Item 1. Business.
THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS ANNUAL REPORT
THAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING
STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS RELATING TO AVOCENT’S
STRATEGY, BUSINESS PROSPECTS, AND FUTURE OPERATING RESULTS, PROSPECTS FOR
INCREASING OEM, BRANDED, AND CHANNEL SALES, BACKLOG, RECEIVABLES, COMPETITION,
NEW PRODUCT INTRODUCTIONS, DEVELOPMENT OF ADDITIONAL SUPPLIER RELATIONSHIPS,
DEVELOPMENT OF DISTRIBUTOR AND RESELLER CHANNELS, PRODUCT RETURNS AND WARRANTY
CLAIMS, ABILITY TO OBTAIN AND PROTECT PROPRIETARY RIGHTS, CUSTOMER SERVICE,
DEVELOPMENT OF INTERNATIONAL SALES, FUTURE INVENTORY LEVELS AND FUTURE
INVENTORY VALUATIONS, FUTURE RESEARCH AND DEVELOPMENT EXPENDITURES, FUTURE
SALES AND MARKETING EXPENSES, FUTURE GENERAL AND ADMINISTRATIVE EXPENSES, AND
FUTURE LIQUIDITY AND CAPITAL RESOURCES. ALL OF THESE FORWARD-LOOKING STATEMENTS
ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE OF THIS ANNUAL REPORT. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS ANNUAL
REPORT. THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT, AND
OTHER WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS MADE BY US FROM TIME TO TIME,
ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED UNDER THE CAPTION “FACTORS THAT MAY AFFECT FUTURE RESULTS.”
Overview
Avocent began operations in July 2000, by the
combination of the businesses of Apex Inc. and Cybex Computer Products
Corporation. As a result of this merger transaction, both Apex and Cybex are
now wholly-owned subsidiaries of Avocent.
We (meaning Avocent and its wholly-owned subsidiaries,
Apex, Cybex, Avocent International Ltd., and Equinox Systems Inc.)
design, manufacture, and sell analog and digital KVM (keyboard, video, and
mouse) switching systems, serial connectivity devices, extension and remote
access products, and display products for the computer industry. Our switching
and connectivity solutions provide IT managers with access and control of
multiple servers and network data centers from any location. Data center managers and network
administrators have increasingly complex and growing server populations, and
our analog, digital, and serial switching solutions, as well as our extension
and remote access products, help them manage multiple servers and serially
controlled devices from a single local or remote console consisting of a
keyboard, video monitor, and mouse. Our switching solutions provide multiple
users, each with a separate keyboard, video monitor, and mouse, with the
capability to control thousands of computers from any location, and eliminate
the need for individual keyboards, video monitors, and mice for the controlled
computers. Elimination of these peripheral devices can provide significant cost
reductions including lower initial investment, reduced utility costs, and space
savings, as well as more efficient technical support capabilities.
We provide plug and play switching systems for the
many network administration, management, and storage problems faced by
corporate customers, data centers, and server farms. Our Avocent, Apex, Cybex,
and Equinox branded switching products, including our DS Series™,
AutoView™, OutLook®, and
XP®4000 Series
products, help facilities managers and network administrators access multiple
servers from one or more centralized or remote consoles and consolidate
hardware requirements. Our systems
provide direct hardwired connections between the switch and the attached
servers to facilitate access to the servers, even when the network is down. In
addition, our switching systems are able to work with multi-platform server
environments. Our switching solutions allow users to control IBM-compatible and
Macintosh PCs, and Sun, Hewlett-Packard, IBM, Compaq, and Silicon Graphics
workstations. These products are particularly useful in networking environments
where multiple computers are dedicated as servers and in situations where multiple
computers need to be controlled from one location to facilitate network
management.
Our family of extension products allows users to
separate the keyboard, video monitor, and mouse up to 500 feet from the
computer. In addition, certain of our extension products allow multiple users
to share access to the same computer from different consoles. Our extension
products are particularly useful in congested work areas or where working
conditions may be hazardous to the function of the computer or the operator.
Our remote access products allow users to control servers from remote locations
using a standard modem, Internet, or network connection without the necessity
of remote access hardware or software on the computers or servers being
accessed. When used in conjunction with our switching products, our remote
access products permit users to control multiple attached computers remotely.
We also offer visual display products for high
information-content digital display solutions. Our SMARTGLAS™ technology offers
users working in time or mission critical environments simultaneous access to
large amounts of information. This technology permits the consolidation of
information from multiple sources to be displayed on single or multiple flat
panel displays, forming a tiled display solution, and has been adopted by stock
exchanges and trading companies globally.
We market and sell our products around the world to a
diversified group of original equipment manufacturers, or OEMs, dealers,
distributors, resellers, and end users, primarily through our inside and
outside sales and customer support staff, advertisements in trade publications,
and participation in major industry trade shows. A substantial portion of our
sales are to a limited number of server OEMs that purchase our switching
systems on a private-label and branded basis. We supply switching systems and
products to Compaq Computer Corporation, Dell Computer Corporation,
Hewlett-Packard Company, IBM, and Siemens under private-label and branded
arrangements. Our end-user branded sales customers in the United States for
2001 included AIG, Bank of America, Citicorp, Disney, DoubleClick, EMC, Exxon,
Ford, General Motors, Intel, Merrill Lynch, Microsoft, Nokia, Novell, Pfizer,
Prudential, and Wendy’s. Our international branded sales customers included
MetroRED (Brazil), CargoLifter (Germany), DaimlerChrysler (Germany), Dresner
Bank (Benelux), Hamburg Mannheimer (Germany), and Integra (France).
Apex, Avocent, AutoView, Cybex, DS1800, DSR, DS
Series, Equinox, KVM over IP, OutLook, and XP4000 are trademarks or registered
trademarks owned by us. This annual report also includes trademarks of other companies.
Industry Background
Information technology is critical to most business
operations as computers perform multiple and diverse functions throughout many
different types of organizations. Many corporations have decentralized
computing power while sharing technology resources and providing broad access
to enterprise data. This has resulted in the widespread adoption of distributed
network computing environments using a client/server architecture of
interconnected computers. The typical client/server installation consists of a
local area network, or LAN, with multiple centralized computers operating as
servers dedicated to performing specific functions for the many client
computers connected to the LAN and, in many cases, may include a wide-area network,
or WAN.
In addition, Internet service providers, or ISPs,
application service providers, or ASPs, data centers, and server farms have
grown as a result of increased individual and business demand for use of and
access to the Internet. This demand for Internet access has created additional
demand for large scale computer networks.
Corporate LANs, WANs, ISPs, ASPs, server farms, and
data centers all face significant network administration and space problems.
Facilities managers and network administrators, who may supervise hundreds or
thousands of servers and other networked devices, must identify and access
relevant servers and devices, add or delete users, add, change, or upgrade
applications, tune systems for better performance, and diagnose and correct
network failures. These servers are generally designed to operate as
stand-alone systems, each with its own console, and facilities managers and
network administrators must therefore deal with a large number of consoles,
whether centrally located or dispersed throughout the organization, when
performing administration and management tasks.
Information technology resources are more critical to
organizations. Accordingly, constant availability is crucial to the operation
of many businesses. The time that a corporation, ISP, ASP, data center, server
farm, or network is down or degraded can cause significant inconvenience, loss
of productivity, and financial loss. Because diagnosis and correction of abnormal
network behavior often requires the support personnel to physically access each
affected server through its own console, quick and efficient fault management
can be difficult, especially when there are a large number of dispersed servers
involved. In addition, when a network fails, the ability of a facilities
manager or network administrator to quickly and efficiently diagnose and
correct the problem is often hampered by the inability to access the software
tools that reside on the network and that are normally used to manage network
failures.
In addition to these administration and management
problems, as organizations grow and their computing needs increase the number
of servers, consoles, and other peripherals grows. Without efficient storage
and configuration, network hardware consumes substantial and often expensive
floor space, creates clutter that hampers network administration and
management, and increases the risk of physical damage to expensive hardware.
The space management solutions available to facilities managers and network
administrators have generally consisted of racks or cabinets designed to house
only one type of server, and most have not been technically designed for ease
of access. Organizations with distributed, heterogeneous client/server networks
have often been left with no customized solution.
Products
We provide a variety of solutions to many of the
network administration, management, and storage problems faced by facilities
managers and network administrators responsible for monitoring and servicing
network installations:
• Our DS Series™
digitizes keyboard, video, and mouse information and compresses and transports
the information in packets over traditional network connections using only a
fraction of the bandwidth required by other products and optimizing performance
for busy data centers. Our DS1800™ switching solution is a digital
console connection that allows facilities managers and network administrators
access to servers utilizing standard networking infrastructure and our KVM OVER
IP™ technology. Our DSR™
switches, the latest in the DS Series,
combine analog and digital connections in one switch and have an easy-to-use
Windows interface. Our DS Series products provide
access and control of servers as well as serial devices in the network
operations center or from any location in the world using TCP/IP connectivity.
• Our high-end XP®4000 Series,
which includes the XP®4040, the XP®4080, and the XP®4400,
provides multiple users, each utilizing one console, with the capability to
configure, monitor, and control thousands of interconnected computers and
network servers located up to 500 feet from the control unit. The XP4000
Series can also be used to control terminals, routers, hubs, and
other equipment. The XP4000 Series is hot-pluggable and thus
can be reconfigured while in operation without disruption of the operation of
the switch or the attached computers or servers.
• Our AutoView™
four and eight port matrix switches are designed to allow two users access to
up to 64 servers. When combined with our LongView® product receiver, the second
user can be located up to 500 feet from the AutoView 200. Additionally, the AutoView 400™
eight, 16, and 24 port matrix KVM switches allow two users to access 64 servers
and support Sun, USB, and PC based servers. Our AutoView™ Commander™
product adds computer selection through an optional on-screen menu system
and adds hot-pluggable operations to the AutoBoot™
technology, which allows support personnel to automatically boot all connected
servers after a power failure or other problem without operator intervention.
• Our OutLook®
switches are designed for small-to-medium network configurations and provide
ease-of-use, reliability, and server density. Our OutLook switches allow one,
two, or four users to access heterogeneous server populations that use
different platforms, such as Intel, Macintosh, IBM RS 6000, Hewlett-Packard
9000, DEC Alpha and Sun Sparc, and different operating systems, such as Windows
NT, Unix, NetWare, and O/S 2, and allow information technology professionals to
organize, access, maintain, and control banks of servers from a single console
or multiple consoles. Multiple OutLook switches can be integrated to
provide centralized control of up to 256 servers. OutLook switches offer
extensive functionality, including programmable naming, scanning, security, and
system broadcast features. With our proprietary OSCAR® interface, OutLook
switches allow users to select and manage servers using an intuitive,
information-rich menu.
• Our SwitchView®
two and four port switches are designed to switch KVM signals among up to 4
computers. Our SwitchView products are our first products designed for mass
marketing. Our SwitchView OSD product is an eight port switch
designed for small and medium-sized businesses with an on-screen display. Our SwitchViewMP is a four port switch that
provides connectivity to Intel-based, Sun, and USB machines without the need
for expensive adapters or converters.
Our SwitchViewSC is
designed to provide secure access to up four computers but to make it
impossible to transfer data between the connected computers, an important
factor for governmental agencies, corporate headquarters, or military offices
that need access to both secure and unsecure networks.
• Our extension
products provide system design flexibility by allowing customers to locate
keyboards, video monitors, and mice up to 500 feet away from a computer or
server. Our LongView®
product allows control of servers from distances of up to 500 feet using a
single Category 5 UTP cable. The LongView product features AutoTuning
(patent pending), which automatically configures systems without requiring user
intervention. Our LongView® Companion® product enables a second
workstation to be located near a computer or server for convenient system
maintenance. These products are particularly useful in providing access to
computers or servers in harsh environments such as manufacturing plants where
it is not desirable to locate them on the plant floor.
• Our SMARTGLAS®
technology offers users working in time or mission critical environments
simultaneous access to large amounts of information. This technology permits
the consolidation of information from multiple sources to be displayed on a
single or multiple flat panel display, forming a tiled display solution. Our SMARTGLAS products
include an 18-inch desktop flat panel display and our SMARTGLAS multi-tile
solution that increases the amount of viewable information, the flexibility and
format of the information on the desktop and the consequent value of the
information to the user.
• Our Equinox
branded products add high-performance, reliable, and affordable server-based
products for serial and dial access applications. The Equinox SuperSerial
product line provides serial communications for security, commercial
point-of-sale, process control, industrial automation, data collection, remote
access, fax servers, Internet access, and custom applications.
The products described above are all part of our
connectivity solutions, and we have no other class of products that accounts
for 10% or more of our net sales.
Sales and Marketing
We market and sell our products through our own sales
force and various distribution channels, including OEM and a variety of
distributor and reseller arrangements. We market our products primarily through
direct customer sales calls, advertisements in trade publications, online
sponsorships, participation in major industry trade shows, promotions with
distributors and resellers, direct marketing, telemarketing, publicity
programs, and through our website. We also devote a substantial portion of our
marketing efforts to developing, monitoring, and enhancing our relationships
with our network of OEMs, independent dealers, distributors, resellers, and end
users. Our sales personnel are supported by our
engineers and our customer service representatives who provide
technical support and advice to customers. As of December 31, 2001, we
employed 212 people in sales, marketing, and customer support.
We currently sell various switching products to Compaq,
Dell, Hewlett-Packard, IBM, and Siemens pursuant to private-label and branded
arrangements. These OEM customers integrate and sell our switches with their
own products, including network servers. We devote significant sales and
customer service resources to our OEM accounts. We are continuing to leverage
our significant experience in working with our OEM and other server
manufacturer customers to enter into new relationships with other manufacturers
of servers in the United States, Europe, and Asia. We believe that the
architecture, quality, and reliability of our products, together with our
commitment to customer service, are attractive to server manufacturers.
We have relationships with a variety of distributors
and resellers, including Tech Data, Ingram Micro, Dakota, Getronics, QDS,
Shanghai Aera, Digital First, and Blue Ridge, value added resellers, or VARs,
and systems integrators, for the distribution and sale of Avocent, Apex, Cybex,
and Equinox branded products in the United States, Europe, Asia, and elsewhere.
We devote resources to educating our distributors and resellers about the
benefits of our products and training them in the proper installation and
support of our products. We will continue devoting additional resources to
increase these branded sales, and we will pursue additional relationships with
distributors and resellers, both domestically and internationally, who have the
technical capability and market presence to assist end-user customers in
developing network space management, access, and control solutions to meet
their particular needs. Our future success will depend in part on our ability
to attract, train, and motivate additional distributors and resellers.
We provide discounts, other special pricing
arrangements, and certain return privileges to our OEMs and our
distributors and resellers. Because of these discounts and other arrangements,
our gross margins on sales to OEMs and through distributors and resellers
are lower than our gross margins on our direct sales. Our agreements with our
distributors and resellers are generally nonexclusive and may be terminated on
short notice by either party without cause. Our distributors and resellers are
not within our control, are not obligated to purchase products from us, and
frequently offer products of several different manufacturers, including
products that compete with ours.
International sales accounted for approximately 38% of
net sales in 2001, 38% of net sales in 2000, and 36% of net sales in 1999, and
are made primarily through OEMs, distributors, and resellers located in Europe,
Canada, Asia, and other foreign countries. We are expanding our international
sales within Europe, Asia, and the Pacific Rim through the utilization of our
sales offices in Guangzhou and Shanghai, China; London, England; Paris, France;
Rotterdam, Holland; Seoul, Korea; Shannon, Ireland; Steinhagen, Germany; Tokyo,
Japan; Hong Kong; and Singapore.
Customers
To date, a substantial portion of our net sales have
been generated from sales of switches to OEMs for integration with their
product offerings. Sales to OEM customers represented 46% of net sales for
2001, 46% of net sales for 2000, and 72% of net sales for 1999. While we have
contracts with certain of our existing OEM customers, none of them is obligated
to purchase products from us except pursuant to binding purchase orders.
Consequently, any OEM customer could cease doing business with us at any time.
The proposed merger between Compaq and Hewlett-Packard will result in a further
concentration of sales in our OEM customers.
The loss of, or material decline in orders from, certain of our current
OEM customers would have a material adverse effect on our business, financial
condition, results of operations, or cash flow.
In addition to our OEM customers, our principal
customers include a diversified group of dealers and major distributors (49% of
net sales in 2001, 45% of net sales in 2000, and 19% of net sales in 1999) and
direct purchasers (5% of net sales in 2001, 9% of net sales in 2000, and 9% of
our net sales in 1999). We believe that our broad range of products sold at
different price points offers us the opportunity to market our products to
customers of all sizes, in different industries, and with varying degrees of
technical sophistication. Sales to Compaq represented approximately 23% of net
sales in 2001, 32% of net sales in 2000, and 50% of net sales in 1999. No other
customer accounted for more than 10% of net sales in 2001.
Seasonality
Our operating results are affected by seasonal trends
and by general conditions in the server market. We have experienced, and expect
to continue to experience, some degree of seasonality due to customer buying
cycles. We believe that the third and fourth quarters will generally have
higher net sales levels due to customer budgeting and procurement cycles, which
may depress net sales in other quarters.
Customer Service
We emphasize customer service by developing
innovative, high quality products, encouraging customer feedback through
contact with our key customers, providing technical support and information on
our website, and providing a customer hotline that offers technical support for
the life of our products. We respond quickly to our customers’ requests for
technical support and service, and our engineering department often works with
individual customers to troubleshoot problems and develop custom solutions. We
offer warranties for parts and service on all of our products, ranging from one
to three years. We also offer a 30-day money-back guarantee for all of our
products. To date, we have not experienced significant product returns. We may,
as a result of competitive pressures, change our warranty policies in the
future to provide coverage that is greater in scope and duration than the
coverage we currently offer. If we were to increase our warranty coverage, our
risk of warranty claims, and therefore our warranty expense and reserves, would
likely increase.
Product Development
We believe that the continued, timely development of
new products and enhancements to our existing products is essential to building
our competitive position. The market for our products has experienced rapid
technological advances, frequent new product introductions and enhancements,
and significant price competition. The introduction of products incorporating
superior or alternative technologies (such as switching software), the creation
or adoption of new technologies, the emergence of new industry standards, or
changes in the market’s pricing structure could render our existing products
and products we have under development obsolete or unmarketable. Our products
combine components, such as printed circuit boards, connectors, cable
assemblies, power supplies and enclosures, that are manufactured by other
companies and are generally available to our competitors and potential
competitors. Our future success will depend in large part upon continued
innovative application of such commercially available components to the expansion
and enhancement of our existing products and the development and introduction
of new technologies and products that address changing customer needs on a
cost-effective and timely basis. By emphasizing customer-driven research
and development, we have been able to develop innovative, practical, and
marketable products that have had immediate application and acceptance. Our
failure to respond timely to technological changes or customer requirements
could have a material adverse effect on our business, financial condition,
results of operations, or cash flow.
Due to our significant reliance on OEM relationships,
some of our product development efforts are focused on developing new products
or enhancements for OEM customers. At times, these new products or enhancements
may not be available to, or readily marketable to, other customers without
significant modifications or delay.
