash used in  investing activities                                                                                       |   | (86,811                        | )          | (32,356 | ) |
|                                                                                                                         |   |                           | ** ** |   | ** ** |
| Cash flows from  financing activities:                                                                                       |   |                           | ** ** |   | ** ** |
| Proceeds from  issuance of short-term debt                                                                                   |   | —                         |       | 45,000 |   |
| Repayment of  short-term debt                                                                                                |   | —                         |       | (45,000 | ) |
| Repayment of  short-term debt assumed in the 2C acquisition                                                                  |   | (890                           | )          | — |   |
| Proceeds from  issuance of stock under employee stock plans                                                                  |   | 3,163                          |       | 9,459 |   |
| Net cash  provided by financing activities                                                                                   |   | 2,273                          |       | 9,459 |   |
|                                                                                                                         |   |                           |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                                                                |   | 52                             |       | (16 | ) |
|                                                                                                                         |   |                           |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                                        |   | (29,437                        | )          | 29,947 |   |
| Cash and cash  equivalents, beginning of period                                                                              |   | 80,506                         |       | 44,106 |   |
| Cash and cash  equivalents, end of period                                                                                    |   | $                              | 51,069     |   | $ | 74,053 |   |

 

See notes accompanyingthese condensed consolidated financial statements.

 

5

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**AVOCENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited, in thousands)

 

Note 1.  Basis of Presentation

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in conformity with generally acceptedaccounting principles and reflect all adjustments consisting of normalrecurring adjustments which, in our opinion, are necessary for a fairpresentation of the results for the periods shown.  The results of operations for these periods are not necessarilyindicative of the results expected for the full fiscal year or for any futureperiods.  The preparation of financialstatements in conformity with generally accepted accounting principles requiresus to make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates and assumptions.  Certain reclassifications have been made tothe prior year financial statements to conform to the current yearpresentation.

 

The accompanying unaudited condensed consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements and the related notes contained in our AnnualReport on Form 10-K for the year ended December 31, 2001, which is on file withthe Securities and Exchange Commission and is available via the investorrelations section of our website, www.avocent.com.

 

We report our annual results based on years endingDecember 31.  We report our quarterly resultsfor the first three interim periods based on 13 week periods ending on Fridaysand for the fourth interim period ending on December 31.

 

Our financial statements are consolidated and includethe accounts of Avocent Corporation (“Avocent”) and its wholly ownedsubsidiaries.  Significant inter-companytransactions and balances have been eliminated in consolidation.

 

Note 2.  Inventories

 

Inventories consisted of the following at:

 
|             |   | **September  27,  2002** |   | **December  31,  2001** |   |
|------------------|--------|--------------------------|--------|-------------------------|--------|
|             |   | ***(unaudited)***        |   | ***(audited)***         |   |
| Raw materials    |   | $                        | 8,439  |                    | $      | 13,034 |   |
| Work-in-process  |   | 1,367                    |   | 446                     |   |
| Finished goods   |   | 15,686                   |   | 13,675                  |   |
| Inventories, net |   | $                        | 25,492 |                    | $      | 27,155 |   |

 

Note 3.  Common Stock 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 in July2000.  We recorded $2,752 of deferredcompensation related to the Equinox employee stock options at the time of theacquisition of Equinox in January 2001. The deferred compensation is being amortized over the vesting period ofthe options for which it was recorded.

 

Common Stock –Options to purchase 316 shares of our Common Stock were exercised during thenine months ending September 27, 2002. Additionally, 78 shares of our CommonStock were issued during the nine months ending September 27, 2002 under ourEmployee Stock Purchase Plan.

 

Note 4.  Accumulated Other Comprehensive Loss

 

We recordunrealized gains and losses on our foreign currency translation adjustments andunrealized holding gains or losses on our available-for-sale securities asaccumulated other comprehensive loss, which is included as a separate componentof stockholders’ equity.  For the ninemonths ended September 27, 2002 and September 28, 2001, total othercomprehensive loss amounted to $(5) and $(258), respectively.  As of September 27, 2002 and December 31,2001, total accumulated other comprehensive loss was $(47) and $(42),respectively.

 

6

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Note 5.  Earnings (Loss) Per Share

 
|                                                                 |   | **Income  (loss)  (Numerator)** |       | **Shares  (Denominator)** |       | **Per-Share  Amount** |       |
|----------------------------------------------------------------------|--------|---------------------------------|------------|---------------------------|------------|-----------------------|------------|
|                                                                 |   |                            | ** ** |                      | ** ** |                  | ** ** |
| **For the three months ended  September 27, 2002**                   |   |                            |       |                      |       |                  |       |
| **Basic EPS**                                                        |   |                            |       |                      |       |                  |       |
| Net loss  available to common stockholders                           |   | $                               | (325       | )                         | 45,016     |                  | $          | (0.01 | ) |
| **Effect of Dilutive Securities**                                    |   |                            |       |                      |       |                  |       |
| Stock options                                                        |   |                            |       | —                    |       |                  |       |
| **Diluted EPS**                                                      |   |                            |       |                      |       |                  |       |
| Net loss  available to common stockholders and assumed conversions   |   | $                               | (325       | )                         | 45,016     |                  | $          | (0.01 | ) |
|                                                                 |   |                            |       |                      |       |                  |       |
| **For the nine months ended September  27, 2002**                    |   |                            |       |                      |       |                  |       |
| **Basic EPS**                                                        |   |                            |       |                      |       |                  |       |
| Net income  available to common stockholders                         |   | $                               | 3,545      |                      | 44,931     |                  | $          | 0.08 |   |
| **Effect of Dilutive Securities**                                    |   |                            |       |                      |       |                  |       |
| Stock options                                                        |   |                            |       | 542                       |       |                  |       |
| **Diluted EPS**                                                      |   |                            |       |                      |       |                  |       |
| Net income  available to common stockholders and assumed conversions |   | $                               | 3,545      |                      | 45,473     |                  | $          | 0.08 |   |
|                                                                 |   |                            | ** ** |                      | ** ** |                  | ** ** |
| **For the three months ended  September 28, 2001**                   |   |                            |       |                      |       |                  |       |
| **Basic EPS**                                                        |   |                            |       |                      |       |                  |       |
| Net loss  available to common stockholders                           |   | $                               | (29,259    | )                         | 44,572     |                  | $          | (0.66 | ) |
| **Effect of Dilutive Securities**                                    |   |                            |       |                      |       |                  |       |
| Stock options                                                        |   |                            |       | —                    |       |                  |       |
| **Diluted EPS**                                                      |   |                            |       |                      |       |                  |       |
| Net loss  available to common stockholders and assumed conversions   |   | $                               | (29,259    | )                         | 44,572     |                  | $          | (0.66 | ) |
|                                                                 |   |                            |       |                      |       |                  |       |
| **For the nine months ended September  28, 2001**                    |   |                            |       |                      |       |                  |       |
| **Basic EPS**                                                        |   |                            |       |                      |       |                  |       |
| Net loss  available to common stockholders                           |   | $                               | (94,237    | )                         | 44,290     |                  | $          | (2.13 | ) |
| **Effect of Dilutive Securities**                                    |   |                            |       |                      |       |                  |       |
| Stock options                                                        |   |                            |       | —                    |       |                  |       |
| **Diluted EPS**                                                      |   |                            |       |                      |       |                  |       |
| Net loss  available to common stockholders and assumed conversions   |   | $                               | (94,237    | )                         | 44,290     |                  | $          | (2.13 | ) |

