** **

**U.S.SECURITIES AND EXCHANGE COMMISSION**WASHINGTON, D.C.  20549

 

# **FORM 10-Q**

 

| **(Mark One)**                                                                                                                                          |   |                                                                                          |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                    |   |                                                                                          |
| **ý**                                                                                                                                              |   | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|                                                                                                                                                    |   |                                                                                          |
| **For the quarterly period ended April 2,  2004**                                                                                                       |
|                                                                                                                                                    |
| **or**                                                                                                                                                  |
|                                                                                                                                                    |   |                                                                                          |
| **o**                                                                                                                                                   |   | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                    |   |                                                                                          |
| **For the period from             to            /** |
|                                                                                                                                                    |   |                                                                                          |
| **Commission file number: 000-30575**                                                                                                                   |

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934, as amended, during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has been subjectto such filing requirements for the past 90 days.

 

ý Yes  o No

 

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

 

ý Yes  o No

 

As of May 4, 2004, the number of outstanding shares of the Registrant’sCommon Stock was 49,042,200.

 

 

----

 

**AVOCENTCORPORATION**

**FORM10-Q**

**April2, 2004**

 

**INDEX**

 
| Part I     | Financial Information |                                                                                                         |
|------------|-----------------------|--------------------------------------------------------------------------------------------------------------|
|       |                  |                                                                                                         |
|       | Item 1.               | Financial Statements (unaudited)                                                                             |   |
|       |                  |                                                                                                         |   |
|       |                  | Condensed Consolidated Statements of  Operations for the Three Months Ended April 2, 2004 and March 28, 2003 |   |
|       |                  |                                                                                                         |   |
|       |                  | Condensed Consolidated Balance Sheets at  April 2, 2004 and December 31, 2003                                |   |
|       |                  |                                                                                                         |   |
|       |                  | Condensed Consolidated Statements of Cash  Flows for the Three Months Ended April 2, 2004 and March 28, 2003 |   |
|       |                  |                                                                                                         |   |
|       |                  | Notes to Condensed Consolidated Financial  Statements                                                        |   |
|       |                  |                                                                                                         |   |
|       | Item 2.               | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                  |   |
|       |                  |                                                                                                         |   |
|       | Item 3.               | Quantitative and Qualitative Disclosures  about Market Risks                                                 |   |
|       |                  |                                                                                                         |   |
|       | Item 4.               | Controls and Procedures                                                                                      |   |
|       |                  |                                                                                                         |   |
| Part II    | Other Information     |                                                                                                         |
|       |                  |                                                                                                         |
|       | Item 1.               | Legal Proceedings                                                                                            |   |
|       |                  |                                                                                                         |   |
|       | Item 2.               | Changes in Securities and Use of Proceeds                                                                    |   |
|       |                  |                                                                                                         |   |
|       | Item 6.               | Exhibits and Reports on Form 8-K                                                                             |   |
|       |                  |                                                                                                         |   |
| Signatures |                  |                                                                                                         |

 

2

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**PART I — FINANCIALINFORMATION**

 

Item 1.  Financial Statements

 

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

 
|                                                           |   | **For the  three months ended** |     |
|----------------------------------------------------------------|--------|---------------------------------|----------|
|                                                           |   | **April 2,  2004**              |     | **March 28,  2003** |   |
|                                                           |   |                            | * * |   | * * |
| Net sales                                                      |   | $                               | 86,085   |   | $ | 71,162 |   |
| Cost of sales                                                  |   | 35,983                          |     | 31,565 |   |
| Gross profit                                                   |   | 50,102                          |     | 39,597 |   |
|                                                           |   |                            |     |   |   |
| Research and development expenses                              |   | 9,428                           |     | 6,812 |   |
| Acquired in-process research and  development expense          |   | 6,490                           |     | — |   |
| Selling, general and administrative  expenses                  |   | 20,335                          |     | 16,659 |   |
| Amortization of intangible assets                              |   | 4,762                           |     | 6,156 |   |
| Total operating expenses                                       |   | 41,015                          |     | 29,627 |   |
|                                                           |   |                            |     |   |   |
| Income from operations                                         |   | 9,087                           |     | 9,970 |   |
|                                                           |   |                            |     |   |   |
| Net investment income                                          |   | 1,251                           |     | 1,226 |   |
| Net realized investment losses                                 |   | (64                             | )        | (87 | ) |
| Other expense, net                                             |   | (50                             | )        | (305 | ) |
|                                                           |   |                            |     |   |   |
| Income before provision for income taxes                       |   | 10,224                          |     | 10,804 |   |
| Provision for income taxes                                     |   | 1,681                           |     | 2,637 |   |
|                                                           |   |                            |     |   |   |
| Net income                                                     |   | $                               | 8,543    |   | $ | 8,167 |   |
|                                                           |   |                            |     |   |   |
| Earnings per share:                                            |   |                            |     |   |   |
| Basic                                                          |   | $                               | 0.18     |   | $ | 0.18 |   |
|                                                           |   |                            |     |   |   |
| Diluted                                                        |   | $                               | 0.17     |   | $ | 0.17 |   |
|                                                           |   |                            |     |   |   |
| Weighted average shares used in computing  earnings per share: |   |                            |     |   |   |
| Basic                                                          |   | 47,650                          |     | 45,413 |   |
|                                                           |   |                            |     |   |   |
| Diluted                                                        |   | 49,513                          |     | 46,691 |   |

 

See notes accompanying these condensedconsolidated financial statements.

 

3

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**AVOCENTCORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(Unaudited, in thousands, except per sharedata)

 
|                                                                                                                                                                 |   | **April 2,  2004** |     | **December  31,  2003** |     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|----------|-------------------------|----------|
|                                                                                                                                                                 |   |               | * * |                    | * * |
| **ASSETS**                                                                                                                                                           |   |               |     |                    |     |
| Current assets:                                                                                                                                                      |   |               |     |                    |     |
| Cash and cash equivalents                                                                                                                                            |   | $                  | 112,531  |                    | $        | 76,492 |   |
| Investments maturing within one year                                                                                                                                 |   | 140,934            |     | 146,900                 |     |
| Accounts receivable, net                                                                                                                                             |   | 49,215             |     | 45,011                  |     |
| Income taxes receivable                                                                                                                                              |   | 405                |     | 415                     |     |
| Other receivables, net                                                                                                                                               |   | 475                |     | 225                     |     |
| Inventories, net                                                                                                                                                     |   | 22,640             |     | 21,324                  |     |
| Other current assets                                                                                                                                                 |   | 3,639              |     | 4,251                   |     |
| Deferred tax assets                                                                                                                                                  |   | 4,589              |     | 4,616                   |     |
| Total current assets                                                                                                                                                 |   | 334,428            |     | 299,234                 |     |
| Investments                                                                                                                                                          |   | 64,885             |     | 82,884                  |     |
| Property held for lease, net                                                                                                                                         |   | 1,477              |     | 1,526                   |     |
| Property and equipment, net                                                                                                                                          |   | 38,402             |     | 38,473                  |     |
| Goodwill                                                                                                                                                             |   | 206,037            |     | 206,037                 |     |
| Other intangible assets, net                                                                                                                                         |   | 29,396             |     | 31,889                  |     |
| Other assets                                                                                                                                                         |   | 801                |     | 720                     |     |
|   Total assets                                                                                                                                             |   | $                  | 675,426  |                    | $        | 660,763 |   |
|                                                                                                                                                                 |   |               |     |                    |     |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                       |   |               |     |                    |     |
| Current liabilities:                                                                                                                                                 |   |               |     |                    |     |
| Accounts payable                                                                                                                                                     |   | $                  | 9,360    |                    | $        | 10,034 |   |
| Accrued wages and commissions                                                                                                                                        |   | 5,656              |     | 9,120                   |     |
| Accrued liabilities                                                                                                                                                  |   | 14,719             |     | 16,866                  |     |
| Income taxes payable                                                                                                                                                 |   | 11,349             |     | 6,702                   |     |
| Total current liabilities                                                                                                                                            |   | 41,084             |     | 42,722                  |     |
| Deferred tax liabilities                                                                                                                                             |   | 6,479              |     | 10,884                  |     |
| Total liabilities                                                                                                                                                    |   | 47,563             |     | 53,606                  |     |
|                                                                                                                                                                 |   |               |     |                    |     |
| Commitments and contingencies                                                                                                                                        |   |               |     |                    |     |
|                                                                                                                                                                 |   |               |     |                    |     |
| Stockholders’ equity:                                                                                                                                           |   |               |     |                    |     |
| Preferred stock, $0.001 par value; 5,000  shares authorized, no shares issued and outstanding as of April 2, 2004 and  December 31, 2003, respectively               |   | —             |     | —                  |     |
| Common stock, $0.001 par value; 200,000  shares authorized, 47,800 and 47,350 shares issued and outstanding as of  April 2, 2004 and December 31, 2003, respectively |   | 48                 |     | 47                      |     |
| Additional paid-in capital                                                                                                                                           |   | 993,473            |     | 982,218                 |     |
| Accumulated other comprehensive income                                                                                                                               |   | 411                |     | 227                     |     |
| Deferred compensation                                                                                                                                                |   | (721               | )        | (1,443                  | )        |
| Accumulated deficit                                                                                                                                                  |   | (365,348           | )        | (373,892                | )        |
| Total stockholders’ equity                                                                                                                                      |   | 627,863            |     | 607,157                 |     |
| Total liabilities and stockholders’ equity                                                                                                                      |   | $                  | 675,426  |                    | $        | 660,763 |   |

 

See notes accompanying these condensedconsolidated financial statements.