Our engineering and product development efforts focus
on anticipating the needs of our customers by providing innovative, practical,
and marketable products that have immediate applications in their markets. By
maintaining contact with customers throughout the installation and technical
support process, we are able to identify and test potential design
modifications and improvements as well as new applications and extensions for
existing products. We expect this process will enable us to develop new product
categories and applications based on existing technology developed to meet
specific customer needs. Many of our products are designed to accommodate
future modifications and additional features, which we believe facilitates the
development and integration of future modifications and features if we see a
market need.
Our engineering and product development expenses were
approximately $22.5 million for 2001 (excluding $4.6 million in expensed
in-process research and development expenses related to the acquisition of
Equinox), $12.9 million for 2000 (excluding $94 million in expensed
in-process research and development costs related to the Apex and Cybex
combination), and $6.5 million for 1999. As of December 31, 2001, we
employed 132 people in our engineering department. In addition, we use
independent contractors from time to time. As of December 31, 2001, we
were working with approximately 12 independent contractors on various
development projects.
To meet the challenges of the rapidly changing
technology in the computer industry, we expect to make substantial investments
in product development in the future. There can be no assurance that these new
or enhanced versions or any other of our product development efforts will lead
to commercially viable products, will be completed on a timely basis, or will
include the features required to achieve market acceptance.
Manufacturing
We do not manufacture any of our products in their
entirety. Instead, we manage product planning, purchasing, and shipping, and we
perform final assembly, quality assurance, and testing on some of our products
while we outsource some or all of these functions on other products. In order
to avoid the capital investment required to establish and maintain in-house
manufacturing capabilities, we rely on subcontractors throughout the world for
the assembly of printed circuit board assemblies, subassemblies, chassis and
equipment enclosures. We believe that our chosen subcontractors can typically
perform these functions at a lower cost than we can while maintaining our high
standards for quality and delivery. Outsourcing our manufacturing functions
allows us to concentrate our resources on research and development, product
design, quality assurance, sales and marketing, and customer service. We (or
our subcontractors) subject our most critical components and products to automated
testing, equipment burn-in procedures, comprehensive quality audits, functional
testing, and regulatory screening to assure quality and reliability. As of
December 31, 2001, we employed 173 people in our manufacturing department.
We currently rely on several third party
manufacturers, including Likom Computer Products, Stephenson Diversified
Industries, Technical Services, Inc., and ETMA, for subassembly of our
products. These outsourcing arrangements, and any future outsourcing
arrangements, involve numerous risks, including reduced control over product
quality, delivery schedules, manufacturing yields, and costs. In addition,
while these third-party manufacturers have arrangements for warranty
obligations, we remain primarily responsible to our customers for warranty
obligations. We attempt to diversify our outsourced manufacturing operations
and believe we have an adequate supply of alternative subcontractors.
We generally purchase industry-standard parts and
components, including power supplies, cable assemblies, line filters,
enclosures, and printed circuit boards for the assembly of our products from
multiple vendors and suppliers through a worldwide sourcing program. Custom
molded cables and certain turnkey products procured from outside sources have
significant delivery times (10 to 12 weeks), and failure to obtain adequate
supplies could adversely affect our product deliveries. We buy components under
purchase orders and generally do not have long-term agreements with our
suppliers. Circuit boards assemblies are currently obtained from a number of
sources, including Likom Computer Products, Stephenson Diversified Industries,
Technical Services, Inc., and ETMA. We believe that there are adequate
alternative sources for our product components. Any termination of, or
significant disruption in, our relationship with the suppliers of our product
components may prevent us from filling customer orders in a timely manner since
we generally do not maintain large inventories of our components.
In the past, we have experienced delays in the receipt
of certain components, which have resulted in delays in related product
deliveries. We attempt to manage these risks through developing alternative
sources, committing internal resources to supply chain management, and
maintaining relationships and close personal contact with each of our contract
manufacturers and suppliers. There can be no assurance, however, that delays in
component and product deliveries will not occur in the future, and the
inability to obtain sufficient components or to develop alternative sources if
and as required in the future, could result in delays or reductions in product
shipments, which, in turn, could have a material adverse effect on our
business, financial condition, results of operations, or cash flow. Some of the
components for our products are available from a single supplier or a limited
number of suppliers. We attempt to maintain quality relationships and close
contact with each of our suppliers.
Competition
The market for our products is highly fragmented and
competitive, and we expect competition to increase in the future. In the market
for switching systems, we compete with third parties such as Raritan Computer,
Rose Electronics, CCC Group, Minicom Advanced Systems, Aten International,
CompuCable Mfg. Group, Belkin, Lightwave Communications, and StarTech Computer
Accessories, some of which may have substantially greater financial, marketing,
and technical resources than we have. We also compete with other companies (such
as Microsoft) that offer alternative technologies (such as software) or
products that compete with our switching systems. In addition, several of our OEM customers (such as Compaq,
Hewlett-Packard, and IBM) currently offer technologies and products that are
competitive with our products, and we expect these technologies and products to
remain competitive in the features they offer.
Some of our OEM customers also manufacture their own switching products
and offer those supplied by our competitors.
In the market for our products, we compete primarily
on the basis of technological advances, performance in relation to price,
product features, quality, reliability, development capabilities, product
availability, and customer service and support. Our future success will be
highly dependent upon timely completion, introduction, and distribution of new
products and product features at competitive price and performance levels that
address the evolving needs of our customers. We are currently experiencing
increased price competition and expect that pricing pressures will continue to
increase in the future.
Proprietary Technology
Our future success is dependent in part upon our
ability to protect our proprietary rights in our products. We seek to protect
our intellectual property rights by invoking the benefits of the patent,
trademark, copyright, trade secret, and unfair competition laws of the United
States, which provide only limited protection. We have been issued 36 U.S.
patents and have 14 U.S. patent applications pending. We have various
corresponding patent applications pending under the provisions of the Patent
Cooperation Treaty, which permits the filing of corresponding foreign patent
applications in numerous foreign countries within a limited time period. We
also have other foreign patent applications pending. There can be no assurance
that any additional patents will be issued from any of our pending
applications, that any patents will be issued in any additional countries where
our products can be sold, or that any claims allowed in our patents or in any
pending patent applications will be of sufficient scope or strength for, or
provide any meaningful protection or any commercial advantage to, us. Moreover,
our competitors may challenge the validity of, or be able to design around,
these patents or any other patents that may be issued to us. The laws of
certain foreign countries in which our products are or may be developed,
manufactured, or sold may not protect our products or intellectual property
rights to the same extent as do the laws of the United States and thus increase
the likelihood of piracy of our technology and products.
We believe that certain products of certain
competitors infringe one or more of our U.S. patents. In February 1998, we
filed patent infringement lawsuits against certain companies, which were
dismissed without prejudice by the agreement of the parties in early 1999 to
allow certain patent issues raised in the litigation to be initially determined
by the U.S. Patent and Trademark Office Board of Appeals and Interpretations.
We also filed a complaint for patent infringement in United States District
Court for the Western District of Washington at Seattle against CCC on June 1,
1998 seeking injunctive relief, damages, attorneys’ fees, and costs. The
complaint in the CCC lawsuit was filed but was never formally served on CCC,
and we subsequently voluntarily dismissed the CCC lawsuit in Seattle without
prejudice.
The issues raised in the Patent and Trademark Office
were subsequently resolved in our favor, and in May 2001, Apex (our
wholly-owned subsidiary) filed a complaint for patent infringement in the
United States District Court for the Southern District of New York against Raritan
Computer Inc. The Raritan complaint sought injunctive relief, damages,
attorneys’ fees and costs under three Apex patents. After a seven day bench trial in New York in January of 2002, U.S. District Judge Milton Pollack found
that there was no infringement of three Apex patents by Raritan and ordered
that judgment be entered in favor of Raritan.
We are in the process of appealing the judgment.
In the future, we may file additional lawsuits against
other companies regarding the alleged infringement. Patent litigation, and any
other litigation relating to our intellectual property to which we become a
party, is subject to numerous risks and uncertainties, and there can be no
assurance that we will be successful in any such litigation. There can be no assurance
that the steps we take to protect our intellectual property rights will be
adequate to prevent misappropriation of our technology or that we can use our
intellectual property rights to successfully prevent competitors from
commercializing technologies that are substantially equivalent or superior to
our technology. Additionally, current or future competitors could obtain
patents that may prevent us from developing or selling our products.
Employees
As of December 31, 2001, we had 439 full-time
employees working in the United States. Of our domestic full-time employees,
146 were in marketing, sales, and customer support, 106 were in engineering,
research, and development, 138 were in manufacturing and operations, and 49
were in administration. As of December 31, 2001, we had 149 full-time
employees working at our facilities outside of the United States. Of our
international full-time employees, 66 were in marketing, sales, and customer
support, 26 were in engineering, research, and development, 35 were in
manufacturing and operations, and 22 were in administration. Our employees are
not covered by any collective bargaining agreements relating to their
employment by us. We believe that we have good relations with our employees.
Backlog
Backlog consists of purchase orders with deliver dates
scheduled within the next six months. None of our customers is obligated to
purchase products from us except pursuant to binding purchase orders. Because
of the timing of orders and the possibility of customer changes to delivery
schedules, our backlog as of any particular date is not representative of
actual sales for any succeeding period. Moreover, with recent industry-wide
initiatives by OEMS, distributors, and resellers to reduce inventories and
shorten lead times, we do not view backlog as an important indicator of our
future results, and we do not believe it is a meaningful indicator of actual
sales for any succeeding period.
Segment Reporting
Subsequent to the merger transaction between Apex and
Cybex on July 1, 2000, we reported segment information on a geographical basis
in which we presented sales and gross profit information for Redmond,
Washington; Huntsville, Alabama; and Shannon, Ireland. Following the merger, the previously
separate businesses of Apex and Cybex began to be integrated. In recent quarters, shipments to certain
international OEM customers that had historically originated from Redmond were
shifted to Shannon. As this occurred,
the historical comparisons by location became less meaningful. Additionally, we have gradually realigned
operating and management responsibilities within Avocent to emphasize that we
are “one company, operating around the world.”
Consequently, we have evaluated the business in light of the segment
reporting requirements, and we have determined that we will report operations
as a single operating segment. We will,
however, disclose sales for the United States and the rest of the world on a
quarterly and annual basis.
FACTORS THAT MAY AFFECT FUTURE
RESULTS
THIS
ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE DISCUSSED IN THIS ANNUAL REPORT, INCLUDING THE FOLLOWING:
Risks relating to the merger transaction
between Apex and Cybex that resulted in the formation of Avocent.
We may not achieve the benefits expected from the
merger transaction, which may have a material adverse effect on our business
and could result in loss of key personnel.
Achieving the benefits expected from the merger
transaction between Apex and Cybex that resulted in the formation of Avocent
will depend in part on the successful integration of technology, operations,
and personnel. The integration of Apex and Cybex has been, and will continue to
be, a complex, time-consuming, expensive, and challenging process, and
management believes that this challenge will continue. The continuing challenges
involved in this integration include the following:
• Retaining
existing customers and strategic partners of each company;
• Retaining and
integrating management and other key employees of both Apex and Cybex;
• Coordinating
research and development activities to enhance introduction of new products and
technologies;
• Integrating
purchasing and procurement operations and financial monitoring and reporting in
multiple locations around the world;
• Integrating
geographically dispersed organizations;
• Combining
product offerings and product lines effectively and quickly;
• Integrating
sales efforts so that customers can do business easily with us;
• Coordinating
domestic and foreign manufacturing operations in a rapid and efficient manner;
• Transitioning
all facilities to a common information technology system;
• Offering the
products and services of Apex and Cybex to each other’s customers;
• Coordinating
marketing efforts; and
• Developing
and maintaining uniform standards, agreements, controls, procedures, and
policies.
The continuing risks to the successful integration of
Apex and Cybex include:
• The
impairment of relationships with employees, customers, and suppliers as a
result of integration of management and other key personnel;
• The potential
disruption of our ongoing business and distraction of management;
• Different
financial reporting and information technology systems;
• The
difficulty of incorporating acquired technology and rights from Apex and Cybex
into product offerings; and
• Unanticipated
expenses related to integration.
We may not succeed in addressing these risks or any
other problems encountered in connection with the merger transaction.
Our
reported financial results have been, and will continue to be, adversely
affected as a result of purchase accounting treatment and the impact of
amortization of goodwill and other intangible assets relating to the merger
transaction between Apex and Cybex and the acquisition of Equinox.
We accounted for the merger transaction as a purchase
of Cybex by Apex using the purchase method of accounting. We also accounted for
the acquisition of Equinox by Avocent using the purchase method of accounting.
Under purchase accounting, we recorded the fair value of the consideration
given for the Cybex and Equinox common stock and for the options to purchase
Cybex and Equinox common stock assumed by us, plus the amount of direct
transaction costs, as the cost of acquiring Cybex and Equinox. We allocated
these costs to the individual Cybex and Equinox assets acquired and liabilities
assumed, including various identifiable intangible assets such as acquired
technology, acquired trademarks and trade names, acquired workforce, and
in-process research and development, based on their respective fair values.
In-process research and development charges, which were valued at
$94.0 million for Cybex and $4.6 million for Equinox, were expensed when
the merger transaction between Apex and Cybex and the acquisition of Equinox
were completed. Intangible assets, including goodwill, are being amortized over
a three- to seven-year period.
The costs allocated to goodwill and other intangibles
in connection with the merger transaction between Apex and Cybex and the
acquisition of Equinox were approximately $707 million and $38 million,
respectively. We began to amortize
goodwill and other intangible assets in equal quarterly amounts in the third
calendar quarter of 2000 following completion of the merger transaction between
Apex and Cybex. We began to amortize
goodwill and other intangible assets in equal quarterly amounts in the first
calendar quarter of 2001 following completion of the acquisition of Equinox.
Amortization of goodwill and other intangibles was approximately $133 million
and $62 million in 2001 and 2000, respectively.
We performed a cash flow
analysis as of December 31, 2001, to determine if the remaining balance of
goodwill resulting from the merger transaction between Apex and Cybex and the
acquisition of Equinox had been impaired.
The study was performed in accordance with SFAS No. 121 “Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of.” As a result of
this study, we recorded a $195.4 million reduction during 2001 in the carrying
value of goodwill created by the merger transaction between Apex and
Cybex. The write-off of the goodwill
was based on an analysis of projected cash flows, which were no longer deemed
adequate to support the value of goodwill associated with the merger. We
adopted SFAS No. 142, Goodwill and Other Intangible Assets, on
January 1, 2002. Our initial test for
goodwill impairment as of January 1, 2002 determined that no adjuistment for
impairment was required. If economic conditions deteriorate and indicators of
impairment become present, an adjustment to the carrying value of goodwill may
be required. Effective January 1, 2002, under the provisions of SFAS No. 142,
goodwill ceases to be amortized. We
expect the amorization of other intangibles to be approximately $22 million in
2002.
Risks relating to our business.
Our
business is dependent upon a limited number of customers that are not obligated
to continue doing business with us.
A substantial portion of our sales is concentrated
among a limited number of OEM customers. Sales to these OEMs represented
approximately 46% of net sales in 2001, 46% of net sales for 2000, and 72% of
net sales for 1999. Sales to Compaq represented approximately 23% of net sales
for 2001, 32% of net sales for 2000, and 50% of net sales for 1999.
Our OEM business is subject to risks, including:
• Contract
termination or reduced or delayed orders;
• Short order
cycles and difficulty in predicting sales, because our OEM customers do not
have long-term commitments to purchase from us;
• Adoption of
competing products or technologies developed by third parties for the OEMs or
by the OEMs' internal development teams; and
• Changes in
corporate ownership, financial condition, business direction, or product mix by
the OEMs.
Any of these risks could have a material adverse
effect on our business, financial condition, and results of operations. We have
experienced, and expect to continue to experience, significant reductions or
delays in orders from our OEM customers, which may in the future have a
material adverse effect on our quarterly sales and operating results.
The loss of one or more large OEM customers could
materially harm our business. While we have contracts with some of our existing
OEM customers, none of our OEM customers is obligated to purchase products from
us except pursuant to binding purchase orders. Consequently, any OEM customer
could cease doing business with us at any time. Our dependence upon a few
OEMs also results in a significant concentration of credit risk, thus a
substantial portion of our trade receivables outstanding from time to time may
be concentrated among a limited number of customers. In addition, OEM customers
have longer payment cycles that increase the likelihood of aged or problem
accounts receivable. The proposed
merger between Compaq and Hewlett-Packard will increase these risks. The loss of, or material decline in orders
from, any of these customers could have a material adverse effect on our
business, financial condition, and results of operations.
Our
revenue may decline.
Although Apex’s and Cybex’s revenues grew
substantially in the quarters prior to the merger transaction that formed
Avocent, our “as if” combined revenue (i.e., the actual calendar year revenues
for Apex and Cybex on a combined basis in 2000 and the actual calendar year
revenues for Apex, Cybex, and Equinox in 2001) grew from $217 million in
1999 to $294 million in 2000 but then declined to $256 million in 2001.
As our business matures, it is highly unlikely that
revenue will grow at the rapid pace it grew prior to the merger. In addition,
general economic conditions are not as favorable as they were in prior years,
and our revenue could continue to decline. If our revenue declines or does not
increase at or above the rate equity research analysts expect, the trading
price for our common stock may decline. Our future growth rates will depend on
general economic conditions and on our ability to expand sales of our existing
products and develop and market new products, which will require significant
expenses that we may not have sufficient resources to undertake.
We are likely to experience fluctuations in operating
results.
Prior to the merger transaction that formed Avocent,
both Apex and Cybex experienced substantial fluctuations in operating results,
on a quarterly and an annual basis. We have experienced these fluctuations
since the merger, and we expect these fluctuations will continue in the future.
Our operating results will be affected by a number of factors, including, but
not limited to:
• The volume
and timing of orders, particularly from OEM and other large customers;
• The timing of
shipments;
• The timing of
new product introductions and enhancements by us and by our competitors;
• Changes in
product or distribution channel mixes;
• Changes in
pricing policies or price reductions;
• Competition
and price reductions by competitors;
• The
availability and cost of supplies and components;
• Sales and
marketing expenses related to entering into new markets, introducing new
products, and retaining current OEM and other large customers; and
• Fluctuations
in sales of servers due to changes in economic conditions or capital spending
levels.
Our operating results will be affected by seasonal
trends, by general conditions in the server market, and by general economic
conditions. We have experienced, and we expect to continue to experience, some
degree of seasonality due to customer buying cycles. We believe that the third
and fourth quarters will generally have higher net sales levels due to customer
budgeting and procurement cycles, which may depress net sales in other quarters.
Because our business and operating results depend to a significant extent on
the general conditions in the server market, any adverse change in the server
market due to adverse economic conditions, declining capital spending levels or
other factors could have a material adverse effect on our business, financial
condition, and results of operations. Moreover, we are currently seeing
indications that the rate of growth in capital spending for information
technology equipment has slowed. In addition, we have recently seen
industry-wide initiatives by OEMs and by distributors and resellers to reduce
their inventories and to shorten their lead times, thereby reducing early
commitments to firm orders by our major OEM and our distributor and reseller
customers.