 

7

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Note 6.  Sales

 

We report operations as a single operatingsegment.  However, we do report sales bygeographic region.  Following is asummary presentation of net sales by geographic region for the periods endedSeptember 27, 2002 and September 28, 2001:

 
|               |   | **For the  Three Months Ended** |       | **For the  Nine Months Ended** |       |
|--------------------|--------|---------------------------------|------------|--------------------------------|------------|
|               |   | **September  27,  2002**        |       | **September  28,  2001**       |       | **September  27,  2002** |   | **September  28,  2001** |   |
| Net sales:         |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| United States      |   | $                               | 38,987     |                           | $          | 34,419 |   | $ | 116,843 |   | $ | 122,817 |   |
| Rest of the  World |   | 25,503                          |       | 20,676                         |       | 72,769 |   | 70,532 |   |
|               |   | $                               | 64,490     |                           | $          | 55,095 |   | $ | 189,612 |   | $ | 193,349 |   |

 

As of September 27, 2002,long-lived assets totaled $287,367, which includes $285,418 held in the U.S.and $1,949 held outside of the U.S.  As ofDecember 31, 2001, long-lived assets totaled $280,423, which includes $278,118held in the U.S. and $2,305 held outside of the U.S.

 

Note 7.  Forward Contracts

 

We useforward contracts to reduce our foreign currency exposure related to the netcash flows from our European operations. The majority of these contracts are short-term contracts (three monthsor less) and are marked-to-market each quarter and included in trade payables,with the offsetting gain or loss included in other revenues in the accompanyingcondensed consolidated statements of operations.  At September 27, 2002, we had open forward contracts, maturing inthe fourth quarter of 2002, to purchase $1,465 in foreign currency. The fairvalue of the contracts at September 27, 2002 was approximately $1,458.

 

Note8.  Acquisition of 2C Computing, Inc.

 

On August 20, 2002, we acquired 2CComputing, Inc. (“2C”) for approximately $22.8 million in cash, plus theassumption of liabilities and stock options, for the outstanding shares of 2Cpreferred and common capital stock.  2C,headquartered in Huntsville, Alabama, has developed digital extensiontechnology that splits the PCI bus of a PC and allows the PC motherboard,processor, hard drive, and other user devices to be located at a distance fromthe user and connected using CAT 5 or fiber cable.

 

In2000, 2C and Cybex Computer Products Corporation (“Cybex”), our wholly-ownedsubsidiary, formed a joint venture, CyCom L.L.C., to focus on computertechnology and research for products in the desktop computer and serverindustry.  Cybex owned 40% of CyCom andthe other 60% of CyCom was owned by 2C. Upon the formation of CyCom, Cybex contributed a license for certain ofits intellectual property related to the split bus concept, and 2C contributedmanagement services and capital funding. The initial products developed from the digital extension technologywere announced in late 2001.  Shipmentsof the products totaled approximately $1.5 million through July 31, 2002.

 

Underthe terms of the joint venture membership agreement, 2C was responsible for alltechnology development efforts.  The netprofits of CyCom were to be split 60% to 2C and 40% to Cybex after 2C recoupedits accumulated losses from the development and marketing of CyComproducts.  The carrying value of ourinvestment in CyCom was zero prior to our acquisition of 2C because Cybex’scontribution to it consisted of previously expensed research and developmentcosts related to the technology and CyCom had earned no profits to date.  We dissolved CyCom upon the closing of ouracquisition of 2C.

 

2C was founded byRemigius G. Shatas and Robert R. Asprey, who served as directors of 2C prior toour acquisition of 2C.  Mr. Shatas wasformerly a member of the Board of Directors of Cybex (before the mergertransaction with Apex Inc. that created Avocent) and served as executive vicepresident and chief technology officer of Cybex. Mr. Shatas remains ashareholder of Avocent.  Mr. Asprey wasalso formerly an officer of Cybex, and he too is a current Avocentshareholder.  David S. Butler, who alsowas a director of 2C prior to our acquisition of 2C, is a former director ofCybex and a current Avocent shareholder. Mr. Shatas, Mr. Asprey, and Mr. Butler own less than 2% of Avocent’soutstanding shares in the aggregate. A number of other former 2C shareholders are also Avocentshareholders.  No officer or director ofAvocent was an officer, director, shareholder or affiliate of 2C prior to ouracquisition of 2C.

 

8

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Note8.  Acquisition of 2C Computing, Inc. *(continued)*

 

The acquisition was recorded under the purchase method of accounting,and the purchase price was allocated based on the fair value of the assetsacquired and liabilities assumed. In accordance with generally acceptedaccounting principles, purchased research and development costsallocated to patented technology were capitalized and will be amortized overthe respective estimated useful lives. The remaining amounts of purchased research and development wereexpensed upon the closing of the transaction. The goodwill recorded as a result of the acquisition will not beamortized but will be included in our annual review of goodwill and otherintangible assets for impairment.  A summary of the total purchase consideration isas follows:

 
| Cash paid for outstanding  shares |   | $     | 22,781 |   |
|-----------------------------------|--------|-------|--------|--------|
| Outstanding options               |   | 1,850 |   |
| Assumed liabilities               |   | 4,656 |   |
| Acquisition costs                 |   | 475   |   |
| Total purchase consideration      |   | $     | 29,762 |   |

 

The purchase consideration was allocated to theestimated fair values of the assets acquired. The preliminary purchase price allocation is as follows:

 
|                                |   | **Preliminary  Purchase  Price  Allocation** |   | **Amortization  Life** |   |
|-------------------------------------|--------|----------------------------------------------|--------|------------------------|--------|
|                                |   |                                         |   |                   |   |
| Tangible assets                     |   | $                                            | 1,306  |                   | — |   |
| Patent                              |   | 370                                          |   | 5 years                |   |
| In-process research and development |   | 6,000                                        |   | —                 |   |
| Non-compete agreements              |   | 3,273                                        |   | 3 years                |   |
| Customer base                       |   | 1,613                                        |   | 3 years                |   |
| Trademarks                          |   | 2,030                                        |   | 5 years                |   |
| Goodwill                            |   | 15,170                                       |   | —                 |   |
| Total purchase price allocation     |   | $                                            | 29,762 |                   |   |   |

 

The acquisition was funded through available cash.  On the closing of the 2C transaction, weacquired $32 in cash

held by 2C.