 

4

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**AVOCENTCORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited, in thousands)

 
|                                                                               |   | **For the  three months ended** |     |
|------------------------------------------------------------------------------------|--------|---------------------------------|----------|
|                                                                               |   | **April 2,  2004**              |     | **March 28,  2003** |   |
|                                                                               |   |                            | * * |   | * * |
| Cash flows from operating activities:                                              |   |                            | * * |   | * * |
| Net income:                                                                        |   | $                               | 8,543    |   | $ | 8,167 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                            |     |   |   |
| Depreciation                                                                       |   | 1,594                           |     | 1,356 |   |
| Amortization of intangible assets                                                  |   | 4,762                           |     | 6,156 |   |
| Stock-based compensation                                                           |   | 722                             |     | 1,615 |   |
| Acquired in-process research and  development expenses                             |   | 6,490                           |     | — |   |
| Amortization of premiums on investments                                            |   | 1,495                           |     | 762 |   |
| Net loss on sales of investments                                                   |   | 64                              |     | 87 |   |
| Income tax benefit from exercise of stock  options                                 |   | 1,238                           |     | 1,687 |   |
| Changes in operating assets and liabilities  (net of effects of acquisition):      |   |                            |     |   |   |
| Accounts receivable, net                                                           |   | (4,204                          | )        | (2,527 | ) |
| Other receivables, net                                                             |   | (250                            | )        | 163 |   |
| Inventories, net                                                                   |   | (1,178                          | )        | 3,158 |   |
| Other assets                                                                       |   | 581                             |     | (164 | ) |
| Accounts payable                                                                   |   | (972                            | )        | (637 | ) |
| Accrued wages and commissions                                                      |   | (3,464                          | )        | (2,228 | ) |
| Accrued liabilities                                                                |   | (2,290                          | )        | (1,151 | ) |
| Income taxes, current and deferred                                                 |   | 252                             |     | 2,226 |   |
| Net cash provided by operating activities                                          |   | 13,383                          |     | 18,670 |   |
|                                                                               |   |                            |     |   |   |
| Cash flows from investing activities:                                              |   |                            |     |   |   |
| Purchase of Crystal Link, net of cash  received  (1)                          |   | (3,311                          | )        | — |   |
| Purchases of property and equipment                                                |   | (1,370                          | )        | (802 | ) |
| Purchases of investments                                                           |   | (52,751                         | )        | (45,111 | ) |
| Maturities and proceeds from sales of  investments                                 |   | 75,232                          |     | 33,352 |   |
| Net cash provided by (used in) investing  activities                               |   | 17,800                          |     | (12,561 | ) |
|                                                                               |   |                            |     |   |   |
| Cash flows from financing activities:                                              |   |                            |     |   |   |
| Repayment of debt assumed at the  acquisition of Crystal Link                      |   | (1,798                          | )        | — |   |
| Proceeds from employee stock option  exercises                                     |   | 5,148                           |     | 6,609 |   |
| Proceeds from employee stock purchase plan                                         |   | 1,371                           |     | 657 |   |
| Net cash provided by financing activities                                          |   | 4,721                           |     | 7,266 |   |
|                                                                               |   |                            |     |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                      |   | 135                             |     | 18 |   |
|                                                                               |   |                            |     |   |   |
| Net increase in cash and cash equivalents                                          |   | 36,039                          |     | 13,393 |   |
| Cash and cash equivalents at beginning of  period                                  |   | 76,492                          |     | 61,699 |   |
| Cash and cash equivalents at end of period                                         |   | $                               | 112,531  |   | $ | 75,092 |   |

 

----

(1)   Supplemental disclosure – Inaddition to the cash paid to Crystal Link shareholders, we issued 106 shares ofour common stock valued at $3,500. The issuance of common stock was recorded asnon-cash consideration for the acquisition.

 

See notes accompanying these condensedconsolidated financial statements.

 

5

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**AVOCENTCORPORATION**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited, in thousands)

 

Note 1.   Basis ofPresentation

 

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

 

The accompanyingunaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and the relatednotes contained in our Annual Report on Form 10-K for the year ended December31, 2003, which is on file with the Securities and Exchange Commission. Thebalance sheet presented in the accompanying financial statements for December31, 2003, was derived from the audited financial statements filed in our 10-Kfor the period ended December 31, 2003.

 

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

 

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

 

Note 2.   Inventories

 

Inventories consisted of the following at:

 
|             |   | **April 2,  2004** |   | **December  31,  2003** |   |
|------------------|--------|--------------------|--------|-------------------------|--------|
|             |   |               |   |                    |   |
| Raw materials    |   | $                  | 4,283  |                    | $      | 4,155 |   |
| Work-in-process  |   | 636                |   | 659                     |   |
| Finished goods   |   | 17,721             |   | 16,510                  |   |
| Inventories, net |   | $                  | 22,640 |                    | $      | 21,324 |   |

 

Inventoriesabove have been reduced by reserves for excess and obsolete inventories of$3,546 and $4,020 as of April 2, 2004 and December 31, 2003, respectively.

 

Note 3.   StockOptions and Deferred Compensation

 

Deferred compensation — We recorded $41,165of deferred compensation related to Cybex employee stock options at the time ofthe merger of Apex and Cybex on July 1, 2000. Additionally, we recorded $2,752 of deferred compensation related to theEquinox employee stock options at the time of the acquisition on January 3,2001.  The deferred compensation isbeing amortized over the vesting period of the options for which it wasrecorded. Amortization of deferred compensation totaled $722 and $1,615 for thequarters ended April 2, 2004 and March 28, 2003, respectively.

 

Stock option exercises — Shares of our commonstock issued as a result of option exercises totaled 254 shares during thequarter ended April 2, 2004 and 425 shares during the quarter ended March 28,2003.  Total proceeds received fromthese option exercises were $5,148 for the quarter ended April 2, 2004 and$6,609 for the quarter ended March 28, 2003. Additionally, common stock issuedunder our Employee Stock Purchase Plan totaled 89 shares during the quarterended April 2, 2004 and 51 shares during the quarter ended March 28, 2003.  Total proceeds received from the sharesissued under the ESPP were $1,371 for the quarter ended April 2, 2004 and $657for the quarter ended March 28, 2003.

 

6

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Note 4.   AccumulatedOther Comprehensive Income

 

We record, net of tax, unrealizedgains and losses on our foreign currency translation adjustments and unrealizedholding gains or losses on our available-for-sale securities as accumulatedother comprehensive income (loss), which is included as a separate component ofstockholders’ equity.  Comprehensiveincome in the first quarter of 2004 of $8,359 consists of $8,543 of net income,$49 of unrealized gains on investments (net of deferred income taxes) and $135of foreign currency translation adjustments (net of deferred income taxes).  Comprehensiveincome in the first quarter of 2003 of $7,908 consists of $8,167 of net income,$241 of unrealized gains on investments (net of deferred income taxes) and $18of foreign currency translation adjustments (net of deferred income taxes).  As of April2, 2004 and December 31, 2003, total accumulated other comprehensive income was$ 411 and $227, respectively.

 

Note 5.   EarningsPer Share

 
|                                                                 |   | **Income  (loss)  (Numerator)** |   | **Shares  (Denominator)** |   | **Per-Share  Amount** |   |
|----------------------------------------------------------------------|--------|---------------------------------|--------|---------------------------|--------|-----------------------|--------|
|                                                                 |   |                            |   |                      |   |                  |   |
| **For the three  months ended April 2, 2004**                        |   |                            |   |                      |   |                  |   |
| **Basic EPS**                                                        |   |                            |   |                      |   |                  |   |
| Net income available to common stockholders                          |   | $                               | 8,543  |                      | 47,650 |                  | $      | 0.18 |   |
| **Effect of Dilutive  Securities**                                   |   |                            |   |                      |   |                  |   |
| Stock options                                                        |   | —                          |   | 1,863                     |   | —                |   |
| **Diluted EPS**                                                      |   |                            |   |                      |   |                  |   |
| Net income available to common stockholders  and assumed conversions |   | $                               | 8,543  |                      | 49,513 |                  | $      | 0.17 |   |
|                                                                 |   |                            |   |                      |   |                  |   |
| **For the three  months ended March 28, 2003**                       |   |                            |   |                      |   |                  |   |
| **Basic EPS**                                                        |   |                            |   |                      |   |                  |   |
| Net income available to common stockholders                          |   | $                               | 8,167  |                      | 45,413 |                  | $      | 0.18 |   |
| **Effect of Dilutive  Securities**                                   |   |                            |   |                      |   |                  |   |
| Stock options                                                        |   | —                          |   | 1,278                     |   | —                |   |
| **Diluted EPS**                                                      |   |                            |   |                      |   |                  |   |
| Net income available to common stockholders  and assumed conversions |   | $                               | 8,167  |                      | 46,691 |                  | $      | 0.17 |   |