We believe that quarter-to-quarter comparisons of the
historical financial results of Apex and Cybex are not meaningful indicators of
our future operating results, and you should not rely on them as an indication
of our future performance. If our quarterly operating results fail to meet the
expectations of equity research analysts, the price of our common stock could
be negatively affected.
A substantial portion of our business consists of sales to
OEM customers, which vary significantly from quarter to quarter. A substantial
drop in OEM sales could greatly harm our business.
A substantial portion of our sales are to OEM
customers. We have experienced, and we expect to continue to experience,
period-to-period variability in sales to OEM customers. Any cancellation,
rescheduling, or reduction of orders by OEM customers in the future could
materially adversely affect our operating results. Although our OEM customers
typically place orders for products up to several months prior to scheduled
shipment dates, these orders are subject to cancellation generally up to six
weeks prior to the scheduled shipment date. We use multiple warehouses for many
of our OEM customers to fulfill their orders under a just-in-time inventory
management system, which requires us to maintain sufficient inventory levels of
our products at each of these warehouses to satisfy our OEM’s anticipated
customer demand, and we generally recognize revenue only when these OEM
customers take possession of our products. We are required to plan production,
order components, and undertake our manufacturing activities prior to the time
that these orders become firm or the products are accepted. In addition, our
OEM customers have requested, and are likely to continue to request, that we
delay shipment dates or cancel orders for branded products that are subject to
firm orders. Accordingly, our sales to OEMs for future quarters are
increasingly difficult to predict. The inability to accurately predict the
timing and volume of orders for our OEM customers during any given quarter
could adversely affect operating results for such quarter and, potentially, for
future periods. If we underestimate sales, we will not be able to fill orders
on a timely basis. This could cause customer dissatisfaction and loss of future
business. If we overestimate sales, we will experience increased costs from
inventory storage, waste, and obsolescence.
A substantial portion of our business consists of sales of
branded products, which are difficult to forecast. Failure to accurately
forecast these sales could lead to costly overproduction or product shortages.
A substantial portion of our sales consists of sales
of branded products. We expect these sales to increase in the future. If we
succeed in increasing branded sales as a percentage of net sales, our quarterly
sales and operating results will become more dependent upon the volume and
timing of branded product orders received during the quarter. Because many
customers of our branded products typically place orders shortly before their
requested shipment date, revenues from branded sales are difficult to forecast.
With recent industry-wide initiatives by distributors and resellers to reduce
their inventories and to shorten their lead times, our major distributor and
reseller customers are reducing early commitments to firm orders. Furthermore,
many purchasers typically require prompt delivery of products. This results in
a limited backlog of orders for these products and requires us to maintain
sufficient inventory levels to satisfy anticipated customer demand. The
inability to accurately forecast the timing and volume of orders for branded
products during any given quarter could adversely affect operating results for
such quarter and, potentially, for future periods. If we underestimate sales,
we will not be able to fill orders on a timely basis. This could cause customer
dissatisfaction and loss of future business. If we overestimate sales, we will
experience increased costs from inventory storage, waste, and obsolescence.
Our
gross margins are expected to vary and may decline.
Gross margins may vary significantly from
period-to-period depending on a number of factors, including:
• The ratio of
OEM sales to branded sales, since OEM sales typically have lower gross margins
than branded sales;
• Product mix,
because sales of some of our products will have lower gross margins than sales
of other products;
• Raw materials
and labor costs;
• New product
introductions by us and by our competitors; and
• The level of
outsourcing of our manufacturing and assembly services.
Our gross margins may decline in the future primarily
due to increased competition and the introduction of new technologies that may
affect product prices.
Our
products are subject to warranty claims and returns. Increased warranty claims
or returns could harm our business.
Cybex historically offered a 30-day unconditional
money-back guarantee and a twelve to fifteen month limited warranty for all of
its products and allowed additional rights of return to certain of its
customers. Apex typically offered a one to three year limited warranty for all
of its products and allowed additional rights of return to certain of its
customers. We offer warranties for parts and service on all our products,
ranging from one to three years (and, in the case of some of Equinox’s
products, five years). Although our historical return experience has not been
significant, our returns may increase in the future. An increase in returns
would have an adverse effect on our sales and could negatively affect our
financial results.
Intense competition from new and existing competitors could
impair our ability to grow our business and sell our products.
The markets for our Avocent, Apex, Cybex, and Equinox
products are highly fragmented and intensely competitive. Increased competition
from both hardware and software products could result in price reductions and
loss of sales, which would materially harm our business. Our business is becoming
increasingly sensitive to new product introductions, price changes, and
marketing efforts by competitors. Accordingly, our future success will be
highly dependent upon timely completion and introduction of new products and
product features at competitive prices and performance levels that address the
evolving needs of our customers. We are currently experiencing increased price
competition and increased customer sensitivity to price for our switching
systems and our extension and remote access products, and pricing pressures on
us will continue to increase in the future. Because of this competition, we may
not be successful in gaining additional OEM or server manufacturer customers.
We compete for sales of switching systems and
extension products with companies such as Raritan, Rose Electronics, CCC Group,
Minicom Advanced Systems, Aten International, CompuCable Mfg. Group, Belkin,
Lightwave Communications, and StarTech Computer Accessories. We also face
competition from software providers, who are able to offer software solutions
at a much lower cost or even bundled for free, and server manufacturers, who
are able to offer their competitive technology or products at the time of the
server sale. These software and hardware solutions address many of the problems
our switching systems, extension products, and remote access products are
designed to address.
Current and potential competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion, and
sale of their products than we do. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties that enhance the ability of their products to
address the needs of our prospective customers. We may not be able to compete
successfully against current and future competitors and competitive pressure
may materially harm our business.
Certain of our customers, such as Compaq or Microsoft,
presently offer competitive hardware and/or software products, technologies,
and solutions that address many of the problems our products address. These
customers could decide to manufacture their own switching or remote access
products, enhance their own internally-developed switching solutions or
technologies, or offer products supplied by competitors. Companies with network
management products, many of which are substantially larger than we are and
have significantly more financial resources, may also compete
with us. Established companies with network management experience could
offer new products, new technologies, or new solutions that compete with our
products.
Our failure to respond to rapid technological change or to
introduce new products may result in lost sales and revenue which would impair
our operating results.
Sales of switching, extension, and remote access
products are characterized by rapid technological advances, frequent new
product introductions and enhancements, and significant price competition. If
we do not keep pace with these changes, we will lose customers, and our
business will be harmed. The introduction of products incorporating superior or
alternative technologies such as switching software, the emergence of new
industry standards, or changes in pricing structure could render existing
products and products under development obsolete or unmarketable.
Our products combine components, such as printed
circuit boards, connectors, cable assemblies, power supplies and enclosures,
that are manufactured by other companies and are generally available to
competitors and potential competitors. Our future success will depend in large
part upon continued innovative application of such commercially available
components to the expansion and enhancement of existing products and the
development and introduction of new products that address changing customer
needs on a cost-effective and timely basis. If we fail to respond on a timely
basis to technological developments, changes in industry standards, customer
requirements, or software innovations, we will lose customers, and our business
will be greatly harmed. Similar results could occur if we experience
significant delays in new product development or introduction.
Due to our significant reliance on OEM relationships,
our product development efforts may often be focused on developing new products
or enhancements for OEM customers. As a result, our OEM relationships may
negatively affect our ability to develop new and enhanced products for our
non-OEM customers. Moreover, these new products or enhancements for OEM
customers may not be available to, or readily marketable to, other customers
without significant modification and delay. The termination or significant
disruption of our relationship with certain OEMs or other customers for
whom we devote significant product development resources is likely to result in
lost opportunities with respect to the development of products or enhancements
for our other customers.
We are dependent upon suppliers and outsourced manufacturing.
Disruption of our access to these supplies and services, or problems with the
quality of supplies or services, could prevent us from filling customer orders
and harm our business.
The principal components of our products are
electronic components, power supplies, cable assemblies, line filters,
enclosures, and printed circuit boards, all of which are purchased from outside
vendors. We generally buy components under purchase orders and generally do not
have long-term agreements with our suppliers. Also, we generally do not
maintain large inventories of components. Any termination of, or significant
disruption of, our relationships with our suppliers of product components may
prevent us from filling customer orders in a timely manner which could result
in customer dissatisfaction and lost sales.
Prior to the merger transaction that formed Avocent,
both Apex and Cybex purchased a number of the components for products from a
single supplier or a limited number of suppliers. Apex, Cybex, and Avocent have
occasionally experienced, and we may in the future experience, delays in
delivery of components. Although alternate suppliers are available for most of
the components and services needed to produce our products, the number of
suppliers of some components is limited, and qualifying a replacement supplier
and receiving components from alternate suppliers could take several months.
We depend upon suppliers to deliver components that
are free from defects, competitive in functionality and cost and in compliance
with specifications and delivery schedules. Disruption in supply, a significant
increase in the cost of one or more components, failure of a third party
supplier to remain competitive in functionality or price, or the failure of a
supplier to comply with any of our procurement needs could delay or interrupt
our ability to manufacture and deliver our products to customers on a timely
basis, thereby adversely affecting our business, financial condition, and
results of operations.
We rely on third party manufacturers for subassembly
of products and for final assembly, quality assurance, and testing of some of
our products. These outsourcing arrangements and any future outsourcing
arrangements involve numerous risks, including reduced control over product
quality, delivery schedules, manufacturing yields, and costs.
Moreover, although
arrangements with such manufacturers may contain provisions for warranty
obligations on the part of such manufacturers, we are primarily responsible to
our customers for warranty obligations.
If the client/server market does not continue to grow or if
network reliability and tools do not continue to develop, our business will be
greatly harmed.
Our business is dependent on the continued acceptance
of the client/server model of network computing. Although distributed network
computing utilizing client/server architecture has gained increasing
acceptance, use of this networking model may not continue to grow or may be
replaced by new technologies. This would render our products obsolete. In
addition, sales of switching and remote access products are driven in part by
the inherent unreliability of client/server networks. As client/server networks
continue to proliferate, however, server manufacturers and software developers
or providers may develop greater reliability and better tools for managing
networks. To the extent that greater reliability and better network management
tools are successfully developed, our products could be rendered obsolete,
which could materially harm our business.
We
will need to expand sales through distributors and resellers in order to
develop our business and increase revenue.
We expect to rely increasingly on distributors and
resellers, VARs, and systems integrators for the distribution and sale of our
branded products. Our strategy contemplates the expansion of our distributor
and reseller network both domestically and internationally. Our future success
will depend in part on our ability to attract, train and motivate new
distributors and resellers and expand our relationships with current
distributors and resellers. We may not be successful in expanding our distributor
and reseller relationships. We will be required to invest significant
additional resources in order to expand these relationships, and the cost of
this investment may exceed the margins generated from this investment.
Distributor and reseller sales have lower margins than direct
sales and do not provide for commitments for future sales.
We provide and expect to continue to provide discounts
and other special pricing arrangements to our distributors and resellers. As a
result of these discounts and other arrangements, gross margins on sales
through distributors and resellers are lower than gross margins on direct
sales. In addition, our distributors and resellers often have significant
rights of return, and in the future, these returns may have a material adverse
effect on our business, financial condition, and results of operations.
Our agreements with our distributors and resellers are
generally nonexclusive and may be terminated on short notice by either party
without cause. These distributors and resellers are not obligated to purchase
products from us and frequently offer products of several different
manufacturers, including competitor’s products. These distributors and
resellers may give higher priority to the sale of other products. A reduction
in sales efforts by our resellers could lead to a reduction in our sales and
could materially adversely affect our business, financial condition, and
results of operations.
Executive officers and other key personnel may depart, which
could harm our ability to grow the business.
We are greatly dependent on the ability to retain key
management and technical personnel. In March, 2002, our Board of Directors
elected John R. Cooper as President and Chief Executive Officer with Stephen F.
Thornton remaining as Chairman. Mr. Cooper has never been President and CEO of
a publicly-traded corporation, and our future success is dependent upon the
personal efforts of Mr. Cooper and upon a successful management transition. Our
future success is also highly dependent upon the personal efforts of other
management and technical personnel, and the loss of services of any one of them
could have a material adverse effect on our business, financial condition, and
results of operations. Many of our key management and technical personnel were
awarded stock options with exercise prices that are substantially above the
current trading price of our common stock and therefore currently have no
value. We may need to grant new options to these employees in the future in
order to provide new incentive and thus retain them. Our success will also be
dependent in part upon our ability to attract, retain, and motivate highly
skilled employees. Competition for employees with the skills required,
particularly engineering and other technical personnel, is intense, and there
can be no assurance that we will be able to attract and retain highly skilled
employees in sufficient numbers to sustain our current business or to support
future growth.
Difficulties encountered managing our growth could adversely
affect our results of operations.
In the periods prior to the merger transaction that
formed Avocent, Apex and Cybex experienced rapid revenue and customer growth
and expansion in the number of employees, product offerings, and the scope and
complexity of their financial systems. This growth placed significant strain on
the managerial, operational, and financial resources of both companies and
resulted in new and increased responsibilities for management personnel. These
strains have continued, and possibly worsened, since the merger. There can be
no assurance that our management, personnel, systems, procedures, and controls
are, or will be, adequate to support our existing and future operations.
Our ability to effectively manage this recent growth
and any future growth will require us to continue to implement and improve our
operational, financial, and information systems and internal controls and will
likely require additional management personnel. In addition, we believe that we
must continue to develop greater engineering, marketing, sales, and customer
service capabilities in order to develop new products and product enhancements,
secure new customers at a rate necessary to achieve desired growth, and
effectively serve the evolving needs of present and future customers. We may
not be successful in strengthening these capabilities. Without adequate
management, engineering, product development, marketing, sales, and customer
service capabilities, our ability to effectively manage growth, expand and
enhance our product lines, further penetrate existing markets, and develop new
markets will be significantly limited. If management is unable to effectively
manage this growth, our business, financial condition, and results of
operations could be materially adversely affected.
We have limited protection of proprietary rights and face
risks of third party infringements.
Our future success is dependent in part upon our
ability to protect proprietary rights in our products. Prior to the merger
transaction, Apex and Cybex sought to protect intellectual property rights by
invoking the benefits of the patent, trademark, copyright, trade secret, and
unfair competition laws of the United States, and we have continued to do so.
These laws, however, afford only limited protection. There can be no assurance
that the steps Apex and Cybex have taken to protect their intellectual property
rights, or that the steps we take in the future, will be adequate to prevent
misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or
superior to our technology.
The U.S. Patent and Trademark Office has issued
several patents to us for various aspects of our products. We have various
corresponding patent applications pending under the provisions of the Patent
Cooperation Treaty, which permits the filing of corresponding foreign patent
applications in numerous foreign countries within a limited time period. We
also have other United States and foreign patent applications pending. There
can be no assurance that any additional patents will be issued from any of
those pending applications or that any patents will be issued in any additional
countries where our products can be sold. Also, claims allowed in our patents
or in any pending patent applications may not be of sufficient scope or
strength for, or provide meaningful protection or any commercial advantage to
us. Also, competitors may challenge the validity of, or be able to design
around, the U.S. patents or any other patents that may be issued to us. The
laws of certain foreign countries in which our products are or may be
developed, manufactured, or sold may not protect our products or intellectual
property rights to the same extent as do the laws of the United States and thus
increase the likelihood of piracy of our technology and products.
In May 2001, Apex (our wholly-owned subsidiary) filed
a complaint for patent infringement in the United States District Court for the
Southern District of New York against Raritan Computer Inc. The Raritan
complaint sought injunctive relief, damages, attorney's fees and costs under
three Apex patents. After a seven day bench trial in New York in January of 2002,
U.S. District Judge Milton Pollack found that there was no infringement of
three Apex patents by Raritan and ordered that judgment be entered in favor of
Raritan. We are in the process of appealing the judgement. We have capitalized $1.8 million of patent
defense costs which are included with intangible assets in our consolidated
balance sheet as of December 31, 2001.
If we are not successful in our appeal, the patent defense costs must be
written off, which would have a material adverse impact on our business,
financial condition, and results of operations.
We may initiate claims or litigation against other
third parties for infringement of proprietary rights or to establish the
validity of proprietary rights. Existing litigation, and any other litigation
relating to intellectual property to which we become a party, is subject to
numerous risks and uncertainties, including the risk of counterclaims or other
litigation against us, and we may not be successful in any such litigation.
Existing litigation or other litigation by or against us could result in
significant expense and divert the efforts of technical and management
personnel, whether or not such litigation results in a favorable determination.
In the event of an adverse result in any such litigation, we could be required
to pay substantial damages, suspend or cease the manufacture, use, and sale of
any infringing products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes, or obtain licenses to the
infringing technology. There can be no assurance that we would be successful in
such development or that such licenses would be available on reasonable terms,
or at all, and any such development or license could require us to expend
substantial time and other resources. In the event that any third party makes a
successful claim against us, or our customers, and a license is not made
available on commercially reasonable terms, our business, financial condition,
and results of operations could be adversely affected.
The network server, electronics, and related
industries are characterized by vigorous pursuit and protection of intellectual
property rights or positions, which has resulted in significant and often
protracted and expensive litigation. Apex and Cybex have in the past been, and
we may from time to time in the future be, a party in proceedings alleging
infringement of intellectual property rights owned by third parties. If
necessary or desirable, we may seek licenses under such intellectual property
rights. However, licenses may not be offered on terms acceptable to us, or at
all. The failure to obtain a license from a third party for technology used by
us could cause us to incur substantial liabilities and to suspend or cease the
manufacture of products requiring such technology. Additionally, current or
future competitors could obtain patents that may prevent us from developing or
selling our products.
We
must meet the increased demands on customer service operations or customer
satisfaction and sales could suffer.
Continued growth of our sales is likely to be
accompanied by increasing demands on customer service operations. As a result
of our commitment to a high level of customer service, we will need to invest
significant resources in the maintenance and improvement of our customer
service resources. Any failure to maintain adequate customer service could
cause customer dissatisfaction, result in reduced sales of products and, accordingly,
materially adversely affect business, financial condition, and results of
operations.
If we are unable to successfully integrate our international
distribution networks and international sales efforts, results of operations
may suffer.
We have to develop, integrate, and expand our
international distribution networks in an effort to increase international
sales of switching, extension, remote access, and other products. We may not be
successful in developing, integrating, or expanding the international
distribution network or in marketing and selling products in foreign markets.
If the revenues generated by our international sales are not adequate to
recover the expense of establishing, expanding, integrating, and maintaining an
international distribution network, our business, financial condition, and
results of operations could be materially adversely affected. If international
sales become a more significant component of net sales, our business could
become more vulnerable to the risks inherent in doing business on an
international level, including:
• Difficulties
in managing foreign resellers;
• Longer
payment cycles and problems in collecting accounts receivable;
• The effects
of seasonal customer demand;
• Changes in
regulatory requirements;
• Difficulties
in meeting the requirements of different international product regulations;
• Risks
relating to intellectual property rights;
• The impact on
our R&D resources as we localize our product offerings to meet local user
requirements such as language translations and hardware compatibility issues;
• Export
restrictions, tariffs and other trade barriers;
• Fluctuations
in currency exchange rates; and
• Potentially
adverse tax consequences and political instability.