 

**Pro Forma Financial Information**—The following unaudited pro forma summarycombines the results of operations of Avocent as if the acquisition of 2C hadoccurred on January 1, 2001. Certain adjustments have been made to reflect theimpact of the purchase transaction. These pro forma results have been preparedfor comparative purposes only and do not purport to be indicative of what wouldhave occurred had the acquisition been made at the beginning of the respectiveyears, or of results which may occur in the future.

 
|                    |   | **Nine Months Ended****** |    |
|-------------------------|--------|---------------------------|---------|
|                    |   | **(Unaudited)**           |    |
|                    |   | **September 27,  2002**   |    | **September 28,  2001** |   |
|                    |   |                      |    |   |   |
| Net sales               |   | $                         | 191,049 |   | $ | 193,349 |   |
| Net income (loss)       |   | $                         | 7,137   |   | $ | (97,246 | ) |
| Income (loss) per share |   | $                         | 0.16    |   | $ | (2.20 | ) |

 

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Note9.  Goodwill and Other Intangible Assets

 

EffectiveJanuary 1, 2002, we adopted Statements of Financial Accounting Standards No.142, *Goodwilland Intangible Asset*s and No. 141, *Business Combinations*, whichwere issued by the Financial Accounting Standards Board in July 2001.  Under these standards, we ceased amortizinggoodwill totaling $188 million (including $2.0 million, net of $1.4 million ofaccumulated amortization for the assembled workforce, classified as otherintangible assets as of December 31, 2001) as of January 1, 2002.  The three and nine months ended September28, 2001 included $27.7 million and $83.3 million, respectively, of amortizationexpense under the previous standards.

 

Thefollowing tables present the impact of the new standards on income (loss) fromoperations, net loss and loss per share, as if they had been in effect for thethree and nine months ended September 28, 2001.

 
|                           |   | **For the  Three Months Ended**       |   |
|--------------------------------|--------|---------------------------------------|--------|
|                           |   | **September  27,  2002  As Reported** |   | **September  28,  2001  As Reported** |   | **September  28,  2001  As Adjusted** |   |
| Income (loss)  from operations |   | $                                     | 326    |   | $ | (31,881 | ) | $ | (4,134 | ) |
| Net loss                       |   | $                                     | (325   | ) | $ | (29,259 | ) | $ | (1,512 | ) |
| Basic loss per  share          |   | $                                     | (0.01  | ) | $ | (0.66 | ) | $ | (0.04 | ) |
| Diluted loss per  share        |   | $                                     | (0.01  | ) | $ | (0.66 | ) | $ | (0.04 | ) |

 
|                               |   | **For the  Nine Months Ended**        |   |
|------------------------------------|--------|---------------------------------------|--------|
|                               |   | **September  27,  2002  As Reported** |   | **September  28,  2001  As Reported** |   | **September  28,  2001  As Adjusted** |   |
| Income (loss)  from operations     |   | $                                     | 2,811  |   | $ | (99,972 | ) | $ | (16,721 | ) |
| Net income  (loss)                 |   | $                                     | 3,545  |   | $ | (94,237 | ) | $ | (10,986 | ) |
| Basic earnings  (loss) per share   |   | $                                     | 0.08   |   | $ | (2.13 | ) | $ | (0.25 | ) |
| Diluted earnings  (loss) per share |   | $                                     | 0.08   |   | $ | (2.13 | ) | $ | (0.25 | ) |

 

Acquiredother intangible assets subject to amortization, including the intangibleassets from the 2C acquisition detailed in Note 8, are as follows:

 
|                             |   | **September  28, 2002**      |    | **December  31, 2001**        |   |
|----------------------------------|--------|------------------------------|---------|-------------------------------|--------|
|                             |   | **Gross  Carrying  Amounts** |    | **Accumulated  Amortization** |   | **Gross  Carrying  Amounts** |   | **Accumulated  Amortization** |   |
| Developed  technology            |   | $                            | 65,740  |                          | $      | 29,635 |   | $ | 65,740 |   | $ | 19,931 |   |
| Patents and  trademarks          |   | 14,788                       |    | 3,841                         |   | 14,152 |   | 2,478 |   |
| Customer base  and certification |   | 21,113                       |    | 14,254                        |   | 19,500 |   | 9,333 |   |
| Non-compete  agreements          |   | 3,273                        |    | 91                            |   | — |   | — |   |
| Assembled  workforce             |   | —                       |    | —                        |   | 3,400 |   | 1,400 |   |
| Other                            |   | 2,020                        |    | 522                           |   | 1,814 |   | 450 |   |
|                             |   | $                            | 106,934 |                          | $      | 48,343 |   | $ | 104,606 |   | $ | 33,592 |   |

 

Forthe three months ended September 27, 2002 and September 28, 2001, amortizationexpense for other intangible assets was $5.5 million and $5.5 million,respectively.  For the nine months endedSeptember 27, 2002 and September 28, 2001, amortization expense for otherintangible assets was $16.1  million and$16.4  million, respectively.  The approximate estimated annualamortization for other intangibles is as follows:

 

| **Years  ending December 31:** |   |   |   |
|--------------------------------|--------|--------|--------|
| 2002                           |   | $      | 22,703 |   |
| 2003                           |   | $      | 21,209 |   |
| 2004                           |   | $      | 17,309 |   |
| 2005                           |   | $      | 10,465 |   |
| 2006                           |   | $      | 2,080  |   |

 

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Note9.  Goodwill and Other Intangible Assets *(continued)*

 

In accordance withFinancial Accounting Standards No. 141 and No. 142, we completed a transitionalimpairment test of all goodwill and intangible assets as of January 1,2002.  The test concluded that noadjustment was required upon adoption. We will test goodwill at least annually, in the fourth quarter, forimpairment, as prescribed by these standards.

 

We expensed $2,700in legal fees during the quarter ended March 29, 2002.  Approximately $1,800 of these fees weredeferred from previous periods (which were included as other intangible assetsat December 31, 2001) and $900 of fees were incurred during the quarter endedMarch 29, 2002.  These fees related toour patent infringement lawsuit brought against a competitor challenging theuse of on-screen technology in the competitor’s switches.  A court decision was reached in February2002 that found no infringement of our patents involved in the lawsuit.  While the judgment is currently on appealand we intend to continue to pursue the lawsuit, we decided to expense thesecosts due to the uncertainty of the outcome of the litigation.