 

Note 6.   Sales byGeographic Region

** **

We have evaluated, and will periodicallyre-evaluate, our business in light of the segment reporting requirementsprescribed by SFAS No. 131, *Disclosures about Segments of an Enterprise andRelated Information.*  We havedetermined that we should report our operations as a single operatingsegment.  However, we supplementallyreport sales by geographic region, as well as by customer type.  Following is a presentation of sales bygeographic region for the three months ended April 2, 2004 and March 28, 2003:

 

|              |   | **For the  three months ended** |   |
|-------------------|--------|---------------------------------|--------|
|              |   | **April 2,  2004**              |   | **March 28,  2003** |   |
| Net sales:        |   |                            |   |   |   |
| United States     |   | $                               | 51,190 |   | $ | 42,321 |   |
| Rest of the World |   | 34,895                          |   | 28,841 |   |
|              |   | $                               | 86,085 |   | $ | 71,162 |   |

 

7

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|       |   | **For the  three months ended** |   |
|------------|--------|---------------------------------|--------|
|       |   | **April 2,  2004**              |   | **March 28,  2003** |   |
| Net sales: |   |                            |   |   |   |
| Branded    |   | $                               | 50,710 |   | $ | 37,989 |   |
| OEM        |   | 35,375                          |   | 33,173 |   |
|       |   | $                               | 86,085 |   | $ | 71,162 |   |

 

We sell our products internationally tocustomers in several countries. Sales to customers in the Netherlands, includingthe European distribution facility for one of our OEM customers, accounted for10% of sales in the first quarter of 2004. Sales to customers in the United Kingdom, including the Europeandistribution facility for one of our OEM customers, accounted for 13% of salesin the first quarter of 2003.  No othercountry accounted for more than 10% of sales in the first quarter of either2004 or 2003.

 

**As of April 2, 2004, long-lived assetstotaled $275,312, which includes $263,899 held in the U.S. and $11,413 heldoutside of the U.S.  As of December 31,2003, long-lived assets totaled $277,925, which includes $267,048 held in theU.S. and $10,877 held outside of the U.S.**

 

**Note 7.**   ForwardContracts

** **

Weuse forward contracts to reduce our foreign currency exposure related to thenet cash flows from our international operations. The majority of thesecontracts are short-term contracts (three months or less) and aremarked-to-market each quarter and included in trade payables, with theoffsetting gain or loss included in other income (expense) in the accompanyingconsolidated statements of operations. As of April 2, 2004 and December 31,2003, we had no open forward contracts.

** **

**Note 8.**   Acquisition ofCrystal Link Technologies

** **

**On January 6, 2004, we acquired the outstandingcommon shares of Crystal Link Technologies (“Crystal Link”) for approximately$6,652 in cash and common stock, plus the assumption of liabilities and paymentof certain acquisition costs.  Thepurchase agreement calls for additional potential earn-out payments of up to$5,000 based on future technical enhancements and achievement of certain salesgoals.  The results of Crystal Link’soperations have been included in the consolidated financial statements sincethe date of acquisition.  Crystal Link,headquartered in Escondido, CA, has developed wireless technology for KVMswitching and extension products, which is incorporated into our LongViewWireless product.**

 

Theacquisition was recorded under the purchase method of accounting, and thepurchase price was allocated based on the fair value of the assets acquired andliabilities assumed. In accordance with generally accepted accountingprinciples, purchased research and development costs allocated topatent-pending technology were capitalized and will be amortized over therespective estimated useful lives.  Theremaining amounts of purchased research and development were expensed upon theclosing of the transaction.  The valuationresulted in an excess of acquired nets assets over cost, or negative goodwillin the amount of $143. As prescribed under FAS 141, *Business Combinations*, thenegative goodwill was recorded as a contingent liability due to the potentialfuture earn-outs.  Goodwill will likelybe recorded if the additional earn-outs mentioned previously are achieved.  If the earn-outs are not achieved, thenegative goodwill will be allocated across all acquired assets, includingacquired research and development expense. In the event goodwill is recorded due to the earn-out payments, thengoodwill will not be amortized but will be included in our annual review ofgoodwill for impairment.  A summary ofthe total purchase consideration is as follows:

 
| Cash paid for outstanding shares                     |   | $      | 3,152  |   |
|------------------------------------------------------|--------|--------|--------|--------|
| Value of common stock issued for  outstanding shares |   | 3,500  |   |
| Acquisition costs                                    |   | 163    |   |
|                                                 |   |   |   |
| Total purchase consideration                         |   | $      | 6,815  |   |

 

8

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Thepurchase consideration was allocated, on a preliminary basis, to the estimatedfair values of the assets acquired and liabilities assumed, as follows:

 

|                                |   | **Purchase  Price  Allocation** |   | **Amortization  Period** |    |
|-------------------------------------|--------|---------------------------------|--------|--------------------------|---------|
| Tangible assets                     |   | $                               | 295    |                     | Various |   |
| In-process research and development |   | 6,490                           |   | —                   |    |
| Developed technology                |   | 520                             |   | 3 years                  |    |
| Non-compete agreements              |   | 500                             |   | 3 years                  |    |
| International marketing rights      |   | 1,250                           |   | 3 years                  |    |
| Contingent consideration liability  |   | (143                            | )      | —                   |    |
| Assumed liabilities                 |   | (2,097                          | )      | —                   |    |
|                                |   |                            |   |                     |    |
|                                |   | $                               | 6,815  |                     |    |   |

 

The acquisition was funded through availablecash and by the issuance of 107 shares of Avocent common stock.  The common stock, valued at approximately$3,500, was recorded as non-cash consideration for the acquisition of CrystalLink. On the closing of the Crystal Link transaction, we acquired $4 in cashheld by Crystal Link.

** **

The fair value of all of the in-processresearch and development (“IPR&D”) received in the acquisition wasdetermined using a form of the discounted cash flow method known as themulti-period excess earnings method. These amounts were deemed to be for particular research and developmentprojects that have no alternative future uses and were therefore expensedrather than capitalized at the time of purchase.

 

Crystal Link’s in-process research anddevelopment activities consisted of a second generation of the KVM wirelessextender with significant enhancements to the developed KVM wireless extenderproduct and the development of a wireless KVM switch and an embedded KVM switchsolution.  The status of these projectsvaried from 10% complete to 60% complete. It is anticipated that each of these products will be completed during2004, however, the projects were still in process at the end of the firstquarter 2004.

 

The new generations of products underdevelopment are projected to sell through sales channels and to customers thatare substantially the same as current and historical sales channels andcustomers. Pricing and margins will not differ significantly from historicalpricing and margins.  Revenue for theprojects under development was projected through 2013, with 100% of CrystalLink’s forecasted revenue in 2005 coming from projects currently indevelopment.   Net income attributableto IPR&D was calculated by applying Crystal Link’s projected gross,operating and net profit margins to IPR&D revenue, while consideringAvocent’s historical results and industry prospects.

 

Revenue growth related to the in-processresearch and development is embodied in products to be launched in late 2004.These products have estimated economic lives ranging from approximately eightto ten years. The product life cycle is characterized by a gradual 3 to 4 yearramp up period, followed by a 1 to 2 year plateau, followed by a 3 to 4 yeardecline period. Operating margins are projected to be below overall historicalAvocent margins in the early years, but will improve for these products overtheir lives as the products mature, as costs are designed out of the products,and as sales volumes increase. The discount rate used to value IPR&D was20%.

 

**ProForma Financial Information -**The following unauditedpro forma summary combines the results of operations of Avocent, Soronti andCrystal Link as if the acquisitions had occurred prior to January 1, 2003.  Certain adjustments have been made toreflect the impact of the purchase transactions. These pro forma results havebeen prepared for comparative purposes only and do not purport to be indicativeof what would have occurred had the acquisitions been made at the beginning of2003, or of results which may occur in the future.