The existence or occurrence of any one of these
factors could have a material adverse effect on our business, financial
condition, and results of operations.
Fluctuations in the value of foreign currencies could result
in currency exchange losses.
Currently, a majority of our international business is
conducted in U.S. dollars. However, as we expand our international operations,
it is likely that international business will increasingly be conducted in
foreign currencies. Fluctuations in the value of foreign currencies relative to
the U.S. dollar have caused, and are expected to increasingly cause, currency
translation gains and losses. While we attempt to hedge our foreign currency
exposure, we cannot predict the effect of exchange rate fluctuations upon
future quarterly and annual operating results, and we may experience currency
losses in the future.
We may acquire technologies or companies in the future that
could cause disruption of business or exposure to other risks.
Effective January 3, 2001, we acquired Equinox
Systems Inc., and in the future, we may acquire technologies or companies
or make investments in complementary companies, products, or technologies.
These acquisitions entail many risks, any of which could materially harm our
business. These risks include:
• Difficulty
assimilating the acquired company’s personnel and operations;
• Diversion of
management’s attention;
• Loss of key
personnel;
• Dilution of
existing stockholders as a result of issuing equity securities;
• Assumption of
liabilities of the acquired company; and
• Incurring
substantial expenses as a result of the transaction.
Any failure to manage these integration challenges
could materially harm our business, financial condition, and results of
operations.
Provisions in our charter documents and in Delaware law may
discourage potential acquisition bids for us and may prevent changes in
management that stockholders may favor.
Provisions in our charter documents could discourage
potential acquisition proposals and could delay or prevent a change in control
transaction that stockholders may favor. These provisions could have the effect
of discouraging others from making tender offers for shares, and as a result,
these provisions may prevent the market price of our common stock from
reflecting the effects of actual or rumored takeover attempts and may prevent
stockholders from reselling their shares at or above the price at which they
purchased their shares. These provisions may also prevent changes in management
that stockholders may favor. Our charter documents do not permit stockholders
to act by written consent, limit the ability of stockholders to call a
stockholders meeting, and provide for a classified board of directors, which
means stockholders can only elect, or remove, a limited number of directors in
any given year. Furthermore, the board of directors has the authority to issue
up to five million shares of preferred stock in one or more series. The board
of directors can fix the price, rights, preferences, privileges and
restrictions of such preferred stock without any further vote or action by our
stockholders. The issuance of shares of preferred stock may delay or prevent a
change in control transaction without further action by our stockholders.
In addition, Delaware law may inhibit potential
acquisition bids for us. Delaware law prevents certain Delaware corporations,
including Avocent, from engaging, under certain circumstances, in a business
combination with any interested stockholder for three years following the date
that such stockholder became an interested stockholder.
Our stock will likely be subject to substantial price and
volume fluctuations which may prevent stockholders from reselling their shares
at or above the price at which they purchased their shares.
Fluctuations in the price and trading volume of our
common stock may prevent stockholders from reselling their shares above the
price at which they purchased their shares. Stock prices and trading volumes
for many technology companies fluctuate widely for a number of reasons,
including some reasons which may be unrelated to their businesses or results of
operations. This market volatility, as well as general domestic or
international economic, market and political conditions, could materially
adversely affect the market price of our common stock without regard to
operating performance. In addition, if our operating results were to be below
the expectations of public market analysts and investors, the market price of
our common stock would likely decrease significantly.
Item 2.
Item 2. Properties.
Our headquarters, occupying 126,000 square feet and
containing administrative, sales, marketing, research and development,
engineering, manufacturing, and distribution facilities, are located in
Huntsville, Alabama, on an 18-acre tract of land owned by us in Cummings
Research Park.
Our Redmond, Washington facility, which consists of
approximately 117,000 square feet in an industrial office building, contains
administrative, sales, marketing, research and development, engineering,
manufacturing, and distribution operations. We lease this space, and the
current base rent under the lease is approximately $100,000 per month, plus
taxes, insurance and maintenance. The 117,000 square foot leased premises has
approximately 35,000 more square feet than we currently need, and in 2000, we
agreed with the subtenant to an early termination of the subleased space.
Avocent International Ltd. is located in a 60,500
square foot leased facility located in the Shannon Free Trade Zone in Shannon,
Ireland. The Shannon facility houses administrative, sales, marketing, research
and development, engineering, manufacturing, and distribution operations. The
lease with the Shannon Development Authority is for twenty-five years with five
five-year break points, and provides for annual rent of approximately $320,000.
Our Steinhagen, Germany facility consists of
approximately 9,900 square feet, contains sales and administrative personnel,
and is located on leased property. The lease, which provides for annual rent of
approximately $75,000, can be terminated in August 2002.
We also lease approximately 5,000 square feet in an
office building in Austin, Texas. This
office contains sales, marketing, and administrative personnel to support our
OEM operations. The sixty-two month
lease terminates in 2006, and our annual rent is approximately $92,000.
As a result of our acquisition of Equinox
Systems Inc. in early 2001, we own a 45,000 square foot building on 6.5
acres of land in Sunrise, Florida. Our Sunrise facility contains
administrative, sales, marketing, research and development, engineering,
manufacturing, and distribution operations.
We also lease approximately 8,600 square feet for
$210,000 per year in Chelmsford, Massachusetts. This facility houses marketing
functions and the engineering team responsible for visual display technology
and products.
We believe that these facilities are sufficient to
support our current operations.
Item 3.
Item 3. Legal Proceedings.
In February 1998, we filed patent infringement
lawsuits against certain companies, which were dismissed without prejudice by
the agreement of the parties in early 1999 to allow certain patent issues
raised in the litigation to be initially determined by the PTO Board of Appeals
and Interpretations. We also filed a complaint for patent infringement in
United States District Court for the Western District of Washington at Seattle
against CCC on June 1, 1998 seeking injunctive relief, damages, attorneys’
fees, and costs. The complaint in the CCC lawsuit was filed but was never
formally served on CCC, and we subsequently voluntarily dismissed the CCC
lawsuit in Seattle without prejudice.
The issues raised in the Patent and Trademark Office
were subsequently resolved in our favor, and in May 2001, Apex (our
wholly-owned subsidiary) filed a complaint for patent infringement in the
United States District Court for the Southern District of New York against
Raritan Computer Inc. The Raritan complaint sought injunctive relief, damages,
attorneys’ fees and costs under three Apex patents. After a seven day bench trial in New York in January of 2002, U.S. District Judge Milton Pollack found
that there was no infringement of three Apex patents by Raritan and ordered
that judgment be entered in favor of Raritan.
We are in the process of appealing the judgment.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5.
Item 5. Market For Registrant’s Common Equity and Related
Stockholder Matters.
Price Range of Common Stock; Holders of Record
Our common stock is quoted on The Nasdaq National
Market System under the symbol “AVCT.” The following table shows the high and
low sales prices of our common stock for the period since the combination of
the businesses of Apex and Cybex, July 1, 2000, to December 31, 2001,
as reported by the Nasdaq National Market System.
The merger transaction combining Apex and Cybex was
accounted for as a purchase of Cybex by Apex. Accordingly, the table below
shows the high and low sales prices, as reported by The Nasdaq National Market
System, for Apex for the period January 1, 1999 to June 30, 2000,
taking into account the effect of the 1.0905 exchange ratio for shareholders of
Apex as a result of the merger transaction between Apex and Cybex.
As of March 15, 2002, there were 240 holders of record
of our common stock. All prices above reflect a three-for-two stock split
effective March 4, 1999.
Dividend Policy
We did not declare or pay any cash dividends in 2001,
2000, or 1999, and for the foreseeable future, we expect to retain earnings to
finance the expansion and development of our business. The payment of dividends
is within the discretion of our Board of Directors and will depend on our
earnings, capital requirements and operating and financial condition, among
other factors. In addition, our line of credit facility prohibits the payment
of dividends if any loans are outstanding under such facility.
Item 6.
Item 6. Selected Financial Data.
(Amounts in thousands,
except per share data.)
Item 7.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
THE INFORMATION IN THIS ITEM
7 - ”MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS” CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITATION,
STATEMENTS RELATING TO OUR REVENUES, EXPENSES, MARGINS, LIQUIDITY, CAPITAL NEEDS,
MERGER ACCOUNTING, ACQUISITION AND TRANSACTION COSTS AND ADJUSTMENTS INCLUDING,
AMONG OTHER THINGS, WRITE OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT COSTS AND
AMORTIZATION OF INTANGIBLE ASSETS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED UNDER THE CAPTION “FACTORS THAT MAY AFFECT FUTURE RESULTS.”
Formation of
Avocent
On July 1, 2000, Apex and
Cybex entered into a merger transaction resulting in a new company, Avocent
Corporation (formerly known as Aegean Sea Inc.). Prior to the effective
date of the merger, Avocent did not conduct any activities. Avocent is on a
calendar year basis with December 31 as its year-end.
The merger was accounted for as
a purchase of Cybex by Apex in accordance with Accounting Principles Board
Opinion No. 16, with the purchase price allocated to the assets and
liabilities of Cybex based upon their fair values on the date of the
transaction. The excess of the purchase price over the fair value of the assets
and liabilities has been allocated to the identifiable intangible assets and
goodwill. The purchase price allocation was as follows: $109 million of
tangible assets, $90 million of identifiable intangible assets,
$34 million of deferred tax liability on intangible assets acquired,
$523 million of goodwill, and $94 million of in-process research and
development. The amortization periods
are 3 to 7 years for identifiable intangibles and 5 years for
goodwill.
In November 2000, Avocent
and Equinox entered into a definitive agreement under which Equinox
agreed to merge with a wholly-owned subsidiary of Avocent Corporation. Equinox received final approval of the merger
from its shareholders on January 2, 2001. The merger was effective as of
January 3, 2001.
The acquisition was recorded
under the purchase method of accounting, and the purchase price was allocated
based on the fair value of the assets acquired and liabilities assumed. In
accordance with generally accepted accounting principles, costs allocated to
research and development assets with alternative future uses were capitalized
and the remaining amounts of purchased in-process research and development were
expensed upon the closing of the transaction. The purchase price allocation was
as follows: $39 million of tangible assets, $12 million of
identifiable intangible assets, $6 million of deferred tax liability on
intangible assets acquired, $21 million of goodwill, and $5 million
of in-process research and development. The amortization periods are 3 to
7 years for identifiable intangibles and 5 years for goodwill.
Avocent’s consolidated statements
of operations, stockholders’ equity, and cash flows for the year ended December
31, 1999 include only the historical results of Apex. Avocent’s consolidated
statement of operations, stockholders’ equity, and cash flows for the year
ended 2000 include the twelve month results of Apex for the period
January 1, 2000 through December 31, 2000 and the six month results
of Cybex for the post-merger period July 1, 2000 through December 31,
2000. Avocent’s consolidated
statements of operations, stockholders’ equity and cash flows for the year
ended December 31, 2001 include the results of Apex, Cybex, and Equinox. Avocent’s consolidated balance sheet as of
December 31, 2000 includes the consolidated financial position of Apex and
Cybex. Avocent’s consolidated balance sheet as of December 31, 2001 includes
the consolidated financial position of Apex, Cybex, and Equinox. Certain
reclassifications have been made to the prior year financial statements to
conform to the current year presentation.
Apex, Cybex,
and Equinox History
Apex operated as a division of
Apex Computer Company through January 1993, providing computer maintenance
services to Microsoft and selling integrated server cabinets and, to a limited
extent, stand-alone switching systems, primarily to Microsoft. In
February 1993, the assets of that division were spun off as a dividend to
the sole shareholder of Apex Computer Company, who contributed those assets as
Apex’s initial capital. Throughout 1993, Apex derived revenue primarily from
the provision of computer maintenance services to Microsoft. In May 1994,
Apex began selling stand-alone switching systems to Compaq for integration into
server cabinets. In June 1994, Apex discontinued its computer maintenance
service business and decided to concentrate on sales of stand-alone switching
products.
Cybex engaged in the development
of software and performed engineering consulting from 1981 to 1984 to finance
its research and development efforts for computer-related products. In 1986,
Cybex shipped its first computer-related hardware product. In 1987, Cybex
shipped its first product that allowed the computer to be extended distances
from the keyboard, monitor, and mouse. Subsequently in 1989, Cybex shipped its
first stand-alone switching system. Through the effective date of the
merger, Cybex derived primarily all of its revenues from switching, extension,
and remote access products.
Equinox engaged in
the development of software and hardware products that provide communications
port management and remote control capabilities. The products were marketed to
end-users under the Equinox brand name through a worldwide, two-tier
distribution channel and network of value added resellers. Equinox also created
customized versions of its products for original equipment manufactures that
sell and support the products under their own brand names.
Overview
We design, manufacture, and sell
analog and digital console switching systems, serial connectivity devices, and
extension and remote access products for the computer industry. Data center
managers and network administrators have increasingly complex and growing
server populations, and our analog, digital, and serial switching solutions, as
well as our extension and remote access products, help them manage multiple
servers and serially controlled devices from a single local or remote console
consisting of a keyboard, video monitor, and mouse. Specifically, our products can provide significant cost
reductions including lower initial investment, reduced utility costs, and space
savings, as well as more efficient technical support capabilities.
We provide “plug and play”
switching systems for many network administration, management, and storage
problems faced by corporate customers, data centers, and server farms. Our
switching solutions include products sold under the Avocent, Apex, Cybex, and
Equinox brands, including our AutoView™, DS Series™, OutLook®, and XP®4000 Series products. Our switching
products help facilities managers and network administrators access multiple
servers and serially controlled devices from one or more centralized or remote
consoles, consolidate hardware requirements, and provide direct hardwired
connections between the switch and the attached servers to facilitate access to
those servers, even when the network is down. Our Equinox branded
products add high-performance, reliable, and affordable server-based products
for serial and dial access applications.
The Equinox SuperSerial product line provides serial
communications for security, commercial point-of-sale, process control,
industrial automation, data collection, remote access, fax servers, Internet
access, and custom applications.
A substantial portion of our revenue is derived from
sales to a limited number of original equipment server manufacturers, or OEMs,
who purchase our switching systems on a private-label or branded basis for
integration and sale with the their own products, sales through our reseller
and distributor network, and sales to a limited amount of direct customers. For
2001, sales to our OEM customers were 46% of net sales, sales to our reseller
and distributor network were 49% of net sales, and sales to our direct
customers were 5% of net sales. We do not have contracts with many of these
customers, and in general, they are obligated to purchase products from us only
pursuant to binding purchase orders.
The proposed merger between Compaq and Hewlett-Packard will result in a further
concentration of sales in our OEM customers, and the loss of, or material
decline in orders from, our OEM customers would have a material adverse effect
on our business, financial condition, results of operation, and cash flow. 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 for approximately 62% of 2001 sales, while sales outside the United
States accounted for 38% of 2001 sales.
With recent industry-wide
initiatives to reduce all channel inventories and to shorten lead times, trends
with our major customers are, generally, to reduce the number of weeks of
forward-committed firm orders. This trend is currently affecting our
business with certain OEMs and other server manufacturers, and we believe
that it will make our sales more difficult to predict and inventory levels more
difficult to manage.
We
are currently experiencing increased price competition in the market for all of
our products, and we expect that pricing pressures will continue to increase in
the future. In addition, general
economic conditions are not as favorable as they were in prior years, and our
revenue growth rate has slowed.
Depending on future general economic conditions and other factors, our
revenue could decline in the future.
Critical
Accounting Policies
Management
believes the following critical accounting policies, among others, affect the
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
• We
review customer contracts to determine if all of the requirements for revenue
recognition have been met prior to recording revenues from sales
transactions. We generally record sales
revenue upon shipment of our products, net of any discounts, since we generally
do not have significant post delivery obligations, the product price is fixed
and determinable, collection of the resulting receivable is probable, and
product returns are reasonably estimable.
We generally ship products upon receipt of a purchase order from a
customer. Shipping terms are evaluated,
and revenue on products shipped FOB destination is recorded when the customer
takes possession of the goods.
• We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
• We
provide for the estimated cost of product warranties at the time revenue is
recognized. While we engage in
extensive product quality programs and processes, including actively monitoring
and evaluating the quality of our component suppliers, our warranty obligation
is affected by product failure rates, failure rates of purchased components
integrated into our products, material usage, and other rework costs incurred
in correcting a product failure. Should
actual product failure rates, material usage, or other rework costs differ from
our estimates, revisions to our estimated warranty liability may be required.
• We
write down our inventory for estimated obsolescence or unmarketable inventory
equal to the estimated market value based upon assumptions about future demand
and market conditions. If actual future
demand or market conditions are less favorable than those projected by
management, additional inventory write-downs may be required.
• We
hold minority interests in companies having operations or technology in areas
within or adjacent to our strategic focus, some of which are in publicly traded
companies with share prices that are volatile and some of which are in
non-publicly traded companies with values that are difficult to determine. We record an investment impairment charge
when we believe an investment has experienced a decline in value that is other
than temporary. Future adverse changes
in market conditions or poor operating results of underlying investments could
result in losses or an inability to recover the carrying value of the
investments that may not be reflected in an investments current carrying value,
thereby possibly requiring an impairment charge in the future.
• We estimate allowances for sales returns based on our experiences from
historical customer returns. If actual
future customer returns are less favorable than those projected by management,
additional sales return expenses may be required.
• We review intangible assets and long-lived assets for impairment under
the guidance prescribed by SFAS No. 121 if indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the carrying values of the assets.
We performed a cash flow analysis as of December 31, 2001, to determine
if the remaining balance of goodwill resulting from the merger transaction
between Apex and Cybex and the acquisition of Equinox had been impaired. The study was performed in accordance with
SFAS No. 121, and as a result of this study, we recorded a $195.4 million
reduction during 2001 in the carrying value of goodwill created by the merger
transaction between Apex and Cybex. The
write-off of the goodwill was based on an analysis of projected cash flows,
which were no longer deemed adequate to support the value of goodwill
associated with the merger. Effective
January 1, 2002, we adopted SFAS No. 142.
Our initial test for goodwill impairment as of January 1, 2002
determined that no adjustment for impairment was required. If economic conditions deteriorate and
indicators of impairment become present, an adjustment to the carrying value of
goodwill may be required.
Results of
Operations
The following table sets forth,
for the periods indicated, selected statement of operations data expressed as a
percentage of net sales:
Years Ended
December 31, 2001 and 2000
Net sales. Our net sales consist of sales
of console switching systems, digital connectivity solutions, serial
connectivity devices, and extension and remote access solutions. Net sales increased 15% to $255.9 million
for 2001 from $222.4 million for 2000. This increase was due to the timing
of the merger of Apex and Cybex and acquisition of Equinox. Only six months of
revenue from the Cybex products was recorded in 2000, while 12 months of
revenue from the Cybex products and the Equinox products was recorded in 2001. Equinox products contributed over
$19 million of net sales in 2001. In addition, this increase in sales
resulted from increased demand from our OEM customers and increased sales
through our resellers and distributors. On a percentage basis, OEM sales for
2001 increased 14% over 2000, and resellers and distributor sales for 2001
increased 26% over 2000. OEM sales were 46% of sales for 2001 and 46% in 2000
as well. Reseller and distributor sales
were 49% of sales for 2001, compared to 45% of sales for 2000, and direct sales
were 5% of sales for 2001 and 9% of sales for 2000. Sales within the United States were 62% of sales in both 2001 and
2000, while sales to the rest of the world accounted for 38% of sales in both
2001 and 2000.