 

Note 10.  Recently Issued Accounting Standards

 

In July 2002, theFinancial Accounting Standards Board issued SFAS No. 146, *Accounting for Costs Associated withExit or Disposal*, which is effective for disposal or exit activitiesthat are initiated after December 31, 2002. The statement requires that a liability for a cost associated with anexit or disposal activity shall be recognized and measured initially at itsfair value in the period in which liability is incurred, except for liabilitiesfor one-time termination benefits that are accrued over time.  In the unusual circumstance in which fairvalue cannot be reasonably estimated, the liability shall be recognizedinitially in the period in which fair value can be reasonably estimated.  The impact of SFAS No. 146 on our financialstatements is not expected to be material.

 

Note 11.  Certain Transactions

 

In the third quarter of 2002, we engagedMirecho Labs, Inc., a privately-held company based in Acton, Massachusetts, toprovide software research and development services to support the recentlyacquired 2C product line.  Victor Odrynais one of Mirecho’s founders and serves as President and Chief ExecutiveOfficer.  Through July 2001, Mr. Odrynawas our Senior Vice President of Corporate Strategic Marketing.  During the second quarter of 2002 two of ourofficers, Douglas E. Pritchett, our Senior Vice President of Finance, ChiefFinancial Officer, Treasurer and Assistant Secretary, and Kieran MacSweeney,our Managing Director of International Operations, and the Chairman of ourBoard of Directors, Stephen F. Thornton, invested a total of $175,000 inMirecho. We paid Mirecho $150,000 for research and development services performedprior to termination of the agreement on November 1, 2002.

 

Note 12.  Subsequent Event

 

On October 17,2002, we signed an agreement to extend the lease term of our Redmond facilityan additional five years, through March 2009. Under the provisions of the lease amendment, future rental payments willbe as follows: $214 for the remainder of 2002, $846 in 2003, $809 in 2004, $777in 2005, $740 in 2006, $706 in 2007 and $836 thereafter.

 

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

 

*THE INFORMATION IN THIS ITEM 2 “MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS” CONTAINS FORWARD-LOOKINGSTATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTS RELATING TO OUR FUTUREBUSINESS PROSPECTS AND ECONOMIC CONDITIONS IN GENERAL, STATEMENTS REGARDING OURENGINEERING AND DESIGN ACTIVITIES, PRODUCT DEVELOPMENT, AND NEW PRODUCTINTRODUCTIONS, STATEMENTS RELATING TO FUTURE PRODUCT DEMAND AND OUR FUTURESALES, EARNINGS, GROSS PROFIT, GROSS MARGIN, INCOME, AND EXPENSES, STATEMENTSREGARDING INTERNATIONAL SALES, STATEMENTS REGARDING MERGER ACCOUNTING,ACQUISITION, AND TRANSACTION COSTS AND ADJUSTMENTS, STATEMENTS ABOUT THE RATIOOF SALES AMONG OUR DISTRIBUTION CHANNELS, STATEMENTS REGARDING FUTURE INVENTORYLEVELS, STATEMENTS REGARDING OUR ACHIEVEMENT OF ISO 9000:2000 ACCREDITATION,STATEMENTS RELATING TO ANTICIPATED LIQUIDITY AND  CAPITAL NEEDS, AND STATEMENTS REGARDING THE EFFECT OF THE U.S.WEST COAST LONGSHOREMAN LABOR DISPUTE.*

 

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

 

**Overview**

 

We design, manufacture, and sellanalog and digital console switching systems, serial connectivity devices, andextension and remote access products for the computer industry.  Data center managers and network administratorshave increasingly complex and growing server populations, and our analog,digital, and serial switching solutions, as well as our extension and remoteaccess products, help them manage multiple servers and serially controlleddevices from one or more local or remote consoles consisting of a keyboard,video monitor, and mouse.  Specifically,our products can provide significant cost reductions including lower initialinvestment, reduced utility costs, and space savings, as well as more efficienttechnical support capabilities.

 

We provide “plug and play”switching systems for many network administration, management, and storageproblems faced by corporate customers, data centers, and server farms.  Our switching solutions include products soldunder the Avocent, Apex, Cybex, and Equinox brands, including our *AMXTM,AutoViewTM, DS SeriesTM, OutLook®,* and *XP®4000 Series*products.  Our switching products helpfacilities managers and network administrators access multiple servers andserially controlled devices from one or more centralized or remote consoles,consolidate hardware requirements, and provide direct hardwired connectionsbetween the switch and the attached servers to facilitate access to thoseservers, even when the network is down. Our Equinox branded products add high-performance, reliable, andaffordable server-based products for serial and dial access applications.  The Equinox *SuperSerialTM* product line provides serial communications forsecurity, commercial point-of-sale, process control, industrial automation,data collection, remote access, fax servers, Internet access, and customapplications.  In the first quarter of2002, we announced two power management solutions, the *SPC*TM*800* and *SPC*TM*1600*, which expand our DSSeries of products.  When combined withAvocent’s *CPS*TM**serial-based network appliances,data center managers can securely control almost any connected device in thedata center.  In the second quarter of2002, we announced the AMX, the latest in our KVM analog solutions.  The AMX switch addresses continued growthopportunities in the analog market segment and provides simpler access andeasier manageability of servers in multi-rack, multi-platformenvironments.  In the third quarter of2002, we began shipping OEM versions of our DSR product family. Additionally, with the 2Cacquisition we added the 2C product line, which includes the *Cstation*TMproduct.  Initial applications forthe Cstation product include financial trading floors where space is at apremium, industrial plant control environments that benefit from remotecomputers due to harsh or unsecure environments, and government installationsthat require high security afforded through the remote location of the computerand hard disk.

 

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Our revenue is derived (i) from sales to a limitednumber of original equipment server manufacturers, or OEMs, who purchase ourswitching systems on a private-label or branded basis for integration and salewith their own products, (ii) from sales through our reseller and distributornetwork, and (iii) from sales to a limited number of direct customers.  For the nine months ended September 27,2002, sales to our reseller and distributor network were 52% of net sales,sales to our OEM customers were 45% of net sales, and sales to our directcustomers were 3% of net sales.  We donot have contracts with many of these customers, and in general, they are onlyobligated to purchase products from us pursuant to binding purchaseorders.  The merger between Compaq andHewlett-Packard will result in a further concentration of sales with a singleOEM customer.  The loss of, or materialdecline in orders from, our OEM customers would have a material adverse effecton our business, financial condition, results of operation, and cash flow.  We sell products to dealers, end-users andOEMs in the United States, Canada, Europe and Asia as well as in other foreignmarkets.  Sales within the United Statesaccounted for approximately 62% of sales for the first nine months of 2002,while sales outside the United States accounted for the remaining 38% of sales.

 

With recent industry-wideinitiatives to reduce all channel inventories and to shorten lead times, trendswith our major customers are, generally, to reduce the number of weeks offorward-committed firm orders.  Thistrend is currently affecting our business with certain OEMs, other servermanufacturers and certain distributors, and we believe that it will make futuresales more difficult to predict and inventory levels more difficult to manage.