 

9

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|                     |   | **Three  Months Ended,** |   |
|--------------------------|--------|--------------------------|--------|
|                     |   | **April 2,  2004**       |   | **March 28,  2003** |   |
|                     |   |                     |   |   |   |
| Net sales                |   | $                        | 86,085 |   | $ | 71,461 |   |
| Net income               |   | $                        | 12,372 |   | $ | 7,335 |   |
| Income per basic share   |   | $                        | 0.26   |   | $ | 0.16 |   |
| Income per diluted share |   | $                        | 0.25   |   | $ | 0.16 |   |

 

**Note 9.**   Goodwill andOther Intangible Assets

** **

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

** **

|                            |   | **April 2,  2004**           |   | **December  31, 2003**        |   |
|---------------------------------|--------|------------------------------|--------|-------------------------------|--------|
|                            |   | **Gross  Carrying  Amounts** |   | **Accumulated  Amortization** |   | **Gross  Carrying  Amounts** |   | **Accumulated  Amortization** |   |
| Developed technology            |   | $                            | 66,760 |                          | $      | 49,143 |   | $ | 66,240 |   | $ | 45,824 |   |
| Patents and trademarks          |   | 17,797                       |   | 10,542                        |   | 17,657 |   | 9,566 |   |
| Customer base and certification |   | 1,613                        |   | 851                           |   | 1,613 |   | 717 |   |
| Non-compete agreements          |   | 3,773                        |   | 1,769                         |   | 3,273 |   | 1,455 |   |
| Other                           |   | 1,918                        |   | 160                           |   | 768 |   | 100 |   |
|                            |   | $                            | 91,861 |                          | $      | 62,465 |   | $ | 89,551 |   | $ | 57,662 |   |

** **

**For the three months ended April 2, 2004and March 28, 2003, amortization expense for other intangible assets was $4,762and $6,156 , respectively.  Theapproximate estimated annual amortization for other intangibles is as follows:**

** **

| **Years ending December 31:** |   |   |   |
|-------------------------------|--------|--------|--------|
| 2004                          |   | $      | 18,670 |   |
| 2005                          |   | $      | 11,870 |   |
| 2006                          |   | $      | 3,370  |   |
| 2007                          |   | $      | 289    |   |

 

**In accordance with Statement ofFinancial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*, we willtest goodwill at least annually for impairment.  Unless conditions warrant earlier review, we perform the annualimpairment test in the fourth quarter of each year.**

 

**There were no additions or deletions tothe carrying amount of goodwill for the three months ended April 2, 2004 (seenote 8 for a discussion of contingent consideration).**

 

**Note 10.  ProductWarranties**

 

The activity within the liability for warranty returns for the quarterended April 2, 2004:

 
|                                                      |   | **2004** |   |
|-----------------------------------------------------------|--------|----------|--------|
|                                                      |   |     |   |
| Balance, January 1, 2004                                  |   | $        | 2,652  |   |
|                                                      |   |     |   |
| Accruals for product warranties issued  during the period |   | 69       |   |
| Changes in estimates related to  pre-existing warranties  |   | (162     | )      |
| Settlements made during the period                        |   | (69      | )      |
|                                                      |   |     |   |
| Balance, April 2, 2004                                    |   | $        | 2,490  |   |

 

10

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Deferred revenue related to our extendedwarranty program was $1,204 for the three months ended April 2, 2004.  We recorded earned revenue from theamortization of deferred revenue related to extended warranties of $106 for thethree months ended April 2, 2004.  Inaddition, we recorded new extended warranties of $264 during the three monthsended April 2, 2004.

 

Note 11.  Effective Tax Rate

 

The effectivetax rate in the first quarter of 2004 was approximately 16.4% compared to aneffective tax rate of approximately 24.4% in the first quarter of 2003.  The provision for income taxes wasapproximately $1.7 million for the first quarter of 2004, compared to $2.6million in the first quarter of 2003. The reduction in provision for income taxes was primarily the result ofthe $2.6 million tax benefit related to the $6.5 million write-off of acquiredresearch and development expense recorded at the acquisition of Crystal Link.Partially offsetting the impact of the tax benefit of the write-off was the mixof our pre-tax profit among our U.S. and international companies as the pre-taxprofit attributable to the US operations was higher than that experienced inrecent quarters.

 

Note 12.  Patent Dispute

 

In May 2001, wefiled a complaint for patent infringement in the United States District Courtfor the Southern District of New York against Raritan Computer Inc. The Raritancomplaint sought injunctive relief, damages, attorneys’ fees and costs underthree of our patents.  After a seven daybench trial in New York in January of 2002, U.S. District Judge MiltonPollack found that there was no infringement of these patents by Raritan andordered that judgment be entered in favor of Raritan.

 

In April 2003, the United States Court ofAppeals for the Federal Circuit issued its ruling on our appeal in this patentlitigation.  The Court of Appeals ruledin our favor by vacating the non-infringement decision of the District Courtfor the Southern District of New York and remanding the case for further proceedingsconsistent with the Court of Appeals’ opinion.

 

In September2003, Raritan petitioned the United States Supreme Court for a Writ ofCertiorari to review the Court of Appeals decision.  The Supreme Court declined to review Raritan’s petition in December2003, and the case is now back before the United States District Court for theSouthern District of New York.

 

In October2003, we filed a complaint for patent infringement in the United StatesDistrict Court for the Northern District of Alabama against ClearCubeTechnology, Inc.  The ClearCubecomplaint seeks injunctive relief, damages, attorneys’ fees, and costs underthree of our patents. ClearCube has filed counterclaims allegingnon-infringement, unenforceability, invalidity, and misuse of the Avocentpatents.

 

11

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**Note 13.  StockBased Compensation**

** **

**We apply Accounting Principles BoardOpinion No. 25, *Accounting for Stock Issued to Employees*, and relatedInterpretations in accounting for our stock plans. Had compensation cost forour stock-based compensation plans been determined based on the fair value atthe grant dates for awards under those plans consistent with the methodprescribed in SFAS No. 123, *Accounting for Stock-Based Compensation*,our net income and earnings per share would have been reduced to the pro formaamounts indicated below.**

 
|                                                                                                                                    |   | **2004** |   | **2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Net income   — as reported                                                                                                    |   | $        | 8,543  |     | $      | 8,167 |   |
| Add: Stock-based employee compensation  expense included in reported net income, net of related tax effects                             |   | 677      |   | 1,501    |   |
| Deduct: Total stock based employee  compensation expense determined under fair value method for all awards, net  of related tax effects |   | 7,060    |   | 7,539    |   |
| Net income — pro forma                                                                                                             |   | $        | 2,160  |     | $      | 2,129 |   |
|                                                                                                                                    |   |     |   |     |   |
| Basic earnings per share — as reported                                                                                             |   | $        | 0.18   |     | $      | 0.18 |   |
| Basic earnings per share — pro forma                                                                                               |   | $        | 0.05   |     | $      | 0.05 |   |
| Diluted earnings per share — as reported                                                                                           |   | $        | 0.17   |     | $      | 0.17 |   |
| Diluted earnings per share — pro forma                                                                                             |   | $        | 0.04   |     | $      | 0.05 |   |

 

Thepro forma amounts reflected above are not representative of the effects onreported net income in future years because, in general, the options grantedtypically do not vest for several years and additional awards are made eachyear. The fair value of each option grant is estimated on the grant date usingthe Black-Scholes option-pricing model using the following weighted-averageassumptions:

 

 
|                    |   | **2004** |   | **2003** |   |
|-------------------------|--------|----------|--------|----------|--------|
| Dividend yield          |   | 0.0      | %      | 0.0      | %      |
| Expected life (years)   |   | 4.5      |   | 4.5      |   |
| Expected volatility     |   | 55.0     | %      | 60.0     | %      |
| Risk-free interest rate |   | 2.79     | %      | 2.69     | %      |

** **

**Note 14.  RecentlyIssued Accounting Standards**

 

**In January 2003, the FASB issued FIN 46*, Consolidation of Variable Interest Entities*.In December 2003, the FASB issued FIN 46R, which replaces FIN 46. FIN 46Rclarifies the application of Accounting Research Bulletin No. 51, *Consolidated Financial Statements*, tocertain entities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated support fromother parties.  FIN 46R is required to be applied by March 31, 2004 toentities not considered to be special-purpose entities. FIN 46R does notcurrently impact our financial statements.**

** **

**Note 15.  SubsequentEvent**

** **

On April 6,2004, we acquired the outstanding stock of OSA Technologies, Inc. (OSA) forcash and common stock of approximately $97,500, plus assumed liabilities of approximately $1,600, employeestock options of approximately $8,900 and acquisition costs of approximately$1,225.  OSA is headquartered in SanJose, California and has additional offices in Shanghai, China and Taipei,Taiwan. OSA has developed embedded manageability firmware and software using IntelligentPlatform Management Interface (IPMI) solutions.

 

We will recordthe acquisition under the purchase method of accounting in the second quarterof 2004, and we will allocate the purchase price based on the fair value of theassets acquired and liabilities assumed. In accordance with generally accepted

 

12

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accounting principles, purchased research anddevelopment costs allocated to patent-pending technology will be capitalizedand will be amortized over the respective estimated useful lives.  The remaining amounts of purchased researchand development will be expensed as of the closing of the transaction.  The goodwill recorded as a result of theacquisition will not be amortized but will be included in the Company’s annualreview of goodwill for impairment.  Asummary of the total estimated purchase consideration is as follows:

 
| Cash paid for outstanding shares                     |   | $      | 51,700  |   |
|------------------------------------------------------|--------|--------|---------|--------|
| Value of common stock issued for  outstanding shares |   | 45,800 |    |
| Value of vested and unvested options  assumed        |   | 8,900  |    |
| Acquisition costs                                    |   | 1,225  |    |
|                                                 |   |   |    |
| Total purchase consideration                         |   | $      | 107,625 |   |

 

We funded the acquisition through availablecash and the issuance of 1,229 shares of Avocent common stock.  We expect to complete the preliminarypurchase allocation during the second quarter of 2004.