Gross profit. Gross profit is affected by a
variety of factors, including: the ratio of sales among our distribution
channels, resellers and distributors, OEMs, and direct sales, as OEM sales
typically have lower gross margins than our reseller and distributor sales and
direct sales; varying absorption of fixed costs as sales levels fluctuate;
product mix, raw materials, and labor costs; new product introductions by us
and by our competitors; and the level of our outsourcing of manufacturing and
assembly services. Gross margins were significantly affected by
$13 million of write-downs for excess and obsolete inventories during
2001. These write-downs were made to
reduce inventory valuations to bring them in-line with current replacement
values and to the level necessary to support current sales demand. Another charge of over $1 million was taken
at one of our locations due to physical count shortages during the fourth
quarter of 2001. An increase in deferred compensation charges to approximately $2.3 million in 2001 from $1.2 million
in 2000 also affected our margins. This
deferred compensation amortization related to stock options for manufacturing
employees was recognized as a result of the merger of Apex and Cybex that
occurred in mid 2000 and the acquisition of Equinox in January 2001. Due to the timing of the merger and
acquisition, only six months of deferred compensation expense from the merger
was recognized in 2000, while 12 months of deferred compensation from the
merger and the acquisition was recognized in 2001. This deferred compensation
expense will decline in 2002. Gross
profit decreased to 41.4% for 2001 from 49.4% for 2000, due primarily to the
factors discussed above.
Research and development expenses. Research
and development expenses include compensation for engineers, support personnel,
and materials costs and are expensed as they are incurred. Research and
development expenses were $22.5 million, or 8.8% of net sales, in 2001,
compared to $12.9 million, or 5.8% of net sales, in 2000. The increase in
research and development expenses in absolute dollars and as a percentage of
sales was due primarily to the addition of Cybex expenses as a result of the
merger of Apex and Cybex on July 1, 2000 and the addition of Equinox
expenses as the result of the acquisition on January 3, 2001. The additional
costs attributable to Cybex and Equinox include over $4 million in
deferred compensation amortization in 2001 as compared to $2 million of
deferred compensation amortization in 2000. Deferred compensation amortization,
related to stock options for research and development employees, was recognized
as a result of the merger of Apex and Cybex that occurred in mid 2000 and the
acquisition of Equinox in January 2001.
Due to the timing of the merger and acquisition, only six months of
deferred compensation expense from the merger was recognized in 2000, while 12
months of deferred compensation from the merger and the acquisition was
recognized in 2001. This deferred
compensation expense will decline in 2002 We believe that the timely
development of innovative new products and enhancements to existing
products is essential to maintaining our competitive position, and we expect
research and development expenditures to continue to increase in absolute
dollars in 2002 compared to 2001.
In-process research and development expense and other
acquisition costs. Acquisition related expenses in 2001 is
comprised solely of the one-time write-off
of $4.6 million of in-process research and development expense. Merger related expenses of $104 million
in 2000 include the one-time write-off of $94 million of in-process
research and development expense and an additional $10 million of
non-recurring charges comprised mainly of fees to professional advisors.
Selling, general and administrative expenses. Selling,
general and administrative expenses include certain merger and acquisition
related expenses, personnel costs for administration, finance, human resources,
sales and marketing and general management, as well as rent, utilities, legal
and accounting expenses, advertising, promotional material, trade show expenses
and related travel costs. The increase in selling, general and administrative
expenses in absolute dollars and as a percentage of sales was due primarily to
the addition of Cybex expenses as a result of the merger transaction between
Apex and Cybex on July 1, 2000 and the addition of Equinox expenses as the
result of the acquisition of Equinox on January 3, 2001. Selling, general and
administrative expenses were $74.8 million, or 29.2% of net sales for 2001
compared to $52.1 million, or 23.5% of net sales for 2000. Approximately
$13.2 million of selling, general and administrative expenses in 2001
related to the amortization of deferred compensation for stock options as a
result of the merger transaction between Apex and Cybex and the acquisition of
Equinox, and the amortization of deferred compensation for stock options as a
result of the two transactions will decline in 2002. Approximately $15.3 million of selling, general and
administrative expenses in 2000 related to the amortization of deferred
compensation for stock options as a result of the merger transaction between Apex
and Cybex, including approximately $9.8 million related to the discretionary
acceleration of stock options by the Apex Board of Directors in connection with
the merger. Additionally, 2001 selling,
general and administrative expenses include $1.3 million of severance
costs related to headcount reductions in the U.S. and Europe. Also, bad debt
expense increased approximately $2.6
million in 2001 when compared to 2000 as we increased reserves to address
collectability issues in light of the general economic decline. In the second half of 2001 selling, general
and administrative expenses declined in absolute dollars and as a percentage of
sales due to cost control measures that included headcount reductions and a
reduction in advertising and promotion programs. We expect selling, general
and administrative expenditures as a percentage of net sales to remain at or
below the level of expense for 2001 in the coming year.
Amortization
and write-down of intangible assets. Amortization and write-down of intangible
assets is comprised of the amortization of the identifiable intangible assets
and goodwill created as a result of the merger transaction between Apex and
Cybex and the acquisition of Equinox and a write-down of goodwill recorded as
the result of a cash flow analysis performed under the applicable provisions of
SFAS No. 121 during 2001. Amortization of identifiable intangible assets and
goodwill was $132.8 million or 52.0% of net sales for 2001 compared to
$62.4 million or 28.0% of net sales for 2000. We performed a cash flow
analysis to determine if the remaining balance of goodwill created at the
merger of Apex and Cybex and the acquisition of Equinox had been impaired. The study was performed in accordance with
SFAS No. 121
“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of.” As a
result of this study, we recorded a $195.4 million reduction in the carrying
value of goodwill created only the merger of Apex and Cybex. The write-off of the goodwill was based on
an analysis of projected cash flows, which were no longer considered adequate
to support the value of goodwill associated with the merger. Additionally, we adopted SFAS No. 142, Goodwill and
Other Intangible Assets, on January 1, 2002. On that date, under the provisions of SFAS
No. 142, goodwill ceased to be amortized.
The amortization of goodwill was approximately $111,000 during 2001.
Other income, net. Other income was $735,000 in
2001, down from $5.7 million for 2000. The decrease related primarily to a
charge of $4.9 million recorded in for an “other-than-temporary” decline in the
market value of our portfolio.
Excluding the $4.9 million charge, other income remained flat in 2001 as
compared to 2000. Although we had more
cash and marketable securities in 2001 than in 2000, interest income has
declined due to lower interest rates.
Provision for (benefit from) income taxes. The
benefit from income taxes was approximately $2.9 million for 2001,
compared to a provision for income taxes of $14.6 million in 2000.
Excluding merger related adjustments to federal taxes, the effective tax rate
for 2001 was approximately 29.0%, compared to 32.2% for 2000, primarily due to
shifting of international sales to our Shannon, Ireland facility. Our Shannon
facility operates under a 10% tax rate.
Net loss. Our net loss for 2001 was
$320.5 million compared to $130.6 million for 2000, as a result of
the above factors, including the reduction in the carrying value of goodwill,
the amortization of identifiable intangible assets and goodwill, deferred
compensation expense, and inventory write-downs. The net loss as a percentage of sales for 2001 was 125.2%,
compared to 58.7% for 2000.
Years Ended
December 31, 2000 and 1999
Net sales. Our net sales consist of sales
of switching systems, extension and remote access products, and display
products. Net sales increased 107% to $222.4 million for 2000 from
$107.3 million for 1999. This increase was due primarily to the impact of
the merger of Apex and Cybex on July 1, 2000. Cybex contributed
$90.8 million of net sales in 2000. Other factors related to the increase
in sales were increased demand from our OEM customers and increased sales
through our resellers and distributors. On a percentage basis, OEM sales for
2000 increased 32% over 1999, and resellers and distributor sales for 2000
increased 402% over 1999. OEM sales were 46% of sales for 2000, compared to 72%
of sales for 1999, reseller and distributor sales were 45% of sales for 2000,
compared to 19% of sales for 1999, and direct sales were 9% of sales for 2000
and 9% of sales for 1999. The shift in customer mix is a reflection of the
addition of Cybex customers. For the period July 1 to December 31,
2000, almost 80% of Cybex’s revenues were derived from sales to resellers and
distributors.
Gross profit. Gross profit is affected by a
variety of factors, including: the ratio of sales among our distribution
channels, resellers and distributors, OEMs, and direct sales, as OEM sales
typically have lower gross margins than our reseller and distributor sales and
direct sales; varying absorption of fixed costs as sales levels fluctuate;
product mix, raw materials, and labor costs; new product introductions by us
and by our competitors; and the level of our outsourcing of manufacturing and
assembly services. Additionally, the addition of Cybex customers as a result of
the merger had a direct impact on gross profit. Cybex’s gross profit
percentages have historically been higher than Apex’s primarily due to the
composition of the Cybex customer base. Historically, Cybex sales were largely
sales to resellers which typically have higher gross margins than sales to
OEMs. Slightly offsetting the benefit of the Cybex customer composition
were charges totaling approximately $1.2 million in deferred compensation
amortization related to stock options for manufacturing employees recognized as
a result of the merger. Gross profit increased to 49.4% for 2000 from 46.5% for
1999, due primarily to the higher percentage of reseller and distributor sales
in 2000 compared to 1999.
Research and development expenses. Research
and development expenses include compensation for engineers, support personnel,
and materials costs and are expensed as they are incurred. Research and
development expenses were $12.9 million, or 5.8% of net sales, in 2000,
compared to $6.5 million, or 6.1% of net sales, in 1999. The large
increase in the amount spent on research and development can be attributed to
the impact of the merger effective July 1, 2000. The additional costs of
the Cybex research and development team includes approximately $2 million
in deferred compensation amortization related to stock options for certain
engineering employees recognized as a result of the merger.
In-process research and development expense and other
acquisition costs. Merger related expenses of $104 million
in 2000 include the one-time write-off of $94 million of in-process
research and development expense and an additional $10 million of one-time
charges comprised mainly of fees to professional advisors.
Selling, general and administrative expenses. Selling,
general and administrative expenses include some merger related expenses,
personnel costs for administration, finance, human resources, sales and
marketing and general management, as well as rent, utilities and legal and
accounting expenses, advertising, promotional material, trade show expenses and
related travel costs. Selling, general and administrative expenses were
$52.1 million, or 23.5% of net sales for 2000 compared to
$14.1 million, or 13.1% of net sales for 1999. Approximately
$15.3 million of selling, general and administrative expenses in 2000
related to the amortization of deferred compensation for stock options as a
result of the merger transaction between Apex and Cybex. Excluding the merger-related
amortization of deferred compensation in 2000, selling, general and
administrative expenses were 16.6% of net sales. The increase in selling,
general and administrative expenses in absolute dollars and as a percentage of
sales was due primarily to growth in our business and to the addition of Cybex
expenses as a result of the merger transaction between Apex and Cybex on
July 1, 2000. Historically, Cybex’s selling, general and administrative
expenses as a percentage of sales were larger than Apex’s due to the higher
levels of staffing and advertising and promotion expenses required to support
its reseller and distributor customers.
Amortization of intangible assets.
Amortization of intangible assets is comprised entirely of the
amortization of the amounts allocated to the identifiable intangible assets and
goodwill that were in excess of the purchase price over the fair value of the
Cybex assets and liabilities acquired by Apex in the merger transaction. The amortization
periods are 3 to 7 years for intangibles and 5 years for goodwill.
Amortization of identifiable intangible assets and goodwill from the date of
the merger on July 1, 2000 was $62.4 million or 28.0% of net sales
for 2000.
Other income, net. Other income was
$5.7 million for 2000, up from $3.1 million for 1999. The increase
related primarily to interest income from increased cash and investments
provided by the addition of the Cybex cash and cash equivalents and investments
as a result of the merger effective July 1, 2000, as well as cash provided
from 2000 operations.
Provision for income taxes. The
provision for income taxes was approximately $14.6 million for 2000,
compared to
$11.1 million in 1999. Excluding merger related adjustments to
federal taxes, the effective tax rate for 2000 was approximately 32.5%,
compared to 34.3% for 1999, primarily due to shifting of international sales to
our Shannon, Ireland facility. Our Shannon facility operates under a 10% tax
rate.
Net income (loss). Our net loss for 2000 was
$130.6 million compared to net income of $21.2 million for 1999, as a
result of the above factors, including in-process research and development
expense and other acquisition costs, the amortization of identifiable assets
and goodwill, and deferred compensation expense. The net loss as a percentage
of sales for 2000 was 58.7%, compared to the net income as a percentage of
sales for 1999 of 19.8%.
Liquidity and
Capital Resources
As of December 31, 2001 our principal
sources of liquidity consisted of approximately $172 million in cash, cash
equivalents, and investments. In addition, we have an unsecured bank line of
credit with a borrowing capacity of
$2.0 million with an interest rate of LIBOR plus 2.25% (approximately
4.12% at December 31, 2001). There were no amounts outstanding under the
line of credit at December 31, 2001, and all $2.0 million was
available. In early January 2001, we arranged two $25 million credit
lines with two separate financial institutions at interest rates of LIBOR plus
1.75% to temporarily finance our acquisition of Equinox pending maturity of
certain short-term investments. Approximately $45 million was drawn against
these lines in January 2001 and was repaid before the end of the first quarter
of 2001. On the closing of the Equinox transaction, we acquired approximately
$24.3 million in cash and short-term investments held by Equinox. There were no other borrowings during 2001.
Our operating activities generated cash of
approximately $72.6 million for 2001, $19.1 million for 2000, and
$8.3 million for 1999. For 2001, after adjusting the net loss for merger
and acquisition related items and the goodwill valuation adjustment, the large increase
in cash flow from operations compared to 2000 is attributable to significant
fluctuations in accounts receivables, other receivables, inventory, and income
taxes payable. The significant decline in accounts receivable was the result of
the timing of sales, increased collection efforts, and increased reserves for
allowance for doubtful accounts to ensure accounts receivable are carried at
their realizable value.
Inventory levels declined significantly from
December 31, 2000 to December 31, 2001.
Inventory levels increased early in 2001 due to the purchase of
long-lead items and transfer of completed subassemblies from a vendor for our
DS1800 product. During the fourth quarter of 2000, we sold a large amount of
our DS1800 components to a subcontractor to produce DS1800 subassemblies. The value of these components was carried
as other receivables at December 31, 2000 and the value was transferred back to
inventory from other receivables upon the receipt of the subassemblies. The large inventory increase during early
2001 was offset later in 2001 by a charge of over $13 million, before tax
benefit, for excess and obsolete inventories recorded during 2001. Another
charge of over $1 million was taken at one of our locations due to physical
count shortages during the fourth quarter of 2001. These charges reduced
inventories to replacement value and to levels necessary to support sales
demand.
Other receivables consist primarily of amounts due
from certain subcontractors, net of estimated uncollectable accounts, for components
sold to the subcontractors. Other
receivables decreased significantly from 2000 to 2001, due primarily to the
timing of a large shipment of components to a subcontractor at the end of 2000,
discussed above. Additionally, income
taxes payable increased significantly from 2000 to 2001. The increase in income taxes payable can be
attributed largely to the decline in the income tax benefit from the exercise
of stock options from 2000 to 2001. The
amount of income tax benefit we record as the result of the exercise of stock
options is directly impacted by the gain an employee receives from the option
exercise. These gains were reduced
significantly due to the decline in our stock price in 2001 versus 2000.
Future minimum rental payments
under non-cancelable operating lease for 2002 total approximately $2.0
million. We believe that existing cash
balances, cash generated from operations and the funds available under our
credit facilities will be sufficient to fund our operations through 2002.
Certain
Transactions
CyCom
L.L.C.
In 2000, Cybex
Computer Products Corporation, our wholly-owned subsidiary, acquired a 40%
interest in CyCom L.L.C., a joint venture created to focus on computer
technology and research for products in the desktop computer and server
industry. The other 60% of CyCom is
owned by 2C Computing, a significant shareholder of which is a former Cybex
director. Upon the formation of CyCom,
Cybex contributed a license for certain of its intellectual property, and 2C
contributed management services and capital funding. Under the terms of the membership agreement, 2C is responsible
for all continued technology development efforts. The net profits of CyCom are to be split 60% to 2C and 40% to
Cybex after 2C recoups its accumulated losses from the development and
marketing of CyCom products. The
carrying value of our investment in the joint venture is zero because Cybex's
contribution to the joint venture consisted of previously expensed research and
development costs related to the technology.
We have no obligation to provide funding or other financial support to
CyCom in future periods. As of December
31, 2001, we believe that 2C had incurred cumulative unaudited losses, and we
do not anticipate that the joint venture will be profitable in 2002.
Employee
Loan
In 2001, in
connection with the opening of our office in Austin, Texas, C. David Perry, our
Vice President of OEM Sales, moved his principal residence from Redmond,
Washintgon, to Austin. In connection
with the purchase of a new residence by Mr. Perry in the Austin area and
pending the sale of his Redmond residence, Apex Solutions Texas L.P., a
wholly-owned indirect affiliate of Apex, loaned Mr. Perry and his wife $760,000
under the terms of a Promissory Note dated October 31, 2001. The loan was interest free and was payable
on the earlier of the first anniversary of the promissory note or the sale of
the Redmond residence. The promissory
note was also conditioned on the future performance by his Mr. Perry of
substantial services to Apex and its affiliates. The promissory note was secured by a Deed of Trust from Mr. Perry
and his wife on the Redmond residence.
The promissory note was repaid in full by Mr. Perry in January, 2002.
Investments
Our investments consist of corporate bonds, commercial
paper, mortgage backed securities guaranteed by U.S. government agencies, and common stock. Debt securities that we
have the positive intent and ability to hold to maturity are classified as
held-to-maturity securities and are reported at amortized cost. Debt and equity
securities not classified as either held-to-maturity securities or trading
securities and that have readily determinable fair values are classified as
available-for-sale securities and are reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders’ equity. We periodically review our investment portfolio
for investments
considered to have sustained an other-than-temporary decline in value. Accordingly, we recorded a $4.9 million
before tax benefit charge related to an other-than-temporary decline in fair
value of certain equity investments in our investment portfolio during the year
ended December 31, 2001.