 

Wecontinue to experience price competition for all of our products, and we expectthat pricing pressures will continue in the future.  If so, unless we continue our technological innovation, marginson our existing products may erode over time. In addition, general economic conditions are not as favorable asthey were in the prior years, and our revenue growth rate has slowed.  Depending on future general economicconditions and other factors, our revenue could decline in the future.

 

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

 

The longshoremanlabor dispute on the US west coast did not have a material impact on ourbusiness in the third quarter of 2002. We have made alternative shipping arrangements for the delivery ofoverseas purchases, and we do not expect the impact of the longshoreman disputeto materially affect our business in the fourth quarter of 2002.

 

Our executiveofficers and directors have vested in significant amounts of options topurchase shares of our Common Stock and continue to vest in additional optionson a regular basis.  These officers anddirectors have informed us that they may exercise options and sell shares ofour Common Stock on a regular basis to provide liquidity and diversify theirportfolios.

 

**Results of Operations**

 

The followingtable sets forth, for the periods indicated, selected statement of operationsdata expressed as a percentage of net sales: 

 
|                                                  |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|-------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|
|                                                  |   | **Sept. 27,  2002**    |   | **Sept. 28,  2001**   |   | **Sept. 27,  2002** |   | **Sept. 28,  2001** |   |
|                                                  |   |                   |   |                  |   |   |   |   |   |
| Net sales                                             |   | 100.0                  | %      | 100.0                 | %      | 100.0 | % | 100.0 | % |
| Cost of sales                                         |   | 48.5                   |   | 54.7                  |   | 49.8 |   | 58.7 |   |
| Gross profit                                          |   | 51.5                   |   | 45.3                  |   | 50.2 |   | 41.3 |   |
| Operating expenses:                                   |   |                   |   |                  |   |   |   |   |   |
| Research and development expenses                     |   | 9.6                    |   | 9.8                   |   | 10.3 |   | 8.9 |   |
| Acquired in-process research and development expenses |   | 9.3                    |   | —                |   | 3.2 |   | 2.4 |   |
| Selling, general and administrative expenses          |   | 23.7                   |   | 33.0                  |   | 26.7 |   | 30.2 |   |
| Amortization of intangible assets                     |   | 8.4                    |   | 60.4                  |   | 8.5 |   | 51.5 |   |
| Total operating expenses                              |   | 51.0                   |   | 103.2                 |   | 48.7 |   | 93.0 |   |
| Income (loss) from operations                         |   | 0.5                    |   | (57.9                 | )      | 1.5 |   | (51.7 | ) |
| Other income, net                                     |   | 1.9                    |   | 2.8                   |   | 2.0 |   | 2.3 |   |
| Income (loss) before income taxes                     |   | 2.4                    |   | (55.1                 | )      | 3.5 |   | (49.4 | ) |
| Provision for (benefit from) income taxes             |   | 2.9                    |   | (2.0                  | )      | 1.6 |   | (0.7 | ) |
| Net income (loss)                                     |   | (0.5                   | )%     | (53.1                 | )%     | 1.9 | % | (48.7 | )% |

 

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*Netsales.*  Our net salesconsist of revenue from console switching systems, digital connectivitysolutions, serial connectivity devices, and extension and remote-accessproducts.  Net sales increased 17% to$64.5 million for the third quarter of 2002 from $55.1 million for the thirdquarter of 2001.  Sequentially, oursales increased almost $1.5 million from the second quarter of 2002.  The sequential improvement in sales was dueto an 8.9% improvement in our OEM business. The increase in OEM sales for the third quarter of 2002 was offsetslightly by a 2.7% reduction in our branded business.  Sales to our reseller and distributor channel and direct saleswere affected by lower sales of PixelVision and Equinox branded products.  The 2C acquisition contributed no materialsales in the third quarter of 2002, while new product introductions accountedfor $4.5 million of third quarter 2002 sales. Both branded and OEM sales included revenue from the new products,including the AMX, the AVR and the OEM versions of our digital productfamily.  Sales through our reseller and distributor channel increased 44% from$22.7 million in the third quarter of 2001 to $32.6 million in the thirdquarter of 2002.  Direct sales decreased18% from $2.9 million in the third quarter of 2001 to $2.4 million in the thirdquarter of 2002, while OEM sales remained flat at $29.5 million.  Reseller and distributor sales were 50% ofsales for the third quarter of 2002, compared to 41% of sales for the thirdquarter of 2001.  OEM sales were 46% ofsales for the third quarter of 2002, compared to 54% of sales for the thirdquarter of 2001.  Direct sales were 4%of sales for the third quarter of 2002, compared to 5% of sales for the thirdquarter of 2001.

 

Sales within the United States increased by over 13% to $39.0 millionin the third quarter of 2002 from $34.4 million in the third quarter of2001.  Salesoutside the U.S. increased over 23% to $25.5 million in the third quarter of2002 from $20.7 million in the third quarter of 2001.  Net sales decreased 2% to $189.6 million for the firstnine months of 2002 from $193.3 million for the first nine months of 2001.  For the year, the decrease in sales resultedfrom the general weakness in the technology sector of the economy when comparedto all of last year.  The weakness insales was most evident in the United States. Sales within the United States decreased by almost 5% to $116.8 millionin the first nine months of 2002 from $122.8 million in the first nine monthsof 2001.  Sales outside the U.S. increased just over 3% from $70.5 million in thefirst nine months of 2001 to $72.8 million in the first nine months of 2002.

 

*Grossprofit.* Gross profit isaffected by a variety of factors, including: the ratio of sales among ourdistribution channels, as our OEM sales typically have lower gross margins thanour reseller and distributor sales and our direct sales; varying absorption offixed costs as sales levels fluctuate; product mix, raw materials and laborcosts; new product introductions by us and by our competitors; and the level ofour outsourcing of manufacturing and assembly services.  Gross margin significantly improved to 51.5%in the third quarter of 2002 from 45.3% in the third quarter of 2001.  Gross margin in the third quarter of 2002benefited from higher sales of our digital solutions, which have a highermargin, and accounted for 24% of our third quarter 2002 sales compared to 10%of sales for our third quarter of 2001. Also, AMX, our new high-end analogmatrix switch, began shipping in the third quarter of 2002 and has higher thanaverage gross margins.  Additionally,gross margin in the third quarter of 2001 was impacted unfavorably by a DS1800list price reduction and lower absorption of overhead due to lower sales.  Gross margin increased to 50.2% for thefirst nine months of 2002 from 41.3% for the first nine months of 2001.  Gross margin was significantly affected byan $11.7 million write-down for excess and obsolete inventories in the secondquarter of 2001.  This write-downreduced inventory valuations to bring them in-line with current replacementvalues and to the level necessary to support then current sales demand.  We anticipate a slightly less favorableproduct mix in the fourth quarter and expect gross margins to decline slightly.