 

13

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

 

*THEINFORMATION IN THIS ITEM 2 “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTSRELATING TO OUR FUTURE BUSINESS PROSPECTS AND ECONOMIC CONDITIONS IN GENERAL,STATEMENTS REGARDING OUR ENGINEERING AND DESIGN ACTIVITIES, PRODUCTDEVELOPMENT, AND NEW PRODUCT INTRODUCTIONS, STATEMENTS RELATING TO FUTUREPRODUCT DEMAND AND OUR FUTURE SALES, EARNINGS, GROSS PROFIT, INCOME, ANDEXPENSES, STATEMENTS REGARDING INTERNATIONAL SALES, STATEMENTS REGARDING THEINTEGRATION OF OUR ACQUISTIONS, ACQUISITION ACCOUNTING, ACQUISITION ANDTRANSACTION COSTS AND ADJUSTMENTS, STATEMENTS ABOUT THE RATIO OF SALES AMONGOUR DISTRIBUTION CHANNELS, STATEMENTS REGARDING FUTURE INVENTORY LEVELS, ANDSTATEMENTS ABOUT THE TIMING, IMPLEMENTATION, AND BENEFITS OF OUR NEW ERP SYSTEMAND STATEMENTS RELATING TO ANTICIPATED CAPITAL NEEDS AND USES.*

 

*THESEFORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THATCOULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED INTHE FORWARD-LOOKING STATEMENTS.  FACTORSTHAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THE RISKSASSOCIATED WITH GENERAL ECONOMIC CONDITIONS, RISKS ATTRIBUTABLE TO FUTUREPRODUCT DEMAND, SALES, AND EXPENSES, RISKS ASSOCIATED WITH PRODUCT DESIGNEFFORTS, RISKS ASSOCIATED WITH RELIANCE ON A LIMITED NUMBER OF COMPONENTSUPPLIERS AND SINGLE SOURCE COMPONENTS, THE LOSS OF ONE OF OUR OEM CUSTOMERS, AREDUCTION OR FLUCTUATIONS IN SALES OF OUR OEM OR BRANDED PRODUCTS, INTENSECOMPETITION AND NEW PRODUCTS AND TECHNOLOGIES FROM EXISTING AND NEWCOMPETITORS, RISKS RELATED TO PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS,FLUCTUATIONS IN FOREIGN CURRENCIES, RISKS RELATED TO ACQUISITIONS AND THEIRSUBSEQUENT INTEGRATION, AND OTHER RISKS DETAILED IN OUR ANNUAL REPORT ON FORM10-K, WHICH WAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 12,2004.*

** **

**Overview**

 

Avocent Corporation was formed as a result of the merger transaction inJuly 2000 between Apex Inc. and Cybex Computer Products Corporation, which wasaccounted for as an acquisition of Cybex by Apex.  Our acquisitions include Equinox Systems Inc. in January 2001, 2CComputing, Inc. in August 2002, Soronti, Inc. in November 2003, and CrystalLink Technologies in January 2004. In April 2004 we closed the acquisition ofOSA Technologies, Inc.  OSA is a leadingprovider of embedded manageability firmware and software that meets theIntelligent Platform Management Interface (“IPMI”) specifications.

 

We design, manufacture, sell, and license analog and digital KVM(keyboard, video and mouse) switching systems, serial connectivity devices,extension, wireless extension, and remote access products, IPMI firmware andsoftware, and related technologies for the computer industry. Data centermanagers and network administrators have increasingly complex and growingserver populations, and our analog, digital, and serial switching solutions, aswell as our IPMI, extension and remote access products and technologies, helpthem manage multiple servers and serially controlled devices from a singlelocal or remote console consisting of a keyboard, video monitor, andmouse.  Specifically, our products canprovide significant cost reductions including lower initial investment, reducedutility costs, and space savings, as well as more efficient technical supportcapabilities.

 

We provide “plug and play” switching systems for many networkadministration, management, and storage problems faced by corporate customers,data centers, and server farms. Our switching solutions include products andtechnologies sold or licensed under the Avocent, Apex, Cybex, Equinox brands,including our *AMX*TM, *AutoViewTM, DS SeriesTM, SwitchView®,OutLook®, LongViewTM,*and*XP®4000 Series* products.Our switching systems and solutions help facilities managers and networkadministrators access multiple servers and serially controlled devices from oneor more centralized or remote consoles, consolidate hardware requirements, andprovide direct hardwired connections between the switch and the attachedservers to facilitate access to those servers, even when the network is down.Our Equinox branded products add high-performance, reliable, and affordableserver-based products for serial and dial-up access applications.  The Equinox *SuperSerialTM* product lineprovides serial communications for security, commercial point-of-sale, processcontrol, industrial automation, data collection, remote access, fax servers,Internet access, and custom applications. Our Digital Desktops product lineincludes the *CstationTM* product. Initial applications for Cstation include financial trading floors wherespace is at a premium, industrial plant control environments that benefit fromremote computers due to harsh or unsecured environments, and governmentinstallations that require high security afforded through the remote locationof the computer and hard disk. In late 2003, we introduced *LongView*TM*Wireless,*whichallows for wireless control of monitors, keyboards, mice, and audio devices ona computer up to 100 feet away.

 

The combination of OSA’s technology and expertise with our currentembedded KVM solutions builds on our strategy of

 

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providing a common management interface to enable automation of themonitoring, configuration, and provisioning of server room devices.  We believe these embedded technologies willextend Avocent’s growth opportunities beyond our traditional KVM products.

 

A substantial portion of our revenue is derived from sales to a limitednumber of OEMs who purchase our switching systems on a private-label or brandedbasis for integration and sale with their own products, sales through ourreseller and distributor network, and sales to a limited number of directcustomers. Sales to our OEM customers accounted for 41% of sales in the firstquarter of 2004 and 47% of sales in the first quarter of 2003.  Sales to our branded customers accounted for59% of sales in the first quarter of 2004 and 53% of sales in the first quarterof 2003. We do not have contracts with many of our OEM and branded customers,and in general, they are obligated to purchase products from us only pursuantto binding purchase orders.  The lossof, or material decline in orders from, our OEM or certain branded customerswould have a material adverse effect on our business, financial condition,results of operations, and cash flows. Our top five customers include both OEM and branded customers, andaccounted for 63% of sales in the first quarter of 2004 and 2003.

 

We sell products to dealers, end-users, and OEMs in the United States,Canada, Europe, and Asia as well as in other foreign markets.  Sales within the United States accounted forapproximately 59% of first quarter sales in both 2004 and 2003.  Sales outside of the United States accountedfor 41% of first quarter sales in both 2004 and 2003.  Sales to customers in the Netherlands, including the Europeandistribution facility for one of our OEM customers, accounted for 10% of oursales in the first quarter of 2004. Sales to customers in the United Kingdom, including the Europeandistribution facility for one of our OEM customers, accounted for 13% of oursales in the first quarter of 2003.  Noother country accounted for more than 10% of sales in the first quarter ofeither 2004 or 2003.

 

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

 

We continue to experience significant price competition in the marketfor all of our products, and we expect that pricing pressures will continue inthe future.  In addition, generaleconomic conditions continue to be unpredictable, and we expect our revenuegrowth rate to fluctuate in relation to economic conditions and IT relatedspending trends.  Depending on futuregeneral economic conditions and other factors, our revenue could decline in thefuture.

 

We implemented a new enterprise resource planning system in the fourthquarter of 2003 at our United States locations, and we plan to implement thesystem at our international locations during 2004. We have capitalized thedevelopment and implementation costs of the new system to date and have begundepreciating the costs for the system used in the United States.  As of April 2, 2004, $9.9 million had beencapitalized for this new system and $6.9 million had been placed in service forlocations in the United States. We expect the new system to provide manybenefits, including more detailed information to improve the ways we manageinventory, customer relationships, and operating expenses on a more timelybasis.

 

Many of our executive officers and directors are vested in significantamounts of options to purchase shares of our common stock and continue to vestin additional shares on a regular basis. These officers and directors have informed us that they have sold, andmay sell additional, shares of our common stock to provide liquidity and diversifytheir portfolios.