Results of
Operations, As If Apex and Cybex Operations Were Combined for All Periods
Presented
The following “as if” combined
financial information is unaudited, presented for illustrative purposes only,
and is not necessarily indicative of the operating results that would have
occurred if the transaction had been consummated prior to the years presented
below. Additionally, all merger and acquisition related expenses, merger and
acquisition related deferred compensation charges, the write-off of in-process
research and development expenses, intangible amortization, the goodwill
valuation write-down, severance charges, inventory write-downs for excess and
obsolescence and investment write-down for other-than-temporary decline are
presented as certain items below the calculation of income. Financial
information for Equinox is included only subsequent to the acquisition on
January 3, 2001. The following table
sets forth, for the periods indicated, selected statement of operations data
expressed in millions:
Combined Financial Information
Years Ended
December 31, 2001 and 2000-On an “as if” Combined Basis
Net sales. Our net sales consist of sales of console switching systems,
digital connectivity solutions, serial connectivity devices, and extension and
remote access solutions. Net sales
decreased 13% to $255.9 million for 2001 from $294.0 million for
2000. The overall decrease in sales resulted from the general weakness in the
technology sector of the economy.
Specifically, this decrease in net sales was the result of decreased
demand from our resellers and distributors and decreased direct sales. The decrease in direct sales and the
decrease in reseller and distributor sales were partially offset by an increase
in sales to our OEM customers. Sales through our reseller and distributor
channel decreased 21% from $158.3 million in 2000 to $125.5 million in 2001.
Direct sales decreased 51% from $28.2 million in 2000 to $13.9 million in 2001.
OEM sales increased 8% from $107.5 million in 2000 to $116.5 million in 2001.
Reseller and distributor sales were 49% of sales for 2001, compared to 54% of
sales for 2000, OEM sales, on the other hand, were 46% of sales for 2001,
compared to 37% of sales for 2000, and direct sales were 5% of sales for 2001,
compared to 9% of sales for 2000. The
decline in sales was more pronounced for sales within the United States as
compared to sales to the rest-of-world. Sales within the United States
decreased 14% from $186.8 million in 2000 to $159.8 million in 2001.
Rest-of-world sales decreased 10% from $107.2 million in 2000 to $96.1 million
in 2001. Sales within the United States
were 62% of sales for 2001, compared to 64% of sales for 2000, and rest-of
-world sales were 38% of sales for 2001, compared to 36% of sales for 2000.
Gross profit. Gross profit is affected by a
variety of factors, including: the ratio of sales among our distribution
channels, resellers and distributors, OEMs, and direct sales, as OEM sales
typically have lower gross margins than our reseller and distributor sales and
direct sales; varying absorption of fixed costs as sales levels fluctuate;
product mix, raw materials and labor costs; new product introductions by us and
by our competitors; and the level of our outsourcing of manufacturing and
assembly services. Gross profit decreased to 46.9% for 2001 from 50.9% for
2000, due primarily to lower absorption of overhead due to reduced sales.
Additionally, we recorded a $3 million inventory charge in the fourth quarter
at one of our facilities. The charge
consisted of $1 million due to physical count shortages. The remaining $2 million was primarily an
increase to the excess and obsolete reserve as we identified additional items similar
to the second quarter charge included with certain items detailed below.
Research and development expenses. Research
and development expenses include compensation for engineers, support personnel,
and materials costs and are expensed as they are incurred. Research and
development expenses were $18.2 million, or 7.1% of net sales in 2001,
compared to $14.8 million, or 5.0% of net sales 2000. The increase in
research and development can be attributed to the additional staff and project
costs added as the result of the acquisition of Equinox on January 3, 2001.
Selling, general and administrative expenses. Selling,
general and administrative expenses include personnel costs for administration,
finance, human resources, sales and marketing and general management, as well
as rent, utilities and legal and accounting expenses, advertising, promotional
material, trade show expenses and related travel costs. Selling, general and
administrative expenses were $58.9 million, or 23.0% of net sales for 2001,
compared to $53.6 million, or 18.2% of net sales for 2000. The increase in
selling, general and administrative expenses in absolute dollars and as a
percentage of sales was due primarily to the additional staff and
administrative costs added as the result of the acquisition of Equinox on
January 3, 2001. In the second half of
2001, selling, general and administrative expenses declined in absolute
dollars and as a percentage of sales due to cost control measures, which
included headcount reductions and a reduction in advertising and promotional
programs.
Other income, net. Interest income was
$5.6 million for 2001, down from $6.0 million for 2000. Although we
had more cash and marketable securities in 2001 than in 2000, interest income
declined due to lower interest rates.
Provision for income taxes. The
provision for income taxes was approximately $14.1 million for 2001,
compared to $28.2 million in 2000. The effective tax rate for 2000 was
approximately 29.0%, compared to 32.3% for 2000. The improvement in the
effective tax rate is due primarily to shifting international OEM shipments to
our Shannon, Ireland facility from our U.S. operations. Our Shannon facility
operates under a 10% tax rate.
Income excluding certain items. Income
excluding certain items declined to $34.5 million for 2001 from
$59.2 million for 2000, as a result of the above factors. As a percentage
of net sales, income decreased to 13.5% for 2001 from 20.1% for 2000.
Certain items. Certain items include the
amortization of intangible assets, the write-off of in-process research and
development expenses related to mergers and acquisitions, deferred compensation
expense related to stock options, additional charges comprised mainly of fees
to professional advisors, goodwill impairment write-down, severance charges,
inventory write-downs for excess and obsolescence and investment write-down for
other than temporary decline. The merger and acquisition charges in 2001 are as
follows: amortization of intangibles was $125.2 million; write-off of
in-process research in development associated with the Equinox acquisition was
$4.6 million; and deferred compensation expense, net of tax, was
$17.3 million. Additionally,
during 2001 we recorded a $195.4 million charge for impairment in the carrying
value of goodwill. Other charges taken
during 2001, net of tax, are as follows: a charge for excess and obsolete
inventory of $8.4 million; severance charges for headcount reductions were $1.0
million; and a write-off for other-than-temporary decline in investments was
$3.1 million. The expenses in 2000
related to the merger of Apex and Cybex are as follows: amortization of
intangibles was $61.9 million; write-off of in-process research in
development associated with the merger of Apex and Cybex was $94.0 million;
deferred compensation expense, net of tax, was $10.9 million; and
professional fees paid to advisors totaled $11.1 million.
Net loss on an “as if” combined basis. Net loss
declined to $320.5 million for 2001 from $118.7 million for 2000, as a result
of the above factors, including the reduction in the carrying value of
goodwill, the amortization of identifiable intangible assets and goodwill,
deferred compensation expense, and inventory write-downs. The net loss as a percentage of sales for
2001 was 125.2%, compared to 40.4% for 2000.
Years Ended December 31, 2000 and 1999-On an “as if”
Combined Basis
Net sales. Our net sales consist of sales
of switching systems, extension and remote access products, and display
products. Net sales increased 36% to $294.0 million for 2000 from
$216.7 million for 1999. This increase in net sales was the result of
increased demand from our resellers and distributors and increased sales to our
OEM customers. On a percentage basis, reseller and distributor sales for 2000
increased 41% over 1999 and OEM sales for 2000 increased 30% over 1999.
Reseller and distributor sales were 54% of sales for 2000, compared to 52% of
sales for 1999, OEM sales were 37% of sales for 2000, compared to 38% of sales
for 1999, and direct sales were 9% of sales for 2000, compared to 10% of sales
for 1999.
Gross profit. Gross profit is affected by a
variety of factors, including: the ratio of sales among our distribution
channels, resellers and distributors, OEMs, and direct sales, as OEM sales
typically have lower gross margins than our reseller and distributor sales and
direct sales; varying absorption of fixed costs as sales levels fluctuate;
product mix, raw materials and labor costs; new product introductions by us and
by our competitors; and the level of our outsourcing of manufacturing and
assembly services. Gross profit increased to 50.9% for 2000 from 50.1% for
1999, due primarily to the higher percentage of reseller and distributor sales
in 2000 compared to 1999.
Research and development expenses. Research
and development expenses include compensation for engineers, support personnel,
and materials costs and are expensed as they are incurred. Research and
development expenses were $14.8 million, or 5.0% of net sales in 2000,
compared to $13.0 million, or 6.0% of net sales 1999. The dollar increase
on research and development includes increased compensation expense associated
with increased staffing levels, which was slightly offset by decreased project
spending in Redmond related to the timing of product development, as there was
significant project spending related to new products introduced by Redmond in
1999.
Selling, general and administrative expenses. Selling,
general and administrative expenses include personnel costs for administration,
finance, human resources, sales and marketing and general management, as well
as rent, utilities and legal and accounting expenses, advertising, promotional
material, trade show expenses and related travel costs. Selling, general and
administrative expenses were $53.6 million, or 18.2% of net sales for
2000, compared to $39.0 million, or 18.0% of net sales for 1999. The
increase in selling, general and administrative expenses in absolute dollars
and as a percentage of sales was due primarily to growth in our business,
increased advertising and promotional expenses and increased compensation
expense associated with increased staffing levels.
Other income, net. Interest income was
$6.0 million for 2000, up from $4.7 million for 1999. The increase
related primarily to interest income from increased cash and investments
provided from 2000 operations.
Provision for income taxes. The
provision for income taxes was approximately $28.2 million for 2000,
compared to $20.9 million in 1999. The effective tax rate for 2000 was
approximately 32.3%, compared to 34.1% for 1999. The improvement in the
effective tax rate is due primarily to shifting our foreign shipments to our
Shannon, Ireland facility from our U.S. operations. Our Shannon facility
operates under a 10% tax rate.
Income excluding certain items. Income
excluding certain items improved to $59.2 million for 2000 from
$40.4 million for 1999, as a result of the above factors. As a percentage of
net sales, income increased to 20.1% for 2000 from 18.7% for 1999.
Certain items. Certain items include the
amortization of intangible assets, the write-off of in-process research and
development expenses related to mergers and acquisitions, deferred compensation
expense related to stock options and additional charges comprised mainly of
fees to professional advisors. The expenses in 2000 related to the merger of
Apex and Cybex as follows: amortization of intangibles was $61.9 million;
write-off of in-process research in development was $94.0 million;
deferred compensation expense, net of tax, was $10.9 million; and
professional fees paid to advisors totaled $11.1 million. The expenses in
1999 of $2.7 million are net of taxes and relate to the acquisition of Fox
Network Solutions Corporation and PixelVision Technology, Inc. The amounts
for 1999 are almost entirely related to the write-off of in-process research
and development expenses.
Net income (loss) on a combined basis. Net loss
for 2000 was $118.7 million compared to net income of $37.7 million for
1999, as a result of the above factors, including in-process research and
development expense and other acquisition costs, the amortization of
identifiable assets and goodwill, and deferred compensation expense. The net loss as a percentage of sales for
2000 was 40.4%, compared to net income as a percentage of sales for 1999 of
17.4%.
Recently Issued Accounting Standards
In
June 2001, the Financial Accounting Standards Board issued SFAS
No. 141, Business Combinations, which has an effective date of June
30, 2001 for all business combinations initiated after this date. This statement supersedes APB Opinion No.
16, Business
Combinations, and FASB Statement No. 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises. This statement requires all business combinations within the
scope of the Statement to be accounted for using the purchase method of
accounting. For business combinations
completed prior to June 30, 2001, the statement requires companies to recognize
intangible assets apart from goodwill and expand the disclosures about assets
acquired and liabilities assumed. The
impact of SFAS No. 141 was not material to the Company’s December 31, 2001
financial statements.
In
June 2001, the Financial Accounting Standards Board issued SFAS
No. 142, Goodwill and Other Intangible Assets, which has an effective
date starting with fiscal years beginning after December 15, 2001. This statement supersedes APB Opinion No.
17, Intangible
Assets. This statement
addresses the initial accounting for intangible assets that are acquired
individually or with a group of other assets.
This statement also addresses the accounting for goodwill and other
intangible assets after they have been initially recognized in the financial
statements. Goodwill will cease to be
amortized upon the implementation of the statement and companies will test
goodwill at least annually for impairment. We adopted SFAS No. 142 effective
January 1, 2002 and accordingly, performed a test for possible goodwill
impairment as of January 1, 2002. The
test concluded that no adjustment was required upon adoption. Additionally, under the provisions of SFAS
No. 142, we will cease to amortize goodwill. Amortization of goodwill was
approximately $111,000 during 2001.
In August 2001,
the Financial Accounting Standards Board issued SFAS No. 143, Accounting
for Asset Retirement Obligations (“ARO”), which has an effective
date for financial statements for fiscal years beginning after June 15,
2002. This statement addresses the
diversity in practice for recognizing asset retirement obligations and requires
that obligations associated with the retirement of a tangible long-lived asset
be recorded as a liability when those obligations are incurred, with the amount
of the liability initially measured at fair value. Upon initially recognizing a liability for an ARO, an entity must
capitalize the cost by recognizing an increase in the carrying amount of the
related long-lived asset. Over time,
the liability is accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The impact of SFAS No.
143 on the financial statements is not expected to be material.
In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which has an
effective date for financial statements for fiscal years beginning after
December 15, 2001. This statement,
which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of, requires that
long-lived assets that are to be disposed of by sale be measured at the lower
of book value or fair value less cost to sell.
Additionally, this statement expands the scope of discontinued operations
to include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. The impact of SFAS No. 144 on the financial
statements is not expected to be material.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risks.
Our primary market risk is the
potential loss arising from changes in interest rates, which could have an
adverse impact on the fair value of our investment securities. Our investment
policy is to manage our investment portfolio to preserve principal and
liquidity while maximizing the return on the investment portfolio through the
investment of available funds. We diversify the investment portfolio by
investing in a variety of highly-rated investment-grade securities
and through the use of different investment managers. Our investment securities
portfolio is primarily invested in securities with maturities (or interest rate
resets) of two years or less with at least an investment grade rating to
minimize interest rate and credit risk as well as to provide for an immediate
source of funds. Market risk is estimated as the potential change in fair value
in the investment portfolio resulting from a hypothetical 10 percent
change in interest rates, and was not material at December 31, 2001. We
generally hold investment securities until maturity and carry the securities at
amortized cost, which approximates fair value.
We are also exposed to equity price risks on our
investments in publicly traded equity securities. These investments are
generally in companies having operations or technology in areas within our
strategic focus. We do not attempt to reduce or eliminate our market exposure
on these securities. As of December 31, 2001, the fair value of our
available-for-sale equity investments was $851,000. A 20 percent
adverse change in equity prices would result in a decrease of approximately
$170,000 in the fair value of our available-for-sale equity
securities as of December 31, 2001.
We also face foreign currency exchange rate risk
to the extent that the value of certain foreign currencies relative to the U.S.
dollar affects our financial results. Our international operations transact a
portion of our business in currencies other than the U.S. dollar, and changes
in exchange rates may positively or negatively affect our revenues, gross
margins, operating expenses, and retained earnings since these transactions are
expressed in U.S. dollars. We engage in some hedging programs aimed at limiting
the impact of currency fluctuations. These hedging activities provide only
limited protection against currency exchange risks, and there can be no assurance
that such an approach will be successful, especially if a significant and
sudden decline occurs in the value of local currencies.
Item 8.
Item 8. Financial Statements.
Index to Consolidated Financial
Statements
Report of Independent
Accountants
Consolidated
Financial Statements:
Consolidated Balance Sheets
as of December 31, 2001 and 2000
Consolidated
Statements of Operations for the years ended December 31, 2001, 2000 and
Consolidated
Statements of Stockholders’ Equity for the years ended December 31,
2001, 2000 and 1999
Consolidated
Statements of Cash Flows for the years ended December 31, 2001, 2000 and
Notes to
Consolidated Financial Statements
Schedule
II - Valuation and Qualifying Accounts
Report
of Independent Accountants
To the Board of Directors and Stockholders
of Avocent Corporation
In our opinion,
the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Avocent Corporation
and its subsidiaries at December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted
in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company’s management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United States
of America, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers
LLP Birmingham,
Alabama
February 15, 2002
Avocent Corporation
Consolidated Balance Sheets
December 31, 2001 and 2000
(In thousands, except per share data)
The accompanying notes
are an integral part of these consolidated financial statements.
Avocent Corporation
Consolidated Statements of Operations
For the Years Ended December 31,
2001, 2000 and 1999
(In thousands, except per share data)
The accompanying notes
are an integral part of these consolidated financial statements.
Avocent Corporation
Consolidated Statements of
Stockholders' Equity
For the Years Ended December 31,
2001, 2000 and 1999
(In thousands)
Comprehensive loss
in 2001 of $323,305 consists of $320,466 of net loss, $2,926 release of
unrealized loss on investments (net of deferred income taxes) and $87 of
foreign currency translation adjustment (net of deferred income taxes). The unrealized loss on investments is net of
$272 of realized losses and a $4,899 write-down on investments that are
included in other income in the accompanying consolidated statement of
operations.
Comprehensive loss
in 2000 of $133,437 consists of $130,556 of net loss, $2,848 of unrealized loss
on investments (net of deferred income taxes) and $33 of foreign currency
translation adjustment (net of deferred income taxes). The unrealized loss on investments is net of
$433 of realized losses on investments that are included in other income in the
accompanying consolidated statement of operations.
The accompanying notes are an integral part of these consolidated
financial statements.
Avocent Corporation
Consolidated Statements of Cash Flows
For the Years Ended December 31,
2001, 2000 and 1999
(In thousands)
The accompanying notes
are an integral part of these consolidated financial statements.
Avocent Corporation
Notes to Consolidated Financial
Statements
For the Years Ended December 31,
2001, 2000 and 1999
(In Thousands, except per share data)
1. Nature of Business and Basis of Presentation
Avocent Corporation (the Company or Avocent) designs, manufactures and
sells analog and digital console switching systems, serial connectivity devices
and extension and remote access products for the computer industry. The Company’s analog, digital and serial
switching solutions and the extension and remote access products help network
administrators manage multiple servers and serially controlled devices from a
single keyboard, video monitor and mouse configuration from extended distances
or from remote locations, facilitating more efficient network management and
administration. The Company sells products to distributors, resellers,
end-users and original equipment manufacturers in the United States and
throughout the rest of the world.
Avocent was formed from the merger of Apex, Inc (“Apex”) and Cybex
Computer Products Corporation (“Cybex”) on July 1, 2000, when both Apex and
Cybex merged with wholly owned subsidiaries of Avocent. The merger has been accounted for as a
purchase of Cybex by Apex. Avocent’s
consolidated statements of operations, stockholders’ equity, and cash flows for
the year ended December 31, 1999, includes only the historical results of Apex. Avocent’s consolidated statements of
operations, stockholders’ equity, and cash flows for the year ended December
31, 2000, include the 12-month results of Apex for the period January 1, 2000
through December 31, 2000, and the six-month results of Cybex for the
post-merger period July 1, 2000 through December 31, 2000. Avocent’s consolidated statements of
operations, stockholders’ equity and cash flows for the year ended December 31,
2001 includes the results of Apex, Cybex and Equinox Systems Inc. (“Equinox”),
which was acquired by Avocent on January 3, 2001. Avocent’s consolidated balance sheet as of December 31, 2000
includes the consolidated financial position of Apex and Cybex. Avocent’s
consolidated balance sheet as of December 31, 2001 includes the consolidated financial
position of Apex, Cybex and Equinox.
2. Summary of Significant Accounting Policies
The principal accounting policies of the Company are as follows:
Principles
of Consolidation
- The Company’s consolidated financial statements include the Company and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and
Cash Equivalents
- The Company considers all highly liquid instruments with an original maturity
of three months or less when purchased to be cash equivalents.