 

*Researchand development expenses.* Research and development expenses include compensation for engineers,support personnel, and materials costs and are expensed as they areincurred.  Research and developmentexpenses were $6.2 million, or 9.6% of net sales, in the third quarter of 2002compared to $5.4 million, or 9.8% of net sales, in the third quarter of 2001.  The increase in the amount spent on researchand development is attributable to an increase in contracted services and othercosts related to the new product roll-outs in the third quarter of 2002 and tothe impact of the acquisition of 2C, effective August 20, 2002.  Year-to-dateresearch and development expenses for 2002 increased to $19.6 million from$17.1 million in 2001 for the reasons listed above.  We expect to continue to focus on newproducts, enhancements to our AMX and digital product families, as well as newsolutions for blade and traditional servers. In the fourth quarter of 2002, we expect research and developmentexpenditures to be slightly higher than the third quarter of 2002, due tohaving a full quarter of costs related to the 2C engineering team.

 

*Acquiredin-process research and development expenses.*The in-processresearch and development expense of $6.0 million in the third quarter of 2002is comprised solely of the acquisition costs of 2C attributable to in-processtechnologies. The in-process research and development expense of $4.6 millionin the first nine months of 2001 is comprised solely of the acquisition costsof Equinox attributable to in-process technologies.  The $4.6 million charge was recorded in thefirst quarter of 2001.  The charges forin-process technologies are non-recurring.

 

*Selling,general and administrative expenses.*  Selling, general and administrative expensesinclude personnel costs for administration, finance, human resources, sales andmarketing and general management, as well as some merger related expenses,rent, utilities and legal and accounting expenses, advertising, promotionalmaterial, trade show expenses, and related

 

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travel costs.  Selling, general and administrative expenseswere $15.3 million, or 23.7% of net sales, for the third quarter of 2002compared to $18.2 million, or 33.0% of net sales, for the third quarter of2001.  The decrease in selling, generaland administrative expenses was largely attributable to a reduction in stockoption compensation related expenses and a reduction in bad debt expense.  Selling, general and administrative expensesin the third quarter of 2002 include $1.9 million of merger and acquisitionrelated expense that is comprised primarily of $1.1 million of deferredcompensation amortization related to stock options assumed upon the merger ofApex and Cybex and the Equinox and 2C acquisitions.  Selling, general and administrative expenses in the third quarterof 2001 include $5.3 million of merger and acquisition related expense that iscomprised primarily of $2.6 million of expense related to the acceleration ofstock options for certain employees that terminated during the year and $2.3million of deferred compensation amortization related to stock options assumedon the merger of Apex and Cybex and the acquisition of Equinox.

 

Year-to-date selling, general, and administrative expenses decreased to$50.7 million or 26.7% of net sales for 2002 from $58.5 million, or 30.2% ofnet sales in 2001.  Selling, general andadministrative expenses for the year decreased partly as a result of thereasons mentioned above.  In addition,selling, general and administrative expenses in the second quarter of 2002benefited from a $1.4 million recapture of a receivable, previously reserved,related to a contract manufacturer that had filed for bankruptcy.  We received a favorable ruling by thebankruptcy judge, which allowed the offset of receivables and payables betweenthe contract manufacturer and certain customers, including Avocent. Partiallyoffsetting the decline in selling, general and administrative expenses, was our decision to expense $2.7 million in legal feesduring the first quarter of 2002.  Thesefees related to the patent infringement lawsuit we brought against one of ourcompetitors challenging the use of on-screen technology in the competitor’sswitches.  A court decision was reachedin February 2002 that found no infringement of the three patents involved inthe lawsuit.  The judgment is currentlyon appeal, and we intend to continue to pursue the lawsuit.  Nevertheless, we decided to expense theselegal fees, as well as related ongoing fees, due to the uncertainty of theoutcome of the litigation.   Also, selling, general and administrativeexpenses in the second quarter of 2001 included $1.3 million of severance costsrelated to headcount reductions in the U.S. and Europe.  We expect selling, general andadministrative expenses to increase slightly in the fourth quarter of 2002 ascompared to the third quarter of 2002.

 

*Amortization of intangible assets.*  Amortizationof intangible assets for the third quarter of 2002 is comprised of theamortization of the amounts allocated to the identifiable Cybex intangibleassets recognized in the merger of Apex and Cybex that occurred in 2000.  Also included is the amortization of similarassets created as a result of the acquisition of Equinox in 2001 and 2C inAugust of 2002.  The third quarter of2001 includes the amortization of these assets as well as amortization of goodwillcreated upon the merger and the Equinox acquisition.  Effective January 1, 2002, we adopted Statements of FinancialAccounting Standards No. 142, *Goodwill and Intangible Asset*s, and No.141, *BusinessCombinations*, which were issued by the Financial AccountingStandards Board in July 2001.  Underthese standards, we ceased amortizing goodwill of approximately $188 million asof January 1, 2002.  Amortization ofother identifiable intangible assets was $5.5 million or 8.4% of net sales forthe third quarter of 2002, while amortization of other identifiable intangibleassets and goodwill was $33.2 million (including $27.7 million related toamortization of goodwill) or 60.4% of net sales, for the third quarter of 2001.  Year-to-date, amortization of otheridentifiable intangible assets was $16.1 million or 8.5% of net sales for thefirst nine months of 2002, while amortization of other identifiable intangibleassets and goodwill was $99.7 million (including $83.3 million related toamortization of goodwill) or 51.5% of net sales, for the first nine months of2001.

 

*Other income, net.*  Other income declined to$1.2 million for the third quarter of 2002 from $1.5 million for the thirdquarter of 2001. The decrease related primarily to the decline in interestrates, but was partially offset by an increase in available funds invested asthe result of positive cash flow from operations.  Additionally, the dollar has weakened against the euro resultingin a $93,000 exchange swing, from a small exchange gain in the third quarter of2001, to a $52,000 exchange loss in the third quarter of 2002.  For the year, other income decreased to $3.8million for 2002, from $4.4 million for 2001, for the reasons listed above.

 

*Provision for income taxes.*  Theprovision for income taxes was approximately $1.9 million for the third quarterof 2002, compared to a benefit from income taxes of $1.1 million in thethird quarter of 2001.  Excluding mergerrelated adjustments to federal taxes, the effective tax rate for the third quarterof 2002 was a provision for income taxes of approximately 27.5%, compared to25.5% for the third quarter of 2001, primarily due to the mix of our pre-taxprofit among our U.S. and international companies.  Shifting international shipments from Redmond, Washington toShannon, Ireland leveraged the 10% tax rate in Ireland.  For the year, the provision for income taxeswas approximately $3.1 million for the first nine months of 2002, compared to abenefit from income taxes of $1.4 million for the first nine months of2001.  Excluding merger relatedadjustments to federal taxes, the effective tax rate for the first nine monthsof 2002 was a provision for income taxes of approximately 26.5%, compared 29.3%for the first nine months of 2001, primarily for the reasons mentionedabove.  We expect our effective tax ratefor 2002 to be between 26% and 28%, depending primarily on the mix of pre-taxprofit between the U.S. locations and Ireland.