 

15

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Results of Operations

 

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

 
|                                                   |   | **Three  Months Ended** |   |
|--------------------------------------------------------|--------|-------------------------|--------|
|                                                   |   | **April 2,  2004**      |   | **March 28,  2003** |   |
| Net sales                                              |   | 100.0                   | %      | 100.0 | % |
| Cost of sales                                          |   | 41.8                    |   | 44.4 |   |
| Gross profit                                           |   | 58.2                    |   | 55.6 |   |
| Operating expenses:                                    |   |                    |   |   |   |
| Research and development expenses                      |   | 11.0                    |   | 9.6 |   |
| Acquired in-process research and  development expenses |   | 7.5                     |   | — |   |
| Selling, general and administrative  expenses          |   | 23.6                    |   | 23.4 |   |
| Amortization of intangible assets                      |   | 5.5                     |   | 8.6 |   |
| Total operating expenses                               |   | 47.6                    |   | 41.6 |   |
|                                                   |   |                    |   |   |   |
| Income from operations                                 |   | 10.6                    |   | 14.0 |   |
|                                                   |   |                    |   |   |   |
| Net investment income                                  |   | 1.5                     |   | 1.7 |   |
| Net realized investment losses                         |   | (0.1                    | )      | (0.1 | ) |
| Other expense, net                                     |   | (0.1                    | )      | (0.4 | ) |
|                                                   |   |                    |   |   |   |
| Loss before provision for income taxes                 |   | 11.9                    |   | 15.2 |   |
|                                                   |   |                    |   |   |   |
| Provision for income taxes                             |   | 2.0                     |   | 3.7 |   |
|                                                   |   |                    |   |   |   |
| Net income                                             |   | 9.9                     | %      | 11.5 | % |

 

*Net sales.* Our net sales consist of sales of keyboard, video, and mouse consoleswitching systems, digital connectivity solutions, serial connectivity devices,wireless extension products, and extension and remote access solutions. Netsales increased 21% to $86.1 million for the first quarter of 2004 from $71.2 millionfor the first quarter of 2003.  Theincrease in sales resulted primarily from the strength of our U.S. brandedsales in the first quarter of 2004 as compared to the first quarter of 2003.  Overall, branded sales grew 33% from $38.0million in the first quarter of 2003 to $50.7 million in the first quarter of2004.  As a percentage of sales, brandedrevenue accounted for 59% of sales in the first quarter of 2004 and 53% ofrevenue in the first quarter of 2003. OEM sales grew 7% from $33.2 million in the first quarter of 2003 to$35.4 million in the first quarter of 2004. OEM sales were 41% of sales for the first quarter of 2004, compared to47% of sales for the first quarter of 2003. Sales of our digital products continued to increase and represented 44%of our revenue in the first quarter of 2004 as compared to 35% of our revenuein the first quarter of 2003. Additionally, our Equinox product line accounted for 8% of first quarter2004 sales as compared to 5% of sales in the first quarter of 2003.  Traditionally, our Equinox branded productsaccount for 4% to 5% of revenue, and revenues for this product line areexpected to return to traditional levels for the remainder of 2004.  Sales of our Secure SwitchView product, soldprimarily to government agencies, contributed to the growth in brandedsales.  Overall, our SwitchView productsaccounted for just over 9% of our first quarter 2004 sales, compared to 7% inthe first quarter of 2003.

 

We experienced an increase in sales bothwithin the United States and internationally. Sales within the United Statesincreased 21% to 51.2 million in the first quarter of 2004 from $42.3 millionin the first quarter of 2003. International sales increased 21% as well, to $34.9 million in the firstquarter of 2004 from $28.9 million in the first quarter of 2003.  Sales within the United States were 59% ofsales for the first quarter of both 2004 and 2003, and international sales were41% of sales for the first quarter of both 2004 and 2003.

 

Revenue for the first quarter of 2004 washigher than anticipated, and accordingly, our outlook for 2004 remainspositive.  We have seen mixed economicindicators during the past quarter, but believe the overall tone of businessremains positive.  Product introductionscurrently planned for the remainder of the year, combined with expected revenuecontributions from our recently announced acquisitions, should allow us tocontinue our positive revenue growth trend for 2004.  We expect revenues to grow between 18% and 23% for 2004 as comparedto 2003.  For the second quarter of2004, we expect revenue to be in the $84 to $88 million range.

 

*Gross profit.* Gross profit may be affected bya variety of factors, including: the ratio of sales among our distributionchannels, as

 

16

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OEM sales have lower gross margins than our branded sales; absorptionof fixed 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 profit increased to 58.2% in the firstquarter 2004 as compared to 55.6% in the first quarter of 2003.  The primary reason for strong margins in2004 relates to the significant increase in mix of branded sales as compared toOEM sales, especially in the digital and the SwitchView product lines.Additionally, our AMX product line grew from 2.5% of sales in the first quarterof 2003 to 4.8% of sales in the first quarter of 2004.   These product lines have higher thanaverage margins.  Our engineering andoperations teams continue to work to lower product costs through productredesign to eliminate costly components and through negotiations with ourcontract manufacturers to reduce costs in our supply chain.

 

We expect gross margins to average between56% and 58% in the remaining quarters of 2004. However, for the second quarter of 2004 we expect margins to be flat toslightly down due to the expected higher mix of OEM sales. For the year, weexpect continued cost reductions from engineering redesigns and pricereductions from our contract manufacturers to help offset the adverse impactfrom competitive and customer pressures.

 

*Research and development expenses.*  Research and development expenses includecompensation for engineers, support personnel, outside contracted services andmaterials costs, and are expensed as they are incurred.  Research and development expenses were $9.4million, or 11.0% of net sales, in the first quarter of 2004 compared to $6.8million, or 9.6% of net sales, for the first quarter of 2003.  The increase in the amount spent on researchand development can be attributed to an increase in headcount, primarily as aresult of the Soronti purchase in November 2003 and the Crystal Linkacquisition in early 2004.  Otherfactors related to the increase include adding additional test labs andincreasing the amount spent for materials, certification, and testing ofproducts as we accelerate our product introductions.  We continue to invest heavily in new technologies such asembedded KVM, digital desktop extension, and wireless KVM solutions. We believethat the timely development of innovative products and enhancements to existingproducts is essential to maintaining our competitive position.

 

In the second quarter of 2004, we expectresearch and development expense to increase sequentially by $1.2 million to$1.4 million, primarily as the result of the added costs from the OSAacquisition.  For the remainder of theyear, we expect research and development expenses to continue to increase as apercentage of sales as our solutions become more royalty based and as wecontinue to add software content to our products.

 

*Acquired in-process research and development expense and otheracquisition costs.* Acquisition related expenses in 2004 are comprised solely of thenon-recurring write-off of $6.5 million of in-process research anddevelopment expense related to the acquisition of Crystal Link. We expect a chargefor acquired research and development expense in the second quarter of 2004related to our acquisition of OSA.

 

*Selling, general and administrative expenses.*  Selling, general and administrative expensesinclude personnel costs for administration, finance, information systems, humanresources, sales and marketing and general management, as well as some mergerand acquisition related expenses, rent, utilities, legal and accountingexpenses, bad debts, advertising, promotional material, trade show expenses andrelated travel costs.  Selling, generaland administrative expenses were $20.3 million, or 23.6% of net sales, for thefirst quarter of 2004 compared to $16.7 million, or 23.4% of net sales, for thefirst quarter of 2003.  The increase inselling, general and administrative expenses is primarily related to increasedheadcount.  We added 45 employees afterthe first quarter of 2003 as a result of the Soronti and Crystal Linkacquisitions and our continued expansion of our international salesinfrastructure.  We also increasedspending for training, advertising, and trade shows.  Other factors contributing to higher selling, general andadministrative expenses were higher depreciation related to the SAPimplementation, costs of compliance with the Sarbanes-Oxley Act of 2002, andhigher legal fees associated with protecting our intellectual property rights.

 

We expect our selling, general and administrative expenses to increasein the second quarter of 2004 by $1.1 to $1.3 million sequentially from thefirst quarter of 2004, primarily as a result of additional costs from the OSAacquisition.  We also expect to addresources to address embedded sales opportunities, and we expect patentlitigation expenses to increase in the second quarter of 2004.

 

*Amortization of intangible assets*.  Amortization of $4.8 million in 2004 iscomprised of the amortization of the identifiable intangible assets created asa result of the merger transaction between Apex and Cybex and the acquisitionsof Equinox, 2C, Soronti and Crystal Link. Amortization of $6.2 million in 2003 is comprised of the amortization ofthe identifiable intangible assets created as a result of the mergertransaction between Apex and Cybex and the acquisitions of Equinox and 2C.  The decrease in amortization expense relatesprimarily to completing amortization during 2003 of several significantintangible assets recorded on the merger of Apex and Cybex and the acquisitionof Equinox.

 

*Net investment income**.** *Net******investment incomeremained flat at $1.2 million in the first quarter of 2004 from the firstquarter of 2003.  Although we had morecash and investments in 2004 than in 2003, the increase in available funds didnot offset the decline in

 

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continued lower interest rates**. **Inaddition, in order to have funds available for the OSA acquisition, wemaintained a higher level of liquid investments, which yielded a lower rate ofreturn.

 

*Net realized investment losses. *Net realized investment losses remainedrelatively flat from $87,000 in the first quarter of 2003 to $64,000 in firstquarter of 2004.

 

*Other expense, net.*  Net other expense improved from an expense of $305,000 in thefirst quarter of 2003, to an expense of $50,000 in the first quarter of 2004.The improvement related primarily to foreign exchange losses of $294,000recorded in the first quarter of 2003 as compared to approximately $29,000recorded in the first quarter of 2004.

 

*Provision for income taxes.*  The provision for income taxes wasapproximately $1.7 million for the first quarter of 2004, compared to $2.6million in the first quarter of 2003. The effective tax rate in the first quarter of 2004 was approximately16.4% compared to an effective tax rate of approximately 24.4% in the firstquarter of 2003.  The reduction inprovision for income taxes was primarily the result of the $2.6 million taxbenefit related to the $6.5 million write-off of acquired research anddevelopment expense recorded at the acquisition of Crystal Link. Partiallyoffsetting the impact of the tax benefit of the write-off was the mix of ourpre-tax profit among our U.S. and international companies as the pre-tax profitattributable to the US operations was higher than that experienced in recentquarters.