Other
Receivables - Other
receivables is primarily comprised of amounts due, net of estimated
uncollectable accounts, from certain subcontract manufacturers of the Company
for product components sold to subcontractors.
Amounts due from component sales is included in the accompanying
consolidated statements of operations as a reduction of cost of sales. As of
December 31, 2001, the Company’s other receivables included an allowance for
uncollectable accounts of approximately $1,800. Additionally, other receivables at December 31, 2001 included a
receivable of $760 due from an executive employee that was collected subsequent
to year-end.
Inventories - Raw materials, work in process and finished goods are
recorded using the lower of standard cost, which approximates first-in
first-out (FIFO), or market.
Financial Instruments - The carrying
amounts reported in the balance sheets for cash and cash equivalents,
short-term investments, accounts receivable and accounts payable approximate
fair value because of the immediate or short-term maturity of these financial
instruments.
Investments - The
Company’s investments consist of corporate bonds, commercial paper, mortgage
backed securities guaranteed by U.S. government agencies and common stock. Debt securities that the Company has the
positive intent and ability to hold to maturity are classified as
held-to-maturity securities and are reported at amortized cost. Debt and equity securities not classified as
either held-to-maturity securities or trading securities and that have readily
determinable fair values are classified as available-for-sale securities and
are reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders’ equity.
Unrealized losses are charged against earnings when a decline in fair value is
determined to be other than temporary.
Realized gains and losses are accounted for on the specific
identification method. Purchases and
sales are recorded on a trade date basis. The Company’s investments at December
31, 2001 and 2000 have been classified as available-for-sale and
held-to-maturity (see Note 5).
Property Held for Lease - Property held for lease is carried at cost, less
accumulated depreciation, which is computed using the straight-line method over
the estimated useful lives of the assets. Rental income from this property is
recorded on a monthly basis in accordance with the lease terms. Initial direct
costs are deferred and matched against rental income over the initial term of
the lease (see Note 6).
Property and Equipment - Property and equipment are carried at cost, less
accumulated depreciation, and include expenditures that substantially increase
the useful lives of existing assets. Maintenance and repairs are charged to
current operations as incurred. Upon sale, retirement, or other disposition of
these assets, the cost and related accumulated depreciation are removed from
the respective accounts, and any gain or loss on the disposition is included in
earnings.
Depreciation expense is computed using the
straight-line method over the following estimated useful lives:
Long-Lived Assets - The Company recognizes impairment losses on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets’ carrying values. There were no such losses recognized during 2001,
2000 or 1999.
Intangible Assets - Intangible assets are amortized on a straight-line
basis over the following estimated useful lives:
At each balance sheet date, or as changes in
circumstances arise, the Company evaluates the recoverability of intangible
assets based upon utilization of related tangible assets and expectations of
future cash flows. Accordingly, the Company recorded an impairment charge of
$195,365 to write-down goodwill created at the merger of Apex and Cybex (see Note 8)
during 2001. There were no
such losses recognized during 2000 or 1999.
Patent Defense Costs -The Company capitalizes legal fees related to the
defense of existing patents. Upon the
successful defense of patent infringement actions, the respective patent
defense costs are amortized over the remaining useful life of the related
patents. If ultimately, an unfavorable
ruling is reached in a patent infringement action, the respective patent
defense costs are written off, and the remaining patents are reviewed for
impairment.
Allowance for Sales Returns - The Company’s sales generally include a one-month
unconditional return policy. The
Company also allows additional rights of return to certain of its distributors,
which generally extend the return period to 90 days. The Company reserves for
sales returns as a reduction of revenue and cost of sales at the time the
product revenue is recognized based on historical sales return experience,
which management believes provides a reasonable estimate of future
returns. The allowance for sales
returns totaled approximately $2,607 and $997 at December 31, 2001 and 2000,
respectively. The reserve is included as a reduction in the carrying value of
accounts receivable in the accompanying consolidated balance sheets.
Liability for Warranty Returns - The Company’s products generally include warranties
of one to three years for product defects. The Company accrues for warranty
returns at cost to repair or replace products. The liability for warranty
returns totaled approximately $4,157 and $3,882 at December 31, 2001 and 2000,
respectively. These liabilities are included in accrued liabilities in the
accompanying consolidated balance sheets.
Stock-Based Compensation - The Company generally records compensation expense for
all stock-based compensation plans using the intrinsic value method in which
compensation expense, if any, is measured as the excess of the market price of
the stock over the exercise price of the award on the measurement date. For
unvested options of Cybex that existed as
of the merger date and unvested options of Equinox
that existed as of the acquisition date, the intrinsic value was computed as of
the consummation date and the pro rata portion related to future service was
deferred (included in deferred compensation in the consolidated balance sheets)
and is being amortized over the remaining vesting period of the stock options.
The fair value of these unvested options as of the consummation date was
computed and the amount in excess of the intrinsic value was included in the
purchase consideration of Cybex and Equinox (see Note 3).
Concentrations of Customer Base and Credit Risk - One of the Company’s OEM (original
equipment manufacturer) customers accounted for 23% of net sales for 2001, 32%
of net sales for 2000 and 50% of net sales for 1999. Accounts receivable from
this customer represented approximately 26% and 34% of trade receivables at
December 31, 2001 and 2000, respectively.
The Company sells its products internationally to
customers in several countries. Total international sales were approximately
$96,112, $84,123 and $38,450 for 2001, 2000 and 1999, respectively.
The Company places cash and investments in several
high-quality financial institutions and limits the credit exposure from any one
institution, issuer or instrument.
Income Taxes - The Company accounts for income taxes using the
asset and liability method. The Company provides for income taxes currently
payable and, in addition, provides deferred income taxes for temporary
differences between the tax bases of assets and liabilities and their reported
amounts in the financial statements. Temporary differences relate principally
to the allowance for doubtful accounts, liability for sales and warranty
returns, unrealized loss on investments, acquired in-process research and
development expenses, acquired intangible assets, foreign subsidiary
intangibles, accumulated depreciation, loss on write-down of investments and
inventory reserves. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Foreign Currency - The Company records transactions denominated in
foreign currencies on a monthly basis using the average monthly exchange rate.
Assets and liabilities denominated in foreign currencies are translated at the
balance sheet dates using the closing rates of exchange between those foreign
currencies and the U.S. Dollar. Resulting translation adjustments are recorded
as a separate component of stockholders’ equity.
The Company uses forward contracts to reduce its
foreign currency exposure related to the net cash flows from its European and
Asian operations. The majority of these contracts are short-term contracts
(three months or less) and are marked-to-market each quarter and included in
trade payables, with the offsetting gain or loss included in other revenues in
the accompanying statements of operations. At December 31, 2001, the Company
had no open forward contracts. At December 31, 2000, the Company had five open
forward contracts, all maturing in the first quarter of 2001, to purchase
$3,100 in foreign currency. The fair
value of the contracts at December 31, 2000 was approximately $3,100.
Revenue Recognition - The Company generally records sales upon shipment
of the related product, net of any discounts, as the Company generally has no
significant post delivery obligations, the product price is fixed and
determinable, collection of the resulting receivable is probable, and product
returns are reasonably estimable. Product shipments occur upon receipt of a
purchase order from a customer. Shipping terms are evaluated, and revenue on
products shipped FOB destination is recorded when the customer takes possession
of the goods. The Company’s shipping and handling fees are included in net
sales, and the related costs are included in cost of sales in the accompanying
consolidated statements of operations. At December 31, 2001, certain shipments
of approximately $1,100 did not meet the criteria for revenue recognition as
described above and were not recorded as revenue in 2001.
The Company participates in cooperative advertising
and market development programs with certain distributors. These programs are
used by the Company to reimburse distributors for certain forms of advertising,
and, in general, allow distributors credits up to a specified percentage of net
purchases. The Company’s costs associated with these programs are estimated and
accrued at the time of sale, and are included in marketing expenses in the
accompanying consolidated statements of operations.
Government Grants - The Company records government grants received in
connection with its Shannon, Ireland operations as reductions of the
corresponding expense in the consolidated statements of operations. Proceeds
from rent reduction grants are recognized as reductions to rent expense as the
related rent expense is incurred. Proceeds from the employment grant, which are
received in multiple installments, are amortized as reductions of compensation
expense over a 12 month period from the creation of the related jobs.
Grants recognized as a reduction of related expenses
totaled approximately $17 and $142 for the years ended December 31, 2001, and
2000, respectively. Accounts receivable of approximately $243 and $248 and
deferred revenue of approximately $49 and $97 related to the grants were
included in the accompanying consolidated balance sheets as of December 31,
2001 and 2000, respectively. The maximum amount attainable under the Shannon
agreements is $1,600, of which $1,369 has been received to date. The grants may
be repayable, in whole or in part, upon certain conditions contained in the
respective grant agreements.
Research and Development Expense - Research and development costs are
expensed as incurred. Research and
development expense totaled $22,520, $12,881 and $6,544 for the years ended
December 31, 2001, 2000, and 1999, respectively.
Software Development Costs - The costs of software development of the Company’s
products incurred between achieving technological feasibility and the
integration into the Company’s products available for sale to customers have
not been material to date. Such costs, if material, would be capitalized.
Additionally, costs related to development of internal use software, other than
those incurred during the application development stage,
are expensed as incurred. Costs incurred during the
application development stage have not been material to date.
Advertising Expense - Advertising costs are expensed as incurred.
Advertising expense totaled approximately $8,079, $5,205 and $921 for the years
ended December 31, 2001, 2000 and 1999, respectively.
Comprehensive Income (Loss) - Comprehensive income (loss) includes all changes in
equity (net assets) during a period from non-owner sources. Items included in
comprehensive income include net income (loss), foreign currency translation
adjustments, and unrealized gains and losses on available-for-sale securities.
Use of Estimates - The preparation of the Company’s consolidated
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements and reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Recently Issued Accounting Standards - In June 2001, the Financial
Accounting Standards Board issued SFAS No. 141, Business Combinations, which
has an effective date of June 30, 2001, for all business combinations initiated
after this date. This statement
supersedes APB Opinion No. 16, Business Combinations, and FASB Statement
No. 38, Accounting
for Preacquisition Contingencies of Purchased Enterprises. This statement requires all business
combinations within the scope of the Statement to be accounted for using the
purchase method of accounting. For
business combinations completed prior to June 30, 2001, the statement requires
companies to recognize intangible assets apart from goodwill and expand the
disclosures about assets acquired and liabilities assumed. The impact of SFAS No. 141 was not material
to the Company's December 31, 2001 financial statements.
In June 2001, the Financial Accounting Standards Board
issued SFAS No. 142, Goodwill and Other Intangible Assets, which
has an effective date starting with fiscal years beginning after December 15,
2001. This statement supersedes APB
Opinion No. 17, Intangible Assets.
This statement addresses the initial accounting for intangible assets
that are acquired individually or with a group of other assets. This statement also addresses the accounting
for goodwill and other intangible assets after they have been initially
recognized in the financial statements.
Goodwill will cease to be amortized upon the implementation of the
statement, and companies will test goodwill at least annually for
impairment. The Company adopted SFAS
No. 142 effective January 1, 2002 and accordingly, performed a test for
possible goodwill impairment as of January 1, 2002. The test concluded that no
adjustment was required upon adoption.
Additionally, under the provisions of SFAS No. 142, goodwill will cease
to be amortized in future periods.
Amortization of goodwill was approximately $111,000 during 2001.
In August 2001, the Financial Accounting Standards
Board issued SFAS No. 143, Accounting for Asset Retirement Obligations (“ARO”),
which has an effective date for financial statements for fiscal years beginning
after June 15, 2002. This statement
addresses the diversity in practice for recognizing asset retirement
obligations and requires that obligations associated with the retirement of a
tangible long-lived asset be recorded as a liability when those obligations are
incurred, with the amount of the liability initially measured at fair
value. Upon initially recognizing a
liability for an ARO, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, the liability is accreted to its
present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The impact of SFAS No. 143 on the financial
statements is not expected to be material.
In October 2001, the
Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which has an effective date for
financial statements for fiscal years beginning after December 15, 2001. This statement, which supercedes SFAS No.
121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, requires that long-lived assets that are to be disposed
of by sale be measured at the lower of book value or fair value less cost to
sell. Additionally, this statement
expands the scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from the rest of the
entity and (2) will be eliminated from the ongoing operations of the entity in
a disposal transaction. The impact of
SFAS No. 144 on the financial statements is not expected to be material.
Reclassifications - Certain reclassifications have been made to the
2000 and 1999 consolidated financial statements in order to conform to the 2001
presentation. These reclassifications had no effect on previously reported net
income (loss), cash flows from operations or total stockholders’ equity.
3. Merger and Acquisition
Acquisition of Equinox
- On January 3, 2001, the Company
acquired Equinox Systems Inc. for cash equal to $9.75 for each outstanding
share of Equinox capital stock. Equinox, headquartered in Sunrise, Florida,
makes products that provide communications port management and remote control
capabilities. The products are distributed through a two-tier distribution
channel; a network of value-added resellers and original equipment
manufacturers.
The acquisition was recorded
under the purchase method of accounting, and the purchase price was allocated
based on the fair value of the assets acquired and liabilities assumed. In
accordance with generally accepted accounting principles, costs allocated to
research and development assets with alternative future uses were capitalized;
and the remaining amounts of purchased in-process research and development were
expensed upon the closing of the transaction.
The excess of the fair value over the intrinsic value of the unvested
Equinox options and the fair value of the vested Equinox options at the date of
consumation have been included in the purchase consideration. A summary of the total purchase
consideration is as follows:
The purchase consideration was
allocated to the estimated fair values of the assets acquired and liabilities
assumed, as follows:
The acquisition was funded
through available cash and the issuance of short-term debt. The Company borrowed a total of $45,000 at
the stated rate of 30-day LIBOR plus 1.75% (8.31% at January 31,
2001). All borrowings were repaid
during the quarter ended March 30, 2001.
On the closing of the Equinox transaction, the Company acquired $24,295
in cash and short-term investments held by Equinox.
In-process research and
development expense and other acquisition costs included in the accompanying
consolidated statement of operations for the year ended December 31, 2001,
include the write-off of the $4,570 of in-process research development upon the
closing of the transaction.
In-Process Research and Development - The fair value of substantially all of
the in-process research and development received in the acquisition was
determined using the discounted cash flow method of the income approach. The
fair value of a small portion of in-process research and development was
estimated using the cost approach.
Also, additional calculations were performed based on the understanding
of the current perspective of the SEC concerning the determination of allocable
amounts for purchased in-process research and development.
Equinox’s in-process research and development
activities consisted of a redesign of its ELS terminal server product line
hardware, developing new Console Port Management technology, developing a
completely new line of Internet Attached Products and creating new software
drivers for use with certain products. The work to be performed in these
projects varied, but at the time of the acquisition, the projects would be
described as 30 to 99 percent complete.
All projects, except for the Internet Attached Products project, were
completed and began shipping in 2001.
The new generations of products under development are
projected to sell through sales channels and to customers that are
substantially the same as current and historical sales channels and customers.
Pricing and margins will not differ significantly from historical pricing and
margins. All technology projections were developed within the context of an
average revenue growth rate for Equinox of 26% annually over six years, based
on historical results and industry prospects.
Revenue growth related to the in-process technology
and development is embodied in products to be launched in fiscal years 2001 and
2002. These products have estimated economic lives ranging from approximately
five to seven years. The product life cycle is characterized by an approximate
2 to 3 year ramp up period, followed by a 1 to 2 year plateau, followed by a 1
to 3 year decline period. Operating margins are projected to remain relatively
constant for these products over their remaining lives, with aggregate margins
declining in later years due to shifts in product mix. The discount rate for
the in-process research and development was estimated to be 25%.
Merger of Apex and Cybex - On July 1, 2000, Apex and Cybex merged to form
Avocent. According to the terms of the merger, each share of Apex common stock
was converted into 1.0905 shares of Avocent common stock, and each share of
Cybex common stock was converted into one share of Avocent common stock. For
accounting purposes, the merger was treated as a purchase of Cybex by Apex. The
excess of the fair value over the intrinsic value of the unvested Cybex options
and the fair value of the vested Cybex options at the date of consummation have
been included in the purchase consideration.
A summary of the total purchase
consideration is as follows:
The merger was recorded using the purchase method of
accounting, and the purchase price was allocated to the estimated fair values
of the assets acquired and liabilities assumed, as follows:
In-process research and development expense and other
acquisition costs included in the accompanying consolidated statement of
operations for the year ended December 31, 2000, include the write-off of the
$94,000 of in-process research and development acquired and approximately
$10,000 of transaction-related fees paid to external advisors.
Pro Forma Financial Information - The following unaudited pro forma summary
combines the results of operations of Apex and Cybex as if the merger had occurred
on January 1, 2000 and includes the results of operations for Equinox as if the
acquisition had occurred on January 1, 2000. Certain adjustments have been made
to reflect the impact of the purchase transactions. These pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisitions been made at the
beginning of 2000, or of results which may occur in the future.
4. Inventories
Inventories consist of the following at December 31,
2001 and 2000:
5. Investments
The amortized costs and estimated fair values of
held-to-maturity investments (carried at amortized cost) and available-for-sale
securities (carried at fair value) are as follows:
Maturities of held-to-maturity investments were as
follows at December 31, 2001:
All debt instruments with fixed maturities at December
31, 2000, were due in one year or less.
Gross realized gains on the sale of available-for-sale
securities were approximately $528 and gross realized losses were approximately
$800 for the year ended December 31, 2001. During 2001, the Company recognized
gross losses of $4,899 on its equity investments due to impairments that were
determined by management to be other than temporary. The remaining fair value
of these investments at December 31, 2001, was $851. Gross realized gains on the sale of available-for-sale securities
were approximately $754 and gross realized losses were approximately $1,187 for
the year ended December 31, 2000. The
remaining fair value of these investments at December 31, 2000 was $3,891.
The Company has a 40% interest in CyCom L.L.C
("CyCom"), a joint venture created to focus on computer technology
and research for products in the computer industry. The other 60% of CyCom is owned by 2C Computing, a significant
shareholder of which is a former Cybex director. Upon the formation of CyCom, the Company contributed a license
for certain of its intellectual property and 2C Computing contributed
management services and capital funding.
Under the terms of the membership agreement, 2C Computing is responsible
for all continued technology development efforts. The net profits of CyCyom are to be split 60% to 2C Computing and
40% to the Company after 2C Computing recoups its accumulated losses from the
development and marketing of CyCom’s products.
The carrying value of the Company’s investment in the joint venture is
zero because the Company's contribution consisted of previously expensed research
and development costs related to the technology. The Company has no obligation to provide funding or other
financial support to CyCom in future periods.
As of December 31, 2001, 2C Computing had incurred cumulative unaudited
losses, and management does not anticipate that the joint venture will be
profitable in 2002.
6. Property Held for Lease
The Company owns a building in Huntsville, Alabama and
has executed a five-year agreement to lease the building to an unrelated party.