 

*Net loss.*  Our net loss for the third quarter of 2002was $325,000 compared to a net loss of $29.3 million for the third

 

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quarter of 2001, as a result of the abovefactors, including the in-process research and development charge forthe 2C acquisition, the amortization of otheridentifiable intangible assets and discontinuing goodwill amortization upon theadoption of SFAS No. 142 on January 1, 2002. Net loss as a percentage of sales for the third quarter of 2002 was0.5%, compared to net loss as a percentage of sales for the third quarter of2001 of 53.1%.  Our net income for thefirst nine months of 2002 was $3.5 million compared to a net loss of$94.2 million for the first nine months of 2001, as a result of the abovefactors.  Net income as a percentage ofsales for the first nine months of 2002 was 1.9%, compared to net loss as apercentage of sales for the first nine months of 2001 of 48.7%.

 

**Liquidity andCapital Resources**

 

As of September 27, 2002, our principal sources ofliquidity consisted of $200 million in cash, cash equivalents andinvestments.  We had a bank line of credit for borrowings of $2.0 million at LIBOR +2.25% with a maturity date of May 2002, which we did not renew.  We determined that our cash position andexpected maturities of investments are adequate to cover our current and futureliabilities.

 

Our operating activities generated cash of over$55 million in the first nine months of 2002, compared to approximately $53million in the first nine months of 2001. The increase in cash flow from operations for the first nine months of2002 compared to the first nine months of 2001 resulted primarily from thedecrease in accounts receivable and inventory. Receivables declined to $37 million at September 27, 2002, from $49million at December 31, 2001.  Thisdecline in receivables is a result of the timing of sales and our increasedcollection efforts.  Inventory levelsdeclined to $25 million at September 27, 2002 from $27 million at December 31,2001, due to our efforts to consume existing supplies and due to increases inreserve and valuation accounts. Inventory levels have risen from the end of the second quarter of 2002as we increased inventory for our new product rollouts.  The impact of the decrease in receivablesand inventory were partially offset by a decrease in accrued liabilities, whichdeclined to $12.4 million at September 27, 2002, from $15.5 million at December31, 2001.  The primary reason for thedecline in accrued liabilities was the payout of almost $1.6 million, afterDecember 31, 2001, related to royalties for certain products.  During 2001, the product royalties accruedreached the maximum amount due under the royalty agreement and no furtheramounts are owed under the agreement.

 

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

 

We believe that our existing cash balances,investments and cash generated from operations will be sufficient to fund ouroperations through 2003.

 

**Acquisition of2C Computing, Inc.**

 

On August 20, 2002, we acquired 2CComputing, Inc. (“2C”) for approximately $22.8 million in cash, plus theassumption of liabilities and stock options. 2C, headquartered in Huntsville, Alabama, has developed digitalextension technology that splits the PCI bus of a PC and allows the PCmotherboard, processor, hard drive, and other user devices to be located at adistance from the user and connected using CAT 5 or fiber cable.

 

In2000, 2C and Cybex Computer Products Corporation (“Cybex”), our wholly-ownedsubsidiary, formed a joint venture, CyCom L.L.C., to focus on computertechnology and research for products in the desktop computer and serverindustry.  Cybex owned 40% of CyCom andthe other 60% of CyCom was owned by 2C. Upon the formation of CyCom, Cybex contributed a license for certain ofits intellectual property related to the split bus concept, and 2C contributedmanagement services and capital funding. The initial products developed from the digital extension technologywere announced in late 2001.  Shipmentsof the products totaled approximately $1.5 million through July 31, 2002.

 

Underthe terms of the joint venture membership agreement, 2C was responsible for alltechnology development efforts.  The netprofits of CyCom were to be split 60% to 2C and 40% to Cybex after 2C recoupedits accumulated losses from the development and marketing of CyCom products.  The carrying value of our investment inCyCom was zero prior to our acquisition of 2C because Cybex’s contribution toit consisted of previously expensed research and development costs related tothe technology and CyComhad earned no profits to date. We dissolved CyCom upon the closing of our acquisition of 2C.

 

2C was founded byRemigius G. Shatas and Robert R. Asprey, who served as directors of 2C prior toour acquisition of 2C.  Mr. Shatas wasformerly a member of the Board of Directors of Cybex (before the merger transactionwith Apex Inc. that created Avocent) and served as executive vice president andchief technology officer of Cybex. Mr. Shatas remains a shareholder ofAvocent.  Mr. Asprey was also formerlyan officer of Cybex, and he too is a current Avocent shareholder.  David S. Butler, who also was a director of2C prior to our acquisition of 2C, is a former director of Cybex and a currentAvocent

 

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shareholder. Mr.Shatas, Mr. Asprey, and Mr. Butler own less than 2% of Avocent’s outstandingshares in the aggregate.  Anumber of other former 2C shareholders are also Avocent shareholders.  No officer or director of Avocent was anofficer, director, shareholder or affiliate of 2C prior to our acquisition of2C.

 

The acquisition was recordedunder the purchase method of accounting, and the purchase price was allocatedbased on the fair value of the assets acquired and liabilities assumed. Inaccordance with generally accepted accounting principles, purchasedresearch and development costs allocated to patented technology werecapitalized and will be amortized over the respective estimated usefullives.  The remaining amounts ofpurchased research and development were expensed upon the closing of thetransaction.  The goodwill recorded as aresult of the acquisition will not be amortized but will be included in ourannual review of goodwill and other intangible assets for impairment.  The amortization of other intangible assetsfrom the 2C acquisition will be approximately $175,000 in the fourth quarter of2002.

 

**CertainTransactions**

 

In the third quarter of 2002, we engagedMirecho Labs, Inc., a privately-held company based in Acton, Massachusetts, toprovide software research and development services to support the recentlyacquired 2C product line.  Victor Odrynais one of Mirecho’s founders and serves as President and Chief ExecutiveOfficer.  Through July 2001, Mr. Odrynawas our Senior Vice President of Corporate Strategic Marketing.  During the second quarter of 2002 two of ourofficers, Douglas E. Pritchett, our Senior Vice President of Finance, ChiefFinancial Officer, Treasurer and Assistant Secretary, and Kieran MacSweeney,our Managing Director of International Operations, and the Chairman of ourBoard of Directors, Stephen F. Thornton, invested a total of $175,000 inMirecho.  We paid Mirecho $150,000 forresearch and development services performed prior to termination of theagreement on November 1, 2002.