 

*Net income.* Net income for the first quarter of 2004 was $8.5 million compared to$8.2 million for the first quarter of 2003, as a result of the above factors,including the increase in our revenues and our margins, offset by increases inselling, general and administrative charges, research and development expensesand the write-off of acquired research and development expense as a result ofthe Crystal Link acquisition.  Netincome as a percentage of sales for the first quarter of 2004 was 9.9%,compared to 11.5% for the first quarter of 2003.

 

Our expectations above for the remainder of 2004 reflect the expectedimpact of the OSA acquistion.  Weestimate that the transaction will reduce reported earnings per share for 2004by approximately $0.14 under generally accepted accounting principles.  This estimated GAAP amount is before ato-be-determined non-recurring charge for acquired in process research anddevelopment.  We expect the transactionwill be accretive to our earnings within two years based on current projectionsfor sales growth of embedded devices, firmware and software.

 

**Liquidityand Capital Resources**

 

As of April 2, 2004, our principal sources ofliquidity consisted of over $318 million in cash, cash equivalents, andinvestments.  We subsequently usedapproximately $52 million of our cash and investments to fund the acquisitionof OSA. We have no outstanding debt or available credit facilities as of thisfiling.

 

Our operating activities generated cash ofover $13 million in the first three months of 2004, compared to approximately$18 million in the first three months of 2003. The reduction in positive cash flow is the result of increases in bothinventories and in our accounts receivable. Inventories increased from $21.3 million at December 31, 2003 to $22.6million at April 2, 2004.  The increasein inventory was primarily the result of adding inventory in anticipation ofnew product introductions planned in the second quarter of 2004.  Our inventory turns for the quarter were6.3. We will continue to monitor our inventory closely as we have over the lastseveral years and work to increase our turns.  We experienced an increase in receivables as a result of the timing andvolume of sales in the first quarter of 2004. Additionally, our DSOs increased to 52 days, which was better than ourgoal of 60 days.  A decline in accruedcompensation also affected cash flow from operations for the first quarter of2004.

 

We implemented a new enterprise resource planning system in the fourthquarter of 2003 at our United States locations, and we plan to implement thesystem at our international locations during 2004. We have capitalized thecosts of the new system to date and have begun depreciating the costs for theportion of the system used in the United States.  As of April 2, 2004, $9.9 million had been capitalized for thisnew system and $6.9 million had been placed in service for our locations in theUnited States. We expect the total cost of the new system to be $11.0 to $12.2million.

 

In the ordinary course of our business, wemay at any point in time have a significant amount of contractual commitmentsnot yet recognized in our financial statements. These commitments relateprimarily to our need to schedule the purchase of inventories in advance of therelated forecasted sales to customers. We have longer lead times for theproducts we purchase from suppliers based in Asia than those for our U.S. basedand European suppliers. Our actual contractual commitments are typicallylimited to products needed for one to three months of forecasted sales. Theliabilities for these inventory purchases along with the related inventoryassets are typically recognized upon our receipt of the products. We also haveat any point in time a variety of short term contractual commitments for servicessuch as advertising, marketing, accounting, legal, and research and developmentactivities. The liabilities for these services and the related expenses aretypically recognized upon our receipt of the related services.  As of April 2, 2004, we had $22.0 million ofsuch commitments.  None of our expectedpurchase commitments required payment beyond the next year.

 

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 sales.

 

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**Investments**

 

Our investments consist of corporate bonds,municipal bonds, commercial paper, mortgage backed securities guaranteed byU.S. government agencies, and common stock. We classify our debt and equitysecurities as available-for-sale securities and report them at fair value, withunrealized gains and losses excluded from earnings and reported as a separatecomponent of stockholders’ equity. We periodically review our investmentportfolio for investments considered to have sustained an other-than-temporarydecline in value.   Upon review of ourinvestment portfolio as of April 2, 2004, no investments were considered tohave sustained an other-than-temporary decline, and no charge was recorded.

** **

**Certain Transactions**

** **

***Acquisitionof Crystal Link Technologies***

** **

On January 6, 2004, we acquired CrystalLink Technologies for an initial payment of cash and common stock ofapproximately $6.7 million, plus assumed liabilities of approximately $2.1million and acquisition costs of approximately $163,000. The purchase agreementcalls for possible additional earn-out payments of up to $5.0 million based onfuture technical enhancements and sales goals. Crystal Link, based in Escondido, California, has developed wirelesstechnology for KVM switching and extension products, which is incorporated intoour LongView Wireless product.

 

We recorded the acquisition under thepurchase method of accounting, and allocated the purchase price based on thefair value of the assets acquired and liabilities assumed. In accordance withgenerally accepted accounting principles, purchased research and developmentcosts allocated to patent-pending technology were capitalized and will beamortized over the respective estimated useful lives.  The remaining amounts of purchased research and development wereexpensed upon the closing of the transaction. The valuation resulted in an excess of acquired nets assets over cost,or negative goodwill of approximately $143,000. As prescribed under FAS 141, *BusinessCombinations*, the negative goodwill was recorded as a contingentliability due to the potential future earn-outs.  Goodwill will likely be recorded if the additional earn-outs mentionedpreviously are achieved.  If theearn-outs are not achieved, the negative goodwill will be allocated across allacquired assets, including acquired research and development expense.  In the event goodwill is recorded due to theearn-out payments, then goodwill will not be amortized but will be included inour annual review of goodwill for impairment.

** **

***Acquisition of OSA Technologies, Inc.***

 

On April 6, 2004, we acquired the outstandingstock of OSA Technologies, Inc. (OSA) for cash and common stock ofapproximately  $97.5 million, plusassumed liabilities of approximately $1.6 million, unvested employee stockoptions $8.9 million and acquisition costs of approximately $1.2 million.  OSA is headquartered in San Jose, Californiaand has additional offices in Shanghai, China and Taipei, Taiwan. OSA hasdeveloped embedded manageability firmware and software using IntelligentPlatform Management Interface solutions.

 

We will record the acquisition under thepurchase method of accounting in the second quarter of 2004 and will allocatethe purchase price based on the fair value of the assets acquired andliabilities assumed. In accordance with generally accepted accountingprinciples, purchased research and development costs allocated topatent-pending technology will be capitalized and will be amortized over therespective estimated useful lives.  Theremaining amounts of purchased research and development will be expensed as ofthe closing of the transaction.  Thegoodwill recorded as a result of the acquisition will not be amortized but willbe included in the Company’s annual review of goodwill for impairment.

 

**Critical AccountingPolicies**

 

We believe the following critical accounting policies affect the moresignificant judgments and estimates used in the preparation of our consolidatedfinancial statements:

 

•              We review customercontracts to determine if all of the requirements for revenue recognition havebeen met prior to recording revenues from sales transactions.  We generally record sales revenue upon shipmentof our products, net of any discounts, since we generally do not havesignificant post delivery obligations, the product price is fixed anddeterminable, collection of the resulting receivable is probable, and productreturns are reasonably estimable.  Wegenerally ship products upon receipt of a purchase order from a customer.  We record revenue in accordance with theapplicable terms of each respective customer contract.  Accordingly, revenue on products shipped FOBdestination is

 

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recorded when the customer takes possession of the goods, and revenueon products shipped FOB shipping point is recorded when the goods leave ourfacilities.  Shipping and handling feesare included in net sales, and the related costs are included in cost of salesin the accompanying consolidated statements of operations.

 

We accrue for sales returns as a reduction of sales and cost of salesbased on our experience from historical customer returns, which we believe providesa reasonable estimate of future returns. Our sales agreements generally include a one-month unconditional returnpolicy.  We also allow additional rightsof return to certain distributors, which generally extend the return period to90 days.  If actual future customerreturns are less favorable than those projected by management, additional salesreturn costs may be incurred.    Thereserve is included as a reduction in the carrying value of accounts receivablein the accompanying consolidated balance sheets.

 

Prior to extending credit to a new customer, we perform a detailedcredit review of the customer and establish credit limits based on the resultsof our credit review.  We reviewcollection experience periodically to determine if the customer’s payment termsand credit limits need to be revised. We maintain allowances for doubtful accounts for estimated lossesresulting from the inability of our customers to make required payments.  If the financial condition of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required.  If circumstances change with regard to individual receivablebalances that had previously been determined to be uncollectible (and for whicha specific reserve had been established), a reduction in our allowance fordoubtful accounts may be required.

 

We participate in cooperative advertising and market developmentprograms with certain distributors and OEMs. We use these programs to reimbursedistributors and OEMs for certain forms of advertising, and in general, allowdistributors and OEMs credits up to a specified percentage of net purchases.Our costs associated with these programs are estimated and accrued at the timeof sale, and are included in sales and marketing expenses in the accompanyingconsolidated statements of operations.