The lease agreement contains renewal options for up to two three-year
extensions, subject to certain conditions. The lease agreement also provides
for early termination at the option of the lessee after three or four years,
subject to certain conditions, including termination fees. Rental income
totaled approximately $221 and $111 for the years ended December 31, 2001 and
2000, respectively.
Property held for lease consists of the following at
December 31, 2001 and 2000:
Future minimum rental income on this non-cancelable
operating lease are approximately as follows:
7. Property and Equipment
Property and equipment consists of the following at
December 31, 2001 and 2000:
8. Intangible Assets
Intangible assets consist of the following at December
31, 2001 and 2000:
During the fourth quarter of 2001, due to the deteriorated economic conditions and lower future
growth expectations relative to estimates made at the merger of Apex and Cybex
and the acquisition of Equinox, the Company performed an analysis to
determine if the remaining balance of
goodwill created at the merger and the acquisition had been impaired. The analysis was performed in accordance
with SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of.”
As a result, the Company recorded a $195,365 reduction in the
remaining carrying value of goodwill arising from the merger of Apex and
Cybex. The write-off of the goodwill
was based on an analysis of projected cash flows, which were no longer deemed
adequate to support the value of goodwill associated with the merger.
9. Short-Term Borrowings
The Company has an unsecured bank line of credit that
provides for borrowings of up to $2,000. Interest on outstanding advances is
payable monthly at LIBOR plus 2.25% (approximately 4.12% at December 31, 2001).
The line of credit expires May 10, 2002. The Company had no amounts outstanding
under the line of credit at December 31, 2001 and 2000.
The acquisition of Equinox (see Note 3)
was funded through available cash and the issuance of short-term debt. The Company borrowed a total of $45,000 at
the stated rate of 30-day LIBOR plus 1.75% (8.31% at January 31,
2001). All borrowings were repaid
during the quarter ended March 30, 2001.
10. Income Taxes
The provision for (benefit from) income taxes for the
years ended December 31, 2001, 2000 and 1999, is comprised of the following:
The provision for (benefit from) federal income taxes
differs from the amount computed by applying the statutory rate of 35% to taxable
income as follows:
The components of the net deferred income tax assets
and liabilities at December 31, 2001 and 2000, are as follows:
The Company has a full valuation allowance recorded
against a deferred tax asset arising from a foreign subsidiary. The Company
intends to fully reserve this asset until it is determined that it is more
likely than not that the asset can be realized through future taxable income
from its acquired foreign operations.
11. Stockholders’ Equity
Preferred Stock - The Company has 5,000 shares of $0.001 par value
preferred stock authorized and no shares issued and outstanding at December 31,
2001 and 2000.
Common Stock - The Company has 200,000 shares of $0.001 par value
common stock authorized. There were
44,650 and 43,820 shares issued and outstanding at December 31, 2001 and 2000,
respectively. Upon the merger of Apex
and Cybex to form Avocent on July 1, 2000, each share of Apex common stock was
exchanged for 1.0905 shares of Avocent common stock. All capital stock and stock option information included in these
consolidated financial statements and related notes have given retroactive
effect for this exchange rate.
12. Earnings Per Share
A summary of the calculation of basic and diluted
earnings per share (EPS) for the years ended December 31, 2001, 2000 and 1999,
is as follows:
There were no options outstanding at December 31,
1999, with exercise prices that were greater than the average market price of
the common shares in each respective year. At December 31, 2000, options to
purchase 5,825 shares of common stock and at December 31, 2001, options to
purchase 7,188 shares of common stock were outstanding but were not included in
the computation of diluted net loss per share because inclusion of such options
would have been anti-dilutive.
13. Commitments and Contingencies
The Company leases buildings and certain equipment
under various operating leases. Rent expense under these leases totaled
approximately $2,871, $1,503 and $772 for the years ended December 31, 2001,
2000 and 1999, respectively. Future
minimum rental payments under non-cancelable operating leases are approximately
as follows:
The Company has been involved from time to
time in litigation in the normal course of business. Management is not aware of
any pending or threatened litigation matters that will have a material adverse
effect on the Company’s business, operations, financial condition or cash flows
(see Note
18).
14. Stock Option and Stock Purchase Plans
The Company has stock option plans covering
substantially all of its employees and directors. Avocent assumed the stock
option plans and the related underlying options of Apex and Cybex at the merger
effective July 1, 2000, and of Equinox at the acquisition effective January 3,
2001. No additional options have been or will be granted under these
pre-existing plans. Options outstanding under the Apex plan were converted to
Avocent options at 1.0905 per outstanding option. Options outstanding under the
Cybex plans were converted on a one-for-one basis. Options outstanding under
the Equinox plan were converted to Avocent options at 0.4575 per outstanding
option.
Apex had adopted the Employee Stock Option Plan (the
Apex Plan), which provided for nonqualified and incentive stock options for officers, directors and employees. At the
time of the merger there were options to purchase 2,775 shares (after
conversion to Avocent options at 1.0905 per outstanding option) of common stock
outstanding under the Apex Plan. Options under the Apex Plan will generally
expire 10 years from the date of grant, or 5 years in the case of an optionee
owning more than 10% of the voting power of all classes of stock. Purchase
prices for common stock subject to options issued under the Apex Plan generally
approximate the fair market value of the related shares at the date of grant.
Generally, options vest over four years.
Cybex had adopted three plans,
including the 1995 Employee Stock Option Plan (the Plan), the 1995 Outside
Directors Option Plan (the 1995 Plan), and the 1998 Employee Stock Incentive
Plan (the 1998 Plan). The 1995 Employee Stock Option Plan provided for nonqualified and incentive
stock options for officers and employees.
At the time of the
merger there were options to
purchase 1,167 shares of common stock outstanding under the Plan. Options under
the Plan will generally expire 10 years from the date of grant. Purchase prices
for common stock subject to options issued under the Plan generally approximate
the fair market value of the related shares at the date of grant. Generally,
options vest over five years.
The 1995 Outside Directors Plan provided for nonqualified options for
outside. At the time of the merger there
were options to purchase 37 shares of common stock outstanding under the 1995
Plan. Options under the 1995 Plan will generally expire 5 years from the date
of grant. Purchase prices for common stock subject to options issued under the
1995 Plan generally approximate the fair market value of the related shares at
the date of grant. Options vest and become exercisable immediately upon
issuance.
The 1998 Employee Stock
Incentive Plan
provided for nonqualified and incentive stock options for officers and employees. At the time of the merger there were
options to purchase 1,171 shares of common stock outstanding under the 1998
Plan. Options under the 1998 Plan will generally expire 10 years from the date
of grant. Purchase prices for common stock subject to options issued under the
1998 Plan generally approximate the fair market value of the related shares at
the date of grant. Generally, options vest over two to five years.
Equinox had adopted an option
plan (the Equinox Plan)
that provided for nonqualified stock options for
officers, directors and employees. At
the time of the merger there were options to purchase 675 shares (after
conversion to Avocent options at 0.4575 per outstanding option) of common stock
outstanding under the Equinox Plan.
Options under this plan generally expire 10 years from the date of
grant. Purchase prices for common stock subject to options issued under the
Equinox Plan generally approximate the fair market value of the related shares
at the date of grant. Generally, options vest quarterly over four years.
Avocent has adopted two additional stock option plans,
the 2000 Stock Option Plan (the 2000 Plan) and the 2000 Transition Nonstatutory
Stock Option Plan (the Transition Plan). The 2000 Stock Option Plan, which
provides for nonqualified and incentive stock options for officers, directors and employees, reserved a total of 6,000 shares
of common stock for issuance pursuant to the 2000 Plan. Options under the 2000
Plan will generally expire 10 years from the date of grant. Purchase prices for
common stock subject to options issued under the 2000 Plan generally
approximate the fair market value of the related shares at the date of grant.
Generally, options vest over two to four years.
The 2000 Transition Nonstatutory Stock Option Plan,
which provides for non-qualified and incentive stock options for employees, reserved a total of 450 shares of
common stock for issuance pursuant to the Transition Plan. Options under the
Transition Plan will generally expire 10 years from the date of grant. Purchase
prices for common stock subject to options issued under the Transition Plan
generally approximate the fair market value of the related shares at the date
of grant. Generally, options vest over four years.
Pertinent information regarding the Company’s plans is
as follows:
Included in the stock options outstanding at December
31, 2001, were 290 shares for which vesting was accelerated as the result of
employment agreements for certain employees that terminated during 2001. These options would have been forfeited had
the vesting not been accelerated. As a
result, the Company recorded compensation expense in 2001 of approximately
$2,600 based on the excess of the intrinsic value at the acceleration date over
the intrinsic value at the grant date.
Included in the stock options exercised during 2000
were 354 shares which were exercised following the merger of Apex and Cybex for
which vesting was accelerated at the discretion of the Board of Directors in
connection with the merger. These options would have been forfeited had the
vesting not been accelerated. As a result, the Company recorded compensation
expense in 2000 of approximately $9,800 based on the excess of the intrinsic
value at the acceleration date over the intrinsic value at the grant date.
The following table summarizes information about stock
options outstanding at December 31, 2001:
The options above were issued with exercise prices
that approximate fair value at the date of grant. At December 31, 2001, 2,838
shares are available for grant under the Company’s stock option plans.
The Company applies Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations in accounting for its stock plans. Accordingly, no compensation
cost has been recognized related to stock options. Had compensation cost for
the Company’s stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
method prescribed in SFAS No. 123, Accounting for Stock-Based Compensation,
the Company’s net income (loss) and earnings (loss) per share would have been
reduced to the pro forma amounts indicated below:
The pro forma amounts reflected above are not
representative of the effects on reported net income in future years because,
in general, the options granted typically do not vest for several years and
additional awards are made each year. The fair value of each option grant is
estimated on the grant date using the Black-Scholes option-pricing model using
the following weighted-average assumptions:
On December 9, 1996, the Company adopted an employee
stock purchase plan (the ESPP), through which qualified employees could
participate in common stock ownership. The ESPP qualifies as a non-compensatory
plan under Section 423 of the Internal Revenue Code. The price of shares purchased under the ESPP was the lower of 85%
of the fair market value of the shares on the first day of each quarterly
offering period, or 85% of the fair market value of the shares on the last day
of the quarterly offering period. The ESPP administrator administers and
interprets all rules and regulations applicable to the ESPP. Pursuant to the
ESPP, 7 shares were issued at a weighted average price of $25.62 per share for
the year ended December 31, 2000. The ESPP was canceled July 1, 2000, the
effective date of the merger between Apex and Cybex.
On December 6, 2000, the stockholders approved an
employee stock purchase plan for all Avocent employees (the AESPP), through
which qualified employees may participate in common stock ownership. The AESPP
qualifies as a non-compensatory plan under Section 423 of the Internal Revenue
Code. The Company has reserved 1,500 shares of common stock for issuance under
the AESPP. The price of stock purchased under the AESPP is generally 85% of the
lower of the fair market value of the common stock (i) at the beginning of the offering
period or (ii) at the end of the purchase period. In the event the fair market
value at the end of a purchase period is less than the fair market value at the
beginning of the offering period, the participants will be withdrawn from the
current offering period following exercise and automatically re-enrolled in a
new offering period. The new offering period will use the lower fair market
value as of the first date of the new offering period to determine the purchase
price for future purchase periods. The AESPP administrator administers and
interprets all rules and regulations applicable to the AESPP. Pursuant to the AESPP, 37 shares were issued
at a weighted average price of $21.63 per share for the year ended December 31,
2001. There were no shares issued under
the AESPP as of December 31, 2000.
15. Retirement Plan
After the acquisition of Equinox, the Company had two
401(k) savings plans and a profit-sharing plan covering substantially all employees.
Effective April 1, 2001, the Company’s two 401(k) plans merged into one plan
(the Avocent Plan) covering substantially all U.S. employees. Under the Avocent
Plan, the employer will match 50% of an employee’s contributions up to 6% of
the employee’s compensation. The Company may also elect to make discretionary
contributions as determined by its Board of Directors. No discretionary
contributions were made during the year ended December 31, 2001 under the
Avocent Plan. The Company’s expense for matching contributions under all plans
totaled approximately $710, $449 and $162 for the years ended December 31,
2001, 2000 and 1999, respectively.
16. Segment Reporting
Subsequent to the merger of Apex and Cybex on July 1,
2000, the Company reported segment information on a geographical basis in which
the Company presented sales and gross profit information for Redmond,
Washington; Huntsville, Alabama; and Shannon, Ireland.
Following the merger, the previously separate
businesses of Apex and Cybex began to be integrated. In recent quarters, shipments to certain international OEM
customers that had historically originated from Redmond were shifted to
Shannon. As this occurred, the
historical comparisons by location became less meaningful. Additionally, the Company has gradually
realigned operating and management responsibilities within the Company to
emphasize that Avocent is “one company, operating around the world.” Consequently, the Company has evaluated its
business in light of the segment reporting requirements prescribed by SFAS No.
131, Disclosures about Segments of an
Enterprise and Related Information, and has determined that Avocent
will report its operations as a single operating segment. The Company will, however, report sales by
geographic region on a quarterly and annual basis. Following is a presentation of sales by geographic region for the
years ended December 31, 2001, 2000 and 1999:
As
of December 31, 2001, long- lived assets totaled $280,423, which includes
$278,118 held in the U.S. and $2,305 held outside of the U.S. As of December 31, 2000, long- lived assets
totaled $568,074, which included $563,948 held in the U.S. and $4,126 held
outside the U.S.
17. Summarized Quarterly Financial Data
(Unaudited)
The following table presents unaudited quarterly
operating results for each of the Company’s last eight fiscal quarters. This
information has been prepared by the Company on a basis consistent with the
Company’s audited financial statements and includes all adjustments, consisting
only of normal recurring adjustments, that the Company considers necessary for
a fair presentation of the data.
(1) Income (loss) from operations and net income
(loss) for the three months ended December 31, 2001 includes a $195,365
reduction in the carrying value of goodwill.
(2) The net income (loss) per share for each
quarter within a fiscal year does not equal the total net income (loss) per
share for the particular fiscal year due to variations in the estimated value
of the Company’s Common stock during the year and the effect these variations
had on the shares outstanding calculation.
Additionally, for 2000, the weighted average shares outstanding
calculation for the fiscal year includes the shares issued to effect the merger
from the date of the merger through year-end.
18. Patent
Dispute
The Company filed a
complaint for infringement of U.S. Patent Number 5,721,842 (the Patent) in
United States District Court for the Western District of Washington at Seattle
against CCC on June 1, 1998. The complaint alleges that the products
manufactured and sold by the defendant embody the inventions claimed in the
Patent, and sought injunctive relief, damages, attorney’s fees and costs. The
complaint in the CCC lawsuit was never formally served on CCC, and
subsequently, Apex voluntarily dismissed the CCC lawsuit in Seattle without
prejudice. The issues raised in the Patent and Trademark Office were
subsequently resolved in the Company’s favor, and in May 2001, Apex (the
Company’s wholly-owned subsidiary) filed a complaint for patent infringement in
the United States District Court for the Southern District of New York against
Raritan Computer Inc. The Raritan complaint sought injunctive relief, damages,
attorneys’ fees and costs under three Apex patents. After a seven day bench trial in New York in January of 2002,
U.S. District Judge Milton Pollack found that there was no infringement of
three Apex patents by Raritan and ordered that judgment be entered in favor of
Raritan. The Company is in the process
of appealing the judgment. The Company has capitalized $1.8 million of patent
defense costs which are included with intangible assets in the Company’s
consolidated balance sheet as of December 31, 2001. Should the Company not be successful with the appeal, the patent
defense costs will be written off and the remaining patents will be reviewed
for impairment.
Item
9.
Item
9. Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure.
None.
PART III
Information with
respect to this Part III may be found in the definitive proxy statement to
be delivered to stockholders in connection with the 2002 Annual Meeting of
Stockholders. Such information is incorporated herein by reference.
PART IV
Item
14.
Item
14. Exhibits,
Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements
Avocent Corporation
Report of Independent
Accountants
Consolidated Balance
Sheets as of December 31, 2001 and 2000
Consolidated Statements
of Operations for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements
of Stockholders’ Equity for the years ended December 31, 2001, 2000 and
Consolidated Statements
of Cash Flows for the years ended December 31, 2001, 2000 and 1999
Notes to Consolidated
Financial Statements
(a)(2) Financial Statement Schedules
Schedule of Valuation and Qualifying
Accounts
For the years ended December 31,
2001 and 2000 (in thousands)
(1) These
are the balances assumed from the acquisition of Cybex Computer Products
Corporation during 2000 and from the acquisition of Equinox Systems Inc. in
2001.
(2) Additions
and deductions to valuation and qualifying accounts were netted for
presentation purposes due to being insignificant to the December 31, 2000
financial statements.
Note: No schedule was
prepared for 1999 as the balances and activity were immaterial for this period.
(a)(3) Exhibits
(1) The
following abbreviations are used to identify corporate entities:
AVCT = Avocent Corporation
AGI = Aegean Sea Inc. (now known as
Avocent Corporation)
Apex = Apex Inc.
Cybex = Cybex Computer Products Corporation
(2) Confidential
treatment has previously been requested for portions of these documents.
(3) Set
forth on page 68 and incorporated herein by reference.
(b) Reports on Form 8-K
None
(c) Exhibits
See Item 14(a)(3), above.
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the
undersigned officers and directors of Avocent Corporation do hereby constitute
and appoint Douglas E. Pritchett, Samuel F. Saracino, and Doyle C. Weeks, and
each of them, the lawful attorney and agent with power and authority to do any
and all acts and things and to execute any and all instruments which said
attorneys and agents, or either of them, determine may be necessary or
advisable or required to enable Avocent Corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules or regulations or
requirements of the Securities Exchange Act of 1934, as amended, and any rules
or regulations or requirements of the Securities and Exchange Commission in
connection with this Form 10-K Report. Without limiting the generality of
the foregoing power and authority, the powers granted include the power and
authority to sign the names of the undersigned officers and directors in the
capacities indicated below to this Form 10-K Report of amendments or
supplements thereto, and each of the undersigned hereby ratifies and confirms
all that said attorneys and agents or either of them, shall do or cause to be
done by virtue hereof. This Power of Attorney may be signed in several
counterparts.
IN WITNESS
WHEREOF, each of the undersigned has executed this Power of Attorney as of the
date indicated opposite his name.
In accordance with
the Exchange Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ John R. Cooper
President
and Chief Executive Officer and Director
March 29, 2002
John R. Cooper
(Principal
Executive Officer)
/s/ Douglas E.
Pritchett
Senior Vice President of Finance, Chief Financial
Officer, Treasurer, and Assistant Secretary
Douglas E. Pritchett
(Principal
Financial and Accounting Officer)
March 29, 2002
/s/ Stephen F. Thornton
Chairman of the
Board and Director
March 29, 2002
Stephen F. Thornton
/s/ Barry L. Harmon
Director
March 29, 2002
Barry L. Harmon
/s/ Edwin L. Harper
Director
March 29, 2002
Edwin L. Harper
/s/ William H. McAleer
Director
March 29, 2002
William H. McAleer
/s/ David P. Vieau
Director
March 29, 2002
David P. Vieau
/s/ Doyle C. Weeks
Director
March 29, 2002
Doyle C. Weeks