 

**Critical Accounting Policies**

 

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

 
| • | We review customer contracts to determine if all of  the requirements for revenue recognition have been met prior to recording  revenues from sales transactions.  We  generally record sales revenue upon shipment of our products, net of any  discounts, since we generally do not have significant post delivery  obligations, the product price is fixed and determinable, collection of the  resulting receivable is probable, and product returns are reasonably  estimable.  We generally ship products  upon receipt of a purchase order from a customer.  Shipping terms are evaluated, and we record revenue on products  shipped FOB destination when the customer takes possession of the goods. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| • | We maintain allowances for doubtful accounts for  estimated losses resulting from the inability of our customers to make  required payments.  If the financial  condition of our customers were to deteriorate, resulting in an impairment of  their ability to make payments, additional allowances may be required.  If circumstances change with regards to  individual receivable balances that had previously been determined to be  uncollectible (and for which a specific reserve had been established), a  reduction in our allowance for doubtful accounts may be required.                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| • | We estimate allowances for sales returns based on  our experiences from historical customer returns.  If actual future customer returns are less favorable than those  projected by management, additional sales return expenses may be required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| • | We provide for the estimated cost of product  warranties at the time revenue is recognized.  While we engage in extensive product quality programs and  processes, including actively monitoring and evaluating the quality of our  component suppliers, our warranty obligation is affected by product failure  rates, failure rates of purchased components integrated into our products,  material usage, and other rework costs incurred in correcting a product  failure.  Should actual product  failure rates, material usage, or other rework costs differ from our  estimates, revisions to our estimated warranty liability may be required.                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| • | We write down our inventory for estimated  obsolescence or unmarketable inventory to the estimated market value based  upon assumptions about future demand and market conditions.  If actual future demand or market  conditions are less favorable than those projected, additional inventory  write-downs may be required.                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| • | We hold investments in various debt securities,  including mortgage-backed and other asset-backed securities.  We record an investment impairment charge  when we believe an investment has experienced a decline in value that is  other than temporary.  Future adverse  changes in market conditions or poor operating results of the underlying  issuers could result in losses or an inability to recover the carrying value  of the investments that may not be reflected in an investment’s current  carrying value, thereby possibly requiring an impairment charge in the  future.                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| • | Effective January 1, 2002, we adopted SFAS No.  142.  Our initial test for goodwill  impairment as of January 1, 2002 determined that no adjustment for impairment  was required.  If economic conditions  deteriorate and indicators of impairment become present, an adjustment to the  carrying value of goodwill and other intangible assets may be required.                                                                                                                                                                                                                                                                                                                                                  |

 

 

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**Item3. Quantitative and QualitativeDisclosures About Market Risks.**

 

Our primary market risk is thepotential loss arising from changes in interest rates, which could have anadverse impact on the fair value of our investment securities.  Our investment policy is to manage ourinvestment portfolio to preserve principal and liquidity while maximizing thereturn on the investment portfolio through the investment of availablefunds.  We diversify the investmentportfolio by investing in a variety of highly-rated investment-grade securitiesand through the use of different investment managers.  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 and in mortgage-backed securities tominimize interest rate and credit risk as well as to provide for an immediatesource of funds.  Market risk isestimated as the potential change in fair value in the investment portfolioresulting from a hypothetical 10% change in interest rates, and was notmaterial at September 27, 2002.  Wegenerally hold investment securities until maturity.

 

We are also exposed to equity price risks on ourinvestments in publicly traded equity securities.  These investments are generally in companies having operations ortechnology in areas within our strategic focus.  We do not attempt to reduce or eliminate our market exposure onthese securities.  As of September 27,2002, the fair value of our equity investments was $434,000.  A 20% adverse change in equity prices wouldresult in a decrease of approximately $87,000 in the fair value of our equitysecurities as of September 27, 2002.

 

We also face foreign currency exchange rate riskto the extent that the value of certain foreign currencies relative to the U.S.dollar affects our financial results. Our international operations transact a portion of our business incurrencies other than the U.S. dollar, predominantly the euro, and changes inexchange rates may positively or negatively affect our revenues, gross margins,operating expenses, and retained earnings since these transactions are reportedin 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. The fair value ofsuch instruments held at September 27, 2002 totaled approximately  $1.5 million.

 

 

**Item 4. Controls andProcedures.**

 

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

 

(b) *Changes in internal controls*.    There were no significant changes in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of their evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

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### **PART II – OTHERINFORMATION**

 

**Item 1. Legal Proceedings.**

 

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

 

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

 

(a)          Exhibits

 

10.37.1  Fourth Amendment to the Net LeaseAgreement dated October 17, 2002, by and between Avocent’s subsidiary, ApexInc.,  and Willows Redmond, L.L.C.

 

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

 

(b)          Reportson Form 8-K

 

On August 7, 2002 we filed a Report on Form8-K with the SEC announcing that we had entered into a Plan and Agreement ofMerger for the acquisition of  2CComputing, Inc. subject to the approval of the 2C shareholders.

 

On August 20,2002, we filed a Report on Form 8-Kwith the SEC announcing that we had completed the acquisition of 2CComputing, Inc.

 

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

 

ITEMS 2, 3, 4 AND 5 OF PART II ARE NOT APPLICABLE AND HAVE BEENOMITTED.

 

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### **SIGNATURES**

 

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

 
|   | AVOCENT CORPORATION                                                                           |
|--------|-----------------------------------------------------------------------------------------------|
|   | (Registrant)                                                                                  |   |
|   |                                                                                          |
|   |                                                                                          |
|   |                                                                                          |
| Date:  | November 12, 2002                                                                             | /s/ Douglas E. Pritchett |   |
|   | Douglas E. Pritchett                                                                          |
|   | Senior Vice President of Finance, Chief Financial  Officer, Treasurer and Assistant Secretary |
|   | (Principal Financial Officer)                                                                 |
|        |                                                                                               |  |  |  |

 

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

 

I, John R. Cooper, certify that:

 

1.                                       Ihave reviewed this Quarterly Report on Form 10-Q of Avocent Corporation;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterly report;

 

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

 

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

 

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

 

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

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

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

 

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

 

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

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: November 12, 2002 |
|-------------------------|
|                    | /s/ John R. Cooper |   |
|                    | John R. Cooper |
|                    | President and Chief Executive Officer |

 

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

 

I, Douglas E. Pritchett, certify that:

 

1.                                       Ihave reviewed this Quarterly Report on Form 10-Q of Avocent Corporation;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

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

 

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

 

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

 

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

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

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

 

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

 

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

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: November 12, 2002 |
|-------------------------|
|                    | /s/ Douglas E. Pritchett |   |
|                    | Douglas E. Pritchett |
|                    | Senior Vice President of Finance, Chief Financial  Officer, Treasurer and Assistant Secretary |

 

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