 

•              We carry ourinventory at the lower of cost or market, with cost being determined using thefirst-in, first-out method.  We usestandard costs for material, labor, and manufacturing overhead to value ourinventory.  We review and revise ourstandard costs on a quarterly basis. Therefore, our inventory costs approximate actual costs at the end ofeach reporting period.  We write down our inventory forestimated obsolescence or unmarketable inventory to the estimated market valuebased upon assumptions about future demand and market conditions.  If actual future demand or market conditionsare less favorable than those projected by management, additional inventorywrite-downs may be required.

 

•              We provide for theestimated cost of product warranties at the time revenue is recognized.  While we engage in extensive product qualityprograms and processes, including actively monitoring and evaluating the qualityof our component suppliers and contract manufacturers, our warranty obligationis affected by product failure rates, failure rates of purchased componentsintegrated into our products, material usage, and other rework costs incurredin correcting a product failure.  Shouldactual product failure rates, material usage, or other rework costs differ fromour estimates, revisions to our estimated warranty liability may be required.

 

•              We hold investmentsin various publicly traded debt securities, including mortgaged-backed andother asset-backed securities.  Werecord an investment impairment charge when we believe an investment hasexperienced a decline in value that is other than temporary.  Future adverse changes in market conditionsor poor operating results of underlying investments could result in losses oran inability to recover the carrying value of the investments that may not bereflected in an investments current carrying value, thereby possibly requiringan impairment charge in the future. There were no other-than-temporary impairment charges recorded againstinvestments in 2004 or 2003.

 

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

 

•              Effective January 1,2002, we adopted SFAS No. 142 and ceased amortizing goodwill.  Our initial test for goodwill impairment asof January 1, 2002 determined that no adjustment for impairment wasrequired.  Additionally, our

 

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annual test for goodwill impairment,performed in the fourth quarter of 2003, determined that no adjustment forimpairment was required.  Our testingindicated that the implied fair value of our goodwill exceeded its carryingvalue; accordingly, in accordance with SFAS 142, no further impairment analysiswas required.  If economic conditionsdeteriorate and indicators of impairment become present, an adjustment to thecarrying value of goodwill and other intangible assets may be required.

 

**•****             **We review long-lived assets forimpairment under the guidance prescribed by SFAS No. 144, *Accounting for the Impairment orDisposal of Long-Lived Assets*. We recognize impairment losses onlong-lived assets used in operations when indicators of impairment are presentand the undiscounted cash flows estimated to be generated by those assets areless than the assets’ carrying values. An impairment loss would be recognizedin the amount by which the recorded value of the asset exceeds the fair valueof the asset, measured by the quoted market price of an asset or an estimatebased on the best information available in the circumstances.  There were no such losses recognized during2004 or 2003.

 

**•****             **We account for income taxes using theasset and liability method. We provide for income taxes currently payable and,in addition, provide deferred income taxes for temporary differences betweenthe tax bases of assets and liabilities and their reported amounts in thefinancial statements and for known contingencies. Temporary differences relateprincipally to the allowance for doubtful accounts, allowance for salesreturns, liability for warranty claims, unrealized gain (loss) on investments,acquired intangible assets, accumulated depreciation, loss on write-down ofinvestments, and inventory reserves. Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to be realized.

 

**RecentlyIssued Accounting Standards**

 

In January 2003, the FASB issued FIN 46*,Consolidation of Variable Interest Entities*. In December 2003, theFASB issued FIN 46R, which replaces FIN 46. FIN 46R clarifies the applicationof Accounting Research Bulletin No. 51, *ConsolidatedFinancial Statements*, to certain entities in which equity investorsdo not have the characteristics of a controlling financial interest or do nothave sufficient equity at risk for the entity to finance its activities withoutadditional subordinated support from other parties.   FIN 46R is requiredto be applied by March 31, 2004 to entities not considered to bespecial-purpose entities. FIN 46R does not currently impact our financialstatements.

 

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**Item 3.**  **Quantitative and Qualitative Disclosures About MarketRisks.**

 

Our primary market risk is the potential lossarising from increases in interest rates, which could have an adverse impact onthe fair value of our investment securities. Our investment policy is to manageour investment portfolio to preserve principal and liquidity while maximizingthe return on our investment portfolio through the investment of availablefunds. We diversify our investment portfolio by investing in a variety ofhighly-rated investment-grade securities and through the use of differentinvestment managers. Our investment securities portfolio is primarily investedin securities with maturities (or interest rate resets) of two years or lesswith at least an investment grade rating to minimize interest rate and creditrisk as well as to provide for an immediate source of funds. Market risk,calculated as the potential change in fair value in our investment portfolioresulting from a hypothetical 10% change in interest rates, was not material atApril 2, 2004. We generally hold investment securities until maturity.

 

We also face foreign currency exchange raterisk to the extent that the value of certain foreign currencies relative to theU.S. dollar affects our financial results. Our international operations transact a portion of our business incurrencies other than the U.S. dollar, predominantly the euro, and changes inexchange rates may positively or negatively affect our revenues, gross margins,operating expenses, and retained earnings since these transactions are reportedby us in U.S. dollars.  We occasionallypurchase foreign currency forwards aimed at limiting the impact of currencyfluctuations.  These instruments provideonly limited protection against currency exchange risks, and there can be noassurance that such an approach will be successful, especially if a significantand sudden decline occurs in the value of local currencies. There were no suchinstruments outstanding as of April 2, 2004.

 

 

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

 

(a) *Evaluation of disclosurecontrols and procedures.*   Based on their evaluation as of April 2, 2004, our Chief ExecutiveOfficer and Chief Financial Officer have concluded that our disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934) are effective to ensure that informationrequired to be disclosed by us in reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission rules and forms.

 

(b) *Changes in internal control overfinancial reporting*.    Therewere no significant changes in our internal control over financial reporting orin other factors that could significantly affect these controls subsequent tothe date of their evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses. We are in the process ofimplementing a new ERP system, which we expect, when fully implemented, willenhance our internal control over financial reporting through the automationand standardization of certain controls and processes and will support ouranticipated future growth.

 

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### **PART II — OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

In May 2001, we filed acomplaint for patent infringement in the United States District Court for theSouthern District of New York against Raritan Computer Inc. The Raritancomplaint sought injunctive relief, damages, attorneys’ fees and costs underthree of our patents.  After a seven daybench trial in New York in January of 2002, U.S. District Judge MiltonPollack found that there was no infringement of these patents by Raritan andordered that judgment be entered in favor of Raritan.

 

In April 2003, the United States Court of Appeals for the FederalCircuit issued its ruling on our appeal in this patent litigation.  The Court of Appeals ruled in our favor byvacating the non-infringement decision of the District Court for the SouthernDistrict of New York and remanding the case for further proceedings consistentwith the Court of Appeals’ opinion.

 

In September 2003, Raritan petitioned theUnited States Supreme Court for a Writ of Certiorari to review the Court ofAppeals decision.  The Supreme Courtdeclined to review Raritan’s petition in December 2003, and the case is nowback before the United States District Court for the Southern District of NewYork.

 

In October 2003, we filed a complaint forpatent infringement in the United States District Court for the NorthernDistrict of Alabama against ClearCube Technology, Inc.  The ClearCube complaint seeks injunctive relief,damages, attorneys’ fees, and costs under three Avocent patents. ClearCube hasfiled counterclaims alleging non-infringement, unenforceability, invalidity,and misuse of the Avocent patents.

 

**Item2.  Changes in Securities and Use ofProceeds.**

 

On January 6, 2004, we issued an aggregate of 106,838 shares of ourcommon stock to the shareholders of Crystal Link in connection with ouracquisition of Crystal Link.  This saleof securities was exempt from registration under the Securities Act of 1933, asamended, pursuant to Rule 506 of Regulation D.  The resale of theseshares was filed on a registration statement on Form S-3 with theSecurities and Exchange Commission on April 12, 2004.  The registrationstatement has not been deemed effective and is currently under review by theCommission.

 

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

 

(a) Exhibits

 

10.33       Employment Agreement dated April 7, 2004,among OSA Technologies, Inc., Avocent Corporation, and Mark Lee

 

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

** **

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

** **

32.1         Certificationof the Chief Executive Officer and the Chief Financial Officer pursuant to 18U.S.C. Section 1350, as 

                adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b) Reports on Form 8-K

 

On January 9, 2004, we filed aReport on Form 8-K with the SEC regarding the public dissemination of apress release announcing that Avocent had completed the acquisition of CrystalLink Technologies.

 

On February 3, 2004, we filed aReport on Form 8-K with the SEC regarding the public dissemination of apress release announcing the financial results for our fourth quarter and yearended December 31, 2003.

 

On March 29, 2004, we filed aReport on Form 8-K with the SEC regarding the public dissemination of apress release announcing a definitive agreement whereby Avocent would acquireOSA Technologies, Inc.

 

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

 

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### **SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|   |         | AVOCENT CORPORATION                                 |   |
|--------|--------------|-----------------------------------------------------|--------|
|   |         | (Registrant)                                        |
|   |         |                                                |
|   |         |                                                |
| Date:  | May 12, 2004 | /s/ Douglas E. Pritchett                            |   |
|   |         | Douglas E. Pritchett                                |
|   |         | Senior Vice President of Finance, Chief Financial   |
|   |         | Officer and Treasurer (Principal Financial Officer) |

 

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